**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One):




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





For
      the
      fiscal year ended: December 31, 2006





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




For
      the
      transition period from: ___________ to ___________





Commission
      File Number: 000-18464





**EMCLAIRE
      FINANCIAL CORP**.





(Exact
      name of registrant as specified in its charter)




Pennsylvania
            
            25-1606091(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)612
                Main Street, Emlenton, PA
            
            16373(Address
                of principal executive office)
            
            (Zip
                Code)Registrant’s
              telephone number: (724) 867-2311Securities
                registered pursuant to Section 12(b) of the Act:
            None.
            OTC
                Electronic Bulletin Board (OTCBB)
              Name
                of exchange on which registeredSecurities
              registered pursuant to Section 12(g) of the Act:





Common
      Stock, par value $1.25 per share


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


YES
o
      NO x.





Indicate
      by checkmark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


YES
o
      NO x.





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 o.





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer.


Large
      accelerated filer o    Accelerated
      filer o   Non-accelerated
      filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). YES o NO x.





As
      of June
      30, 2006, the aggregate value of the 1,267,835 shares of Common Stock of the
      Registrant issued and outstanding on such date, which excludes 130,582 shares
      held by the directors and officers of the Registrant as a group, was
      approximately $30.7 million. This figure is based on the last sales price of
      $27.00 per share of the Registrant’s Common Stock on June 30, 2006.





**DOCUMENTS
      INCORPORATED BY REFERENCE**


1.
            Portions
                of the Annual Report to Stockholders for the Fiscal Year ended December
                31, 2006 (Parts I, II, and IV). 2.
            Portions
              of the Proxy Statement for the April 25, 2007 Annual Meeting of
              Stockholders (Part III).







**EMCLAIRE
      FINANCIAL CORP.**





**TABLE
      OF CONTENTS**


**PART
                  I**Item
                  1.
              Business
              1Item
                  1A.
              Risk
                  Factors
              16Item
                  1B.
              Unresolved
                  Staff Comments
              17Item
                  2.
              Properties
              18Item
                  3.
              Legal
                  Proceedings
              18Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              18**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              19Item
                  6.
              Selected
                  Financial Data
              20Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              20Item
                  7A.
              Quantitative
                  and Qualitative Disclosure about Market Risk
              20Item
                  8.
              Financial
                  Statements and Supplementary Data
              21Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              21Item
                  9A.
              Controls
                  and Procedures
              21Item
                  9B.
              Other
                  Information
              21**PART
                  III**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              22Item
                  11.
              Executive
                  Compensation
              22Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              22Item
                  13.
              Certain
                  Relationships, Related Transactions and Director
                  Independence
              22Item
                  14.
              Principal
                  Accounting Fees and Services
              22Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              22**Signatures**
              
              24







**PART
      I**





**Item
      1. Business**





**General**





Emclaire
      Financial Corp. (the Corporation) is a Pennsylvania corporation and financial
      holding company that provides a full range of retail and commercial financial
      products and services to customers in western Pennsylvania through its wholly
      owned subsidiary bank, the Farmers National Bank of Emlenton (the Bank). The
      Bank also provides investment advisory services through its Farmers National
      Financial Services division.





The
      Bank
      was organized in 1900 as a national banking association and is a financial
      intermediary whose principal business consists of attracting deposits from
      the
      general public and investing such funds in real estate loans secured by liens
      on
      residential and commercial property, consumer loans, commercial business loans,
      marketable securities and interest-earning deposits. The Bank operates through
      a
      network of eleven retail branch offices in Venango, Butler, Clarion, Clearfield,
      Elk and Jefferson counties, Pennsylvania. The Corporation and the Bank are
      headquartered in Emlenton, Pennsylvania.





The
      Corporation and the Bank are subject to examination and comprehensive regulation
      by the Office of the Comptroller of the Currency (OCC), which is the Bank’s
      chartering authority, and the Federal Deposit Insurance Corporation (FDIC),
      which insures customer deposits held by the Bank to the full extent provided
      by
      law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and
      the
      Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered
      financial holding company pursuant to the Bank Holding Company Act of 1956
      (BHCA), as amended.





During
      January 2006, the Bank submitted an application to the OCC for a new branch
      location in Cranberry, Pennsylvania. This office opened with OCC approval in
      November 2006.





At
      December 31, 2006, the Corporation had $300.6 million in total assets, $23.9
      million in stockholders’ equity, $213.3 million in loans and $244.5 million in
      deposits.





**Lending
      Activities**





*General.* The
      principal lending activities of the Bank are the origination of residential
      mortgage, commercial mortgage, commercial business and consumer loans.
      Significantly all of the Bank’s loans are secured by property in the Bank’s
      primary market area.





*One-to-Four
      Family Mortgage Loans.* The Bank
      offers first mortgage loans secured by one-to-four family residences located
      in
      the Bank’s primary lending area. Typically such residences are single-family
      owner occupied units. The Bank is an approved, qualified lender for the Federal
      Home Loan Mortgage Corporation (FHLMC). As a result, the Bank may sell loans
      to
      and service loans for the FHLMC in market conditions and circumstances where
      this is advantageous in managing interest rate risk.





*Home
      Equity Loans.* The Bank
      originates home equity loans secured by single-family residences. These loans
      may be either a single advance fixed-rate loan with a term of up to 20 years,
      or
      a variable rate revolving line of credit. These loans are made only on
      owner-occupied single-family residences.





*Commercial
      Business and Commercial Real Estate Loans.* Commercial lending constitutes a significant portion of the Bank’s lending
      activities. Commercial business and commercial real estate loans amounted to
      44.4% of the total loan portfolio at December 31, 2006. Commercial real estate
      loans generally consist of loans granted for commercial purposes secured by
      commercial or other nonresidential real estate. Commercial loans consist of
      secured and unsecured loans for such items as capital assets, inventory,
      operations and other commercial purposes.


1


*Consumer
      Loans.* Consumer
      loans generally consist of fixed-rate term loans for automobile purchases,
      home
      improvements not secured by real estate, capital and other personal
      expenditures. The Bank also offers unsecured revolving personal lines of credit
      and overdraft protection.





*Loans
      to One Borrower.* National
      banks are subject to limits on the amount of credit that they can extend to
      one
      borrower. Under current law, loans to one borrower are limited to an amount
      equal to 15% of unimpaired capital and surplus on an unsecured basis, and an
      additional amount equal to 10% of unimpaired capital and surplus if the loan
      is
      secured by readily marketable collateral. At December 31, 2006, the Bank’s loans
      to one borrower limit based upon 15% of unimpaired capital was $3.4 million. At
      December 31, 2006, the Bank’s largest single lending relationship had an
      outstanding balance of $4.5 million, which consisted of a loan to a municipality
      and was not subject to the legal lending limit. The Bank had one additional
      lending relationship exceeding the legal lending limit totaling $3.8 million
      at
      December 31, 2006. Credit granted to this borrower in excess of the legal
      lending limit is part of the Pilot Program approved by the OCC which allows
      the
      Bank to exceed its legal lending limit within certain parameters. The next
      largest borrower had loans which totaled $3.3 million and consisted of loans
      secured by commercial real estate and business property in the Bank’s lending
      area. At December 31, 2006, all of such loans were performing in accordance
      with
      their terms.





*Loan
      Portfolio.* The
      following table sets forth the composition and percentage of the Corporation’s
      loans receivable in dollar amounts and in percentages of the portfolio as of
      December 31:


*(Dollar
                  amounts in thousands)*
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Dollar
                  Amount
              
              %
              
              Dollar
                  Amount
              
              %
              
              Dollar
                  Amount
              
              %
              
              Dollar
                  Amount
              
              %
              
              Dollar
                  Amount
              
              %Mortgage
                  loans on real estate:Residential
                  first mortgages
              
              $
              64,662
              
              
              30.0
              %
              
              $
              66,011
              
              
              34.0
              %
              
              $
              69,310
              
              
              38.2
              %
              
              $
              76,396
              
              
              39.7
              %
              
              $
              82,449
              
              
              48.2
              %Home
                  equity loans and lines of credit
              
              
              47,330
              
              
              22.0
              %
              
              
              39,933
              
              
              20.5
              %
              
              
              31,548
              
              
              17.4
              %
              
              
              30,316
              
              
              15.8
              %
              
              
              19,136
              
              
              11.2
              %Commercial
              
              
              61,128
              
              
              28.4
              %
              
              
              52,990
              
              
              27.3
              %
              
              
              48,539
              
              
              26.8
              %
              
              
              44,935
              
              
              23.4
              %
              
              
              34,986
              
              
              20.4
              %Total real estate loans
              
              
              173,120
              
              
              80.4
              %
              
              
              158,934
              
              
              81.8
              %
              
              
              149,397
              
              
              82.4
              %
              
              
              151,647
              
              
              78.9
              %
              
              
              136,571
              
              
              79.8
              %Other
                  loans:Commercial
                  business
              
              
              34,588
              
              
              16.0
              %
              
              
              27,732
              
              
              14.2
              %
              
              
              23,898
              
              
              13.2
              %
              
              
              26,470
              
              
              13.8
              %
              
              
              21,913
              
              
              12.8
              %Consumer
              
              
              7,671
              
              
              3.6
              %
              
              
              7,729
              
              
              4.0
              %
              
              
              8,090
              
              
              4.4
              %
              
              
              14,142
              
              
              7.3
              %
              
              
              12,660
              
              
              7.4
              %Total other loans
              
              
              42,259
              
              
              19.6
              %
              
              
              35,461
              
              
              18.2
              %
              
              
              31,988
              
              
              17.6
              %
              
              
              40,612
              
              
              21.1
              %
              
              
              34,573
              
              
              20.2
              %Total
                  loans receivable
              
              
              215,379
              
              
              100.0
              %
              
              
              194,395
              
              
              100.0
              %
              
              
              181,385
              
              
              100.0
              %
              
              
              192,259
              
              
              100.0
              %
              
              
              171,144
              
              
              100.0
              %Less:Allowance
                  for loan losses
              
              
              2,035
              
              
              
              
              
              
              1,869
              
              
              
              
              
              
              1,810
              
              
              
              
              
              
              1,777
              
              
              
              
              
              
              1,587Net
                  loans receivable
              
              $
              213,344
              
              
              
              
              
              $
              192,526
              
              
              
              
              
              $
              179,575
              
              
              
              
              
              $
              190,482
              
              
              
              
              
              $
              169,557




The
      following table sets forth the scheduled contractual principal repayments or
      interest repricing of loans in the Corporation’s portfolio as of December 31,
      2006. Demand loans having no stated schedule of repayment and no stated maturity
      are reported as due within one year.


*(Dollar
                  amounts in thousands)*
              
              Due
                  in one
              
              Due
                  from one
              
              Due
                  from five
              
              Due
                  afteryear
                  or less
              
              to
                  five years
              
              to
                  ten years
              
              ten
                  years
              
              TotalResidential
                  mortgages
              
              $
              373
              
              $
              3,970
              
              $
              10,803
              
              $
              49,516
              
              $
              64,662Home
                  equity loans and lines of credit
              
              
              137
              
              
              7,230
              
              
              14,855
              
              
              25,108
              
              
              47,330Commercial
                  mortgages
              
              
              2,938
              
              
              4,107
              
              
              17,509
              
              
              36,574
              
              
              61,128Commercial
                  business
              
              
              2,727
              
              
              10,903
              
              
              5,549
              
              
              15,409
              
              
              34,588Consumer
              
              
              479
              
              
              6,042
              
              
              796
              
              
              354
              
              
              7,671$
              6,654
              
              $
              32,252
              
              $
              49,512
              
              $
              126,961
              
              $
              215,379




2


The
      following table sets forth the dollar amount of the Corporation’s fixed- and
      adjustable-rate loans with maturities greater than one year as of December
      31,
      2006:


*(Dollar
                  amounts in thousands)*
              
              Fixed
              
              Adjustablerates
              
              ratesResidential
                  mortgage
              
              $
              52,883
              
              $
              11,405Home
                  equity loans and lines of credit
              
              
              43,588
              
              
              3,605Commercial
                  mortgage
              
              
              23,377
              
              
              34,813Commercial
                  business
              
              
              24,402
              
              
              7,459Consumer
              
              
              7,193
              
              
              -$
              151,443
              
              $
              57,282




Contractual
      maturities of loans do not reflect the actual term of the Corporation’s loan
      portfolio. The average life of mortgage loans is substantially less than their
      contractual terms because of loan prepayments and enforcement of due-on-sale
      clauses, which give the Corporation the right to declare a loan immediately
      payable in the event, among other things, that the borrower sells the real
      property subject to the mortgage. Scheduled principal amortization also reduces
      the average life of the loan portfolio. The average life of mortgage loans
      tends
      to increase when current market mortgage rates substantially exceed rates on
      existing mortgages and conversely, decrease when rates on existing mortgages
      substantially exceed current market interest rates.





**Delinquencies
      and Classified Assets**





*Delinquent
      Loans and Real Estate Acquired Through Foreclosure (REO).* Typically,
      a loan is considered past due and a late charge is assessed when the borrower
      has not made a payment within fifteen days from the payment due date. When
      a
      borrower fails to make a required payment on a loan, the Corporation attempts
      to
      cure the deficiency by contacting the borrower. The initial contact with the
      borrower is made shortly after the seventeenth day following the due date for
      which a payment was not received. In most cases, delinquencies are cured
      promptly.





If
      the
      delinquency exceeds 60 days, the Corporation works with the borrower to set
      up a
      satisfactory repayment schedule. Typically loans are considered non-accruing
      upon reaching 90 days delinquency, although the Corporation may be receiving
      partial payments of interest and partial repayments of principal on such loans.
      When a loan is placed in non-accrual status, previously accrued but unpaid
      interest is deducted from interest income. The Corporation institutes
      foreclosure action on secured loans only if all other remedies have been
      exhausted. If an action to foreclose is instituted and the loan is not
      reinstated or paid in full, the property is sold at a judicial or trustee’s sale
      at which the Corporation may be the buyer.





Real
      estate properties acquired through, or in lieu of, loan foreclosure are to
      be
      sold and are initially recorded at fair value at the date of foreclosure
      establishing a new cost basis. After foreclosure, management periodically
      performs valuations and the real estate is carried at the lower of carrying
      amount or fair value less cost to sell. Revenue and expenses from operations
      and
      changes in the valuation allowance are included in loss on foreclosed real
      estate. The Corporation generally attempts to sell its REO properties as soon
      as
      practical upon receipt of clear title. The original lender typically handles
      disposition of those REO properties resulting from loans purchased in the
      secondary market.





As
      of
      December 31, 2006, the Corporation’s non-performing assets, which include
      non-accrual loans, loans delinquent due to maturity, troubled debt
      restructuring, repossessions and REO, amounted to $1.9 million or 0.65% of
      the
      Corporation’s total assets.




3


*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 classifications 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 and 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 December 31, 2006, the
      Corporation’s classified and criticized assets amounted to $5.1 million with
      $3.3 million classified as substandard and $1.8 million identified as special
      mention.





The
      following table sets forth information regarding the Corporation’s
      non-performing assets as of December 31:


*(Dollar
                  amounts in thousands)*
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              2002Non-performing
                  loans
              
              $
              1,841
              
              
              $
              1,452
              
              
              $
              840
              
              
              $
              1,329
              
              
              $
              1,160Total
                  as a percentage of gross loans
              
              
              0.85
              %
              
              
              0.75
              %
              
              
              0.46
              %
              
              
              0.69
              %
              
              
              0.69
              %Repossessions
              
              
              -
              
              
              
              -
              
              
              
              2
              
              
              
              45
              
              
              
              -Real
                  estate acquired through foreclosure
              
              
              98
              
              
              
              106
              
              
              
              69
              
              
              
              -
              
              
              
              3Total
                  as a percentage of total assets
              
              
              0.03
              %
              
              
              0.04
              %
              
              
              0.03
              %
              
              
              0.00
              %
              
              
              0.00
              %Total
                  non-performing assets
              
              $
              1,939
              
              
              $
              1,558
              
              
              $
              911
              
              
              $
              1,374
              
              
              $
              1,163Total
                  non-performing assetsas
                  a
                  percentage of total assets
              
              
              0.65
              %
              
              
              0.57
              %
              
              
              0.33
              %
              
              
              0.52
              %
              
              
              0.49
              %Allowance
                  for loan losses as apercentage
                  of non-performing loans
              
              
              110.54
              %
              
              
              128.72
              %
              
              
              215.48
              %
              
              
              133.71
              %
              
              
              136.81
              %




*Allowance
      for Loan Losses.* Management establishes allowances for estimated losses on loans based upon
      its
      evaluation of the pertinent factors underlying the types and quality of loans;
      historical loss experience based on volume and types of loans; trend in
      portfolio volume and composition; level and trend on non-performing assets;
      detailed analysis of individual loans for which full collectibility may not
      be
      assured; determination of the existence and realizable value of the collateral
      and guarantees securing such loans and the current economic conditions affecting
      the collectibility of loans in the portfolio. The Corporation analyzes its
      loan
      portfolio each month for valuation purposes and to determine the adequacy of
      its
      allowance for losses. Based upon the factors discussed above, management
      believes that the Corporation’s allowance for losses as of December 31, 2006 of
      $2.0 million was adequate to cover probable losses inherent in the
      portfolio.




4


The
      following table sets forth an analysis of the allowance for losses on loans
      receivable for the years ended December 31:


*(Dollar
                  amounts in thousands)*
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              2002Balance
                  at beginning of period
              
              $
              1,869
              
              
              $
              1,810
              
              
              $
              1,777
              
              
              $
              1,587
              
              
              $
              1,464Provision
                  for loan losses
              
              
              358
              
              
              
              205
              
              
              
              290
              
              
              
              330
              
              
              
              381Charge-offs:Mortgage
                  loans
              
              
              (154
              )
              
              
              (46
              )
              
              
              (165
              )
              
              
              (25
              )
              
              
              (36
              )Commercial
                  business loans
              
              
              (18
              )
              
              
              (60
              )
              
              
              (36
              )
              
              
              (26
              )
              
              
              (186
              )Consumer
                  loans
              
              
              (49
              )
              
              
              (91
              )
              
              
              (117
              )
              
              
              (154
              )
              
              
              (109
              )(221
              )
              
              
              (197
              )
              
              
              (318
              )
              
              
              (205
              )
              
              
              (331
              )Recoveries:Mortgage
                  loans
              
              
              -
              
              
              
              -
              
              
              
              17
              
              
              
              -
              
              
              
              26Commercial
                  business loans
              
              
              19
              
              
              
              18
              
              
              
              19
              
              
              
              22
              
              
              
              20Consumer
                  loans
              
              
              10
              
              
              
              33
              
              
              
              25
              
              
              
              43
              
              
              
              2729
              
              
              
              51
              
              
              
              61
              
              
              
              65
              
              
              
              73Balance
                  at end of period
              
              $
              2,035
              
              
              $
              1,869
              
              
              $
              1,810
              
              
              $
              1,777
              
              
              $
              1,587Ratio
                  of net charge-offs to average loans outstanding
              
              
              0.09
              %
              
              
              0.08
              %
              
              
              0.14
              %
              
              
              0.08
              %
              
              
              0.15
              %Ratio
                  of allowance to total loans at end of period
              
              
              0.94
              %
              
              
              0.96
              %
              
              
              1.00
              %
              
              
              0.92
              %
              
              
              0.93
              %





The
      following table provides a breakdown of the allowance for loan losses by major
      loan category for the years ended December 31:


*(Dollar
                  amounts in thousands)*
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Percent
                  of
              
              
              
              Percent
                  of
              
              
              
              Percent
                  of
              
              
              
              Percent
                  of
              
              
              
              Percent
                  ofloans
                  in each
              
              
              
              loans
                  in each
              
              
              
              loans
                  in each
              
              
              
              loans
                  in each
              
              
              
              loans
                  in eachDollar
              
              category
                  to
              
              Dollar
              
              category
                  to
              
              Dollar
              
              category
                  to
              
              Dollar
              
              category
                  to
              
              Dollar
              
              category
                  toLoan
                  Categories:
              
              Amount
              
              total
                  loans
              
              Amount
              
              total
                  loans
              
              Amount
              
              total
                  loans
              
              Amount
              
              total
                  loans
              
              Amount
              
              total
                  loansCommercial,
                  financial and agricultural
              
              $
              532
              
              
              26.1
              %
              
              $
              554
              
              
              29.6
              %
              
              $
              503
              
              
              27.8
              %
              
              $
              623
              
              
              35.1
              %
              
              $
              479
              
              
              30.2
              %Commercial
                  mortgages
              
              
              820
              
              
              40.3
              %
              
              
              841
              
              
              45.0
              %
              
              
              1,137
              
              
              62.8
              %
              
              
              798
              
              
              44.9
              %
              
              
              625
              
              
              39.4
              %Residential
                  mortgages
              
              
              239
              
              
              11.7
              %
              
              
              211
              
              
              11.3
              %
              
              
              10
              
              
              0.6
              %
              
              
              20
              
              
              1.1
              %
              
              
              21
              
              
              1.3
              %Home
                  equity loans
              
              
              339
              
              
              16.7
              %
              
              
              150
              
              
              8.0
              %
              
              
              39
              
              
              2.2
              %
              
              
              68
              
              
              3.8
              %
              
              
              63
              
              
              4.0
              %Consumer
                  loans
              
              
              83
              
              
              4.1
              %
              
              
              106
              
              
              5.7
              %
              
              
              121
              
              
              6.7
              %
              
              
              190
              
              
              10.7
              %
              
              
              119
              
              
              7.5
              %Unallocated
              
              
              22
              
              
              1.1
              %
              
              
              7
              
              
              0.4
              %
              
              
              -
              
              
              0.0
              %
              
              
              78
              
              
              4.4
              %
              
              
              280
              
              
              17.6
              %$
              2,035
              
              
              100
              %
              
              $
              1,869
              
              
              100
              %
              
              $
              1,810
              
              
              100
              %
              
              $
              1,777
              
              
              100
              %
              
              $
              1,587
              
              
              100
              %




**Investment
      Portfolio**





*General.* The
      Corporation maintains an investment portfolio of securities such as U.S.
      government and agency securities, state and municipal debt obligations,
      corporate notes and bonds, and to a lesser extent, mortgage-backed and equity
      securities. Management generally maintains an investment portfolio with
      relatively short maturities to minimize overall interest rate risk. However,
      at
      December 31, 2006 approximately $14.7 million was invested in longer-term
      callable municipal securities, as part of a strategy to moderate federal income
      taxes. The Bank has no investment with any one issuer in an amount greater
      than
      10% of stockholders’ equity.





Investment
      decisions are made within policy guidelines established by the Board of
      Directors. This policy is aimed at maintaining a diversified investment
      portfolio, which complements the overall asset/liability and liquidity
      objectives of the Bank, while limiting the related credit risk to an acceptable
      level.


5




The
      following table sets forth certain information regarding the fair value,
      weighted average yields and contractual maturities of the Corporation’s
      securities as of December 31, 2006:


*(Dollar
                  amounts in thousands)*
              
              Due
                  in 1
              
              Due
                  from 1
              
              Due
                  from 3
              
              Due
                  from 5
              
              Due
                  after
              
              No
                  scheduledyear
                  or less
              
              to
                  3
                  years
              
              to
                  5
                  years
              
              to
                  10 years
              
              10
                  years
              
              maturity
              
              TotalU.S.
                  Government securities
              
              $
              6,423
              
              
              $
              18,445
              
              
              $
              3,926
              
              
              $
              1,954
              
              
              $
              -
              
              
              $
              -
              
              
              $
              30,748Mortgage-backed
                  securities
              
              
              -
              
              
              
              288
              
              
              
              942
              
              
              
              1,109
              
              
              
              -
              
              
              
              -
              
              
              
              2,339Municipal
                  securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              939
              
              
              
              14,323
              
              
              
              -
              
              
              
              15,262Equity
                  securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,425
              
              
              
              3,425Estimated
                  fair value
              
              $
              6,423
              
              
              $
              18,733
              
              
              $
              4,868
              
              
              $
              4,002
              
              
              $
              14,323
              
              
              $
              3,425
              
              
              $
              51,774Weighted
                  average yield (1)
              
              
              2.60
              %
              
              
              4.06
              %
              
              
              4.70
              %
              
              
              4.12
              %
              
              
              4.84
              %
              
              
              4.39
              %
              
              
              4.17
              %(1)
                  Weighted average yield is calculated based upon amortized
                  cost.





For
      additional information regarding the Corporation’s investment portfolio see
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” and “Notes to Consolidated Financial Statements” in the Annual
      Report incorporated herein by reference.





**Sources
      of Funds**





*General.* Deposits
      are the primary source of the Bank’s funds for lending and investing activities.
      Secondary sources of funds are derived from loan repayments and investment
      maturities. Loan repayments can be considered a relatively stable funding
      source, while deposit activity is greatly influenced by interest rates and
      general market conditions. The Bank also has access to funds through credit
      facilities available from the FHLB. In addition, the Bank can obtain advances
      from the FRB discount window. For a description of the Bank’s sources of funds,
      see “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” in the Annual Report incorporated herein by reference.





*Deposits.* The Bank
      offers a wide variety of retail deposit account products to both consumer and
      commercial deposit customers, including time deposits, non-interest bearing
      and
      interest bearing demand deposit accounts, savings deposits and money market
      accounts.





Deposit
      products are promoted in periodic newspaper and radio advertisements, along
      with
      notices provided in customer account statements. The Bank’s market strategy is
      based on its reputation as a community bank that provides quality products
      and
      personal customer service.





The
      Bank
      pays interest rates on its interest bearing deposit products that are
      competitive with rates offered by other financial institutions in its market
      area. Management reviews interest rates on deposits weekly and considers a
      number of factors, including (1) the Bank’s internal cost of funds; (2) rates
      offered by competing financial institutions; (3) investing and lending
      opportunities; and (4) the Bank’s liquidity position.





For
      additional information regarding the Corporation’s deposit base and borrowed
      funds, see “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” and “Notes to Consolidated Financial Statements” in the
      Annual Report incorporated herein by reference.





**Subsidiary
      Activity**





The
      Corporation has one wholly owned subsidiary, the Bank, a national association.
      As of December 31, 2006, the Bank had no subsidiaries.




6




**Personnel**





At
      December 31, 2006, the Bank had 101 full time equivalent employees. There is
      no
      collective bargaining agreement between the Bank and its employees, and the
      Bank
      believes its relationship with its employees to be satisfactory.





**Competition**





The
      Bank
      competes for loans, deposits and customers with other commercial banks, savings
      and loan associations, securities and brokerage companies, mortgage companies,
      insurance companies, finance companies, money market funds, credit unions and
      other nonbank financial service providers.




**Supervision
      and Regulation**





***General*** *.* Bank
      holding companies and banks are extensively regulated under both federal and
      state law. Set forth below is a summary description of certain provisions of
      certain laws that relate to the regulation of the Corporation and the Bank.
      The
      description does not purport to be complete and is qualified in its entirety
      by
      reference to the applicable laws and regulations.





***The
      Corporation*** .
      The
      Corporation is a registered bank holding company, and subject to regulation
      and
      examination by the FRB under the Bank Holding Company Act of 1956, as amended
      (the BHCA). The Corporation is required to file with the FRB
      periodic **** reports
      and such additional information as the FRB may require. Recent changes to the
      Bank Holding Company rating system emphasizes risk management and evaluation
      of
      the potential impact of non-depository entities on safety and
      soundness.





The
      FRB
      may require the Corporation to terminate an activity or terminate control of
      or
      liquidate or divest certain subsidiaries, affiliates or investments when the
      FRB
      believes the activity or the control of the subsidiary or affiliate constitutes
      a significant risk to the financial safety, soundness or stability of any of
      its
      banking subsidiaries. The FRB also has the authority to regulate provisions
      of
      certain bank holding company debt, including the authority to impose interest
      ceilings and reserve requirements on such debt. Under certain circumstances,
      the
      Corporation must file written notice and obtain FRB approval prior to purchasing
      or redeeming its equity securities.





Further,
      the Corporation is required by the FRB to maintain certain levels of capital.
      See “Capital Standards.”





The
      Corporation is required to obtain prior FRB approval for the acquisition of
      more
      than 5% of the outstanding shares of any class of voting securities or
      substantially all of the assets of any bank or bank holding company. Prior
      FRB
      approval is also required for the merger or consolidation of the Corporation
      and
      another bank holding company.





The
      Corporation is prohibited by the BHCA, except in certain statutorily prescribed
      instances, from acquiring direct or indirect ownership or control of more than
      5% of the outstanding voting shares of any company that is not a bank or bank
      holding company and from engaging directly or indirectly in activities other
      than those of banking, managing or controlling banks, or furnishing services
      to
      its subsidiaries. However, subject to the prior FRB approval, the Corporation
      may engage in any, or acquire shares of companies engaged in, activities that
      the FRB deems to be so closely related to banking or managing or controlling
      banks as to be a proper incident thereto.





Under
      FRB
      regulations, the Corporation is required to serve as a source of financial
      and
      managerial strength to the Corporation’s subsidiary bank and may not conduct
      operations in an unsafe or unsound manner. In addition, it is the FRB’s policy
      that a bank holding company should stand ready to use available resources to
      provide adequate capital funds to its subsidiary banks during periods of
      financial stress or adversity and should maintain the financial flexibility
      and
      capital-raising capacity to obtain additional resources for assisting its
      subsidiary banks. A bank holding company’s failure to meet its obligations to
      serve as a source of strength to its subsidiary banks will generally be
      considered by the FRB to be an unsafe and unsound banking practice or a
      violation of FRB regulations or both.


The
      Corporation is also a bank holding company within the meaning of the
      Pennsylvania Banking Code. As such, the Corporation and its subsidiaries are
      subject to examination by, and may be required to file reports with, the
      Pennsylvania Department of Banking.




7




The
      Corporation’s securities are registered with the SEC under the Exchange Act. As
      such, the Corporation is subject to the information, proxy solicitation, insider
      trading, corporate governance, and other requirements and restrictions of the
      Exchange Act. The public may obtain all forms and information filed with the
      SEC
      through their website http://www.sec.gov.





***The
      Bank*** *.* As a
      national banking association, the Bank is subject to primary supervision,
      examination and regulation by the OCC. The Corporation is also subject to
      regulations of the FDIC as administrator of the Bank Insurance Fund (BIF) and
      the FRB. If, as a result of an examination of the Bank, the OCC should determine
      that the financial condition, capital resources, asset quality, earnings
      prospects, management, liquidity or other aspects of the Corporation’s
      operations are unsatisfactory or that the Bank is violating or has violated
      any
      law or regulation, various remedies are available to the OCC. Such remedies
      include the power to enjoin “unsafe or unsound practices,” to require
      affirmative action to correct any conditions resulting from any violation or
      practice, to issue an administrative order that can be judicially enforced,
      to
      direct an increase in capital, to restrict the Bank’s growth, to assess civil
      monetary penalties, and to remove officers and directors. The FDIC has similar
      enforcement authority, in addition to its authority to terminate the Bank’s
      deposit insurance in the absence of action by the OCC and upon a finding that
      the Bank is operating in an unsafe or unsound condition, is engaging in unsafe
      or unsound activities, or that the Corporation’s conduct poses a risk to the
      deposit insurance fund or may prejudice the interest of its
      depositors.





A
      national
      bank may have a financial subsidiary engaged in any activity authorized for
      national banks directly or certain permissible activities. Generally, a
      financial subsidiary is permitted to engage in activities that are “financial in
      nature” or incidental thereto, even though they are not permissible for the
      national bank itself. The definition of “financial in nature” includes, among
      other items, underwriting, dealing in or making a market in securities,
      including, for example, distributing shares of mutual funds. The subsidiary
      may
      not, however, engage as principal in underwriting insurance, issue annuities
      or
      engage in real estate development or investment or merchant
      banking.





***The
      Sarbanes-Oxley Act of 2002*** .
      The
      Sarbanes-Oxley Act of 2002 addresses accounting oversight and corporate
      governance matters, including:




**·**
            the
                prohibition of accounting firms from providing various types of consulting
                services to public clients and requiring accounting firms to rotate
                partners among public client assignments every five
                years;


**·**
            increased
                penalties for financial crimes and forfeiture of executive bonuses
                in
                certain circumstances;


**·**
            required
                executive certification of financial
                presentations;


**·**
            increased
                requirements for board audit committees and their
                members;


**·**
            enhanced
                disclosure of controls and procedures and internal control over financial
                reporting;


**·**
            enhanced
                controls on, and reporting of, insider trading; and


**·**
            statutory
                separations between investment bankers and analysts.




The
      new
      legislation and its implementing regulations have resulted in increased costs
      of
      compliance, including certain outside professional costs. To date these costs
      have not had a material impact on the Corporation’s operations.




***USA
      PATRIOT Act of 2001*** .
      The USA
      PATRIOT Act of 2001 and its implementing regulations significantly expanded
      the
      anti-money laundering and financial transparency laws. Under the USA PATRIOT
      Act, financial institutions are subject to prohibitions regarding specified
      financial transactions and account relationships, as well as enhanced due
      diligence and “know your customer” standards in their dealings with foreign
      financial institutions and foreign customers. For example, the enhanced due
      diligence policies, procedures and controls generally require financial
      institutions to take reasonable steps:




8




·
            To
                conduct enhanced scrutiny of account relationships to guard against
                money
                laundering and report any suspicious
                transaction,


·
            To
                ascertain the identity of the nominal and beneficial owners of, and
                the
                source of funds deposited into, each account as needed to guard against
                money laundering and report
                any suspicious transactions,


·
            To
                ascertain for any foreign bank, the shares of which are not publicly
                traded, the identity of the owners of the foreign bank, and the nature
                and
                extent of the ownership interest of each such owner, and


·
            To
                ascertain whether any foreign bank provides correspondent accounts
                to
                other foreign banks and, if so, the identity of those foreign banks
                and
                related due diligence information.




Under
      the
      USA PATRIOT Act, financial institutions are required to establish and maintain
      anti-money laundering programs which included:




·
            The
                establishment of a customer identification
                program,


·
            The
                development of internal policies, procedures, and controls,


·
            The
                designation of a compliance officer,


·
            An
                ongoing employee training program, and


·
            An
                independent audit function to test the programs.




The
      Bank
      has implemented comprehensive policies and procedures to address the
      requirements of the USA PATRIOT Act.




***Privacy*** .
      Federal
      banking rules limit the ability of banks and other financial institutions to
      disclose non-public information about consumers to nonaffiliated third parties.
      Pursuant to these rules, financial institutions must provide:




·
            initial
                notices to customers about their privacy policies, describing the
                conditions under which they may disclose nonpublic personal information
                to
                nonaffiliated third parties and
                affiliates;


·
            annual
                notices of their privacy policies to current customers;
                and


·
            a
                reasonable method for customers to “opt out” of disclosures to
                nonaffiliated third parties.




These
      privacy provisions affect how consumer information is transmitted through
      diversified financial companies and conveyed to outside vendors. The
      Corporation’s privacy policies have been implemented in accordance with the
      law.




***Dividends
        and Other Transfers of Funds*** **.** Dividends
        from the Bank constitute the principal source of income to the Corporation.
        The
        Corporation is a legal entity separate and distinct from the Bank. The Bank
        is
        subject to various statutory and regulatory restrictions on its ability to
        pay
        dividends to the Corporation. In addition, the Bank’s regulators have the
        authority to prohibit the Bank from paying dividends, depending upon the
        Bank’s
        financial condition, if such payment is deemed to constitute an unsafe or
        unsound practice.
  ***Transactions
        with Affiliates.*** **** The
        Bank
        is subject to certain restrictions imposed by federal law on any extensions
        of
        credit to, or the issuance of a guarantee or letter of credit on behalf of,
        any
        affiliates, the purchase of, or investments in, stock or other securities
        thereof, the taking of such securities as collateral for loans, and the purchase
        of assets of any affiliates. Such restrictions prevent any affiliates from
        borrowing from the Bank unless the loans are secured by marketable obligations
        of designated amounts. Further, such secured loans and investments by the
        Bank
        to or in any affiliate are limited, individually, to 10.0% of the Bank’s capital
        and surplus (as defined by federal regulations), and such secured loans and
        investments are limited, in the aggregate, to 20.0% of the Bank’s capital and
        surplus. Some of the entities included in the definition of an affiliate
        are
        parent companies, sister banks, sponsored and advised companies, investment
        companies whereby the Bank or its affiliate serves as investment advisor,
        and
        financial subsidiaries of the bank. Additional restrictions on transactions
        with
        affiliates may be imposed on the Bank under the prompt corrective action
        provisions of federal law. See “Prompt Corrective Action and Other Enforcement
        Mechanisms.”




9




***Loans
      to One Borrower Limitations.*** **** With
      certain limited exceptions, the maximum amount that a national bank may lend
      to
      any borrower (including certain related entities of the borrower) at one time
      may not exceed 15% of the unimpaired capital and surplus of the institution,
      plus an additional 10% of unimpaired capital and surplus for loans fully secured
      by readily marketable collateral. At December 31, 2006, the Bank’s
      loans-to-one-borrower limit was $3.4 million based upon the 15% of unimpaired
      capital and surplus measurement. At December 31, 2006, the Bank’s largest single
      lending relationship had an outstanding balance of $4.5 million, which consisted
      of a loan to a municipality and was not subject to the legal lending limit.
      The
      Bank had one additional lending relationship exceeding the legal lending limit
      totaling $3.8 million at December 31, 2006. Credit granted to this borrower
      in
      excess of the legal lending limit is part of the Pilot Program approved by
      the
      OCC which allows the Bank to exceed its legal lending limit within certain
      parameters. The next largest borrower had loans which totaled $3.3 million
      and
      consisted of loans secured by commercial real estate and business property
      in
      the Bank’s lending area. At December 31, 2006, all of such loans were performing
      in accordance with their terms.




***Capital
      Standards*** **.** The
      federal banking agencies have adopted risk-based minimum capital guidelines
      intended to provide a measure of capital that reflects the degree of risk
      associated with a banking organization’s operations for both transactions
      reported on the balance sheet as assets and transactions which are recorded
      as
      off-balance sheet items. Under these guidelines, nominal dollar amounts of
      assets and credit equivalent amounts of off-balance sheet items are multiplied
      by one of several risk adjustment percentages, which range from 0% for assets
      with low credit risk, such as federal banking agencies, to 100% for assets
      with
      relatively high credit risk.




The
      risk-based capital ratio is determined by classifying assets and certain
      off-balance sheet financial instruments into weighted categories, with higher
      levels of capital being required for those categories perceived as representing
      greater risk. Under the capital guidelines, a banking organization’s total
      capital is divided into tiers. “Tier I capital” consists of (1) common equity,
      (2) qualifying noncumulative perpetual preferred stock, (3) a limited amount
      of
      qualifying cumulative perpetual preferred stock and (4) minority interests
      in
      the equity accounts of consolidated subsidiaries (including trust-preferred
      securities), less goodwill and certain other intangible assets. Not more than
      25% of qualifying Tier I capital may consist of trust-preferred securities.
      “Tier II capital” consists of hybrid capital instruments, perpetual debt,
      mandatory convertible debt securities, a limited amount of subordinated debt,
      preferred stock that does not qualify as Tier I capital, a limited amount of
      the
      allowance for loan and lease losses and a limited amount of unrealized holding
      gains on equity securities. “Tier III capital” consists of qualifying unsecured
      subordinated debt. The sum of Tier II and Tier III capital may not exceed the
      amount of Tier I capital.




The
      guidelines require a minimum ratio of qualifying total capital to risk-adjusted
      assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets
      of
      4%. In addition to the risk-based guidelines, federal banking regulators require
      banking organizations to maintain a minimum amount of Tier 1 capital to total
      assets, referred to as the leverage ratio. For a banking organization rated
      in
      the highest of the five categories used by regulators to rate banking
      organizations, the minimum leverage ratio of Tier 1 capital to total assets
      must
      be 3%. In addition to these uniform risk-based capital guidelines and leverage
      ratios that apply across the industry, the regulators have the discretion to
      set
      individual minimum capital requirements for specific institutions at rates
      significantly above the minimum guidelines and ratios.




In
        addition, federal banking regulators may set capital requirements higher
        than
        the minimums described above for financial institutions whose circumstances
        warrant it. For example, a financial institution experiencing or anticipating
        significant growth may be expected to maintain capital positions substantially
        above the minimum supervisory levels without significant reliance on intangible
        assets.




10


***Prompt
      Corrective Action and Other Enforcement Mechanisms*** .
      Federal
      banking agencies possess broad powers to take corrective and other supervisory
      action to resolve the problems of insured depository institutions, including
      but
      not limited to those institutions that fall below one or more prescribed minimum
      capital ratios. Each federal banking agency has promulgated regulations defining
      the following five categories in which an insured depository institution will
      be
      placed, based on its capital ratios: well capitalized, adequately capitalized,
      undercapitalized, significantly undercapitalized, and critically
      undercapitalized. At December 31, 2006, the Bank exceeded the required ratios
      for classification as “well/adequately capitalized.”





An
      institution that, based upon its capital levels, is classified as well
      capitalized, adequately capitalized, or undercapitalized may be treated as
      though it were in the next lower capital category if the appropriate federal
      banking agency, after notice and opportunity for hearing, determines that an
      unsafe or unsound condition or an unsafe or unsound practice warrants such
      treatment. At each successive lower capital category, an insured depository
      institution is subject to more restrictions. The federal banking agencies,
      however, may not treat a significantly undercapitalized institution as
      critically undercapitalized unless its capital ratio actually warrants such
      treatment.





In
      addition to measures taken under the prompt corrective action provisions,
      commercial banking organizations may be subject to potential enforcement actions
      by the federal regulators for unsafe or unsound practices in conducting their
      businesses or for violations of any law, rule, regulation, or any condition
      imposed in writing by the agency or any written agreement with the agency.
      Finally, pursuant to an interagency agreement, the FDIC can examine any
      institution that has a substandard regulatory examination score or is considered
      undercapitalized - without the express permission of the institution’s primary
      regulator.





***Safety
      and Soundness Standards*** .
      The
      federal banking agencies have adopted guidelines designed to assist the federal
      banking agencies in identifying and addressing potential safety and soundness
      concerns before capital becomes impaired. The guidelines set forth operational
      and managerial standards relating to: (i) internal controls, information
      systems and internal audit systems, (ii) loan documentation,
      (iii) credit underwriting, (iv) asset growth, (v) earnings, and
      (vi) compensation, fees and benefits. In addition, the federal banking
      agencies have also adopted safety and soundness guidelines with respect to
      asset
      quality and earnings standards. These guidelines provide six standards for
      establishing and maintaining a system to identify problem assets and prevent
      those assets from deteriorating. Under these standards, an insured depository
      institution should: (i) conduct periodic asset quality reviews to identify
      problem assets, (ii) estimate the inherent losses in problem assets and
      establish reserves that are sufficient to absorb estimated losses,
      (iii) compare problem asset totals to capital, (iv) take appropriate
      corrective action to resolve problem assets, (v) consider the size and
      potential risks of material asset concentrations, and (vi) provide periodic
      asset quality reports with adequate information for management and the board
      of
      directors to assess the level of asset risk. These guidelines also set forth
      standards for evaluating and monitoring earnings and for ensuring that earnings
      are sufficient for the maintenance of adequate capital and
      reserves.





***Premiums
      for Deposit Insurance*** **.** Through
      the BIF, the FDIC insures the Bank’s customer deposits up to prescribed limits
      for each depositor. The amount of FDIC assessments paid by each BIF member
      institution is based on its relative risk of default as measured by regulatory
      capital ratios and other factors. Specifically, the assessment rate is based
      on
      the institution's capitalization risk category and supervisory subgroup
      category. An institution's capitalization risk category is based on the FDIC's
      determination of whether the institution is well capitalized, adequately
      capitalized or less than adequately capitalized. An institution's supervisory
      subgroup category is based on the FDIC's assessment of the financial condition
      of the institution and the probability that FDIC intervention or other
      corrective action will be required.




FDIC-insured
      depository institutions pay an assessment rate equal to the rate assessed on
      deposits insured by the Saving s
      Association Insurance Fund (SAIF).


11




The
      assessment rate currently ranges from zero to 27 cents per $100 of domestic
      deposits. The FDIC may increase or decrease the assessment rate schedule on
      a
      semi-annual basis. Due to continued growth in deposits and some recent bank
      failures, the BIF is nearing its minimum ratio of 1.25% of insured deposits
      as
      mandated by law. If the ratio drops below 1.25%, it is likely the FDIC will
      be
      required to assess premiums on all banks. Any increase in assessments or the
      assessment rate could have a material adverse effect on the Corporation's
      earnings, depending on the amount of the increase. Furthermore, the FDIC is
      authorized to raise insurance premiums under certain circumstances.





The
      FDIC
      is authorized to terminate a depository institution's deposit insurance upon
      a
      finding by the FDIC that the institution's financial condition is unsafe or
      unsound or that the institution has engaged in unsafe or unsound practices
      or
      has violated any applicable rule, regulation, order or condition enacted or
      imposed by the institution's regulatory agency. The termination of deposit
      insurance for the Bank could have a material adverse effect on the Corporation's
      earnings, depending on the collective size of the particular institutions
      involved.





All
      FDIC-insured depository institutions must pay an annual assessment to provide
      funds for the payment of interest on bonds issued by the Financing Corporation,
      a federal corporation chartered under the authority of the Federal Housing
      Finance Board. The bonds, commonly referred to as FICO bonds, were issued to
      capitalize the Federal Savings and Loan Insurance Corporation. The FICO
      assessment rates for fourth quarter of fiscal 2006 were 1.24 cents for each
      $100
      of assessable deposits. The FICO assessments are adjusted quarterly to reflect
      changes in the assessment bases of the FDIC's insurance funds and do not vary
      depending on a depository institution's capitalization or supervisory
      evaluations.





***Deposit
      Insurance Reform.*** ** On
      February 8, 2006, President Bush signed into law legislation that merges the
      BIF
      and the SAIF, eliminates any disparities in bank and thrift risk-based premium
      assessments, reduces the administrative burden of maintaining and operating
      two
      separate funds and establishes certain new insurance coverage limits and a
      mechanism for possible periodic increases. The legislation also gives the FDIC
      greater discretion to identify the relative risks all institutions present
      to
      the deposit insurance fund and set risk-based premiums.





Major
      provisions in the legislation include: maintaining basic deposit and municipal
      account insurance coverage at $100,000 but providing for a new basic insurance
      coverage for retirement accounts of $250,000. Insurance coverage for basic
      deposit and retirement accounts could be increased for inflation every five
      years in $10,000 increments beginning in 2011; providing the FDIC with the
      ability to set the designated reserve ratio within a range of between 1.15
      percent and 1.50 percent, rather than maintaining 1.25 percent at all times
      regardless of prevailing economic conditions; providing a one-time assessment
      credit of $4.7 billion to banks and savings associations in existence on
      December 31, 1996. The institutions qualifying for the credit may use it to
      offset future premiums with certain limitations; requiring the payment of
      dividends of 100% of the amount that the insurance fund exceeds 1.5% of the
      estimated insured deposits and the payment of 50% of the amount that the
      insurance fund exceeds **** 1.35%
      of
      the estimated insured deposits. (when the reserve is greater than 1.35% but
      no
      more than 1.5%); the merger of the SAIF and BIF must occur no later than July
      1,
      2006. Other provisions will become effective within 90 days of the publication
      date of the final FDIC regulations implementing the legislation.





***Interstate
      Banking and Branching*** **.** Banks
      have
      the ability, subject to certain State restrictions, to acquire, by acquisition
      or merger, branches outside its home state. The establishment of new interstate
      branches is also possible in those states with laws that expressly permit it.
      Interstate branches are subject to certain laws of the states in which they
      are
      located. Competition may increase further as banks branch across state lines
      and
      enter new markets.




***Consumer
      Protection Laws and Regulations*** .
      The bank
      regulatory agencies are focusing greater attention on compliance with consumer
      protection laws and their implementing regulations. Examination and enforcement
      have become more intense in nature, and insured institutions have been advised
      to monitor carefully compliance with such laws and regulations. The bank is
      subject to many federal consumer protection statutes and regulations, some
      of
      which are discussed below.




12




The
      Community Reinvestment Act (CRA) is intended to encourage insured depository
      institutions, while operating safely and soundly, to help meet the credit needs
      of their communities. The CRA specifically directs the federal regulatory
      agencies, in examining insured depository institutions, to assess a bank’s
      record of helping meet the credit needs of its entire community, including
      low-
      and moderate-income neighborhoods, consistent with safe and sound banking
      practices. The CRA further requires the agencies to take a financial
      institution’s record of meeting its community credit needs into account when
      evaluating applications for, among other things, domestic branches, mergers
      or
      acquisitions, or holding company formations. The agencies use the CRA assessment
      factors in order to provide a rating to the financial institution. The ratings
      range from a high of “outstanding” to a low of “substantial noncompliance.” In
      its last examination for CRA compliance, as of March 22, 1999, the Bank was
      rated “satisfactory.”




On
      February 22, 2005, the federal banking agencies re-proposed amendments to the
      CRA regulations that would:




·
            increase
                the definition of “small institution” from total assets of $250 million to
                $1 billion, without regard to any holding company;
                and




·
            take
                into account abusive lending practices by a bank or its affiliates
                in
                determining a bank’s CRA rating.




There
      can
      be no assurances such proposal will be adopted or, if adopted, in what
      form.




The
      Fair
      Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions
      Act (FACT) requires financial firms to help deter identity theft, including
      developing appropriate fraud response programs, and give consumers more control
      of their credit data. It also reauthorizes a federal ban on state laws that
      interfere with corporate credit granting and marketing practices. In connection
      with FACT, financial institution regulatory agencies proposed rules that would
      prohibit an institution from using certain information about a consumer it
      received from an affiliate to make a solicitation to the consumer, unless the
      consumer has been notified and given a chance to opt out of such solicitations.
      A consumer’s election to opt out would be applicable for at least five
      years.




The
      Check
      Clearing for the 21st Century Act (Check 21) facilitates check truncation and
      electronic check exchange by authorizing a new negotiable instrument called
      a
“substitute check,” which is the legal equivalent of an original check. Check
      21, effective October 28, 2004, does not require banks to create substitute
      checks or accept checks electronically; however, it does require banks to accept
      a legally equivalent substitute check in place of an original.




The
      Equal
      Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit
      transaction, whether for consumer or business purposes, on the basis of race,
      color, religion, national origin, sex, marital status, age (except in limited
      circumstances), receipt of income from public assistance programs, or good
      faith
      exercise of any rights under the Consumer Credit Protection Act.




The
      Truth
      in Lending Act (TILA) is designed to ensure that credit terms are disclosed
      in a
      meaningful way so that consumers may compare credit terms more readily and
      knowledgeably. As a result of the TILA, all creditors must use the same credit
      terminology to express rates and payments, including the annual percentage
      rate,
      the finance charge, the amount financed, the total of payments and the payment
      schedule, among other things.




The
      Fair
      Housing Act (FH Act) regulates many practices, including making it unlawful
      for
      any lender to discriminate in its housing-related lending activities against
      any
      person because of race, color, religion, national origin, sex, handicap or
      familial status. A number of lending practices have been found by the courts
      to
      be, or may be considered, illegal under the FH Act, including some that are
      not
      specifically mentioned in the FH Act itself.




13




The
      Home
      Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages
      in certain urban neighborhoods and provides public information that will help
      show whether financial institutions are serving the housing credit needs of
      the
      neighborhoods and communities in which they are located. The HMDA also includes
      a “fair lending” aspect that requires the collection and disclosure of data
      about applicant and borrower characteristics as a way of identifying possible
      discriminatory lending patterns and enforcing anti-discrimination statutes.




The
      term
“predatory lending,” much like the terms “safety and soundness” and “unfair and
      deceptive practices,” is far-reaching and covers a potentially broad range of
      behavior. As such, it does not lend itself to a concise or a comprehensive
      definition. But typically predatory lending involves at least one, and perhaps
      all three, of the following elements:




·
            making
                unaffordable loans based on the assets of the borrower rather than
                on the
                borrower’s ability to repay an obligation (“asset-based lending”)




·
            inducing
                a borrower to refinance a loan repeatedly in order to charge high
                points
                and fees each time the loan is refinanced (“loan flipping”)




·
            engaging
                in fraud or deception to conceal the true nature of the loan obligation
                from an unsuspecting or unsophisticated borrower.




FRB
      regulations aimed at curbing such lending significantly widen the pool of
      high-cost home-secured loans covered by the Home Ownership and Equity Protection
      Act of 1994, a federal law that requires extra disclosures and consumer
      protections to borrowers. Lenders that violate the rules face cancellation
      of
      loans and penalties equal to the finance charges paid.




Effective
      April 8, 2005, OCC guidelines require national banks and their operating
      subsidiaries to comply with certain standards when making or purchasing loans
      to
      avoid predatory or abusive residential mortgage lending practices. Failure
      to
      comply with the guidelines could be deemed an unsafe and unsound or unfair
      or
      deceptive practice, subjecting the bank to supervisory enforcement
      actions.




Finally,
      the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide
      borrowers with disclosures regarding the nature and cost of real estate
      settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks,
      and places limitations on the amount of escrow accounts. Penalties under the
      above laws may include fines, reimbursements and other penalties. Due to
      heightened regulatory concern related to compliance with the CRA, TILA, FH
      Act,
      ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs
      or be required to expend additional funds for investments in its local
      community.




***Federal
      Home Loan Bank System*** **.** The Bank
      is a member of the Federal Home Loan Bank of Pittsburgh. Among other benefits,
      each FHLB serves as a reserve or central bank for its members within its
      assigned region. Each FHLB is financed primarily from the sale of consolidated
      obligations of the FHLB system. Each FHLB makes available loans or advances
      to
      its members in compliance with the policies and procedures established by the
      Board of Directors of the individual FHLB. As an FHLB member, the Bank is
      required to own a certain amount of capital stock in the FHLB. At December
      31,
      2006, the Bank was in compliance with the stock requirements.




***Federal
      Reserve System*** **.** The
      FRB
      requires all depository institutions to maintain non-interest bearing reserves
      at specified levels against their transaction accounts (primarily checking,
      NOW,
      and Super NOW checking accounts) and non-personal time deposits. At December
      31,
      2006, the Bank was in compliance with these requirements.




14




**Forward
      Looking Statements**




Discussions
      of certain matters in this Form 10- K
      and
      other related year end documents may constitute forward-looking statements
      within the meaning of Section 27A of the Securities Act of 1933, as amended,
      and
      Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
      Act), and as such, may involve risks and uncertainties. Forward-looking
      statements, which are based on certain assumptions and describe future plans,
      strategies, and expectations, are generally identifiable by the use of words
      or
      phrases such as “believe”, “plan”, “expect”, “intend”, “anticipate”, “estimate”,
“project”, “forecast”, “may increase”, “may fluctuate”, “may improve” and
      similar expressions of future or conditional verbs such as “will”, “should”,
“would”, and “could”. These forward-looking statements relate to, among other
      things, expectations of the business environment in which the Corporation
      operates, projections of future performance, potential future credit experience,
      perceived opportunities in the market and statements regarding the Corporation’s
      mission and vision. The Corporation’s actual results, performance and
      achievements may differ materially from the results, performance, and
      achievements expressed or implied in such forward-looking statements due to
      a
      wide range of factors. These factors include, but are not limited to, changes
      in
      interest rates, general economic conditions, the local economy, the demand
      for
      the Corporation’s products and services, accounting principles or guidelines,
      legislative and regulatory changes, monetary and fiscal policies of the U.S.
      Government, U.S. Treasury, and Federal Reserve, real estate markets, competition
      in the financial services industry, attracting and retaining key personnel,
      performance of new employees, regulatory actions, changes in and utilization
      of
      new technologies and other risks detailed in the Corporation’s reports filed
      with the Securities and Exchange Commission (SEC) from time to time. These
      factors and those discussed under “Risk Factors” should be considered in
      evaluating the forward-looking statements, and undue reliance should not be
      placed on such statements. The Corporation does not undertake, and specifically
      disclaims any obligation, to update any forward-looking statements to reflect
      occurrences or unanticipated events or circumstances after the date of such
      statements.





15




**Item
      1A. Risk Factors**




The
      following discusses certain factors that may affect the Corporation’s financial
      condition and results of operations and should be considered in analyzing
      whether to make or continue an investment in our common stock.





*Ability
      of the Corporation to Execute Its Business Strategy* .
      The
      financial performance and profitability of the Corporation will depend, in
      large
      part, on its ability to favorably execute its business strategy. This execution
      entails risks in, among other areas, technology implementation, market
      segmentation, brand identification, banking operations, and capital and human
      resource investments. Accordingly, there can be no assurance that the
      Corporation will be successful in its business strategy.





*Economic
      Conditions and Geographic Concentration* .
      The
      Corporation’s operations are located in western Pennsylvania and are
      concentrated in Venango, Clarion and Butler Counties, Pennsylvania. Although
      management has diversified the Corporation’s loan portfolio into other
      Pennsylvania counties, and to a very limited extent into other states, the
      vast
      majority of the Corporation’s credits remain concentrated in the
      three **** primary
      counties. As a result of this geographic concentration, the Corporation’s
      results depend largely upon economic and real estate market conditions in these
      areas. Deterioration in economic or real estate market conditions in the
      Corporation’s primary market areas could have a material adverse impact on the
      quality of the Corporation’s loan portfolio, the demand for its products and
      services, and its financial condition and results of operations.





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


§
            the
                demand for new loans;


§
            the
                value of our interest-earning
                assets;


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


§
            credit
                profiles of existing borrowers;


§
            rates
                received on loans and securities;


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


§
            rates
                paid on deposits and borrowings.





As
      presented previously, the Corporation is financially exposed to parallel shifts
      in general market interest rates, changes in the relative pricing of the term
      structure of general market interest rates, and relative credit spreads.
      Therefore, significant fluctuations in interest rates may have
      an
      adverse effect upon the Corporation’s financial condition and results of
      operations.




*Government
      Regulation And Monetary Policy.* **** The
      financial services industry is subject to extensive federal and state
      supervision and regulation. Significant new laws, changes in existing laws,
      or
      repeals of present laws could cause the Corporation’s financial results to
      materially differ from past results. Further, federal monetary policy,
      particularly as implemented through the Federal Reserve System, significantly
      affects credit conditions for the Corporation, and a material change in these
      conditions could present an adverse impact on the Corporation’s financial
      condition and results of operations.





*Competition.* The
      financial services business in the Corporation’s market areas is highly
      competitive, and is becoming more so due to technological advances (particularly
      Internet based financial services delivery), changes in the regulatory
      environment, and the enormous consolidation that has occurred among financial
      services providers. Many of the Corporation’s competitors are much larger in
      terms of total assets and market capitalization, enjoy greater liquidity in
      their equity securities, have greater access to capital and funding, and offer
      a
      broader array of financial products and services. In light of this environment,
      there can be no assurance that the Corporation will be able to compete
      effectively. The results of the Corporation may materially differ in future
      periods depending upon the nature or level of competition.




16




*Credit
      Quality* .
      A
      significant source of risk arises from the possibility that losses will be
      sustained because borrowers, guarantors, and related parties may fail to perform
      in accordance with the terms of their loans. The Corporation has adopted
      underwriting and credit monitoring procedures and credit policies, including
      the
      establishment and review of the allowance for loan losses, that management
      believes are appropriate to control this risk by assessing the likelihood of
      non-performance, tracking loan performance, and diversifying the credit
      portfolio. Such policies and procedures may not, however, prevent unexpected
      losses that could have a material adverse effect on the Corporation’s financial
      condition or results of operations. Unexpected losses may arise from a wide
      variety of specific or systemic factors, many of which are beyond the
      Corporation’s ability to predict, influence, or control.





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





*Our
      allowance for loan losses on loans may not be adequate to cover probable
      losses* **.** We have
      established an allowance for loan losses which we believe is adequate to offset
      probable losses on our existing loans. There can be no assurance that any future
      declines in real estate market conditions, general economic conditions or
      changes in regulatory policies will not require us to increase our allowance
      for
      loan losses, which could adversely affect our results of
      operations.





*Other
      Risks.* From time
      to time, the Corporation details other risks with respect to its business and
      financial results in its filings with the SEC.





**Item
      1B. Unresolved staff comments**





Not
      applicable.




17


**Item
      2. Properties**





The
      Corporation owns no real property but utilizes the main office of the Bank.
      The
      Corporation’s and the Bank’s executive offices are located at 612 Main Street,
      Emlenton, Pennsylvania. The Corporation pays no rent or other form of
      consideration for the use of this facility. The following table sets forth
      information with respect to the Bank’s offices at December 31,
      2006:




*(Dollar
                  amounts in thousands)*
              
              
              
              **Owned**
              
              **Lease**
              
              **Net
                  Book**
              
              **Deposits****or**
              
              **Expiration**
              
              **Value
                  or**
              
              **at****Location**
              
              
              
              **County**
              
              **Leased**
              
              **Date
                  (1)**
              
              **Annual
                  Rent**
              
              **12/31/2006****Corporate
                  and Bank Main Offices:**Headquarters
                  and Main Office
              
              
              
              
              
              Venango
              
              
              Owned
              
              
              --
              
              $
              1,913
              
              $
              44,998612
                  Main Street, Emlenton, Pennsylvania 16373Data
                  Center
              
              
              
              
              
              Venango
              
              
              Owned
              
              
              --
              
              
              1,057
              
              
              --708
                  Main Street, Emlenton, Pennsylvania 16373**Bank
                  Branch Offices**Bon
                  Aire Office
              
              
              
              
              
              Butler
              
              
              Leased
              
              
              May
                  2011
              
              
              38
              
              
              40,8201101
                  North Main Street, Butler, Pennsylvania 16003Brookville
                  Office
              
              
              
              
              
              Jefferson
              
              
              Owned
              
              
              --
              
              
              699
              
              
              21,543263
                  Main Street, Brookville, Pennsylvania 15825Clarion
                  Office
              
              
              
              
              
              Clarion
              
              
              Owned
              
              
              --
              
              
              318
              
              
              36,999Sixth
                  & Wood Street, Clarion, Pennsylvania 16214Cranberry
                  Office
              
              
              
              
              
              Venango
              
              
              Owned
              
              
              --
              
              
              1,219
              
              
              3,1877001
                  Route 322, PO Box 235, Cranberry, PA 16319DuBois
                  Office
              
              
              
              
              
              Clearfield
              
              
              Leased
              
              
              June
                  2010
              
              
              21
              
              
              14,694861
                  Beaver Drive, Dubois, Pennsylvania 15801East
                  Brady Office
              
              
              
              
              
              Clarion
              
              
              Owned
              
              
              --
              
              
              50
              
              
              17,835323
                  Kelly's Way, East Brady, Pennsylvania 16028Eau
                  Claire Office
              
              
              
              
              
              Butler
              
              
              Owned
              
              
              --
              
              
              156
              
              
              14,527207
                  Washington Street, Eau Claire, Pennsylvania 16030Grove
                  City Office (2)
              
              
              
              
              
              Mercer
              
              
              Owned
              
              
              --
              
              
              688
              
              
              --1319
                  West Main Street, Grove City, Pennsylvania 16127Knox
                  Office
              
              
              
              
              
              Clarion
              
              
              Leased
              
              
              December
                  2011
              
              
              27
              
              
              28,985Route
                  338 South, Knox, Pennsylvania 16232Meridian
                  Office
              
              
              
              
              
              Butler
              
              
              Leased
              
              
              December
                  2012
              
              
              26
              
              
              9,707101
                  Meridian Road, Butler, Pennsylvania 16003Ridgway
                  Office
              
              
              
              
              
              Elk
              
              
              Owned
              
              
              --
              
              
              161
              
              
              11,198173
                  Main Street, Ridgway, Pennsylvania 15853$
              244,493(1)Lease
                  agreements for leased offices typically include renewal options.(2)Branch
                  office expected to open in early
                  2008.


**Item
      3. Legal Proceedings**





Neither
      the Bank nor the Corporation is involved in any material legal proceedings.
      The
      Bank, from time to time, is party to litigation that arises in the ordinary
      course of business, such as claims to enforce liens, claims involving the
      origination and servicing of loans, and other issues related to the business
      of
      the Bank. In the opinion of management, the resolution of any such issues would
      not have a material adverse impact on the financial position, results of
      operation, or liquidity of the Bank or the Corporation.





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





No
      matters
      were submitted to stockholders for a vote during the quarter ended December
      31,
      2006.


18


**PART
      II**


**Item
      5. Market for the Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchase of Equity Securities.**





(a)
            The
                information is contained under the section captioned “Stock and Dividend
                Information” in the Corporation’s Annual Report for the fiscal year ended
                December 31, 2006, and is incorporated herein by reference. For
                information with respect to equity compensation plans, see “Item 12 -
                Security Ownership of Certain Beneficial Owners and Management and
                Related
                Stockholder Matters.” There were no sales of the Corporation’s
                unregistered securities during the period covered by this
                report.


Set
      forth
      below is a graph comparing the yearly percentage change in the cumulative total
      shareholder return on the Corporation’s common stock against the cumulative
      total return of NASDAQ Composite and SNL $250 million to $500 million Bank
      Index
      for the five year period beginning December 31, 2001 and ending December 31,
      2006. Each assumes an investment of $100 on December 31, 2001 and reinvestment
      of dividends when paid. The graph is not necessarily indicative of future price
      performance.









***Period
                  Ending******Index***
              
              **12/31/01**
              
              **12/31/02**
              
              **12/31/03**
              
              **12/31/04**
              
              **12/31/05**
              
              **12/31/06**Emclaire
                  Financial Corp.
              
              
              100.00
              
              
              133.83
              
              
              165.38
              
              
              174.91
              
              
              183.66
              
              
              210.29NASDAQ
                  Composite
              
              
              100.00
              
              
              68.76
              
              
              103.67
              
              
              113.16
              
              
              115.57
              
              
              127.58SNL
                  $250M-$500M Bank Index
              
              
              100.00
              
              
              128.95
              
              
              186.31
              
              
              211.46
              
              
              224.51
              
              
              234.58




(b)
            Not
                applicable.





(c)****
            Issuer
                Purchases of Equity Securities. The Corporation did not repurchase
                any of
                its equity securities in the year ended December 31, 2006.




19


**Item
      6. Selected Financial Data**





The
      required information is contained in the section captioned “Selected
      Consolidated Financial Data” in the Corporation’s Annual Report for the year
      ended December 31, 2006 and incorporated herein by reference.





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





The
      required information is contained in the section captioned “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” in the
      Corporation’s Annual Report for the year ended December 31, 2006 and is
      incorporated herein by reference.





**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk**





Market
      risk for the Corporation is comprised primarily from interest rate risk exposure
      and liquidity risk. Since virtually all of the interest-earning assets and
      paying 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. 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.





Based
      on
      certain assumptions 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 December 31, 2006, the Corporation’s
      interest-earning assets maturing or repricing within one year totaled $78.5
      million while the Corporation’s interest-bearing liabilities maturing or
      repricing within one-year totaled $92.2 million, providing an excess of
      interest-bearing liabilities over interest-earning assets of $13.7 million
      or a
      negative 4.6% of total assets. At December 31, 2006, the percentage of the
      Corporation’s assets to liabilities maturing or repricing within one year was
      85.1%.





For
      more
      information, see “Market Risk Management” in Exhibit 13 to the Corporation’s
      Annual Report on Form 10-K for the year ended December 31, 2006.




20




**Item
      8. Financial Statements and Supplementary Data**





The
      Corporation’s consolidated financial statements required herein are contained in
      the Corporation’s Annual Report for the year ended December 31, 2006 and are
      incorporated herein by reference.





**Item
      9. Changes in and Disagreements With Accountants on Accounting and Financial
      Disclosure**





On
      January
      19, 2005, the Corporation’s Board of Directors dismissed its independent
      auditors, Crowe Chizek and Company LLC (Crowe Chizek) to be effective upon
      filing of the 2004 Form 10-K. Crowe Chizek completed its engagement as
      independent auditor for the Corporation’s fiscal year ended December 31, 2004
      upon the filing of the Corporation’s Form 10-K for the year ended December 31,
      2004. Crowe Chizek’s report on the Corporation’s consolidated financial
      statements during the fiscal years ended December 31, 2004 and 2003 contained
      no
      adverse opinion or a disclaimer of opinion, and was not qualified or modified
      as
      to uncertainty, audit scope or accounting principles. The decision to change
      accountants was approved by the Corporation’s Audit Committee. During the two
      fiscal years ended December 31, 2004 and 2003 and the subsequent interim period
      to the date of their dismissal, there were no disagreements between the
      Corporation and Crowe Chizek on any matters of accounting principles or
      practices, financial statement disclosure, or auditing scope or principles,
      which disagreement(s), if not resolved to the satisfaction of Crowe Chizek,
      would have caused it to make a reference to the subject matter of the
      disagreement(s) in connection with its reports. None of the *“reportable
      events”* described
      in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Corporation
      within the two fiscal years ended December 31, 2004 and 2003 and the subsequent
      interim period to the date of their dismissal.





Effective
      January 19, 2005, the Corporation engaged BEARD MILLER COMPANY LLP (Beard
      Miller) as its independent auditors for the fiscal year ending December 31,
      2005. During the two fiscal years ended December 31, 2004 and 2003 and the
      subsequent interim period to the date of their engagement, the Corporation
      did
      not consult Beard Miller regarding any of the matters or events set forth in
      Item 304(a)(2)(i) and (ii) of Regulation S-K.





**Item
      9A. 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 reports in
      compliance with the Exchange Act, 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 and Principal Financial and
      Accounting Officer, as appropriate, to allow timely decisions regarding required
      disclosure based closely on the definition of “disclosure controls and
      procedures” in Rule 13a-14(c) promulgated under the Exchange Act. As of December
      31, 2006, the Corporation carried out an evaluation, under the supervision
      and
      with the participation of the Corporation’s Management, including the
      Corporation’s Chief Executive Officer and the Corporation’s Chief Financial
      Officer, of the effectiveness of the design and operation of the Corporation’s
      disclosure controls and procedures. Based on the foregoing, the Corporation’s
      Chief Executive Officer and Chief Financial Officer concluded that the
      Corporation’s disclosure controls and procedures were effective.





During
      the
      fourth quarter of fiscal year 2006, there were no significant changes in the
      Corporation’s internal control over financial reporting or in other factors that
      could significantly affect the internal controls subsequent to the date of
      the
      evaluation referenced above.





**Item
      9B. Other Information.**





None.




21




**PART
      III**





**Item
      10. Directors, Executive Officers and Corporate Governance**





The
      information contained under the sections captioned “Principal Beneficial Owners
      of the Corporation’s Common Stock”, “Section 16(a) Beneficial Ownership
      Reporting Compliance” and “Information With Respect to Nominees For Director,
      Continuing Director and Executive Officers” is incorporated herein by reference
      to the Corporation’s definitive proxy statement for the Corporation’s Annual
      Meeting of Stockholders to be held on April 25, 2007 (the Proxy Statement)
      which
      will be filed no later than 120 days following the Corporation’s fiscal year
      end.





The
      Corporation maintains a Code of Personal and Business Conduct and Ethics (the
      Code) that applies to all employees, including the CEO and the CFO. A copy
      of
      the Code has previously been filed with the SEC and is posted on our website
      at www.farmersnb.com .
      Any
      waiver of the Code with respect to the CEO and the CFO will be publicly
      disclosed in accordance with applicable regulations.





**Item
      11. Executive Compensation**





The
      information contained under the section captioned “Executive Compensation” in
      the Proxy Statement is incorporated herein by reference.





**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**





Information
      required by this item is incorporated herein by reference to the section
      captioned “Principal Beneficial


Owners
      of
      the Corporation’s Common Stock” in the Proxy Statement.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence**





The
      information required by this item is incorporated herein by reference to the
      sections captioned “Information With Respect to Nominees For Director,
      Continuing Directors and Executive Officers” and “Executive Compensation” in the
      Proxy Statement.





**Item
      14. Principal Accounting Fees and Services**





The
      information required by this item is incorporated herein by reference to the
      section captioned “Relationship With Independent Registered Public Accounting
      Firm” in the Proxy Statement.





**PART
      IV**





**Item
      15. Exhibits and Financial Schedules**





(a)(1)-(2) Financial
      Statements and Schedules:




(i)
            Financial
                statements and schedules included in Exhibit 13 to this Form 10-K
                are
                filed as part ofthis
                report.




(ii)
            All
                other financial statement schedules are omitted because the required
                information is notapplicable,
                or because the information required is included in the consolidated
                financialstatements
                and notes thereto.




22


(3) Management Contracts or Compensatory Plans:





(i)
      Exhibits 10.1-10.3 listed below in (b) below identify management contracts
      or
      compensatory plans or arrangements
      required to be filed as exhibits to this report, and such listing is
      incorporated herein by reference.


(b)
                Exhibits
                    are either attached as part of this Report or incorporated herein
                    by
                    reference.


3.1
            Articles
                of Incorporation of Emclaire Financial Corp.
                (1)





3.2
            Bylaws
                of Emclaire Financial Corp. (1)





4
            Specimen
                Stock Certificate of Emclaire Financial Corp.
                (2)





10.1
            Form
                of Change in Control Agreement between Registrant and two executive
                officers. (3)





10.2
            Form
                of Group Term Carve-Out Plan between the Farmers National Bank of
                Emlenton
                and 20 Officers and Employees. (5)




10.3
            Form
                of Supplemental Executive Retirement Plan Agreement between the Farmers
                National Bank of Emlenton and Six Officers.
                (5)




11
            Statement
                regarding computation of earnings per share (see Note 1 of the Notes
                to
                Consolidated Financial Statements in the Annual
                Report).




13
            Annual
                Report to Stockholders for the fiscal year ended December 31,
                2006.


14
            Code
                of Personal and Business Conduct and Ethics.
                (6)





16
            Letter
                regarding change in certifying
                accountant





20
            Emclaire
                Financial Corp. Dividend Reinvestment and Stock Purchase
                Plan.(4)





21
            Subsidiaries
                of the Registrant (see information contained herein under “Item 1.
                Description of Business - Subsidiary
                Activity”).





31.1
            CEO
                302 Certification.





31.2
            CFO
                302 Certification.





32.1
            Chief
                Executive Officer 906
                Certification.





32.2
            CFO
                906 Certification.


_____________________________________________________________________________________________


(1)
            Incorporated
                by reference to the Registrant’s Registration Statement on Form SB-2, as
                amended, (File No. 333-11773) declared effective by the SEC on October
                25,
                1996.


(2)
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 1997.


(3)
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 1996.


(4)
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K
                for the year ended December 31,
                2001.


(5)
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2002.


(6)
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2004.




23




SIGNATURES





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




**EMCLAIRE
      FINANCIAL CORP.**




Dated:
                  March 23, 2007
                By:
                /s/
                    David L. CoxDavid
                    L. Cox
                  President,
                    Chief Executive Officer, and Director
                  (Duly
                      Authorized Representative)Pursuant
                  to the requirement of the Securities Exchange Act of 1934, this
                  Report has
                  been signed below by the following persons on behalf of the Registrant
                  and
                  in the capacities and on the dates indicated.By:
                /s/
                    David L. Cox
                
                By:
                /s/
                    William C. MarshDavid
                    L. Cox
                  President
                  Chairman
                    of the Board Chief
                    Executive Officer
                  Director)
                  (Principal
                    Executive Officer)
                
                
                William
                    C. Marsh
                  Executive
                      Vice President
                    Chief
                        Financial Officer and Treasurer
                      Director
                        (Principal
                            Financial and Accounting Officer)Date:
                March
                    23, 2007
                
                Date:
                March
                    23, 2007By:
                /s/
                    Ronald L. Ashbaugh
                
                By:
                /s/
                    Brian C. McCarrierRonald
                    L. Ashbaugh
                  Director
                
                
                Brian
                    C. McCarrier
                  DirectorDate:
                March
                    23, 2007
                
                Date:
                March
                    23, 2007By:
                /s/
                    James M. Crooks
                
                By:
                /s/
                    George W. FreemanJames
                    M. Crooks
                  Director
                
                
                George
                    W. Freeman
                  DirectorDate:
                    March 23, 2007
                
                
                Date:
                    March 23, 2007By:
                /s/J.
                    Michael King
                
                By:
                /s/
                    John B. MasonJ.
                    Michael King
                  Director
                
                
                John
                    B. Mason
                  DirectorDate:
                March
                    23, 2007
                
                Date:
                March
                    23, 2007






24