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, 2009





 ̈
            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) 867-2311





Securities
registered pursuant to Section 12(b) of the Act:





Common Stock, par value $1.25 per
      share
                
                NASDAQ Capital Markets
    (NASDAQ)(Title
      of Class)
                
                (Name
      of exchange on which
registered)





Securities
registered pursuant to Section 12(g) of the Act: None.





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


YES  ̈  NO x.





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


YES  ̈  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  ̈.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 month (or for such shorter period that the registrant was required to submit
and post such files).  YES  ̈  NO  ̈.





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.  x





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


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





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





As of
June 30, 2009, the aggregate value of the 1,258,798 shares of Common Stock of
the Registrant issued and outstanding on such date, which excludes 172,606
shares held by the directors and officers of the Registrant as a group, was
approximately $22.7 million.  This figure is based on the last sales
price of $18.00 per share of the Registrant’s Common Stock on June 30,
2009.





DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.





EMCLAIRE
FINANCIAL CORP.





TABLE
OF CONTENTS





PART IItem
      1.
                            Business
                            K-3Item
      1A.
                            Risk
      Factors
                            K-19Item
      1B.
                            Unresolved
      Staff Comments
                            K-24Item
      2.
                            Properties
                            K-24Item
      3.
                            Legal
      Proceedings
                            K-24Item
      4.
                            (Removed
      and Reserved)
                            K-24PART IIItem
      5.
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                            K-25Item
      6.
                            Selected
      Financial Data
                            K-26Item
      7.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            K-26Item
      7A.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            K-37Item
      8.
                            Financial
      Statements and Supplementary Data
                            K-37Item
      9.
                            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                            K-38Item
      9A(T).
                            Controls
      and Procedures
                            K-38Item
      9B.
                            Other
      Information
                            K-39PART IIIItem
      10.
                            Directors,
      Executive Officers and Corporate Governance
                            K-39Item
      11.
                            Executive
      Compensation
                            K-39Item
      12.
                            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                            K-39Item
      13.
                            Certain
      Relationships and Related Transactions, and Director
      Independence
                            K-39Item
      14.
                            Principal
      Accountant Fees and Services
                            K-39PART IVItem
      15.
                            Exhibits
      and Financial Statement Schedules
                            K-40SIGNATURES AND
      CERTIFICATIONS





K-2





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 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.





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 Corporation also provides real estate settlement services
through its subsidiary, Emclaire Settlement Services, LLC (the Title
Company).  In addition, the Bank 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 thirteen retail branch offices in Venango, Butler,
Clarion, Clearfield, Crawford, Elk, Jefferson and Mercer counties,
Pennsylvania.  The Corporation and the Bank are headquartered in
Emlenton, Pennsylvania.





The Bank
is 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, as
amended (BHCA).





On August
28, 2009, the Bank completed the purchase of a former National City Bank full
service branch office in Titusville, Pennsylvania.  Through the
acquisition of this office, the Bank assumed $90.8 million in deposits in
exchange for $32.6 million in loans, $54.9 million in net cash and certain fixed
assets of the office.


K-3


On
December 23, 2008 the Corporation issued to the U.S. Department of the Treasury
(U.S. Treasury), in exchange for aggregate consideration of $7.5 million, 7,500
shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, with a
liquidation preference of $1,000, and a ten year warrant to purchase up to
50,111 shares of the Corporation’s common stock at an exercise price of $22.45
per share.  The preferred securities pay cumulative dividends of 5% a
year for the first five years and 9% a year thereafter.





On
October 17, 2008, the Corporation completed the acquisition of Elk County
Savings and Loan Association (ECSLA) and the merger conversion of ECSLA with and
into the Bank.  Associated with the merger conversion, the Corporation
also conducted a common stock offering to eligible depositors and borrowers of
ECSLA and the general public.  The merger conversion and the offering
generated $4.5 million in additional equity for the Corporation.





At
December 31, 2009, the Corporation had $467.5 million in total assets, $37.0
million in stockholders’ equity, $292.6 million in loans and $385.3 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 originated in and secured by property within 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 44.5% of the total loan portfolio at December 31,
2009.  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.





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, 2009,
the Bank’s loans to one borrower limit based upon 15% of unimpaired capital was
$5.6 million.  At December 31, 2009, the Bank’s largest single lending
relationship had an outstanding balance of $7.0 million.  Credit
granted to this borrower in excess of the legal lending limit is part of the
Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to
exceed its legal lending limit within certain parameters.  The Bank’s
next largest single lending relationship had an outstanding balance of $4.3
million at December 31, 2009.  Both loans were performing in
accordance with their loan terms at December 31, 2009.


K-4


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)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Dollar
                
                
                
                
                
                Dollar
                
                
                
                
                
                Dollar
                
                
                
                
                
                Dollar
                
                
                
                
                
                DollarAmount
                
                
                %
                
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %Mortgage
      loans on real estate:Residential
      first mortgages
                
                $
                74,099
                
                
                
                25.0
                %
                
                $
                74,130
                
                
                
                27.7
                %
                
                $
                65,706
                
                
                
                28.3
                %
                
                $
                64,662
                
                
                
                30.0
                %
                
                $
                66,011
                
                
                
                34.0
                %Home
      equity loans and lines of credit
                
                
                77,284
                
                
                
                26.1
                %
                
                
                57,454
                
                
                
                21.5
                %
                
                
                49,426
                
                
                
                21.3
                %
                
                
                47,330
                
                
                
                22.0
                %
                
                
                39,933
                
                
                
                20.5
                %Commercial
                
                
                89,952
                
                
                
                30.4
                %
                
                
                85,689
                
                
                
                32.1
                %
                
                
                71,599
                
                
                
                30.9
                %
                
                
                61,128
                
                
                
                28.4
                %
                
                
                52,990
                
                
                
                27.3
                %Total
      real estate loans
                
                
                241,335
                
                
                
                81.5
                %
                
                
                217,273
                
                
                
                81.3
                %
                
                
                186,731
                
                
                
                80.5
                %
                
                
                173,120
                
                
                
                80.4
                %
                
                
                158,934
                
                
                
                81.8
                %Other
      loans:Commercial
      business
                
                
                41,588
                
                
                
                14.1
                %
                
                
                40,787
                
                
                
                15.2
                %
                
                
                35,566
                
                
                
                15.3
                %
                
                
                34,588
                
                
                
                16.0
                %
                
                
                27,732
                
                
                
                14.2
                %Consumer
                
                
                12,894
                
                
                
                4.4
                %
                
                
                9,429
                
                
                
                3.5
                %
                
                
                9,679
                
                
                
                4.2
                %
                
                
                7,671
                
                
                
                3.6
                %
                
                
                7,729
                
                
                
                4.0
                %Total
      other loans
                
                
                54,482
                
                
                
                18.5
                %
                
                
                50,216
                
                
                
                18.7
                %
                
                
                45,245
                
                
                
                19.5
                %
                
                
                42,259
                
                
                
                19.6
                %
                
                
                35,461
                
                
                
                18.2
                %Total
      loans receivable
                
                
                295,817
                
                
                
                100.0
                %
                
                
                267,489
                
                
                
                100.0
                %
                
                
                231,976
                
                
                
                100.0
                %
                
                
                215,379
                
                
                
                100.0
                %
                
                
                194,395
                
                
                
                100.0
                %Less:Allowance
      for loan losses
                
                
                3,202
                
                
                
                
                
                
                
                2,651
                
                
                
                
                
                
                
                2,157
                
                
                
                
                
                
                
                2,035
                
                
                
                
                
                
                
                1,869Net
      loans receivable
                
                $
                292,615
                
                
                
                
                
                
                $
                264,838
                
                
                
                
                
                
                $
                229,819
                
                
                
                
                
                
                $
                213,344
                
                
                
                
                
                
                $
                192,526





The
following table sets forth the scheduled contractual principal repayments or
interest repricing of loans in the Corporation’s portfolio as of December 31,
2009.  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
                
                $
                1,523
                
                
                $
                3,976
                
                
                $
                13,216
                
                
                $
                55,384
                
                
                $
                74,099Home
      equity loans and lines of credit
                
                
                913
                
                
                
                6,680
                
                
                
                25,475
                
                
                
                44,216
                
                
                
                77,284Commercial
      mortgages
                
                
                2,428
                
                
                
                5,348
                
                
                
                13,545
                
                
                
                68,631
                
                
                
                89,952Commercial
      business
                
                
                3,001
                
                
                
                7,939
                
                
                
                6,462
                
                
                
                24,186
                
                
                
                41,588Consumer
                
                
                357
                
                
                
                6,985
                
                
                
                384
                
                
                
                5,168
                
                
                
                12,894$
                8,222
                
                
                $
                30,928
                
                
                $
                59,082
                
                
                $
                197,585
                
                
                $
                295,817





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,
2009:





(Dollar amounts in
    thousands)
                
                Fixed
                
                
                Adjustablerates
                
                
                ratesResidential
      mortgage
                
                $
                47,778
                
                
                $
                24,798Home
      equity loans and lines of credit
                
                
                61,058
                
                
                
                15,313Commercial
      mortgage
                
                
                39,772
                
                
                
                47,752Commercial
      business
                
                
                37,218
                
                
                
                1,369Consumer
                
                
                12,537
                
                
                
                -$
                198,363
                
                
                $
                89,232





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.


K-5


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 delinquent, 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, 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 the cost to sell the property.  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.





As of
December 31, 2009, the Corporation’s non-performing assets, which consist of
non-accrual loans, loans delinquent due to maturity, troubled debt
restructuring, repossessions and REO, amounted to $2.6 million or 0.56% of the
Corporation’s total assets compared to $1.1 million or 0.28% of the
Corporation’s total assets at December 31, 2008.  This increase was
due to continued pressure on borrowers related to the prevailing poor economic
climate.  Interest income of $218,000 would have been recorded in 2009
if these loans had been current and performing during the entire
period.  Interest of $139,000 on these loans was included in income
during 2009.





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 or improbable.  Assets classified as loss
are considered uncollectible and of such little value that their continuance as
assets is not warranted.





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





The
Corporation regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Corporation’s policy and applicable regulations.  As of December 31,
2009, the Corporation’s classified and criticized assets amounted to $16.6
million or 3.6% of total assets, with $10.2 million classified as substandard,
$180,000 classified as doubtful and $6.3 million identified as special
mention.




K-6


Included
in classified and criticized assets at December 31, 2009 are two separate large
loans which have certain credit problems potentially impacting the ability of
the borrowers to comply with their present loan repayment terms on a timely
basis.





The first
loan, with an outstanding balance of $3.0 million at December 31, 2009, was
originated for the construction of a hotel, restaurant and retail plaza secured
by such property, the borrower’s personal residence, a separate residence and a
separate farm.  The hotel, restaurant and retail plaza are complete
and operational.  However, cash flows from operations have not been
constant and are impacted by the seasonal nature of the hotel.  In
addition, the borrower does not have other liquid sources of cash
flow.  As a result, the borrower has listed substantial real estate
holdings for sale.  Pending such sales, the Bank anticipates that the
relationship may continue to have cash flow issues which may impact the timely
payment of principal and interest to the Bank.  At December 31, 2009,
the loan was current but identified as special mention.  Ultimately,
due to the estimated value of the borrower’s significant real estate holdings,
the Bank does not currently expect to incur any significant loss on this
loan.





The
second loan, with an outstanding balance of $2.3 million at December 31, 2009,
is a consumer installment loan for the purpose of consolidating various personal
debts.  This loan is secured by a lien on the primary residence of the
first borrower discussed above, an assigned life insurance policy and the
assignment of patent royalty income.  Due to business difficulties and
decreased royalty income, payments on the loan have not always been
timely.  At December 31, 2009, the loan was performing but was
classified as substandard.  As a result of the estimated value of the
lien on the property owned by the first borrower, the estimated cash flow of
royalty income and the borrower’s business prospects, the Bank does not
currently expect to incur any significant loss on this loan.





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





(Dollar amounts in
    thousands)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Non-performing
      loans
                
                $
                2,418
                
                
                $
                1,011
                
                
                $
                952
                
                
                $
                1,841
                
                
                $
                1,452Total
      as a percentage of gross loans
                
                
                0.82
                %
                
                
                0.38
                %
                
                
                0.41
                %
                
                
                0.85
                %
                
                
                0.75
                %Repossessions
                
                
                40
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Real
      estate acquired through foreclosure
                
                
                173
                
                
                
                50
                
                
                
                129
                
                
                
                98
                
                
                
                106Total
      as a percentage of total assets
                
                
                0.05
                %
                
                
                0.01
                %
                
                
                0.04
                %
                
                
                0.03
                %
                
                
                0.04
                %Total
      non-performing assets
                
                $
                2,631
                
                
                $
                1,061
                
                
                $
                1,081
                
                
                $
                1,939
                
                
                $
                1,558Total
      non-performing assets as a percentage of total assets
                
                
                0.56
                %
                
                
                0.28
                %
                
                
                0.35
                %
                
                
                0.65
                %
                
                
                0.57
                %Allowance
      for loan losses as a percentage of non-performing loans
                
                
                132.42
                %
                
                
                262.22
                %
                
                
                226.58
                %
                
                
                110.54
                %
                
                
                128.72
                %





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
at least quarterly 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, 2009 of $3.2 million was adequate to cover probable losses inherent in the
portfolio at such time.


K-7


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)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Balance
      at beginning of period
                    
                    $
                    2,651
                    
                    
                    $
                    2,157
                    
                    
                    $
                    2,035
                    
                    
                    $
                    1,869
                    
                    
                    $
                    1,810Provision
      for loan losses
                    
                    
                    1,367
                    
                    
                    
                    500
                    
                    
                    
                    256
                    
                    
                    
                    358
                    
                    
                    
                    205Allowance
      for loan losses of  ECSLA
                    
                    
                    -
                    
                    
                    
                    206
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Charge-offs:Residential
      mortgage loans
                    
                    
                    (35
                    )
                    
                    
                    (10
                    )
                    
                    
                    (48
                    )
                    
                    
                    (71
                    )
                    
                    
                    (45
                    )Commercial
      mortgage loans
                    
                    
                    (477
                    )
                    
                    
                    (82
                    )
                    
                    
                    (34
                    )
                    
                    
                    (83
                    )
                    
                    
                    (1
                    )Commercial
      business loans
                    
                    
                    (264
                    )
                    
                    
                    -
                    
                    
                    
                    (22
                    )
                    
                    
                    (18
                    )
                    
                    
                    (60
                    )Consumer
      loans
                    
                    
                    (83
                    )
                    
                    
                    (160
                    )
                    
                    
                    (60
                    )
                    
                    
                    (49
                    )
                    
                    
                    (91
                    )(859
                    )
                    
                    
                    (252
                    )
                    
                    
                    (164
                    )
                    
                    
                    (221
                    )
                    
                    
                    (197
                    )Recoveries:Residential
      mortgage loans
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    -Commercial
      business loans
                    
                    
                    7
                    
                    
                    
                    15
                    
                    
                    
                    16
                    
                    
                    
                    19
                    
                    
                    
                    18Consumer
      loans
                    
                    
                    36
                    
                    
                    
                    25
                    
                    
                    
                    13
                    
                    
                    
                    10
                    
                    
                    
                    3343
                    
                    
                    
                    40
                    
                    
                    
                    30
                    
                    
                    
                    29
                    
                    
                    
                    51Net
      charge-offs
                    
                    
                    (816
                    )
                    
                    
                    (212
                    )
                    
                    
                    (134
                    )
                    
                    
                    (192
                    )
                    
                    
                    (146
                    )Balance
      at end of period
                    
                    $
                    3,202
                    
                    
                    $
                    2,651
                    
                    
                    $
                    2,157
                    
                    
                    $
                    2,035
                    
                    
                    $
                    1,869Ratio
      of net charge-offs to average loans outstanding
                    
                    
                    0.29
                    %
                    
                    
                    0.08
                    %
                    
                    
                    0.06
                    %
                    
                    
                    0.09
                    %
                    
                    
                    0.08
                    %Ratio
      of allowance to total loans at end of period
                    
                    
                    1.08
                    %
                    
                    
                    0.99
                    %
                    
                    
                    0.93
                    %
                    
                    
                    0.94
                    %
                    
                    
                    0.96
                    %





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)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Percent
      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
                
                $
                448
                
                
                
                14.1
                %
                
                $
                431
                
                
                
                15.2
                %
                
                $
                387
                
                
                
                15.3
                %
                
                $
                532
                
                
                
                16.0
                %
                
                $
                554
                
                
                
                14.2
                %Commercial
      mortgages
                
                
                1,891
                
                
                
                30.4
                %
                
                
                1,369
                
                
                
                32.1
                %
                
                
                1,068
                
                
                
                30.9
                %
                
                
                820
                
                
                
                28.4
                %
                
                
                841
                
                
                
                27.3
                %Residential
      mortgages
                
                
                356
                
                
                
                25.0
                %
                
                
                363
                
                
                
                27.7
                %
                
                
                309
                
                
                
                28.3
                %
                
                
                239
                
                
                
                30.0
                %
                
                
                211
                
                
                
                34.0
                %Home
      equity loans
                
                
                452
                
                
                
                26.1
                %
                
                
                467
                
                
                
                21.5
                %
                
                
                368
                
                
                
                21.3
                %
                
                
                339
                
                
                
                22.0
                %
                
                
                150
                
                
                
                20.5
                %Consumer
      loans
                
                
                51
                
                
                
                4.4
                %
                
                
                73
                
                
                
                3.5
                %
                
                
                79
                
                
                
                4.2
                %
                
                
                83
                
                
                
                3.6
                %
                
                
                106
                
                
                
                4.0
                %Unallocated
                
                
                4
                
                
                
                -
                
                
                
                (52
                )
                
                
                -
                
                
                
                (54
                )
                
                
                -
                
                
                
                22
                
                
                
                -
                
                
                
                7
                
                
                
                -$
                3,202
                
                
                
                100
                %
                
                $
                2,651
                
                
                
                100
                %
                
                $
                2,157
                
                
                
                100
                %
                
                $
                2,035
                
                
                
                100
                %
                
                $
                1,869
                
                
                
                100
                %





Investment
Activities





General.  The Corporation
maintains an investment portfolio of securities such as U.S. government
agencies, mortgage-backed securities, municipal and corporate securities and
equity securities.





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.




K-8


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, 2009:





(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.
      Treasury and federal agency
                  
                  $
                  -
                  
                  
                  $
                  1,004
                  
                  
                  $
                  993
                  
                  
                  $
                  1,004
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,001U.S.
      government sponsored entities and agencies
                  
                  
                  -
                  
                  
                  
                  27,928
                  
                  
                  
                  18,926
                  
                  
                  
                  3,943
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  50,797Mortgage-backed
      securities: residential
                  
                  
                  105
                  
                  
                  
                  277
                  
                  
                  
                  488
                  
                  
                  
                  3,928
                  
                  
                  
                  11,732
                  
                  
                  
                  -
                  
                  
                  
                  16,530Collateralized
      mortgage obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,130
                  
                  
                  
                  -
                  
                  
                  
                  5,130State
      and political subdivision
                  
                  
                  -
                  
                  
                  
                  101
                  
                  
                  
                  1,014
                  
                  
                  
                  11,380
                  
                  
                  
                  14,472
                  
                  
                  
                  -
                  
                  
                  
                  26,967Equity
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,818
                  
                  
                  
                  2,818Estimated
      fair value
                  
                  $
                  105
                  
                  
                  $
                  29,310
                  
                  
                  $
                  21,421
                  
                  
                  $
                  20,255
                  
                  
                  $
                  31,334
                  
                  
                  $
                  2,818
                  
                  
                  $
                  105,243Weighted
      average yield (1)
                  
                  
                  4.09
                  %
                  
                  
                  1.79
                  %
                  
                  
                  2.97
                  %
                  
                  
                  5.15
                  %
                  
                  
                  5.24
                  %
                  
                  
                  3.15
                  %
                  
                  
                  3.74
                  %


(1)
Taxable equivalent adjustments have been made in calculating yields on state and
political subdivision securities.





The
following table sets forth the fair value of the Corporation’s investment
securities as of December 31:





(Dollar amounts in
    thousands)
                
                2009
                
                
                2008
                
                
                2007U.S.
      Treasury and federal agency
                
                $
                3,001
                
                
                $
                -
                
                
                $
                -U.S.
      government sponsored entities and agencies
                
                
                50,797
                
                
                
                20,077
                
                
                
                29,334Mortgage-backed
      securities: residential
                
                
                16,530
                
                
                
                17,218
                
                
                
                1,884Collateralized
      mortgage obligations
                
                
                5,130
                
                
                
                13,162
                
                
                
                -State
      and political subdivision
                
                
                26,967
                
                
                
                13,808
                
                
                
                14,251Corporate
      securities
                
                
                -
                
                
                
                3,984
                
                
                
                2,939Equity
      securities
                
                
                2,818
                
                
                
                3,194
                
                
                
                3,511$
                105,243
                
                
                $
                71,443
                
                
                $
                51,919





For
additional information regarding the Corporation’s investment portfolio see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in item 7 and “Notes to Consolidated Financial Statements” beginning
on page F-7.





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, investment
maturities and borrowed funds.  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 other various sources.  For a description of
the Bank’s sources of funds, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in item 7.





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 marketing
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.




K-9


The
following table sets forth maturities of the Corporation’s certificates of
deposit of $100,000 or more at December 31, 2009 by time remaining to
maturity:





(Dollar
      amounts in thousands)
                      
                      AmountLess
      than three months
                      
                      $
                      3,442Over
      three months to six months
                      
                      
                      3,306Over
      six months to twelve months
                      
                      
                      5,020Over
      twelve months
                      
                      
                      37,545$
                      49,313





Borrowings.  Borrowings may
be used to compensate for reductions in deposit inflows or net deposit outflows,
or to support lending and investment activities.  These borrowings
include FHLB advances, federal funds, repurchase agreements, advances from the
Federal Reserve Discount Window and lines of credit at the Bank and the
Corporation with other correspondent banks.  The following table
summarizes information with respect to borrowings at or for the years ending
December 31:





(Dollar amounts in
    thousands)
                      
                      2009
                      
                      
                      2008Ending
      balance
                      
                      $
                      40,000
                      
                      
                      $
                      48,188Average
      balance
                      
                      
                      50,611
                      
                      
                      
                      45,096Maximum
      balance
                      
                      
                      75,000
                      
                      
                      
                      54,683Weighted
      average rate
                      
                      
                      3.34
                      %
                      
                      
                      3.89
                      %





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” in item 7 and “Notes to Consolidated Financial
Statements” beginning on page F-7.





Subsidiary
Activity





The
Corporation has two wholly owned subsidiaries, the Bank, a national association
and the Title Company.  As of December 31, 2009, the Bank and the
Title Company had no subsidiaries.





Personnel





At
December 31, 2009, the Bank had 119 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.




K-10


The
Corporation.  The Corporation is a registered bank holding
company, and subject to regulation and examination by the FRB under the
BHCA.  The Corporation is required to file with the FRB periodicreports 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 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.





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.




K-11


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 Deposit Insurance Fund (DIF) 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.


K-12


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:





·
            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 include:





·
            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.





The
Corporation entered into a Securities Purchase Agreement (the Agreement) on
December 23, 2008 with the U.S. Treasury in association with its participation
in the Capital Purchase Program (CPP) of the Emergency Economic Stabilization
Act of 2008 (EESA).  As a result of the Corporation’s participation in
the CPP, the Corporation may not pay a dividend in excess of $0.32 per share
until the earlier of December 23, 2011 or the date the preferred shares have
been redeemed in whole or transferred to a non-affiliated party.




K-13


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% 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% 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 onthe Bank under the
prompt corrective action provisions of federal law. See “Prompt Corrective
Action and Other Enforcement Mechanisms.”





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, 2009, the Bank’s
loans-to-one-borrower limit was $5.6 million based upon the 15% of unimpaired
capital and surplus measurement.  At December 31, 2009, the Bank’s
largest single lending relationship had an outstanding balance of $7.0
million.  Credit granted to this borrower in excess of the legal
lending limit is part of the Legal Lending Limit Pilot Program approved by the
OCC which allows the Bank to exceed its legal lending limit within certain
parameters.  The Bank’s next largest single lending relationship had
an outstanding balance of $4.3 million at December 31, 2009.





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-adjustedassets 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.


K-14


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.





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,
2009, the Bank exceeded the required ratios for classification as “well
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.





Insurance of
Accounts.  The deposits of the Bank are insured to the maximum
extent permitted by the DIF.  The FDIC administers the DIF, which
generally insures commercial bank, savings association and state savings bank
deposits.  The DIF was created as a result of the merger of the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF), pursuant
to the Federal Deposit Insurance Reform Act of 2005 (Reform Act).





In
October 2008, the maximum amount insured under FDIC deposit insurance was
temporarily increased from $100,000 to $250,000 per insured depositor through
December 31, 2009.  In May 2009, the FDIC extended this increased
insurance level of $250,000 per depositor through December 31,
2013.  On January 1, 2014, the standard insurance amount will return
to $100,000 per depositor for all account categories except IRAs and certain
other retirement accounts.




K-15


In
October 2008, the FDIC announced its Temporary Liquidity Guarantee Program
(TLGP) which provides full coverage for noninterest-bearing transaction deposit
accounts at FDIC-insured institutions that agree to participate in the
program.  The unlimited coverage applies to all personal and business
checking deposit accounts that do not earn interest, low-interest NOW accounts
(accounts that cannot earn more than 0.5% interest), Official Items and IOLTA
accounts.  A 10 basis point surcharge is added to a participating
institution’s current insurance assessment.  The Bank elected to
participate in the TLGP.  This unlimited insurance coverage is
temporary and was originally scheduled to expire on December 31, 2009; however,
in August 2009, the FDIC extended the program through June 30,
2010.  The deposit insurance surcharge was increased from 10 to 25
basis points for institutions electing to participate in the
extension.





Under the
Reform Act, the FDIC’s deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of four categories and assessed insurance premiums based upon their
level of capital and risk profile.  The FDIC is authorized to
establish annual deposit insurance assessment rates for members of the DIF and
to increase assessment rates if it determines such increases are appropriate to
maintain reserves of the insurance fund.  In addition, the FDIC is
authorized to levy emergency special assessments on DIF members.  The
FDIC may terminate deposit insurance if it determines an institution has engaged
in or is engaging in unsafe or unsound banking practices, is in an unsafe or
unsound condition or has violated applicable laws, regulations or
orders.  No institution may pay a dividend if it is in default of the
federal deposit insurance assessment.





In
October 2008, the FDIC published a restoration plan designed to replenish the
DIF over a period of five years and to increase the deposit insurance reserve
ratio to the statutory minimum of 1.15% of insured deposits by December 31,
2013.  In March 2009, the deposit insurance reserve ratio was
0.27%.  In order to accomplish this, the FDIC changed both its
risk-based assessment system and its base assessment rates.  For the
first quarter of 2009, the FDIC increased all FDIC deposit assessment rates by 7
basis points.  These new rates ranged from 12 to 14 basis points for
Risk Category I institutions to 50 basis points for Risk Category IV
institutions.  Beginning April 1, 2009, the base assessment rates
range from 12 to 16 basis points for Risk Category I institutions to 77.5 basis
points for Risk Category IV institutions.  As of December 31, 2009,
the Bank was classified as a Risk Category I institution and as such was
assessed an FDIC deposit assessment rate of 13.79 basis points.





In May
2009, the FDIC adopted a final rule imposing a 5 basis point special assessment
on each insured depository institution’s assets minus Tier 1 capital as of June
30, 2009.  The special assessment was collected on September 30, 2009
and totaled $178,000.





In
November 2009, the FDIC adopted a final rule requiring insured institutions to
prepay three years of estimated insurance assessments.  This
prepayment strengthened the cash position of the DIF immediately without
impacting earnings to financial institutions.  Payment of the prepaid
assessment for the years endings December 31, 2010, 2011 and 2012 was collected
on December 30, 2009 and totaled $2.1 million.  This prepayment was
based upon assumed increases in insured deposits of 5% annually through 2012
with a three basis point increase in the proposed assessment rate for the years
ending December 31, 2011 and 2012.





The FDIC
may further increase the assessment rate schedule in order to manage the DIF to
prescribed target levels.  An increase in the risk category for the
Bank or in the assessment rates could have an adverse effect on the Bank’s
earnings.





In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation (FICO), a mixed-ownership government corporation established to
recapitalize a predecessor to the DIF.  The current annualized
assessment rate is 1.06 basis points of insured deposits, or approximately 0.265
basis points per quarter.  These assessments will continue until the
FICO bonds mature in 2019.




K-16


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.





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 April 21, 2008, the Bank was
rated “satisfactory.”





On
September 1, 2005, the federal banking agencies amended the CRA regulations
to:





·
            Establish
      the definition of “Intermediate Small Bank” as an institution with 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.





The Fair
Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit
Transactions Act of 2003 (FACTA), 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 the FACTA,
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
Federal Trade Commission (FTC), the federal bank regulatory agencies and the
National Credit Union Administration (NCUA) have issued regulations (the Red
Flag Rules) requiring financial institutions and creditors to develop and
implement written identity theft prevention programs as part of the
FACTA.  The programs were required be in place by May 1, 2009 and must
provide for the identification, detection and response to patterns, practices or
specific activities – known as red flags – that could indicate identity
theft.  These red flags may include unusual account activity, fraud
alerts on a consumer report or attempted use of suspicious account application
documents.  The program must also describe appropriate responses that
would prevent and mitigate the crime and detail a plan to update the
program.  The program must be managed by the Board of Directors or
senior employees of the institution or creditor, include appropriate staff
training and provide oversight of any service providers.


K-17


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 (FHA) 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 FHA, including some that are not
specifically mentioned in the FHA itself.





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.




K-18


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, FACTA, TILA,
FHA, 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 FHLB.  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, 2009, the Bank was in
compliance with the stock requirements.





Federal Reserve
System.The FRB requires
all depository institutions to maintain noninterest bearing reserves at
specified levels against their transaction accounts (primarily checking) and
non-personal time deposits.  At December 31, 2009, the Bank was in
compliance with these requirements.





Item 1A.  Risk
Factors




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





We are
located in western Pennsylvania and our loans are concentrated in Butler,
Clarion, Crawford, Jefferson and Venango Counties,
Pennsylvania.  Although we have diversified our loan portfolio into
other Pennsylvania counties, and to a very limited extent, into other states,
the vast majority of our loans remain concentrated in the three primary
counties.  As a result of this geographic concentration, our financial
results depend largely upon economic and real estate market conditions in these
areas.  Deterioration in economic or real estate market conditions in
our primary market areas could have a material adverse impact on the quality of
our loan portfolio, the demand for our products and services, and our financial
condition and results of operations.  Non-performing assets increased
from $1.1 million or 0.28% of total assets at December 31, 2008 to
$2.6 million or 0.56% of total assets at December 31,
2009.





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





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


K-19


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





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





At December 31,
2009, our investment portfolio included $2.8 million of securities in other
financial institutions held by us.  After our third quarter 2009
evaluation of our investment portfolio, we determined that
other-than-temporary impairments existed on three financial institution equity
securities.  The impairment of these securities were considered to be
other-than-temporary due to continued concerns related to the financial
condition and near-term prospects of the three financial
institutions, economic conditions of the financial services industry and
deteriorating market values.  These securities were written down to
their fair market values as of September 30, 2009 and resulted
in impairment losses of $898,000  that we recognized for
the year ended December 31, 2009.  A number of factors or
combinations of factors could cause us to conclude in one or more future
reporting periods that an unrealized loss that exists with respect to one or
more of these securities or other financial institution
securities will constitute an impairment that is other-than
temporary.  These factors include, but are not limited to, failure to
make scheduled interest or dividend payments, an increase in the severity of the
unrealized loss on a particular security, an increase in the continuous duration
of the unrealized loss without an improvement in value or changes in market
conditions and/or industry or issuer specific factors that would render us
unable to forecast a full recovery in
value.  Additional other-than-temporary impairment write-downs
could reduce our earnings.





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





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





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





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


K-20


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





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





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





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





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





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





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





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


K-21


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





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





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





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





In
November 2009, the FDIC adopted a final rule to recapitalize the DIF by
requiring insured institutions to prepay their insurance premiums for the
quarter ending December 31, 2009 and for the years ending December 31,
2010, 2011 and 2012.  The prepayment was collected on
December 30, 2009 and totaled $2.1 million.  The FDIC further
proposed that assessments for the years ending December 31, 2011 and 2012
would increase by three basis points, and would be based upon assumed increases
in insured deposits of 5% annually through 2012.  An increase in
assessment rates will result in a further increase in our FDIC general insurance
premium expense, and the prepayment of insurance premiums increased our
non-earning assets.





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





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





·
            the
      demand for new loans;


·
            the
      value of our interest-earning
assets;


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


·
            credit
      profiles of existing borrowers;


·
            rates
      received on loans and securities;


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


·
            rates
      paid on deposits and
borrowings.


K-22


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





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





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





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





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





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





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




K-23


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





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





Item
1B.  Unresolved Staff Comments





None.





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
Corporation owns and leases numerous other premises for use in conducting
business activities.  The Corporation considers these facilities owned
or occupied under lease to be adequate.  For additional information
regarding the Corporation’s properties, see “Notes to Consolidated Financial
Statements” beginning on page F-7.





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.  (Removed
and Reserved)


K-24


PART
II





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





Market,
Holder and Dividend Information





Emclaire
Financial Corp. common stock is traded on NASDAQ Capital Markets (NASDAQ) under
the symbol “EMCF”.  The listed market makers for the Corporation’s
common stock include:





Boenning
      and Scattergood, Inc.
            Janney
      Montgomery Scott LLC
            Monroe
      Securities, Inc.4
      Tower Bridge, Suite 300
            1801
      Market Street
            100
      North Riverside Plaza200
      Bar Harbor Drive
            Philadelphia,
      PA  19103-1675
            Suite
      1620West
      Conshohocken, PA  19428
            Telephone:  (215)
      665-6000
            Chicago,
      IL  60606Telephone:  (800)
      889-6440
            
            Telephone:  (312)
      327-2530





The
Corporation has traditionally paid regular quarterly cash
dividends.  Future dividends will be determined by the Board of
Directors after giving consideration to the Corporation’s financial condition,
results of operations, tax status, industry standards, economic conditions,
regulatory requirements and other factors.  As a result of the
Corporation’s participation in the U.S. Treasury’s CPP, the Corporation may not
pay a dividend in excess of $0.32 per share until the earlier of December 23,
2011 or the date the preferred shares have been redeemed in whole or transferred
to a non-affiliated third party.  For additional information regarding
the Corporation’s participation in the CPP, see “Notes to Consolidated Financial
Statements” beginning on page F-7.





The
following table sets forth the high and low sale market prices of the
Corporation’s common stock as well as cash dividends paid for the quarterly
periods presented:





Market Price
                      
                      
                      CashHigh
                      
                      
                      Low
                      
                      
                      Close
                      
                      
                      Dividend2009:Fourth
      quarter
                      
                      $
                      17.10
                      
                      
                      $
                      12.11
                      
                      
                      $
                      13.85
                      
                      
                      $
                      0.14Third
      quarter
                      
                      
                      18.30
                      
                      
                      
                      15.85
                      
                      
                      
                      17.10
                      
                      
                      
                      0.14Second
      quarter
                      
                      
                      23.50
                      
                      
                      
                      17.50
                      
                      
                      
                      18.00
                      
                      
                      
                      0.14First
      quarter
                      
                      
                      23.50
                      
                      
                      
                      18.00
                      
                      
                      
                      21.50
                      
                      
                      
                      0.322008:Fourth
      quarter
                      
                      $
                      24.50
                      
                      
                      $
                      20.05
                      
                      
                      $
                      23.50
                      
                      
                      $
                      0.34Third
      quarter
                      
                      
                      26.50
                      
                      
                      
                      21.00
                      
                      
                      
                      24.00
                      
                      
                      
                      0.32Second
      quarter
                      
                      
                      28.00
                      
                      
                      
                      24.60
                      
                      
                      
                      25.75
                      
                      
                      
                      0.32First
      quarter
                      
                      
                      28.35
                      
                      
                      
                      24.55
                      
                      
                      
                      26.50
                      
                      
                      
                      0.32





As of
December 31, 2009, there were approximately 720 stockholders of record and
1,431,404 shares of common stock entitled to vote, receive dividends and
considered outstanding for financial reporting purposes.  The number
of stockholders of record does not include the number of persons or entities who
hold their stock in nominee or “street” name.





Common
stockholders may have Corporation dividends reinvested to purchase additional
shares.  Participants may also make optional cash purchases of common
stock through this plan and pay no brokerage commissions or fees.  To
obtain a plan document and authorization card call 800-757-5755.





Purchases
of Equity Securities





The
Corporation did not repurchase any of its equity securities in the year ended
December 31, 2009.


K-25


Item 6.  Selected
Financial Data





Not
required as the Corporation is a smaller reporting company.





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





The
following discussion and analysis represents a review of the Corporation’s
consolidated financial condition and results of operations.  This
review should be read in conjunction with the consolidated financial statements
beginning on page F-3.





Overview





The
Corporation reported a decrease in net income of $891,000 or 36.7% for 2009 as
consolidated net income before accumulated preferred stock dividends and
discount accretion amounted to $1.5 million or $0.80 per common share for 2009,
compared to net income of $2.4 million or $1.87 per common share for
2008.  Net income was impacted by the following:





·
            Net
      interest income grew by $1.8 million or 16.7% in 2009.  This
      increase was driven by loan growth through the fourth quarter 2008
      acquisition of ECSLA which added $7.3 million to the Corporation’s loan
      portfolio, the extension of three, one-year tax anticipation notes to
      local municipalities totaling $11.5 million during the first quarter of
      2009, and the third quarter 2009 purchase of a branch banking office in
      Titusville, Pennsylvania from PNC/National City in which $32.6 million of
      loans were acquired.


·
            The
      provision for loan losses increased $867,000 as a result of continued loan
      growth and pressure on borrowers related to the prevailing poor national
      economic conditions.


·
            Impairment
      charges totaling $898,000 were recognized during the third quarter of 2009
      related to three marketable equity securities.  Offsetting these
      impairment charges, the Corporation realized gains on the sale of certain
      U.S. government agency and mortgage-backed securities totaling
      $864,000.


·
            Costs
      associated with the Titusville branch purchase totaled $592,000 and were
      recorded during the second and third quarters of 2009.  These
      costs included legal, project management, data conversion and valuation
      services, printing and mailing costs of required disclosure material,
      customer check replacement and other conversion
  costs.


·
            Stock
      offering costs totaling $484,000 were recognized during the fourth quarter
      of 2009 as the Corporation withdrew its common stock
      offering.  These costs were primarily professional fees incurred
      for legal and accounting services.  Also contributing to stock
      offering costs were fees associated with printing and filing various
      documents and travel expenses.


·
            Regular
      quarterly FDIC insurance premiums increased $402,000 from 2008 to
      2009.  In addition, the Bank recorded a $178,000 one-time charge
      during the second quarter of 2009 related to a special assessment that was
      assessed on all FDIC insured depository
  institutions.


·
            The
      Corporation recorded extraordinary income in 2008 totaling $906,000
      associated with the acquisition of
ECSLA.


·
            The
      Corporation’s total assets grew by $91.9 million during 2009, primarily
      related to the Titusville branch
purchase.





Changes in Financial
Condition





Total
assets increased $91.9 million or 24.5% to $467.5 million at December 31, 2009
from $375.7 million at December 31, 2008.  This increase was due
primarily to increases in securities available for sale, net loans receivable
and cash and equivalents of $33.8 million, $27.8 million and $22.4 million,
respectively.





The
increase in the Corporation’s total assets was primarily funded by increases in
total liabilities of $91.0 million or 26.8% and total stockholders’ equity of
$911,000 or 2.5%.  The increase in total liabilities was primarily due
to an increase in total deposits of $98.7 million or 34.4%, partially offset by
a decrease in borrowed funds of $8.2 million or 17.0%.


K-26


Cash and cash
equivalents.  These accounts increased a combined $22.4 million
or 135.1% to $39.0 million at December 31, 2009 from $16.6 million at December
31, 2008.  This increase was primarily due to cash received from the
Titusville branch office purchase that had not yet been deployed into
higher-yielding assets.  Typically, cash accounts are increased by net
operating results, deposits by customers into savings and checking accounts,
loan and security repayments and proceeds from borrowed
funds.  Decreases result from customer deposit withdrawals, new loan
originations or other loan fundings, security purchases, repayments of borrowed
funds and cash dividends to stockholders.





Securities.  Securities
increased $33.8 million or 47.3% to $105.2 million at December 31, 2009 from
$71.4 million at December 31, 2008.  This increase was primarily
related to the partial deployment of cash received from the Titusville branch
office purchase into higher-yielding investment securities, offset by security
calls, sales and repayments.





Loans
receivable.  Net loans receivable increased $27.8 million or
10.5% to $292.6 million at December 31, 2009 from $264.8 million at December 31,
2008, primarily related to $32.6 million of loans acquired through the
Titusville branch purchase, offset by normal amortization and
payoffs.  Home equity loans and lines of credit increased $19.8
million or 34.5%, commercial real estate increased $4.3 million or 5.0% and
consumer loans increased $3.5 million or 36.7%.





Non-performing
assets.  Non-performing assets include non-accrual loans, loans
90 days past due and still accruing, repossessions and real estate
owned.  Non-performing assets were $2.6 million or 0.56% of total
assets at December 31, 2009 compared to $1.1 million or 0.28% of total assets at
December 31, 2008.  Non-performing assets consisted of non-performing
loans, repossessions and real estate owned of $2.4 million, $40,000 and
$173,000, respectively, at December 31, 2009 and $1.0 million, $0 and $50,000,
respectively, at December 31, 2008.  This increase in non-performing
assets was due to continued pressure on borrowers related to the prevailing poor
economic climate.  At December 31, 2009, non-performing assets
consisted primarily of commercial and residential mortgage loans.





Federal bank
stocks.  Federal bank stocks were comprised of FHLB stock and
FRB stock of $3.5 million and $662,000, respectively, at December 31,
2009.  These stocks are purchased and redeemed at par as directed by
the federal banks and levels maintained are based primarily on borrowing and
other correspondent relationships between the Corporation and the
banks.  In December 2008, the FHLB notified member banks that it was
suspending dividend payments and the repurchase of capital
stock.  Management evaluated the FHLB stock for impairment and
determined that no impairment charge was necessary as of December 31,
2009.





Bank-owned life insurance
(BOLI).  The Corporation maintains single premium life
insurance policies on twenty current and former officers and employees of the
Bank.  In addition to providing life insurance coverage, whereby the
Bank as well as the officers and employees receive life insurance benefits, the
appreciation of the cash surrender value of the BOLI will serve to offset and
finance existing and future employee benefit costs.  Increases in this
account during 2009 were associated with an increase in the cash surrender value
of the policies, partially offset by certain administrative
expenses.





Premises and
equipment.  Premises and equipment increased $561,000 or 6.5%
to $9.2 million at December 31, 2009 from $8.6 million at December 31,
2008.  The overall increase in premises and equipment during the year
was due to capital expenditures of $1.5 million, partially offset by normal
depreciation and amortization of $860,000.  Major capital expenditures
during the year included the construction of a new building for the
Corporation’s East Brady, Pennsylvania branch office and extensive renovations
at the Ridgway, Pennsylvania branch office.


K-27


Goodwill.Goodwill
increased $2.2 million or 157.2% to $3.7 million at December 31, 2009 from $1.4
million at December 31, 2008.In connection with the
Titusville branch purchase, the Bank recorded goodwill of $2.2
million.  Goodwill represents the excess of the total purchase price
paid for the Titusville branch over the fair value of the assets acquired, net
of the fair value of the liabilities assumed.  The entire amount of
goodwill will be tax deductible and amortized over 15 years for income tax
purposes.  Goodwill will be evaluated for possible impairment at least
annually, and more frequently, if events and circumstances indicate that the
asset might be impaired.





Core deposit
intangible.Core deposit intangible was $2.6 million at
December 31, 2009.  In connection with the assumption of deposits
through the Titusville branch purchase, the Bank recorded a core deposit
intangible of $2.8 million.  This asset represents the value ascribed
to the long-term value of the core deposits acquired.  Fair value was
determined using a third-party valuation expert specializing in estimating fair
values of core deposit intangibles.  The fair value was derived using
an industry standard financial instrument present value
methodology.  All-in costs and runoff balances by year were discounted
by comparable term FHLB advance rates, used as an alternative cost of funds
measure.  This intangible asset will be amortized on a double
declining balance method of amortization over a weighted average estimated life
of nine years.  The core deposit intangible asset is not estimated to
have a significant residual value.  During 2009, the Corporation
recorded $203,000 of intangible amortization related to the core deposit
intangible.





Deposits.Total
deposits increased $98.7 million or 34.4% to $385.3 million at December 31, 2009
from $286.6 million at December 31, 2008.  Noninterest bearing
deposits increased $10.7 million or 19.0% during the year and interest bearing
deposits increased $88.0 million or 38.2%.  Overall deposit growth was
primarily attributable to the Titusville branch purchase, as deposits assumed
with the branch purchase totaled $90.8 million.  Organic deposit
growth in existing offices totaled $7.9 million or 2.8%.





Borrowed
funds.  Borrowed funds decreased $8.2 million or 17.0% to $40.0
million at December 31, 2009 from $48.2 million at December 31, 2008 related to
a decrease in short-term borrowings.





Stockholders’
equity.  Stockholders’ equity increased $911,000 or 2.5% to
$37.0 million at December 31, 2009 from $36.1 million at December 31, 2008
resulting primarily from an increase in retained earnings totaling $127,000
related to net income less preferred and common stock dividends and a decrease
in accumulated other comprehensive loss totaling $645,000, resulting primarily
from a change in the funded status of the Corporation’s defined benefit
plan.


K-28


Changes in Results of
Operations





The
Corporation reported net income of $1.5 million and $2.4 million in 2009 and
2008, respectively.  The following “Average Balance Sheet and
Yield/Rate Analysis” and “Analysis of Changes in Net Interest Income” tables
should be utilized in conjunction with the discussion of the net interest income
and interest expense components of net income.





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





Year
      ended December 31,2009
                                                                                
                                                                                
                                                                                2008Average
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                Yield
      /
                                                                                
                                                                                
                                                                                Average
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                Yield
      /(Dollar
      amounts in thousands)
                                                                                
                                                                                Balance
                                                                                
                                                                                
                                                                                Interest
                                                                                
                                                                                
                                                                                Rate
                                                                                
                                                                                
                                                                                Balance
                                                                                
                                                                                
                                                                                Interest
                                                                                
                                                                                
                                                                                RateInterest-earning
      assets:Loans,
      taxable
                                                                                
                                                                                $
                                                                                269,192
                                                                                
                                                                                
                                                                                $
                                                                                16,768
                                                                                
                                                                                
                                                                                
                                                                                6.23
                                                                                %
                                                                                
                                                                                $
                                                                                240,714
                                                                                
                                                                                
                                                                                $
                                                                                15,906
                                                                                
                                                                                
                                                                                
                                                                                6.61
                                                                                %Loans,
      tax-exempt
                                                                                
                                                                                
                                                                                14,841
                                                                                
                                                                                
                                                                                
                                                                                614
                                                                                
                                                                                
                                                                                
                                                                                4.14
                                                                                %
                                                                                
                                                                                
                                                                                5,954
                                                                                
                                                                                
                                                                                
                                                                                370
                                                                                
                                                                                
                                                                                
                                                                                6.21
                                                                                %Total
      loans receivable
                                                                                
                                                                                
                                                                                284,033
                                                                                
                                                                                
                                                                                
                                                                                17,382
                                                                                
                                                                                
                                                                                
                                                                                6.12
                                                                                %
                                                                                
                                                                                
                                                                                246,668
                                                                                
                                                                                
                                                                                
                                                                                16,276
                                                                                
                                                                                
                                                                                
                                                                                6.60
                                                                                %Securities,
      taxable
                                                                                
                                                                                
                                                                                51,227
                                                                                
                                                                                
                                                                                
                                                                                1,871
                                                                                
                                                                                
                                                                                
                                                                                3.65
                                                                                %
                                                                                
                                                                                
                                                                                44,447
                                                                                
                                                                                
                                                                                
                                                                                1,992
                                                                                
                                                                                
                                                                                
                                                                                4.48
                                                                                %Securities,
      tax-exempt
                                                                                
                                                                                
                                                                                20,595
                                                                                
                                                                                
                                                                                
                                                                                1,256
                                                                                
                                                                                
                                                                                
                                                                                6.10
                                                                                %
                                                                                
                                                                                
                                                                                14,031
                                                                                
                                                                                
                                                                                
                                                                                921
                                                                                
                                                                                
                                                                                
                                                                                6.56
                                                                                %Total
      securities
                                                                                
                                                                                
                                                                                71,822
                                                                                
                                                                                
                                                                                
                                                                                3,127
                                                                                
                                                                                
                                                                                
                                                                                4.35
                                                                                %
                                                                                
                                                                                
                                                                                58,478
                                                                                
                                                                                
                                                                                
                                                                                2,913
                                                                                
                                                                                
                                                                                
                                                                                4.98
                                                                                %Interest-earning
      deposits with banks
                                                                                
                                                                                
                                                                                33,107
                                                                                
                                                                                
                                                                                
                                                                                362
                                                                                
                                                                                
                                                                                
                                                                                1.09
                                                                                %
                                                                                
                                                                                
                                                                                7,515
                                                                                
                                                                                
                                                                                
                                                                                201
                                                                                
                                                                                
                                                                                
                                                                                2.67
                                                                                %Federal
      bank stocks
                                                                                
                                                                                
                                                                                4,044
                                                                                
                                                                                
                                                                                
                                                                                28
                                                                                
                                                                                
                                                                                
                                                                                0.69
                                                                                %
                                                                                
                                                                                
                                                                                2,868
                                                                                
                                                                                
                                                                                
                                                                                102
                                                                                
                                                                                
                                                                                
                                                                                3.56
                                                                                %Total
      interest-earning cash equivalents
                                                                                
                                                                                
                                                                                37,151
                                                                                
                                                                                
                                                                                
                                                                                390
                                                                                
                                                                                
                                                                                
                                                                                1.05
                                                                                %
                                                                                
                                                                                
                                                                                10,383
                                                                                
                                                                                
                                                                                
                                                                                303
                                                                                
                                                                                
                                                                                
                                                                                2.92
                                                                                %Total
      interest-earning assets
                                                                                
                                                                                
                                                                                393,006
                                                                                
                                                                                
                                                                                
                                                                                20,899
                                                                                
                                                                                
                                                                                
                                                                                5.32
                                                                                %
                                                                                
                                                                                
                                                                                315,529
                                                                                
                                                                                
                                                                                
                                                                                19,492
                                                                                
                                                                                
                                                                                
                                                                                6.18
                                                                                %Cash
      and due from banks
                                                                                
                                                                                
                                                                                2,187
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                5,512Other
      noninterest-earning assets
                                                                                
                                                                                
                                                                                18,627
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                14,928Total
      Assets
                                                                                
                                                                                $
                                                                                413,820
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                335,969Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                                                
                                                                                $
                                                                                125,797
                                                                                
                                                                                
                                                                                
                                                                                1,049
                                                                                
                                                                                
                                                                                
                                                                                0.83
                                                                                %
                                                                                
                                                                                $
                                                                                92,208
                                                                                
                                                                                
                                                                                
                                                                                1,332
                                                                                
                                                                                
                                                                                
                                                                                1.44
                                                                                %Time
      deposits
                                                                                
                                                                                
                                                                                138,855
                                                                                
                                                                                
                                                                                
                                                                                4,843
                                                                                
                                                                                
                                                                                
                                                                                3.49
                                                                                %
                                                                                
                                                                                
                                                                                121,275
                                                                                
                                                                                
                                                                                
                                                                                5,083
                                                                                
                                                                                
                                                                                
                                                                                4.19
                                                                                %Total
      interest-bearing deposits
                                                                                
                                                                                
                                                                                264,652
                                                                                
                                                                                
                                                                                
                                                                                5,892
                                                                                
                                                                                
                                                                                
                                                                                2.23
                                                                                %
                                                                                
                                                                                
                                                                                213,483
                                                                                
                                                                                
                                                                                
                                                                                6,415
                                                                                
                                                                                
                                                                                
                                                                                3.00
                                                                                %Borrowed
      funds, short-term
                                                                                
                                                                                
                                                                                15,611
                                                                                
                                                                                
                                                                                
                                                                                124
                                                                                
                                                                                
                                                                                
                                                                                0.79
                                                                                %
                                                                                
                                                                                
                                                                                10,096
                                                                                
                                                                                
                                                                                
                                                                                182
                                                                                
                                                                                
                                                                                
                                                                                1.80
                                                                                %Borrowed
      funds, long-term
                                                                                
                                                                                
                                                                                35,000
                                                                                
                                                                                
                                                                                
                                                                                1,566
                                                                                
                                                                                
                                                                                
                                                                                4.47
                                                                                %
                                                                                
                                                                                
                                                                                35,000
                                                                                
                                                                                
                                                                                
                                                                                1,571
                                                                                
                                                                                
                                                                                
                                                                                4.49
                                                                                %Total
      borrowed funds
                                                                                
                                                                                
                                                                                50,611
                                                                                
                                                                                
                                                                                
                                                                                1,690
                                                                                
                                                                                
                                                                                
                                                                                3.34
                                                                                %
                                                                                
                                                                                
                                                                                45,096
                                                                                
                                                                                
                                                                                
                                                                                1,753
                                                                                
                                                                                
                                                                                
                                                                                3.89
                                                                                %Total
      interest-bearing liabilities
                                                                                
                                                                                
                                                                                315,263
                                                                                
                                                                                
                                                                                
                                                                                7,582
                                                                                
                                                                                
                                                                                
                                                                                2.40
                                                                                %
                                                                                
                                                                                
                                                                                258,579
                                                                                
                                                                                
                                                                                
                                                                                8,168
                                                                                
                                                                                
                                                                                
                                                                                3.16
                                                                                %Noninterest-bearing
      demand deposits
                                                                                
                                                                                
                                                                                58,126
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                48,696
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -Funding
      and cost of funds
                                                                                
                                                                                
                                                                                373,389
                                                                                
                                                                                
                                                                                
                                                                                7,582
                                                                                
                                                                                
                                                                                
                                                                                2.03
                                                                                %
                                                                                
                                                                                
                                                                                307,275
                                                                                
                                                                                
                                                                                
                                                                                8,168
                                                                                
                                                                                
                                                                                
                                                                                2.66
                                                                                %Other
      noninterest-bearing liabilities
                                                                                
                                                                                
                                                                                4,076
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                2,762Total
      Liabilities
                                                                                
                                                                                
                                                                                377,465
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                310,037Stockholders'
      Equity
                                                                                
                                                                                
                                                                                36,355
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                25,932Total
      Liabilities and Stockholders' Equity
                                                                                
                                                                                $
                                                                                413,820
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                335,969Net
      interest income
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                13,317
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                11,324Interest rate
      spread(difference betweenweighted
      average rate on interest-earning assets and interest-bearing
      liabilities)
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                2.92
                                                                                %
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                3.02
                                                                                %Net interest
      margin(net interestincome
      as a percentage of average interest-earning
      assets)
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                3.39
                                                                                %
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                3.59
                                                                                %


K-29


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





2009 versus 2008Increase (decrease) due to(Dollar amounts in thousands)
                      
                      Volume
                      
                      
                      Rate
                      
                      
                      TotalInterest
      income:Loans
                      
                      $
                      2,345
                      
                      
                      $
                      (1,239
                      )
                      
                      $
                      1,106Securities
                      
                      
                      611
                      
                      
                      
                      (397
                      )
                      
                      
                      214Interest-earning
      deposits with banks
                      
                      
                      340
                      
                      
                      
                      (179
                      )
                      
                      
                      161Federal
      bank stocks
                      
                      
                      30
                      
                      
                      
                      (104
                      )
                      
                      
                      (74
                      )Total
      interest-earning assets
                      
                      
                      3,326
                      
                      
                      
                      (1,919
                      )
                      
                      
                      1,407Interest
      expense:Deposits
                      
                      
                      1,346
                      
                      
                      
                      (1,869
                      )
                      
                      
                      (523
                      )Borrowed
      funds
                      
                      
                      200
                      
                      
                      
                      (263
                      )
                      
                      
                      (63
                      )Total
      interest-bearing liabilities
                      
                      
                      1,546
                      
                      
                      
                      (2,132
                      )
                      
                      
                      (586
                      )Net
      interest income
                      
                      $
                      1,780
                      
                      
                      $
                      213
                      
                      
                      $
                      1,993





2009
Results Compared to 2008 Results





The
Corporation reported net income before accumulated preferred stock dividends and
discount accretion of $1.5 million and $2.4 million for 2009 and 2008,
respectively.  The $891,000 or 36.6% decrease in net income was
attributed to increases in noninterest expense and the provision for loan losses
of $1.6 million and $867,000, respectively, partially offset by increases in net
interest income and noninterest income of $1.8 million and $343,000,
respectively, and a decrease in the provision for income taxes of
$298,000.  In addition, during 2008, the Corporation recorded
extraordinary income totaling $906,000 associated with the ECSLA
acquisition.





Net interest
income.  The primary source of the Corporation’s revenue is net
interest income.  Net interest income is the difference between
interest income on earning assets such as loans and securities, and interest
expense on liabilities, such as deposits and borrowed funds, used to fund the
earning assets.  Net interest income is impacted by the volume and
composition of interest-earning assets and interest-bearing liabilities, and
changes in the level of interest rates.  Tax equivalent net interest
income increased $2.0 million to $13.3 million for 2009, compared to $11.3
million for 2008.  This increase in net interest income can be
attributed to an increase in tax equivalent interest income of $1.4 million and
a decrease in interest expense of $586,000.





Interest
income.  Tax equivalent interest income increased $1.4 million
or 7.2% to $20.9 million for 2009, compared to $19.5 million for
2008.  This increase can be attributed to increases in interest earned
on loans, securities and interest-earning deposits of $1.1 million, $214,000,
and $161,000, partially offset by a decrease in dividends on federal bank stocks
of $74,000.


K-30


Tax
equivalent interest earned on loans receivable increased $1.1 million or 6.8% to
$17.4 million for 2009, compared to $16.3 million for 2008.  During
that time, average loans increased $37.4 million or 15.2%, generating $2.3
million of additional loan interest income.  The increase in average
loans outstanding can primarily be attributable to loans acquired through the
Titusville branch purchase.  Offsetting this favorable asset growth,
the yield on loans decreased 48 basis points to 6.12% for 2009, versus 6.60% for
2008 due to declines in market interest rates throughout 2009 causing a $1.2
million decrease in interest income.





Tax
equivalent interest earned on securities increased $214,000 or 7.3% to $3.1
million for 2009, compared to $2.9 million for 2008.  During this
time, average securities increased $13.3 million or 22.8% accounting for
$611,000 in additional security interest income.  This increase was
primarily related to the deployment of cash received in association with the
Titusville branch purchase into higher yielding investment
securities.  The average yield on securities decreased 63 basis points
to 4.35% for 2009, versus 4.98% for 2008 in part due to calls of certain higher
rate securities and purchases of shorter term, lower yielding
investments.





Interest
earned on interest-earning deposit accounts increased $161,000 or 80.1% to
$362,000 for 2009, compared to $201,000 for 2008.  Average
interest-earning deposits increased $25.6 million or 340.6% primarily related to
cash received from the Titusville branch purchase and the timing associated with
the deployment of that cash. This increase generated $340,000 of additional
interest income.  Partially offsetting the favorable volume variance,
the average yield decreased 158 basis points due primarily to a change in asset
mix from primarily certificates of deposit to cash held with the Federal Reserve
resulting in a $179,000 decrease in interest income.  Interest earned
on federal bank stocks decreased $74,000 or 72.6% to $28,000 for 2009, compared
to $102,000 for 2008 due to the suspension of dividend payments by the
FHLB.





Interest
expense.  Interest expense decreased $586,000 or 7.2% to $7.6
million for 2009, compared to $8.2 million for 2008.  This decrease
can be attributed to decreases in interest incurred on interest-bearing deposits
and borrowed funds of $523,000 and $63,000, respectively.





Deposit
interest expense decreased $523,000 or 8.2% to $5.9 million for 2009, compared
to $6.4 million for 2008.  Declines in market interest rates caused
the rate on interest-bearing deposits to decrease by 77 basis points to 2.23%
for 2009 versus 3.00% for 2008 accounting for a $1.9 million decrease in
interest expense.  Average interest-bearing deposits increased $51.2
million or 24.0%, primarily due to deposits assumed related to the Titusville
branch purchase.  This increase accounted for $1.3 million in
additional interest expense.





Interest
expense on borrowed funds decreased $63,000 or 3.6% to $1.7 million for 2009,
compared to $1.8 million for 2008.  The average rate on borrowed funds
decreased 55 basis points to 3.34% for 2009 versus 3.89% for 2008 due to lower
short-term borrowing rates in 2009.  This decrease in rate accounted
for $263,000 of reduced interest expense.  Average borrowed funds
increased $5.5 million or 12.2% accounting for an increase in interest expense
of $200,000.





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





The
provision for loan losses increased $867,000 to $1.4 million for 2009, compared
to $500,000 for 2008. The Corporation’s allowance for loan losses amounted to
$3.2 million or 1.08% of the Corporation’s total loan portfolio at December 31,
2009, compared to $2.7 million or 0.99% at December 31, 2008.  The
allowance for loan losses as a percentage of non-performing loans at December
31, 2009 and 2008 was 132.4% and 262.2%, respectively.  The increase
in the provision for loan losses was due to management’s estimates of the impact
on the loan portfolio of credit defaults related to the continued recessionary
economic climate, charge-offs, increases in classified and nonperforming assets
and loan growth in general.


K-31


Noninterest
income.  Noninterest income includes revenue that is not
related to interest rates, but rather to services rendered and activities
conducted in the financial services industry, including fees on depository
accounts, general transaction and service fees, commissions on financial
services, title premiums, security and loan gains and losses, and earnings on
BOLI.  Noninterest income increased $343,000 or 13.8% to $2.8 million
for 2009, compared to $2.5 million for 2008.  This increase was
primarily due to a decrease in net losses on securities available for
sale.  During 2009, the Corporation realized security losses of
$898,000 as management determined that three marketable equity securities were
impaired.  The impairment of these financial industry securities were
considered to be other than temporary due to developments in the financial
conditions and near-term prospects of the issuers, a downturn of economic
conditions of the industry and deteriorating book values of the
securities.  Offsetting these impairment charges, the Corporation sold
several U.S. agency and mortgage-backed securities and realized gains of
$864,000.  During 2008, the Corporation realized security losses of
$391,000 as management determined that two marketable equity securities were
impaired.





Noninterest
expense.  Noninterest expense increased $1.6 million or 14.4%
to $12.6 million for 2009, compared to $11.0 million for 2008.  This
increase in noninterest expense was comprised of increases in premises and
equipment, intangible amortization, professional fees, federal deposit insurance
and other expenses, partially offset by a decrease in compensation and employee
benefits expense.





The
largest component of noninterest expense, compensation and employee benefits,
decreased $293,000 or 4.6% to $6.1 million for 2009, compared to $6.3 million
for 2008.  This decrease was primarily due to the elimination of the
Corporation’s incentive programs as part of its capital management and
preservation plan adopted during the first quarter of 2009.  In
addition, severance charges were recognized in the fourth quarter of 2008,
principally associated with the previously disclosed retirement of the
Corporation’s former Chairman of the Board, President and Chief Executive
Officer.





Premises
and equipment expense increased $185,000 or 10.8% to $1.9 million for 2009,
compared to $1.7 million for 2008, primarily related to costs associated with
the Titusville branch purchase.





The
Corporation recognized $203,000 of intangible amortization associated with a
core deposit intangible asset of $2.8 million that was recorded related to the
Titusville branch purchase transaction.





Professional
fees increased $791,000 to $1.3 million for 2009, compared to $501,000 for
2008.  This increase is attributable to the aforementioned branch
purchase and stock offering.  Professional fees related to the branch
purchase totaled $376,000 and included legal fees, project management fees and
conversion assistance costs.  Professional fees associated with the
stock offering, consisting mainly of legal and accounting fees, were
$399,000.





FDIC
expense increased $580,000 to $662,000 for 2009, compared to $82,000 for
2008.  This was the result of increases in base assessment rates for
FDIC insurance premiums and a special assessment that was assessed on all FDIC
insured depository institutions in 2009.  The special assessment
totaled $178,000 and was recognized during the second quarter of
2009.





Other
noninterest expense increased $120,000 or 5.0% to $2.5 million for 2009,
compared to $2.4 million for 2008 due primarily to $216,000 of costs related to
the branch purchase.  These included costs associated with customer
check and debit card replacement and the printing and mailing of required legal
disclosures to affected customers.  In addition, $85,000 of costs were
recognized related to the stock offering consisting of printing and filing fees,
NASDAQ listing fees and travel and other expenses.





The
provision for income taxes decreased $298,000 or 83.7% to $58,000 for 2009,
compared to $356,000 for 2008 due to lower pre-tax income with an increased
portion of pre-tax income being generated from tax-exempt investment securities
and loans.


K-32


Market Risk
Management





Market
risk for the Corporation consists primarily of interest rate risk exposure and
liquidity risk.  The Corporation 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 Corporation 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.





The
primary objective of the Corporation’s asset liability management function is to
maximize the Corporation’s net interest income while simultaneously maintaining
an acceptable level of interest rate risk given the Corporation’s operating
environment, capital and liquidity requirements, balance sheet mix, performance
objectives and overall business focus.  One of the primary measures of
the exposure of the Corporation’s earnings to interest rate risk is the timing
difference between the repricing or maturity of interest-earning assets and the
repricing or maturity of its interest-bearing liabilities.





The
Corporation’s Board of Directors has established a Finance Committee, consisting
of four outside directors, the President and Chief Executive Officer (CEO) and
the Principal Accounting Officer (PAO), to monitor market risk, including
primarily interest rate risk.  This committee, which meets at least
quarterly, generally establishes and monitors the investment, interest rate risk
and asset liability management policies established by the
Corporation.





In order
to minimize the potential for adverse affects of material and prolonged changes
in interest rates on the Corporation’s results of operations, the Corporation’s
management has implemented and continues to monitor asset liability management
policies to better match the maturities and repricing terms of the Corporation’s
interest-earning assets and interest-bearing liabilities.  Such
policies have consisted primarily of (i) originating adjustable-rate mortgage
loans; (ii) originating short-term secured commercial loans with the rate on the
loan tied to the prime rate or reset features in which the rate changes at
determined intervals; (iii) emphasizing investment in shorter-term (15 years or
less) investment securities; (iv) selling longer-term (30-year) fixed-rate
residential mortgage loans in the secondary market; (v) maintaining a high level
of liquid assets (including securities classified as available for sale) that
can be readily reinvested in higher yielding investments should interest rates
rise; (vi) emphasizing the retention of lower-costing savings accounts and other
core deposits; and (vii) lengthening liabilities and locking in lower borrowing
rates with longer terms whenever possible.





Interest Rate Sensitivity
Gap Analysis





The
implementation of asset and liability initiatives and strategies and compliance
with related policies, combined with other external factors such as demand for
the Corporation’s products and economic and interest rate environments in
general, has resulted in the Corporation maintaining a one-year cumulative
interest rate sensitivity gap ranging between a positive and negative 20% of
total assets.  The one-year interest rate sensitivity gap is
identified as the difference between the Corporation’s interest-earning assets
that are scheduled to mature or reprice within one year and its interest-bearing
liabilities that are scheduled to mature or reprice within one
year.





The
interest rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period.  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, or more neutral, that gap is
maintained, generally, the lesser the impact of market interest rate changes on
net interest income.


K-33


Based on
certain assumptions provided by a federal regulatory agency, which management
believes most accurately represents the sensitivity of the Corporation’s assets
and liabilities to interest rate changes, at December 31, 2009, the
Corporation’s interest-earning assets maturing or repricing within one year
totaled $141.0 million while the Corporation’s interest-bearing liabilities
maturing or repricing within one-year totaled $136.3 million, providing an
excess of interest-earning assets over interest-bearing liabilities of $4.8
million or 1.0% of total assets.  At December 31, 2009, the percentage
of the Corporation’s assets to liabilities maturing or repricing within one year
was 103.5%.





The
following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 2009 which are
expected to mature, prepay or reprice in each of the future time periods
presented:





Due in
                      
                      
                      Due within
                      
                      
                      Due within
                      
                      
                      Due within
                      
                      
                      Due insix months
                      
                      
                      six months
                      
                      
                      one to
                      
                      
                      three to
                      
                      
                      over(Dollar amounts in thousands)
                      
                      or less
                      
                      
                      to one year
                      
                      
                      three years
                      
                      
                      five years
                      
                      
                      five years
                      
                      
                      TotalTotal
      interest-earning assets
                      
                      $
                      108,606
                      
                      
                      $
                      32,399
                      
                      
                      $
                      129,331
                      
                      
                      $
                      81,372
                      
                      
                      $
                      82,653
                      
                      
                      $
                      434,361Total
      interest-bearing liabilities
                      
                      
                      86,715
                      
                      
                      
                      49,538
                      
                      
                      
                      92,557
                      
                      
                      
                      74,712
                      
                      
                      
                      116,860
                      
                      
                      
                      420,382Maturity
      or repricing gap during the period
                      
                      $
                      21,891
                      
                      
                      $
                      (17,139
                      )
                      
                      $
                      36,774
                      
                      
                      $
                      6,660
                      
                      
                      $
                      (34,207
                      )
                      
                      $
                      13,979Cumulative
      gap
                      
                      $
                      21,891
                      
                      
                      $
                      4,752
                      
                      
                      $
                      41,526
                      
                      
                      $
                      48,186
                      
                      
                      $
                      13,979Ratio
      of gap during the period to total assets
                      
                      
                      4.68
                      %
                      
                      
                      (3.67
                      )%
                      
                      
                      7.87
                      %
                      
                      
                      1.42
                      %
                      
                      
                      (7.32
                      )%Ratio
      of cumulative gap to total assets
                      
                      
                      4.68
                      %
                      
                      
                      1.02
                      %
                      
                      
                      8.88
                      %
                      
                      
                      10.31
                      %
                      
                      
                      2.99
                      %Total
      assets
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      467,526





Although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest
rates.  The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types of assets and liabilities may lag behind changes in market
interest rates.  In the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table.  The ability of many borrowers
to service their debt may decrease in the event of an interest rate
increase.





The
one-year interest rate sensitivity gap has been the most common industry
standard used to measure an institution’s interest rate risk position regarding
maturities, repricing and prepayments.  In recent years, in addition
to utilizing interest rate sensitivity gap analysis, the Corporation has
increased its emphasis on the utilization of interest rate sensitivity
simulation analysis to evaluate and manage interest rate risk.





Interest
Rate Sensitivity Simulation Analysis





The
Corporation also utilizes income simulation modeling in measuring its interest
rate risk and managing its interest rate sensitivity.  The Finance
Committee of the Corporation believes that simulation modeling enables the
Corporation to more accurately evaluate and manage the possible effects on net
interest income due to the exposure to changing market interest rates, the slope
of the yield curve and different loan and security prepayment and deposit decay
assumptions under various interest rate scenarios.





As with
gap analysis and earnings simulation modeling, assumptions about the timing and
variability of cash flows are critical in net portfolio equity valuation
analysis.  Particularly important are the assumptions driving mortgage
prepayments and the assumptions about expected attrition of the core deposit
portfolios.  These assumptions are based on the Corporation’s
historical experience and industry standards and are applied consistently across
the different rate risk measures.


K-34


The
Corporation has established the following guidelines for assessing interest rate
risk:





Net interest income
simulation.  Given a 200 basis point parallel and gradual
increase or decrease in market interest rates, net interest income may not
change by more than 25% for a one-year period.





Portfolio equity
simulation.  Portfolio equity is the net present value of the
Corporation’s existing assets and liabilities.  Given a 200 basis
point immediate and permanent increase or decrease in market interest rates,
portfolio equity may not correspondingly decrease or increase by more than 30%
of stockholders’ equity.





These
guidelines take into consideration the current interest rate environment, the
Corporation’s financial asset and financial liability product mix and
characteristics and liquidity sources among other factors.  Given the
current rate environment, a drop in short-term market interest rates of 200
basis points immediately or over a one-year horizon would seem
unlikely.  This should be considered in evaluating modeling results
outlined in the table below.





The
following table presents the simulated impact of a 100 basis point or 200 basis
point upward or downward shift of market interest rates on net interest income,
for the years ended December 31, 2009 and 2008, respectively.  This
analysis was done assuming that the interest-earning asset and interest-bearing
liability levels at December 31, 2009 remained constant.  The impact
of the market rate movements on net interest income was developed by simulating
the effects of rates changing gradually during a one-year period from the
December 31, 2009 levels for net interest income.





Increase
                          
                          
                          Decrease+100
                          
                          
                          +200
                          
                          
                          -100
                          
                          
                          -200BP
                          
                          
                          BP
                          
                          
                          BP
                          
                          
                          BP2009
      Net interest income - increase (decrease)
                          
                          
                          2.64
                          %
                          
                          
                          4.42
                          %
                          
                          
                          (5.87
                          )%
                          
                          
                          (11.02
                          )%2008
      Net interest income - increase (decrease)
                          
                          
                          2.71
                          %
                          
                          
                          3.37
                          %
                          
                          
                          (4.42
                          )%
                          
                          
                          (7.52
                          )%





Impact of Inflation and
Changing Prices





The
consolidated financial statements of the Corporation and related notes presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America which require the measurement of
financial condition and operating results in terms of historical dollars,
without considering changes in the relative purchasing power of money over time
due to inflation.





Unlike
most industrial companies, substantially all of the assets and liabilities of a
financial institution are monetary in nature.  As a result, interest
rates have a more significant impact on a financial institution’s performance
than the effects of general levels of inflation.  Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services since such prices are affected by inflation to a
larger degree than interest rates.  In the current interest rate
environment, liquidity and the maturity structure of the Corporation’s assets
and liabilities are critical to the maintenance of acceptable performance
levels.





Capital
Resources





Total
stockholders’ equity increased $911,000 or 2.5% to $37.0 million at December 31,
2009 from $36.1 million at December 31, 2008.  Net income of $1.5
million in 2009 represented a decrease in earnings of $891,000 or 36.7% compared
to 2008.  Returns on average equity and assets were 4.23% and 0.37%,
respectively, for 2009.


K-35


The
Corporation has maintained a strong capital position with a capital to assets
ratio of 7.9% at December 31, 2009.  In an effort to sustain this
strong capital position, regular cash dividends on common stock decreased to
$1.1 million in 2009 from $1.7 million in 2008.  Stockholders have
taken part in the Corporation’s dividend reinvestment plan introduced during
2003 with 47% of registered shareholder accounts active in the plan at December
31, 2009.





Capital
adequacy is intended to enhance the Corporation’s ability to support growth
while protecting the interest of shareholders and depositors and to ensure that
capital ratios are in compliance with regulatory minimum
requirements.  Regulatory agencies have developed certain capital
ratio requirements that are used to assist them in monitoring the safety and
soundness of financial institutions.  At December 31, 2009, the
Corporation and the Bank were in excess of all regulatory capital
requirements.





Liquidity





The
Corporation’s primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB, and amortization and
prepayments of outstanding loans and maturing securities.  During
2009, the Corporation used its sources of funds primarily to fund loan
commitments.  As of December 31, 2009, the Corporation had outstanding
loan commitments, including undisbursed loans and amounts available under credit
lines, totaling $46.1 million, and standby letters of credit totaling $1.5
million.  The Bank is required by the OCC to establish policies to
monitor and manage liquidity levels to ensure the Bank’s ability to meet demands
for customer withdrawals and the repayment of short-term borrowings, and the
Bank is currently in compliance with all liquidity policy limits.





At
December 31, 2009, time deposits amounted to $164.2 million or 42.6% of the
Corporation’s total consolidated deposits, including approximately $53.0
million, which are scheduled to mature within the next
year.  Management of the Corporation believes that the Corporation has
adequate resources to fund all of its commitments, that all of its commitments
will be funded as required by related maturity dates and that, based upon past
experience and current pricing policies, it can adjust the rates of time
deposits to retain a substantial portion of maturing liabilities.





Aside
from liquidity available from customer deposits or through sales and maturities
of securities, the Corporation has alternative sources of funds such as a line
of credit and term borrowing capacity from the FHLB and, to a more limited
extent, through the sale of loans.  At December 31, 2009, the
Corporation’s borrowing capacity with the FHLB, net of funds borrowed, was
$130.3 million.





The
Corporation paid quarterly cash dividends over the past two years and determined
to reduce the quarterly cash dividend from $0.32 per share to $0.14 per share
effective for the second quarter of 2009.  The determination of future
dividends on the Corporation’s common stock will depend on conditions existing
at that time with consideration given to the Corporation’s earnings, capital and
liquidity needs, among other factors.





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


K-36


Critical Accounting
Policies





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





The most
significant accounting policies followed by the Corporation are presented in
Note 1 to the consolidated financial statements.  These policies,
along with the disclosures presented in the other financial statement notes
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.  Management
views critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions and where changes in
those estimates and assumptions could have a significant impact on the financial
statements.  Management has identified the following as critical
accounting policies.





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





Other-than-temporary
impairment.  Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic, market or other concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, (3) the intent of the
Corporation to sell a security, and (4) whether it is more likely than not the
Corporation will have to sell the security before recovery of its cost
basis.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





Information
required by this item is included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in item 7.





Item  8.  Financial
Statements and Supplementary Data





Information
required by this item is included herein beginning on page F-1.


K-37


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





On
February 17, 2010, the Corporation’s Board of Directors dismissed its
independent auditors, ParenteBeard LLC (ParenteBeard).  ParenteBeard
will complete its engagement as independent auditor for the Corporation’s fiscal
year ended December 31, 2009 upon the filing of the Corporation’s Form 10-K for
the year ended December 31, 2009.  ParenteBeard’s report on the
Corporation’s consolidated financial statements during the two most recent
fiscal years preceding the date hereof contained no adverse opinion or a
disclaimer of opinions, 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 last two fiscal years and the subsequent interim period to the date hereof,
there were no disagreements between the Corporation and ParenteBeard 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 ParenteBeard, 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 last two fiscal years and the subsequent interim period to the date
hereof.





Effective
February 17, 2010, the Corporation engaged Crowe Horwath LLP (Crowe Horwath) as
its independent auditors for the fiscal year ending December 31,
2010.  The Corporation engaged Crowe Horwath to perform limited
non-audit services related to the years ending December 31, 2009 and
2008.  The services performed during this period included preparation
of consolidated federal and state tax returns, assisting management with
quarterly estimated tax payments, effective tax rates, deferred tax inventory,
tax related journal entries and discussions on tax matters related to a branch
acquisition.  On occasion, Crowe Horwath also informally discussed
with management of the Corporation general accounting topics and/or
issues.





The
nature of Crowe Horwath’s involvement with the Corporation as indicated above
did not result in any conclusion on the type of  audit opinion(s)
rendered or to be rendered, views expressed, management’s final decisions as to
the accounting, auditing  or financial reporting requirements nor a
disagreement or reportable event.





Item
9A(T).  Controls and Procedures





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





As of
December 31, 2009, the Corporation carried out an evaluation, under the
supervision and with the participation of the Corporation’s management,
including the Corporation’s CEO and PAO, of the effectiveness of the design and
operation of the Corporation’s disclosure controls and
procedures.  Based on the foregoing, the Corporation’s CEO and PAO
concluded that the Corporation’s disclosure controls and procedures were
effective.





There
have been no significant changes in the Corporation’s internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Corporation completed its valuation.





During
the fourth quarter of fiscal year 2009, there has been no change made in the
Corporation’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Corporation.  Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.


K-38


Management
completed an assessment of the Corporation’s internal control over financial
reporting as of December 31, 2009.  This assessment was based on
criteria for evaluating internal control over financial reporting established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on this assessment, management concluded
that the Corporation’s internal control over financial reporting was effective
as of December 31, 2009.





This
annual report does not include an attestation report of the Corporation’s
registered public accounting firm regarding internal control over financial
reporting.  The Corporation’s internal control over financial
reporting was not subject to attestation by the Corporation’s registered public
accounting firm pursuant to temporary rules of the SEC that permit the
Corporation to provide only management’s report in this annual
report.





Item 9B.  Other
Information





None.





PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance





The
information  required by this item is incorporated herein by reference
to 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” in the Corporation’s definitive proxy statement for the
Corporation’s Annual Meeting of Stockholders to be held on April 28, 2010 (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 PAO.  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 PAO will be publicly disclosed in accordance with applicable
regulations.





Item
11.  Executive Compensation





The
information required by this item is incorporated herein by reference to the
section captioned “Executive Compensation” in the Proxy Statement.





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





The
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 Accountant 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.


K-39


PART
IV





Item 15.  Exhibits
and Financial Statement Schedules




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




(i)  The
financial statements required in response to this item are incorporated by
reference from Item 8 of this report.




(3)  Management Contracts
or Compensatory Plans:





(i)
Exhibits 10.1-10.6 listed below in (b) 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.





2.1
              Agreement
      and Plan of Merger by and between Emclaire Financial Corp. and Elk County
      Savings and Loan Association. (1)3.1
              Articles
      of Incorporation of Emclaire Financial Corp. (2)3.2
              Bylaws
      of Emclaire Financial Corp. (2)3.3
              Statement
      with respect to shares for Preferred Stock. (3)4.0
              Specimen
      Stock Certificate of Emclaire Financial Corp. (4)4.1
              Form
      of certificate for Preferred Stock. (3)4.2
              Warrant
      for purchase of shares of Common Stock. (3)10.1
              Employment
      Agreement between Emclaire Financial Corp., the Farmers National Bank of
      Emlenton and certain executive officers, dated as of July 1, 2007.
      (5)10.2
              Change
      in Control Agreement between Emclaire Financial Corp., the Farmers
      National Bank of Emlenton and certain executive officers, dated as of July
      1, 2007. (5)10.3
              Change
      in Control Agreement between Emclaire Financial Corp., the Farmers
      National Bank of Emlenton and certain executive officer, dated as of May
      12, 2008.10.4
              Group
      Term Carve-Out Plan between the Farmers National Bank of Emlenton and 20
      Officers and Employees. (6)10.5
              Supplemental
      Executive Retirement Plan Agreement between the Farmers National Bank of
      Emlenton and Six Officers. (6)10.6
              Adoption
      of Farmers National Bank of Emlenton Deferred Compensation Plan.
      (7)10.7
              Letter
      Agreement, dated December 23, 2008 between the Corporation and the U.S.
      Department of the Treasury. (3)11.0
              Statement
      regarding computation of earnings per share (see Note 1 of the Notes to
      Consolidated Financial Statements in the Annual
  Report).


K-40





13.0
              Annual
      Report to Stockholders for the fiscal year ended December 31,
      2009.14.0
              Code
      of Personal and Business Conduct and Ethics. (8)20.0
              Emclaire
      Financial Corp. Dividend Reinvestment and Stock Purchase Plan.
      (9)21.0
              Subsidiaries
      of the Registrant (see information contained herein under “Item 1.
      Description of Business - Subsidiary Activity”).31.1
              Principal
      Executive Officer 302 Certification.31.2
              Principal
      Accounting Officer 302 Certification.32.1
              Principal
      Executive Officer 906 Certification.32.2
              Principal
      Accounting Officer 906 Certification.99.1
              Principal
      Executive Officer 111 Certification.99.2
              Principal
      Financial Officer 111
Certification.





(1)
            Incorporated
      by reference to the Registrant’s Current Report on Form 8-K dated October
      20, 2008.


(2)
            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.


(3)
            Incorporated
      by reference to the Registrant’s Current Report on Form 8-K dated December
      23, 2008.


(4)
            Incorporated
      by reference to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 1997.


(5)
            Incorporated
      by reference to the Registrant’s Current Report on Form 8-K dated June 21,
      2007.


(6)
            Incorporated
      by reference to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2002.


(7)
            Incorporated
      by reference to the Registrant’s Current Report on Form 8-K dated December
      15, 2008.


(8)
            Incorporated
      by reference to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2004.


(9)
            Incorporated
      by reference to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2001.


K-41


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
      22, 2010
                
                By:
                /s/ William C. MarshWilliam
      C. MarshChairman,
      Chief Executive Officer, President 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/ William C. Marsh
                  
                  By:
                  /s/ Amanda L.
  EnglesWilliam
      C. Marsh
                  
                  
                  Amanda
      L. EnglesChairman
      of the Board
                  
                  
                  TreasurerChief
      Executive Officer
                  
                  
                  (Principal
      Accounting Officer)PresidentDirector(Principal
      Executive Officer)Date:     March
      22, 2010
                  
                  Date:     March
      22, 2010By:
                  /s/ Ronald L.
Ashbaugh
                  
                  By:
                  /s/ David L. CoxRonald
      L. Ashbaugh
                  
                  
                  David
      L. CoxDirector
                  
                  
                  DirectorDate:     March
      22, 2010
                  
                  Date:     March
      22, 2010By:
                  /s/ James M. Crooks
                  
                  By:
                  /s/ George W.
  FreemanJames
      M. Crooks
                  
                  
                  George
      W. FreemanDirector
                  
                  
                  DirectorDate:     March
      22, 2010
                  
                  Date:     March
      22, 2010By:
                  /s/ Mark A. Freemer
                  
                  By:
                  /s/ Robert L.
  HunterMark
      A. Freemer
                  
                  
                  Robert
      L. HunterDirector
                  
                  
                  DirectorDate:     March
      22, 2010
                  
                  Date:     March
      22, 2010By:
                  /s/ John B. Mason
                  
                  By:
                  /s/ Brian C.
  McCarrierJohn
      B. Mason
                  
                  
                  Brian
      C. McCarrierDirector
                  
                  
                  DirectorDate:     March
      22, 2010
                  
                  Date:     March
      22, 2010


K-42


Financial
Statements
 Table
of Contents
 
 Report
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Balance Sheets
                  F-3Consolidated
      Statements of Income
                  F-4Consolidated
      Statements of Changes in Stockholders’ Equity
                  F-5Consolidated
      Statements of Cash Flows
                  F-6Notes
      to Consolidated Financial Statements
                  F-7
  F-1
 
 Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Stockholders
 Emclaire
Financial Corp.
 Emlenton,
Pennsylvania
 
 We have
audited the accompanying consolidated balance sheets of Emclaire Financial Corp.
and subsidiaries (the “Corporation”) as of December 31, 2009 and 2008, and the
related consolidated statements of income, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2009.  Emclaire Financial Corp.’s management
is responsible for these consolidated financial statements. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Corporation is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation’s internal control over
financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Emclaire Financial Corp. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
 
 /s/
ParenteBeard LLC
 Pittsburgh,
Pennsylvania
 March 22,
2010
  F-2
 
 Consolidated
Balance Sheets
 (Dollar
amounts in thousands, except share data)
 
 December
      31,2009
                                  
                                  
                                  2008AssetsCash
      and due from banks
                                  
                                  $
                                  2,822
                                  
                                  
                                  $
                                  4,292Interest
      earning deposits with banks
                                  
                                  
                                  36,130
                                  
                                  
                                  
                                  12,279Total
      cash and cash equivalents
                                  
                                  
                                  38,952
                                  
                                  
                                  
                                  16,571Securities
      available for sale, at fair value
                                  
                                  
                                  105,243
                                  
                                  
                                  
                                  71,443Loans
      receivable, net of allowance for loan losses of $3,202 and
      $2,651
                                  
                                  
                                  292,615
                                  
                                  
                                  
                                  264,838Federal
      bank stocks, at cost
                                  
                                  
                                  4,125
                                  
                                  
                                  
                                  3,797Bank-owned
      life insurance
                                  
                                  
                                  5,388
                                  
                                  
                                  
                                  5,186Accrued
      interest receivable
                                  
                                  
                                  1,574
                                  
                                  
                                  
                                  1,519Premises
      and equipment, net
                                  
                                  
                                  9,170
                                  
                                  
                                  
                                  8,609Goodwill
                                  
                                  
                                  3,657
                                  
                                  
                                  
                                  1,422Core
      deposit intangible
                                  
                                  
                                  2,585
                                  
                                  
                                  
                                  -Prepaid
      expenses and other assets
                                  
                                  
                                  4,217
                                  
                                  
                                  
                                  2,279Total
      Assets
                                  
                                  $
                                  467,526
                                  
                                  
                                  $
                                  375,664Liabilities
      and Stockholders' EquityLiabilitiesDeposits:Non-interest
      bearing
                                  
                                  $
                                  67,033
                                  
                                  
                                  $
                                  56,351Interest
      bearing
                                  
                                  
                                  318,292
                                  
                                  
                                  
                                  230,296Total
      deposits
                                  
                                  
                                  385,325
                                  
                                  
                                  
                                  286,647Borrowed
      funds:Short-term
                                  
                                  
                                  5,000
                                  
                                  
                                  
                                  13,188Long-term
                                  
                                  
                                  35,000
                                  
                                  
                                  
                                  35,000Total
      borrowed funds
                                  
                                  
                                  40,000
                                  
                                  
                                  
                                  48,188Accrued
      interest payable
                                  
                                  
                                  711
                                  
                                  
                                  
                                  761Accrued
      expenses and other liabilities
                                  
                                  
                                  4,456
                                  
                                  
                                  
                                  3,945Total
      Liabilities
                                  
                                  
                                  430,492
                                  
                                  
                                  
                                  339,541Commitments
      and Contingencies
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Stockholders'
      EquityPreferred
      stock, $1.00 par value, 3,000,000 shares authorized; 7,500 shares issued
      and outstanding
                                  
                                  
                                  7,430
                                  
                                  
                                  
                                  7,412Warrants
                                  
                                  
                                  88
                                  
                                  
                                  
                                  88Common
      stock, $1.25 par value, 12,000,000 shares authorized; 1,559,421 shares
      issued; 1,431,404 shares outstanding
                                  
                                  
                                  1,949
                                  
                                  
                                  
                                  1,949Additional
      paid-in capital
                                  
                                  
                                  14,685
                                  
                                  
                                  
                                  14,564Treasury
      stock, at cost; 128,017 shares
                                  
                                  
                                  (2,653
                                  )
                                  
                                  
                                  (2,653
                                  )Retained
      earnings
                                  
                                  
                                  15,967
                                  
                                  
                                  
                                  15,840Accumulated
      other comprehensive loss
                                  
                                  
                                  (432
                                  )
                                  
                                  
                                  (1,077
                                  )Total
      Stockholders' Equity
                                  
                                  
                                  37,034
                                  
                                  
                                  
                                  36,123Total
      Liabilities and Stockholders' Equity
                                  
                                  $
                                  467,526
                                  
                                  
                                  $
                                  375,664
 
 See
accompanying notes to consolidated financial statements.
  F-3
  Consolidated
Statements of Income
 (Dollar
amounts in thousands, except share data)
 
 Year ended December 31,2009
                    
                    
                    2008Interest
      and dividend incomeLoans
      receivable, including fees
                    
                    $
                    17,203
                    
                    
                    $
                    16,162Securities:Taxable
                    
                    
                    1,871
                    
                    
                    
                    1,992Exempt
      from federal income tax
                    
                    
                    870
                    
                    
                    
                    636Federal
      bank stocks
                    
                    
                    28
                    
                    
                    
                    102Deposits
      with banks
                    
                    
                    362
                    
                    
                    
                    201Total
      interest and dividend income
                    
                    
                    20,334
                    
                    
                    
                    19,093Interest
      expenseDeposits
                    
                    
                    5,892
                    
                    
                    
                    6,415Short-term
      borrowed funds
                    
                    
                    124
                    
                    
                    
                    182Long-term
      borrowed funds
                    
                    
                    1,566
                    
                    
                    
                    1,571Total
      interest expense
                    
                    
                    7,582
                    
                    
                    
                    8,168Net
      interest income
                    
                    
                    12,752
                    
                    
                    
                    10,925Provision
      for loan losses
                    
                    
                    1,367
                    
                    
                    
                    500Net
      interest income after provision for loan losses
                    
                    
                    11,385
                    
                    
                    
                    10,425Noninterest
      incomeFees
      and service charges
                    
                    
                    1,495
                    
                    
                    
                    1,638Commissions
      on financial services
                    
                    
                    389
                    
                    
                    
                    449Title
      premiums
                    
                    
                    62
                    
                    
                    
                    -Other-than-temporary
      impairment losses on equity securities
                    
                    
                    (898
                    )
                    
                    
                    (391
                    )Net
      gain on sales of loans
                    
                    
                    4
                    
                    
                    
                    6Net
      gain on sales of available for sale securities
                    
                    
                    864
                    
                    
                    
                    -Earnings
      on bank-owned life insurance
                    
                    
                    232
                    
                    
                    
                    227Other
                    
                    
                    682
                    
                    
                    
                    558Total
      noninterest income
                    
                    
                    2,830
                    
                    
                    
                    2,487Noninterest
      expenseCompensation
      and employee benefits
                    
                    
                    6,054
                    
                    
                    
                    6,347Premises
      and equipment
                    
                    
                    1,899
                    
                    
                    
                    1,714Intangible
      asset amortization
                    
                    
                    203
                    
                    
                    
                    -Professional
      fees
                    
                    
                    1,292
                    
                    
                    
                    501Federal
      deposit insurance
                    
                    
                    662
                    
                    
                    
                    82Other
                    
                    
                    2,508
                    
                    
                    
                    2,388Total
      noninterest expense
                    
                    
                    12,618
                    
                    
                    
                    11,032Income
      before provision for income taxes and extraordinary item
                    
                    
                    1,597
                    
                    
                    
                    1,880Provision
      for income taxes
                    
                    
                    58
                    
                    
                    
                    356Income
      before extraordinary item
                    
                    
                    1,539
                    
                    
                    
                    1,524Extraordinary
      item, gain on business combination
                    
                    
                    -
                    
                    
                    
                    906Net
      income
                    
                    
                    1,539
                    
                    
                    
                    2,430Accumulated
      preferred stock dividends and discount accretion
                    
                    
                    393
                    
                    
                    
                    -Net
      income available to common stockholders
                    
                    $
                    1,146
                    
                    
                    $
                    2,430Earnings
      per common shareNet
      income before extraordinary item
                    
                    $
                    0.80
                    
                    
                    $
                    1.17Extraordinary
      item, gain on business combination
                    
                    
                    -
                    
                    
                    
                    0.70Net
      income (basic)
                    
                    $
                    0.80
                    
                    
                    $
                    1.87Net
      income (diluted)
                    
                    $
                    0.80
                    
                    
                    $
                    1.87
 
 See
accompanying notes to consolidated financial statements.
  F-4
 
 Consolidated
Statements of Changes in Stockholders’ Equity
 (Dollar
amounts in thousands, except share data)
 
 AccumulatedAdditional
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    Other
                                    
                                    
                                    TotalPreferred
                                    
                                    
                                    
                                    
                                    
                                    Common
                                    
                                    
                                    Paid-in
                                    
                                    
                                    Treasury
                                    
                                    
                                    Retained
                                    
                                    
                                    Comprehensive
                                    
                                    
                                    Stockholders'Stock
                                    
                                    
                                    Warrants
                                    
                                    
                                    Stock
                                    
                                    
                                    Capital
                                    
                                    
                                    Stock
                                    
                                    
                                    Earnings
                                    
                                    
                                    Loss
                                    
                                    
                                    EquityBalance
      at January 1, 2008
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    1,745
                                    
                                    
                                    $
                                    10,902
                                    
                                    
                                    $
                                    (2,653
                                    )
                                    
                                    $
                                    15,114
                                    
                                    
                                    $
                                    (405
                                    )
                                    
                                    $
                                    24,703Comprehensive
      income:Net
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,430
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,430Change
      in net unrealized losses on securities available for sale, net of taxes of
      $129
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    251
                                    
                                    
                                    
                                    251Change
      in funded status of defined benefit plan, net of taxes of
      ($475)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (923
                                    )
                                    
                                    
                                    (923
                                    )Comprehensive
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,758Issuance
      of common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    204
                                    
                                    
                                    
                                    3,549
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3,753Issuance
      of preferred stock
                                    
                                    
                                    7,412
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    7,412Issuance
      of warrants
                                    
                                    
                                    
                                    
                                    
                                    
                                    88
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    88Stock
      compensation expense
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    113
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    113Cash
      dividends declared on commonstock
      ($1.30 per share)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,704
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,704
                                    )Balance
      at December 31, 2008
                                    
                                    
                                    7,412
                                    
                                    
                                    
                                    88
                                    
                                    
                                    
                                    1,949
                                    
                                    
                                    
                                    14,564
                                    
                                    
                                    
                                    (2,653
                                    )
                                    
                                    
                                    15,840
                                    
                                    
                                    
                                    (1,077
                                    )
                                    
                                    
                                    36,123Comprehensive
      income:Net
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,539
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,539Change
      in net unrealized losses on securities available for sale, for which a
      portion of an other than temporary impairment has been recognized in
      earnings, net of taxes of $145
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    280
                                    
                                    
                                    
                                    280Change
      in net unrealized losses on securities available for sale, net of taxes of
      ($70)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (135
                                    )
                                    
                                    
                                    (135
                                    )Change
      in funded status of defined benefit plan, net of taxes of
    $258
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    500
                                    
                                    
                                    
                                    500Comprehensive
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,184Stock
      compensation expense
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    121
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    121Preferred
      dividends and amortization of discount
                                    
                                    
                                    18
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (353
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (335
                                    )Cash
      dividends declared on common stock ($0.74 per share)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,059
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,059
                                    )Balance
      at December 31, 2009
                                    
                                    $
                                    7,430
                                    
                                    
                                    $
                                    88
                                    
                                    
                                    $
                                    1,949
                                    
                                    
                                    $
                                    14,685
                                    
                                    
                                    $
                                    (2,653
                                    )
                                    
                                    $
                                    15,967
                                    
                                    
                                    $
                                    (432
                                    )
                                    
                                    $
                                    37,034
 
 See
accompanying notes to consolidated financial statements.
  F-5
  Consolidated
Statements of Cash Flows
 (Dollar
amounts in thousands, except share data)
 
 Year ended December 31,2009
                                
                                
                                2008Cash
      flows from operating activitiesNet
      income
                                
                                $
                                1,539
                                
                                
                                $
                                2,430Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
                                
                                
                                860
                                
                                
                                
                                737Provision
      for loan losses
                                
                                
                                1,367
                                
                                
                                
                                500Amortization
      of premiums and (accretion of discounts), net
                                
                                
                                176
                                
                                
                                
                                (161
                                )Amortization
      of intangible assets and mortgage servicing rights
                                
                                
                                220
                                
                                
                                
                                17Securities
      impairment loss recognized in earnings
                                
                                
                                898
                                
                                
                                
                                391Realized
      gains on sales of available for sale securities, net
                                
                                
                                (864
                                )
                                
                                
                                -Net
      gains on sales of loans
                                
                                
                                (4
                                )
                                
                                
                                (6
                                )Net
      (gains) losses on foreclosed real estate
                                
                                
                                4
                                
                                
                                
                                (96
                                )Net
      gains on sales of bank premises and equipment
                                
                                
                                (16
                                )
                                
                                
                                -Originations
      of loans sold
                                
                                
                                (159
                                )
                                
                                
                                (1,209
                                )Proceeds
      from the sale of loans
                                
                                
                                163
                                
                                
                                
                                1,215Restricted
      stock and stock option compensation
                                
                                
                                121
                                
                                
                                
                                113Increase
      in bank-owned life insurance, net
                                
                                
                                (202
                                )
                                
                                
                                (199
                                )(Increase)
      decrease in accrued interest receivable
                                
                                
                                88
                                
                                
                                
                                (154
                                )Increase
      in deferred taxes
                                
                                
                                (286
                                )
                                
                                
                                (433
                                )Increase
      in prepaid expenses and other assets
                                
                                
                                (1,627
                                )
                                
                                
                                (913
                                )Decrease
      in accrued interest payable
                                
                                
                                (50
                                )
                                
                                
                                (10
                                )Increase
      in accrued expenses and other liabilities
                                
                                
                                1,011
                                
                                
                                
                                1,438Net
      cash provided by operating activities
                                
                                
                                3,239
                                
                                
                                
                                3,660Cash
      flows from investing activitiesLoan
      originations and principal collections, net
                                
                                
                                2,784
                                
                                
                                
                                (35,818
                                )Available
      for sale securities:Sales
                                
                                
                                20,513
                                
                                
                                
                                -Maturities,
      repayments and calls
                                
                                
                                40,697
                                
                                
                                
                                70,999Purchases
                                
                                
                                (94,720
                                )
                                
                                
                                (90,361
                                )Purchase
      of federal bank stocks
                                
                                
                                (328
                                )
                                
                                
                                (1,135
                                )Proceeds
      from the sale of bank premises and equipment
                                
                                
                                203
                                
                                
                                
                                -Proceeds
      from the sale of foreclosed real estate
                                
                                
                                99
                                
                                
                                
                                463Net
      cash received in branch acquisition
                                
                                
                                54,923
                                
                                
                                
                                -Purchases
      of premises and equipment
                                
                                
                                (1,530
                                )
                                
                                
                                (1,442
                                )Net
      cash provided by (used in) investing activities
                                
                                
                                22,641
                                
                                
                                
                                (57,294
                                )Cash
      flows from financing activitiesNet
      increase in deposits
                                
                                
                                6,083
                                
                                
                                
                                42,385Net
      change in short-term borrowings
                                
                                
                                (8,188
                                )
                                
                                
                                7,788Proceeds
      from sale of preferred stock
                                
                                
                                -
                                
                                
                                
                                7,412Issuance
      of warrants
                                
                                
                                -
                                
                                
                                
                                88Proceeds
      from sale of common stock
                                
                                
                                -
                                
                                
                                
                                3,753Dividends
      paid
                                
                                
                                (1,394
                                )
                                
                                
                                (1,704
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                (3,499
                                )
                                
                                
                                59,722Net
      increase in cash and cash equivalents
                                
                                
                                22,381
                                
                                
                                
                                6,088Cash
      and cash equivalents at beginning of period
                                
                                
                                16,571
                                
                                
                                
                                10,483Cash
      and cash equivalents at end of period
                                
                                $
                                38,952
                                
                                
                                $
                                16,571Supplemental
      information:Interest
      paid
                                
                                $
                                7,632
                                
                                
                                $
                                8,178Income
      taxes paid
                                
                                
                                183
                                
                                
                                
                                805Supplemental
      noncash disclosures:Transfers
      from loans to foreclosed real estate
                                
                                
                                227
                                
                                
                                
                                288Summary
      of branch acquisition:Fair
      value of deposits assumed
                                
                                
                                92,596
                                
                                
                                
                                -Less:
      Fair value of tangible assets acquired
                                
                                
                                32,673
                                
                                
                                
                                -Cash received in acquisition
                                
                                
                                54,923
                                
                                
                                
                                -Goodwill
      and other intangibles recorded
                                
                                $
                                5,000
                                
                                
                                $
                                -
 
 See
accompanying notes to consolidated financial statements.
  F-6
 
 Notes
to Consolidated Financial Statements
  1.
                Summary
      of Significant Accounting Policies
 
 Basis of
Presentation and Consolidation.  The consolidated financial
statements include the accounts of Emclaire Financial Corp. (the Corporation)
and its wholly owned subsidiaries, the Farmers National Bank of Emlenton (the
Bank) and Emclaire Settlement Services, LLC (the Title Company).  All
significant intercompany balances and transactions have been eliminated in
consolidation.
 
 Nature of
Operations. The Corporation provides a variety of financial services to
individuals and businesses through its offices in Western
Pennsylvania.  Its primary deposit products are checking, savings and
term certificate accounts and its primary lending products are residential and
commercial mortgages, commercial business loans and consumer loans.
 
 Use of Estimates
and Classifications.  In preparing consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America (GAAP), management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, fair value of financial instruments, goodwill, the valuation of
deferred tax assets and other than temporary impairment
charges.  Certain amounts previously reported may have been
reclassified to conform to the current year financial statement
presentation.  Such reclassifications did not affect net income or
stockholders’ equity.
 
 Significant Group
Concentrations of Credit Risk.  Most of the Corporation’s
activities are with customers located within the Western Pennsylvania region of
the country.  Note 4 discusses the type of securities that the
Corporation invests in.  Note 5 discusses the types of lending the
Corporation engages in.  The Corporation does not have any significant
concentrations to any one industry or customer.
 
 Cash
Equivalents.  For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash on hand, cash items,
interest-earning deposits with other financial institutions and federal funds
sold and due from correspondent banks.  Interest-earning deposits
mature within one year and are carried at cost.  Federal funds are
generally sold or purchased for one day periods.  Net cash flows are
reported for loan and deposit transactions.
 
 Restrictions on
Cash.  Cash on hand or on deposit with the Federal Reserve Bank
of Cleveland (FRB) of approximately $60,000 was required to meet regulatory
reserve and clearing requirements at December 31, 2009 and 2008.  Both
required and excess reserves earn interest.
 
 Securities.Debt
securities are classified as available for sale when they might be sold before
maturity.  Equity securities with readily determinable fair values are
classified as available for sale.  Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income.
 
 Interest
income includes amortization of purchase premium or
discount.  Premiums and discounts on securities are amortized using
the interest method over the term of the securities.  Gains and losses
on sales are recorded on the trade date and determined using the specific
identification method.
  F-7
 
 Notes
to Consolidated Financial Statements (continued)
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Securities
(continued).Management evaluates securities for
other-than-temporary impairment (OTTI) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, (3) the intent of the
Corporation to sell a security, and (4) whether it is more likely than not the
Corporation will have to sell the security before recovery of its cost
basis.  If the Corporation intends to sell an impaired security, or if
it is more likely than not the Corporation will have to sell the security before
recovery of its cost basis, the Corporation records an other-than-temporary loss
in an amount equal to the entire difference between fair value and amortized
cost.  Otherwise, only the credit portion of the estimated loss on
debt securities is recognized in earnings, with the other portion of the loss
recognized in other comprehensive income.
 
 Loans Held for
Sale.  Loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value in the
aggregate.  Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.  Loans held for sale are
generally sold with servicing rights retained.  The carrying value of
such loans sold is reduced by the cost allocated to the servicing
rights.  Gains and losses on sales of mortgage loans are based on the
difference between the selling price and the carrying value of the related loan
sold.
 
 Loans
Receivable.  The Corporation grants mortgage, commercial and
consumer loans to customers.  A substantial portion of the loan
portfolio is represented by mortgage loans throughout Western
Pennsylvania.  The ability of the Corporation’s debtors to honor their
contracts is dependent upon real estate and general economic conditions in this
area.
 
 Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or net pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans or premiums or discounts on
purchased loans.  Interest income is accrued on the unpaid principal
balance.  Loan origination fees, net of certain direct origination
costs, and premiums and discounts are deferred and recognized as an adjustment
of the related loan yield using the interest method.
 
 The
accrual of interest on loans is typically discontinued at the time the loan is
90 days past due unless the credit is well secured and in the process of
collection.  Loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered
doubtful.  All interest accrued but not collected for loans that are
placed on nonaccrual status or charged-off is reversed against interest
income.  The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to
accrual.  Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
 
 Allowance for
Loan Losses.The allowance for loan losses is established for
probable credit losses through a provision for loan losses charged to
earnings.  Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed.  Subsequent recoveries, if any, are typically credited to
the allowance.
  F-8
 
 Notes
to Consolidated Financial Statements (continued)
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Allowance
      for Loan Losses (continued).The allowance for loan
      losses is evaluated on a regular basis by management and is based upon
      management’s periodic review of the collectibility of loans in light of
      historic experience, the nature and volume of the loan portfolio, adverse
      situations that may affect the borrower’s ability to repay, estimated
      value of any underlying collateral and prevailing economic
      conditions.  This evaluation is inherently subjective as it
      requires estimates that are susceptible to significant revision as more
      information becomes available.  The allowance consists of
      specific, general and unallocated components.  The specific
      component relates to loans that are classified as doubtful, substandard or
      special mention.  For such loans that are also classified as
      impaired, an allowance is established when the discounted cash flows (or
      collateral value or observable market price) of the impaired loan is lower
      than the carrying value of that loan.  The general component
      covers non-classified loans and is based on historical loss experience
      adjusted for qualitative factors.  An unallocated component is
      maintained to cover uncertainties that could affect management’s estimate
      of probable losses.  The unallocated component of the allowance
      reflects the margin of imprecision inherent in the underlying assumptions
      used in the methodologies for estimating specific and general losses in
      the portfolio.
 
 A loan is
considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis for commercial loans by either the present value of expected future cash
flows discounted at the loans effective interest rate, the loan’s obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent.  Large groups of small balance homogeneous loans are
collectively evaluated for impairment.  Accordingly, the Corporation
does not separately identify individual consumer and residential mortgage loans
for impairment disclosures, unless such loans are the subject of a restructuring
agreement.
 
 Federal Bank
Stocks.  The Bank is a member of the Federal Home Loan Bank of
Pittsburgh (FHLB) and the FRB.  As a member of these federal banking
systems, the Bank maintains an investment in the capital stock of the respective
regional banks, at cost.  These stocks are purchased and redeemed at
par as directed by the federal banks and levels maintained are based primarily
on borrowing and other correspondent relationships.
 
 Bank-Owned Life
Insurance (BOLI).  The Bank purchased life insurance policies
on certain key officers and employees.  BOLI is recorded at its cash
surrender value, or the amount that can be realized.
  F-9
 
 Notes
to Consolidated Financial Statements (continued)
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Premises
      and Equipment.  Land is carried at
      cost.  Premises, furniture and equipment, and leasehold
      improvements are carried at cost less accumulated depreciation or
      amortization.  Depreciation is calculated on a straight-line
      basis over the estimated useful lives of the related assets, which are
      twenty-five to fifty years for buildings and three to ten years for
      furniture and equipment.  Amortization of leasehold improvements
      is computed using the straight-line method over the shorter of their
      estimated useful life or the expected term of the
      leases.  Expected terms include lease option periods to the
      extent that the exercise of such option is reasonably
      assured.  Premises and equipment are reviewed for impairment
      when events indicate their carrying amount may not be recoverable from
      future undiscounted cash flows.  If impaired, assets are
      recorded at fair value.
 
 Goodwill and
Intangible Assets.  Goodwill results from business acquisitions
and represents the excess of the purchase price over the fair value of acquired
assets and liabilities.  Core deposit intangible assets arise from
whole bank or branch acquisitions and are measured at fair value and then are
amortized over their estimated lives, generally less than ten
years.  Customer relationship intangible assets arise from the
purchase of a customer list from another company or individual and then are
amortized on a straight-line basis over two years.  Goodwill is not
amortized and is assessed at least annually for impairment and any such
impairment will be recognized in the period identified.
 
 Servicing
Assets.Servicing assets represent the allocated value of
retained servicing rights on loans sold.  Servicing assets are
expensed in proportion to, and over the period of, estimated net servicing
revenues.  Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest
rates.  Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions.  Any impairment of a grouping is
reported as a valuation allowance, to the extent that fair value is less than
the capitalized amount for a grouping.
 
 Real Estate
Acquired Through Foreclosure (REO).Real estate properties
acquired through foreclosure are initially recorded at fair value less cost to
sell at the date of foreclosure, establishing a new cost basis.  After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell.  Revenue and expenses from operations of the properties, gains
and losses on sales and additions to the valuation allowance are included in
operating results.  Real estate acquired through foreclosure is
classified in prepaid expenses and other assets and totaled $173,000 and $50,000
at December 31, 2009 and 2008, respectively.
 
 Treasury
Stock.Common stock purchased for treasury is recorded at
cost.  At the date of subsequent reissue, the treasury stock account
is reduced by the cost of such stock on the first-in, first-out
basis.
 
 Income
Taxes.Deferred income tax assets and liabilities are
determined using the liability (or balance sheet) method.  Under this
method, the net deferred tax asset or liability is determined based on the tax
effects of the temporary differences between the book and tax basis of the
various balance sheet assets and liabilities and gives current recognition to
changes in tax rate and laws.
  F-10
 
 Notes
to Consolidated Financial Statements (continued)
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Earnings Per
Common Share (EPS).EPS on income before extraordinary income
is computed by dividing income before extraordinary item by the weighted average
number of common shares outstanding during the period and EPS on the
extraordinary item is computed by dividing the extraordinary item by the
weighted average number of common shares outstanding during the
period.  Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during the
period.  Diluted EPS reflects the potential dilution that could occur
if securities or contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Corporation.  Options and restricted stock
awards of 107,500 shares of common stock and warrants to purchase 50,111 shares
of common stock were not included in computing diluted earnings per share
because their effects were not dilutive.
 
 Comprehensive
Income.  Comprehensive income includes net income from
operating results and the net change in accumulated other comprehensive
income.  Accumulated other comprehensive income (loss) is comprised of
unrealized holding gains and losses on securities available for sale and the
over funded or under funded status of pension and other postretirement benefit
plans on the balance sheet.  The effects of other comprehensive income
are presented as part of the statement of changes in stockholders’
equity.
 
 Operating
Segments.  Operations are managed and financial performance is
evaluated on a corporate-wide basis.  Accordingly, all financial
services operations are considered by management to be aggregated in one
reportable operating segment.
 
 Retirement
Plans.  The Corporation maintains a noncontributory defined
benefit plan covering substantially all employees and
officers.  Effective January 1, 2009 the plan was closed to new
participants. The plan calls for benefits to be paid to eligible employees at
retirement based primarily on years of service and compensation rates near
retirement.  The Corporation also maintains a 401(k) plan, which
covers substantially all employees, and a supplemental executive retirement plan
for key executive officers.
 
 Stock
Compensation Plans.The Corporation follows guidance issued by
the Financial Accounting Standards Board (FASB) requiring that the compensation
cost relating to share-based payment transactions be recognized in financial
statements.  The cost is measured based on the fair value of the
equity or liability instruments issued.  The guidance covers a wide
range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans.  An entity is required to measure the
cost of employee services received in exchange for the stock options based on
the grant-date fair value of the award, and to recognize the cost over the
period the employee is required to provide services for the award.  An
entity may use any option-pricing model that meets the fair value objective of
the guidance.
 
 Transfers of
Financial Assets.  Transfers of financial assets are accounted
for as sales, when control over the assets has been
surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Corporation does not maintain effective control over the transferred assets
through an agreement to repurchase them before their
maturity.
  F-11
 
 Notes
to Consolidated Financial Statements (continued)
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Off-Balance Sheet
Financial Instruments.  In the ordinary course of business, the
Corporation has entered into off-balance sheet financial instruments, consisting
of commitments to extend credit, commitments under line of credit lending
arrangements and letters of credit.  Such financial instruments are
recorded in the financial statements when they are funded or related fees are
received.
 
 Fair Value
      of Financial Instruments.  Fair values of financial
      instruments are estimated using relevant market information and other
      assumptions, as more fully disclosed in a separate note.  Fair
      value estimates involve uncertainties and matters of significant judgment
      regarding interest rates, credit risk, prepayments, and other factors,
      especially in the absence of broad markets for particular
      items.  Changes in assumptions or in market conditions could
      significantly affect the estimates.
 
 Recently Adopted
Accounting Standards.In June 2009, the FASB replaced The Hierarchy of Generally Accepted
Accounting Principles, with the FASB Accounting Standards Codification
(the Codification) as the single source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities.  The Codification
reorganizes all previous GAAP pronouncements into roughly 90 accounting topics
and displays all topics using a consistent structure.  All existing
standards that were used to create the Codification have been superseded,
replacing the previous references to specific Statements of Financial Accounting
Standards (SFAS) with numbers used in the Codification’s structural
organization.  The guidance was effective for interim and annual
periods ending after September 15, 2009.  After September 15, 2009,
only one level of authoritative GAAP exists, other than guidance issued by the
Securities and Exchange Commission (SEC).  All other accounting
literature excluded from the Codification is considered
non-authoritative.  The adoption of the Codification does not have a
material impact on the Corporation’s consolidated financial
statements.
 
 In
September 2006, the FASB issued guidance that defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This guidance also establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an
asset.  The guidance was effective for fiscal years beginning after
November 15, 2007.  In February 2008, the FASB issued guidance that
delayed the effective date of this fair value guidance for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years.  The
adoption of this guidance did not have a material impact on the Corporation’s
consolidated financial statements.
 
 In
December 2007, the FASB issued guidance that requires an acquirer to recognize
assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that
date.  The guidance requires prospective application for business
combinations consummated in fiscal years beginning on or after December 15,
2009.  The branch purchase described in Note 2 was accounted for under
this guidance.
 
 In
December 2008, the FASB issued guidance requiring additional disclosures about
plan assets in an employer’s defined benefit pension and other postretirement
plans.  The required disclosures have been included in Note
14.
  F-12
 
 Notes
to Consolidated Financial Statements (continued)
 
 1.
                Summary
      of Significant Accounting Policies
(continued)
 
 Recently Adopted
Accounting Standards (continued).In April 2009, the FASB
issued guidance amending the previous OTTI guidance for debt securities and
included additional presentation and disclosure requirements for both debt and
equity securities.  The guidance was effective for interim reporting
periods ending after June 15, 2009.  The adoption of this guidance
requires an adjustment to retained earnings and other comprehensive income in
the period of adoption to reclassify non-credit related impairment to other
comprehensive income for debt securities that the Corporation does not have the
intent to sell and will not more likely than not be required to
sell.  The adoption of this guidance did not have a material impact on
the Corporation’s consolidated financial statements.
 
 In April
2009, the FASB issued guidance that emphasizes that the objective of a fair
value measurement does not change even when market activity for the asset or
liability has decreased significantly.  Fair value is the price that
would be received for an asset sold or paid to transfer a liability in an
orderly transaction that is not a forced liquidation or distressed sale between
market participants at the measurement date under current market
conditions.  When observable transactions or quoted prices are not
considered orderly, then little, if any, weight should be assigned to the
indication of the asset or liability’s fair value.  Adjustments to
those transactions or prices should be applied to determine the appropriate fair
value.  The adoption of this guidance was effective for interim and
annual reporting periods ending after June 15, 2009 and did not have a material
impact on the Corporation’s consolidated financial statements.
 
 In May
2009, the FASB issued guidance that establishes general standards of accounting
for and disclosure of subsequent events.  Subsequent events are events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued.  Events occurring subsequent to
the date of the balance sheet have been evaluated for potential recognition or
disclosure in the consolidated financial statements through the date of the
filing of the consolidated financial statements with the SEC.  In
February 2010, the FASB issued amendments to this guidance clarifying which
entities are required to evaluate subsequent events through the date the
financial statements are issued and the scope of subsequent events disclosures.
This amendment removes the requirement for an SEC filer to disclose the date
through which subsequent events have been evaluated in both issued and revised
financial statements. Except as noted in the guidance, all amendments or
additions to this guidance were effective upon issuance.  The adoption
of this guidance did not have a material impact on the Corporation’s
consolidated financial statements.
 
 In August
2009, the FASB amended existing guidance related to the measurement of
liabilities that are recognized or disclosed at fair value on a recurring
basis.  This amendment clarifies how a corporation should measure the
fair value of liabilities and that restrictions preventing the transfer of a
liability should not be considered as a factor in the measurement of
liabilities.  The adoption of this guidance did not have a material
impact on the Corporation’s consolidated financial statements.
  F-13
 
 Notes
to Consolidated Financial Statements (continued)
 
 2.
                Business
      Combinations
 
 On April
6, 2009, the Bank entered into a Purchase and Assumption Agreement with National
City Bank (National City) and PNC Financial Services Group, Inc. (PNC) where the
Bank agreed to acquire certain assets and assume certain liabilities of one
National City branch office located in Titusville, Pennsylvania.  The
Board of Governors of the Federal Reserve System and U.S. Department of Justice
required National City to divest of this and other branch locations in
connection with of its acquisition by PNC.
 
 The
primary purpose of the Titusville branch acquisition was to expand the Bank’s
presence into a new market with demographics consistent with its current market
area.  The deposits assumed through the Titusville branch acquisition
have a favorable composition mix and the loans acquired currently present
limited risk since none of these loans are presently greater than thirty days
past due.  The Titusville branch acquisition is expected to result in
increased earnings and provide additional liquidity that has been used to payoff
certain short-term borrowings and to fund future loan and securities
growth.
 
 On August
28, 2009, the Bank completed the Titusville branch acquisition and assumed $90.8
million of deposits and acquired $32.6 million of loans and $58.0 million in
cash, as well as certain fixed assets associated with the branch
office.  The Bank retained all existing employees of the
office.
 
 The $90.8
million of deposits assumed in the branch acquisition consisted of,
approximately $47.9 million of certificates of deposit, or 53% of the deposits
assumed, $23.9 million of interest bearing checking, savings and money market
accounts, or 26% of the deposits assumed, and $19.0 million of non-interest
bearing accounts, or 21% of the deposits assumed.  The interest rates
on interest bearing checking, savings and money market accounts were adjusted to
the Bank’s current deposit rates.  The interest rates and maturities
on the certificates of deposit were assumed at stated contractual
terms.  Also at the closing of the acquisition, the Bank assumed the
obligations under the Titusville branch property lease.
 
 In
connection with the assumption of deposits, the Bank recorded a core deposit
intangible of $2.8 million. This asset represents the value ascribed to the
long-term value of the core deposits acquired.  Fair value was
determined using a third-party valuation expert specializing in estimating fair
values of core deposit intangibles.  The fair value was derived using
an industry standard financial instrument present value
methodology.  All-in costs and runoff balances by year were discounted
by comparable term FHLB advance rates, used as an alternative cost of funds
measure.  This intangible asset will be amortized on a double
declining balance method of amortization over a weighted average estimated life
of nine years.  The core deposit intangible asset is not estimated to
have a significant residual value.
 
 The $32.6
million of loans acquired consisted of approximately $20.3 million of home
equity loans, or 63% of the loans acquired, $9.9 million of commercial loans, or
30% of the loans acquired and $2.4 million of consumer loans, or 7% of the loans
acquired.  Of the loans acquired, approximately 50% are fixed rate
loans and 50% are variable rate loans.  The Bank did not acquire any
subprime loans and generally did not receive any loans that had a delinquency
status of greater than 30 days as of the date of closing.
 
 The
Bank’s payment of the 3.4% premium on the assumed deposits and the purchase
price for the acquired loans and other assets of the Titusville branch office
was made through a reduction of the cash received from National City to fund the
deposits assumed by the Bank.  Net of this premium paid, the Bank
received a cash settlement amount of approximately $54.9 million from National
City.
  F-14
 
 Notes
to Consolidated Financial Statements (continued)
 
 2.
                Business
      Combinations (continued)
 
 In
connection with the branch acquisition, the Bank recorded goodwill of $2.2
million.  Goodwill represents the excess of the total purchase price
paid for the Titusville branch over the fair value of the assets acquired, net
of the fair value of the liabilities assumed.  The entire amount of
goodwill will be tax deductible and amortized over 15 years for income tax
purposes.  Goodwill will be evaluated for possible impairment at least
annually, and more frequently, if events and circumstances indicate that the
asset might be impaired.
 
 The
Corporation recorded the following assets and liabilities in connection with the
branch purchase as of August 28, 2009:
 
 (Dollar
      amounts in thousands)
                                      
                                      Assets
      Acquiredand
      Liabilities
                                      
                                      
                                      AcquisitionAssumed
                                      
                                      
                                      AdjustmentsAssets:Cash
      and cash equivalents
                                      
                                      $
                                      58,017
                                      
                                      
                                      $
                                      (3,094
                                      )(1)Loans
      receivable, net of allowance for loan losses
                                      
                                      
                                      32,553
                                      
                                      
                                      
                                      (101
                                      )(2)Premises
      and equipment, net
                                      
                                      
                                      78
                                      
                                      
                                      
                                      -Goodwill
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,213
                                      (3)Other
      intangible assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,787
                                      (4)Prepaid
      expenses and other assets
                                      
                                      
                                      143
                                      
                                      
                                      
                                      -$
                                      90,791
                                      
                                      
                                      $
                                      1,805Liabilities
      and Stockholders' Equity:DepositsNon-interest
      bearing
                                      
                                      $
                                      18,974
                                      
                                      
                                      $
                                      -Interest
      bearing
                                      
                                      
                                      71,817
                                      
                                      
                                      
                                      1,805
                                      (5)$
                                      90,791
                                      
                                      
                                      $
                                      1,805
 
 (1)
                Represents
      a deposit premium paid of approxiamtely 3.4% of the average daily balance
      of the assumed deposits for the thirty calendar day period ending on
      and including the second business day prior to the closing
      date.
 (2)
                The
      purchase accounting adjustment on loans relates to the fair value
      adjustment that includes an interest rate component and a credit
      adjustment for estimated lifetime
losses.
 (3)
                The
      goodwill adjustment relates to the recording of acquired assets and
      assumed liabilities at fair value.
 (4)
                Represents
      the estimated fair value of the core deposit intangible asset
      (approximately 6.5% of core deposits) associated with deposits
      assumed.  The core deposit intangible is being amortized using
      the double declining balance method of amortization over nine
      years.
 (5)
                The
      purchase accounting adjustment on deposits relates to the fair value
      adjustment of the certificates of
deposit.
 
 On
October 17, 2008, the Corporation completed an acquisition of Elk County Savings
and Loan Association (ECSLA), a Pennsylvania-chartered savings association
located in Ridgway, Pennsylvania.  ECSLA converted from the mutual to
the stock form of organization and immediately issued all of its capital stock
to the Corporation and merged with and into the Bank.  In connection
with the merger, the Corporation issued 163,569 shares of its common stock at a
price of $21.15 per share, resulting in proceeds of $3,459,484, net of discount
on common stock of $293,279.
  F-15
 
 Notes
to Consolidated Financial Statements (continued)
 2.
                Business
      Combinations (continued)
 
 The
Corporation recorded the following assets and liabilities of ECSLA as of October
17, 2008.  These amounts represent the carrying value of ECSLA’s
assets and liabilities adjusted to reflect the fair value at the date of the
acquisition.  The discounts and premiums resulting from the fair value
adjustments are being accreted and amortized on a level yield basis over the
anticipated lives of the underlying financial assets or
liabilities.  This amortization of premiums and discounts did not have
a material impact on the Corporation’s results of operations and is not
projected to have a material impact on future periods.
 
 (Dollar
      amounts in thousands)
                                    
                                    Acquired
      onOctober
      17, 2008AssetsCash
      and cash equivalents
                                    
                                    $
                                    504Securities
      available for sale
                                    
                                    
                                    283Loans
      receivable, net of allowance for loan losses of $206
                                    
                                    
                                    7,321Federal
      bank stocks, at cost
                                    
                                    
                                    44Other
      assets
                                    
                                    
                                    47Total
      assets acquired
                                    
                                    $
                                    8,199LiabilitiesDeposits
                                    
                                    $
                                    6,221Other
      liabilities
                                    
                                    
                                    119Total
      liabilities assumed
                                    
                                    $
                                    6,340
 The
excess fair value of assets acquired over liabilities assumed, less transaction
costs incurred, resulted in negative goodwill of $906,000.  This
negative goodwill is reflected as an extraordinary item in the Corporation’s
consolidated financial statements.
 
 The
primary purpose of the ECSLA acquisition was to expand the Corporation’s deposit
market share in Ridgway and to provide additional capital to the
Bank.  The Corporation’s deposit market share approximately doubled
and capital was added through the negative goodwill generated and the issuance
of common stock.
 
 3.
                  Participation
      in the U.S. Department of the Treasury (U.S. Treasury) Capital Purchase
      Program (CPP)
 
 The
Corporation entered into a Securities Purchase Agreement (the Agreement) on
December 23, 2008 with the U.S. Treasury In association with its participation
in the CPP of the Emergency Economic Stabilization Act of 2008
(EESA).  Pursuant to the agreement, the Corporation sold 7,500 shares
of Senior Perpetual Preferred Stock, par value $1.00 per share, having a
liquidation amount equal to $1,000.00 per share, with an attached warrant to
purchase 50,111 shares of the Corporation’s common stock, par value $1.25 per
share, for the aggregate price of $7.5 million, to the U.S.
Treasury.
 
 The
preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at
a rate of 5% per year, for the first five years, and 9% per year
thereafter.  Under the terms of the CPP, the preferred stock may be
redeemed with the approval of the Federal Reserve in the first three years with
the proceeds from the issuance of certain qualifying Tier 1 capital or after
three years at par value plus accrued and unpaid dividends.
 
 The
warrant has a 10-year term with an exercise price equal to $22.45 per share of
common stock.
  F-16
 
 Notes
to Consolidated Financial Statements (continued)
 4.
                  Securities
 
 The
      following table summarizes the Corporation’s securities as of December
      31:
 
 (Dollar
      amounts in thousands)
                            
                            
                            
                            
                            Gross
                            
                            
                            GrossAmortized
                            
                            
                            Unrealized
                            
                            
                            Unrealized
                            
                            
                            FairCost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            ValueAvailable for
    sale:December
      31, 2009:U.S.
      Treasury and federal agency
                            
                            $
                            2,976
                            
                            
                            $
                            25
                            
                            
                            $
                            -
                            
                            
                            $
                            3,001U.S.
      government sponsored entities and agencies
                            
                            
                            50,953
                            
                            
                            
                            113
                            
                            
                            
                            (269
                            )
                            
                            
                            50,797Mortgage-backed
      securities: residential
                            
                            
                            16,459
                            
                            
                            
                            109
                            
                            
                            
                            (38
                            )
                            
                            
                            16,530Collateralized
      mortgage obligations
                            
                            
                            5,130
                            
                            
                            
                            4
                            
                            
                            
                            (4
                            )
                            
                            
                            5,130State
      and political subdivision
                            
                            
                            26,271
                            
                            
                            
                            696
                            
                            
                            
                            -
                            
                            
                            
                            26,967Equity
      securities
                            
                            
                            3,003
                            
                            
                            
                            -
                            
                            
                            
                            (185
                            )
                            
                            
                            2,818$
                            104,792
                            
                            
                            $
                            947
                            
                            
                            $
                            (496
                            )
                            
                            $
                            105,243December
      31, 2008:U.S.
      government sponsored entities and agencies
                            
                            $
                            19,985
                            
                            
                            $
                            139
                            
                            
                            $
                            (47
                            )
                            
                            $
                            20,077Mortgage-backed
      securities: residential
                            
                            
                            16,672
                            
                            
                            
                            546
                            
                            
                            
                            -
                            
                            
                            
                            17,218Collateralized
      mortgage obligations
                            
                            
                            13,134
                            
                            
                            
                            40
                            
                            
                            
                            (12
                            )
                            
                            
                            13,162State
      and political subdivision
                            
                            
                            13,543
                            
                            
                            
                            270
                            
                            
                            
                            (5
                            )
                            
                            
                            13,808Corporate
      securities
                            
                            
                            3,984
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,984Equity
      securities
                            
                            
                            3,893
                            
                            
                            
                            -
                            
                            
                            
                            (699
                            )
                            
                            
                            3,194$
                            71,211
                            
                            
                            $
                            995
                            
                            
                            $
                            (763
                            )
                            
                            $
                            71,443
 
 Gains on
sales of available for sale securities for the years ended December 31 were as
follows:
 
 (Dollar amounts in
    thousands)
                        
                        2009
                        
                        
                        2008Proceeds
                        
                        $
                        20,513
                        
                        
                        $
                        -Gross
      gains
                        
                        
                        864
                        
                        
                        
                        -Tax
      provision related to gains
                        
                        
                        294
                        
                        
                        
                        -
 
 The
following table summarizes scheduled maturities of the Corporation’s securities
as of December 31, 2009:
 
 (Dollar
      amounts in thousands)
                              
                              Available
      for saleAmortized
                              
                              
                              FairCost
                              
                              
                              ValueDue
      in one year or less
                              
                              $
                              104
                              
                              
                              $
                              105Due
      after one year through five years
                              
                              
                              50,787
                              
                              
                              
                              50,731Due
      after five through ten years
                              
                              
                              19,921
                              
                              
                              
                              20,255Due
      after ten years
                              
                              
                              30,977
                              
                              
                              
                              31,334No
      scheduled maturity
                              
                              
                              3,003
                              
                              
                              
                              2,818$
                              104,792
                              
                              
                              $
                              105,243
  F-17
 
 Notes
to Consolidated Financial Statements (continued)
 4.
                  Securities
      (continued)
 
 Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
 
 Securities
with carrying values of $20.7 million and $13.0 million as of December 31, 2009
and 2008, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
 
 Information
pertaining to securities with gross unrealized losses at December 31, 2009 and
2008 aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:
 
 (Dollar
      amounts in thousands)
                        
                        Less than 12 Months
                        
                        
                        12 Months or More
                        
                        
                        TotalFair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        UnrealizedDescription of Securities
                        
                        Value
                        
                        
                        Loss
                        
                        
                        Value
                        
                        
                        Loss
                        
                        
                        Value
                        
                        
                        LossDecember
      31, 2009:U.S.
      government sponsored entities and agencies
                        
                        $
                        32,716
                        
                        
                        $
                        (269
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        32,716
                        
                        
                        $
                        (269
                        )Mortgage-backed
      securities: residential
                        
                        
                        1,961
                        
                        
                        
                        (38
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,961
                        
                        
                        
                        (38
                        )Collateralized
      mortgage obligations
                        
                        
                        1,275
                        
                        
                        
                        (2
                        )
                        
                        
                        910
                        
                        
                        
                        (2
                        )
                        
                        
                        2,185
                        
                        
                        
                        (4
                        )Equity
      securities
                        
                        
                        1,341
                        
                        
                        
                        (110
                        )
                        
                        
                        686
                        
                        
                        
                        (75
                        )
                        
                        
                        2,027
                        
                        
                        
                        (185
                        )$
                        37,293
                        
                        
                        $
                        (419
                        )
                        
                        $
                        1,596
                        
                        
                        $
                        (77
                        )
                        
                        $
                        38,889
                        
                        
                        $
                        (496
                        )December
      31, 2008:U.S.
      government sponsored entities and agencies
                        
                        $
                        6,452
                        
                        
                        $
                        (47
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        6,452
                        
                        
                        $
                        (47
                        )Collateralized
      mortgage obligations
                        
                        
                        9,185
                        
                        
                        
                        (12
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,185
                        
                        
                        
                        (12
                        )State
      and political subdivision
                        
                        
                        2,352
                        
                        
                        
                        (5
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,352
                        
                        
                        
                        (5
                        )Equity
      securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,128
                        
                        
                        
                        (699
                        )
                        
                        
                        3,128
                        
                        
                        
                        (699
                        )$
                        17,989
                        
                        
                        $
                        (64
                        )
                        
                        $
                        3,128
                        
                        
                        $
                        (699
                        )
                        
                        $
                        21,117
                        
                        
                        $
                        (763
                        )
 
 Management
evaluates securities for OTTI at least on a quarterly basis, and more frequently
when economic, market or other concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, (3) the intent of the
Corporation to sell a security, and (4) whether it is more likely than not the
Corporation will have to sell the security before recovery of its cost
basis.
 
 During
2009, after evaluation of the securities portfolio, management determined that
other-than-temporary impairments existed on three financial institution equity
securities.  The impairment of these securities was considered to be
other-than-temporary due to continued concerns related to the financial
condition and near-term prospects of the issuers, economic conditions of the
financial services industry and deteriorating market values.  These
securities were written down to their fair market values as of September 30,
2009 and the resulting impairment losses of $898,000 were recognized in earnings
during the third quarter of 2009.
 
 During
2008, management evaluated the Corporation’s investment portfolio and determined
that OTTI existed on Fannie Mae and Freddie Mac stocks.  The
impairment of these securities was considered to be other-than-temporary due to
continued concerns related to the financial condition and near-term prospects of
the issuers, economic conditions of the financial services industry and
deteriorating market values.  These securities were written down to
their fair market value as of June 30, 2008 and again as of September 30,
2008.  The resulting impairment losses of $391,000 were recognized in
earnings during the second and third quarters of 2008.
  F-18
  Notes to Consolidated Financial
Statements (continued)
  4.
                  Securities
      (continued)
 
 The
following table presents information related to the Corporation’s gains and
losses on the sales of equity and debt securities, and losses recognized for the
OTTI of investments:
 
 (Dollar
      amounts in thousands)
                              
                              Gross
      Realized
                              
                              
                              Gross
      Realized
                              
                              
                              Other-than-temporary
                              
                              
                              Net
      GainsGains
                              
                              
                              Losses
                              
                              
                              Impairment Losses
                              
                              
                              (Losses)Year
      ended December 31, 2009:Equity
      securities
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              (898
                              )
                              
                              $
                              (898
                              )Debt
      securities
                              
                              
                              864
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              864$
                              864
                              
                              
                              $
                              -
                              
                              
                              $
                              (898
                              )
                              
                              $
                              (34
                              )Year
      ended December 31, 2008:Equity
      securities
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              (391
                              )
                              
                              $
                              (391
                              )Debt
      securities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -$
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              (391
                              )
                              
                              $
                              (391
                              )
 
 After
realizing the impairment charges on the aforementioned equity securities, there
were 33 debt securities and seven equity securities in an unrealized loss
position as of December 31, 2009.  For investments in equity
securities, in addition to the general factors mentioned above for determining
whether the decline in market value is other-than-temporary, the analysis of
whether an equity security is other-than-temporarily impaired includes review of
the profitability and the capital adequacy and all information available to
determine the credit quality of each issuer.  Based on that
evaluation, and given that the Corporation’s current intention is not to sell
any impaired securities and it is more likely than not it will not be required
to sell these securities before the recovery of its amortized cost basis, the
Corporation does not consider those seven equity securities with unrealized
losses as of December 31, 2009 to be other-than-temporarily
impaired.
 
 For debt
securities, an additional and critical component of the evaluation for OTTI is
the identification of credit impaired securities where it is likely that the
Corporation will not receive cash flows sufficient to recover the entire
amortized cost basis of the security.  Based on that evaluation and
other general considerations, and given that the Corporation’s current intention
is not to sell any impaired securities and it is more likely than not it will
not be required to sell these securities before the recovery of its amortized
cost basis, the Corporation does not consider those 33 debt securities with
unrealized losses as of December 31, 2009 to be other-than-temporarily
impaired.
  F-19





Notes to Consolidated Financial Statements(continued)





5.
            Loans
      Receivable





The
following table summarizes the Corporation’s loans receivable as of December
31:





(Dollar amounts in
    thousands)
                                      
                                      2009
                                      
                                      
                                      2008Mortgage
      loans on real estate:Residential
      first mortgages
                                      
                                      $
                                      74,099
                                      
                                      
                                      $
                                      74,130Home
      equity loans and lines of credit
                                      
                                      
                                      77,284
                                      
                                      
                                      
                                      57,454Commercial
      real estate
                                      
                                      
                                      89,952
                                      
                                      
                                      
                                      85,689241,335
                                      
                                      
                                      
                                      217,273Other
      loans:Commercial
      business
                                      
                                      
                                      41,588
                                      
                                      
                                      
                                      40,787Consumer
                                      
                                      
                                      12,894
                                      
                                      
                                      
                                      9,42954,482
                                      
                                      
                                      
                                      50,216Total
      loans, gross
                                      
                                      
                                      295,817
                                      
                                      
                                      
                                      267,489Less
      allowance for loan losses
                                      
                                      
                                      3,202
                                      
                                      
                                      
                                      2,651Total
      loans, net
                                      
                                      $
                                      292,615
                                      
                                      
                                      $
                                      264,838





Following
is an analysis of the changes in the allowance for loan losses for the years
ended December 31:





(Dollar amounts in
    thousands)
                      
                      2009
                      
                      
                      2008Balance
      at the beginning of the year
                      
                      $
                      2,651
                      
                      
                      $
                      2,157Allowance
      for loan losses of ECSLA
                      
                      
                      -
                      
                      
                      
                      206Provision
      for loan losses
                      
                      
                      1,367
                      
                      
                      
                      500Charge-offs
                      
                      
                      (859
                      )
                      
                      
                      (252
                      )Recoveries
                      
                      
                      43
                      
                      
                      
                      40Balance
      at the end of the year
                      
                      $
                      3,202
                      
                      
                      $
                      2,651





Non-performing
loans, which include primarily non-accrual loans, were $2.4 million and $1.0
million at December 31, 2009 and 2008, respectively.  The Corporation
is not committed to lend significant additional funds to debtors whose loans are
on non-accrual status.  At December 31, 2009, the recorded investment
in loans considered to be impaired was $740,000.  Of the impaired
loans at December 31, 2009, loans with a recorded investment of $590,000
required a specific valuation allowance of $128,000.  During 2009,
impaired loans averaged $533,000.  The Corporation recognized interest
income on impaired loans of approximately $71,000 on a cash basis, during
2009.  The Corporation did not have any impaired loans during the year
ending December 31, 2008.  Nonperforming loans and impaired loans are
defined differently.  Some loans may be included in both categories
whereas other loans may be included in only one category.





The
Corporation is required to maintain qualifying collateral with the FHLB to
secure all outstanding loans.  Loans with book values of $135.4
million and $140.0 million as of December 31, 2009 and 2008, respectively, were
pledged as qualifying collateral.  The Corporation was in compliance
with all FHLB credit policies at December 31, 2009.


F-20





Notes to Consolidated Financial Statements(continued)





5.
            Loans
      Receivable (continued)





The
Corporation was servicing residential mortgage loans with unpaid principal
balances of $6.7 million and $7.9 million at December 31, 2009 and 2008,
respectively, for a third party investor.  In addition, the
Corporation was servicing commercial loans with unpaid principal balances of
$2.7 million and $4.8 million at December 2009 and 2008, respectively, for third
party investors.  Such loans are not reflected in the consolidated
balance sheet and servicing operations result in the generation of annual fee
income of approximately 0.25% of the unpaid principal balances of such
loans.





6.
            Federal
      Bank Stocks





The Bank
is a member of the FHLB and the FRB.  As a member of these federal
banking systems, the Bank maintains an investment in the capital stock of the
respective regional banks, at cost.  These stocks are purchased and
redeemed at par as directed by the federal banks and levels maintained are based
primarily on borrowing and other correspondent relationships.  The
Bank’s investment in FHLB and FRB stocks was $3.5 million and $662,000,
respectively, at December 31, 2009, and $3.5 million and $333,000, respectively,
at December 31, 2008.  In December 2008, the FHLB notified member
banks that it was suspending dividend payments and the repurchase of capital
stock.





Management
evaluated the FHLB capital stock for impairment in accordance with relevant
accounting guidance.  Management’s determination of whether these
investments are impaired is based on their assessment of the ultimate
recoverability of their cost rather than by recognizing temporary declines in
value.  The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as: (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB,
and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB.





Management
believes no impairment charge is necessary related to the FHLB capital stock as
of December 31, 2009.





7.
            Premises
      and Equipment





Premises
and equipment at December 31 are summarized by major classification as
follows:





(Dollar amounts in
    thousands)
                      
                      2009
                      
                      
                      2008Land
                      
                      $
                      1,623
                      
                      
                      $
                      1,403Buildings
      and improvements
                      
                      
                      7,364
                      
                      
                      
                      6,710Leasehold
      improvements
                      
                      
                      750
                      
                      
                      
                      744Furniture,
      fixtures and equipment
                      
                      
                      5,056
                      
                      
                      
                      4,757Software
                      
                      
                      2,342
                      
                      
                      
                      2,105Construction
      in progress
                      
                      
                      537
                      
                      
                      
                      71417,672
                      
                      
                      
                      16,432Less
      accumulated depreciation and amortization
                      
                      
                      8,502
                      
                      
                      
                      7,823$
                      9,170
                      
                      
                      $
                      8,609


F-21





Notes to Consolidated Financial Statements(continued)





7.
            Premises
      and Equipment (continued)





Depreciation
and amortization expense for the years ended December 31, 2009 and 2008 were
$860,000 and $737,000, respectively.





Rent
expense under non-cancelable operating lease agreements for the years ended
December 31, 2009 and 2008 was $146,000 and $120,000,
respectively.  Rent commitments under non-cancelable long-term
operating lease agreements for certain branch offices for the years ended
December 31, are as follows, before considering renewal options that are
generally present:





(Dollar amounts in
    thousands)
                    
                    Amount2010
                    
                    $
                    1972011
                    
                    
                    1722012
                    
                    
                    1242013
                    
                    
                    962014
                    
                    
                    96Thereafter
                    
                    
                    11$
                    696





8.
            Goodwill
      and Intangible Assets





The
following table summarizes the Corporation’s acquired goodwill and intangible
assets as of December 31:





(Dollar amounts in thousands)
                                
                                2009
                                
                                
                                2008Gross Carrying
                                  Amount
                                
                                
                                Accumulated
                                  Amortization
                                
                                
                                Gross Carrying
                                  Amount
                                
                                
                                Accumulated
                                  AmortizationGoodwill
                                
                                $
                                3,657
                                
                                
                                $
                                -
                                
                                
                                $
                                1,422
                                
                                
                                $
                                -Core
      deposit intangibles
                                
                                
                                4,027
                                
                                
                                
                                1,443
                                
                                
                                
                                1,240
                                
                                
                                
                                1,240Other
      customer relationship intangibles
                                
                                
                                20
                                
                                
                                
                                20
                                
                                
                                
                                20
                                
                                
                                
                                20Total
                                
                                $
                                7,704
                                
                                
                                $
                                1,463
                                
                                
                                $
                                2,682
                                
                                
                                $
                                1,260





As
discussed in Note 2, the Bank completed a branch purchase transaction during the
third quarter of 2009. In connection with the branch purchase, the Bank recorded
initial goodwill of $2.2 million.  After the initial goodwill was
recorded, the Corporation recorded $23,000 of additional credit adjustments on
certain loans acquired and adjusted the goodwill related to the branch
purchase.  Goodwill represents the excess of the total purchase price
paid for the Titusville branch purchase over the fair value of the assets
acquired, net of the fair value of the liabilities assumed.  Goodwill
is not amortized but is evaluated for impairment on an annual basis or whenever
events or changes in circumstances indicate the carrying value may not be
recoverable.  No goodwill impairment charges were recorded in
2009.





Also, in
connection with the assumption of deposits, the Bank recorded a core deposit
intangible of $2.8 million.  This intangible asset will be amortized
using the double declining balance method over a weighted average estimated life
of nine years.  The core deposit intangible asset is not estimated to
have a significant residual value.  During 2009, the Corporation
recorded intangible amortization expense totaling $203,000.


F-22





Notes to Consolidated Financial Statements(continued)





8.
            Goodwill
      and Intangible Assets (continued)





The
estimated amortization expense of the core deposit intangible for the years
ending December 31, are as follows:





(Dollar
      amounts in thousands)
                    
                    AmortizationExpense2010
                    
                    $
                    5642011
                    
                    
                    4412012
                    
                    
                    3452013
                    
                    
                    2712014
                    
                    
                    217Thereafter
                    
                    
                    746$
                    2,584





9.
            Related
      Party Balances and Transactions





In the
ordinary course of business, the Bank maintains loan and deposit relationships
with employees, principal officers and directors.  The Bank has
granted loans to principal officers and directors and their affiliates amounting
to $1.3 million and $1.1 million at December 31, 2009 and 2008,
respectively.  During 2009, total principal additions and total
principal repayments associated with these loans were $379,000 and $156,000,
respectively.  Deposits from principal officers and directors held by
the Bank at December 31, 2009 and 2008 totaled $2.3 million and $1.6 million,
respectively.





In
addition, directors and their affiliates may provide certain professional and
other services to the Corporation and the Bank in the ordinary course of
business at market fee rates.  During 2009 and 2008, amounts paid to
affiliates for such services totaled $51,000 and $174,000,
respectively.





10.
            Deposits





The
following table summarizes the Corporation’s deposits as of December
31:





(Dollar amounts in thousands)
                                              
                                              2009
                                              
                                              
                                              2008Weighted
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              WeightedType of accounts
                                              
                                              average rate
                                              
                                              
                                              Amount
                                              
                                              
                                              %
                                              
                                              
                                              average rate
                                              
                                              
                                              Amount
                                              
                                              
                                              %Non-interest
      bearing deposits
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              67,033
                                              
                                              
                                              
                                              17.4
                                              %
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              56,351
                                              
                                              
                                              
                                              19.7
                                              %Interest
      bearing demand deposits
                                              
                                              
                                              0.56
                                              %
                                              
                                              
                                              154,085
                                              
                                              
                                              
                                              40.0
                                              %
                                              
                                              
                                              1.31
                                              %
                                              
                                              
                                              106,042
                                              
                                              
                                              
                                              37.0
                                              %Time
      deposits
                                              
                                              
                                              3.25
                                              %
                                              
                                              
                                              164,207
                                              
                                              
                                              
                                              42.6
                                              %
                                              
                                              
                                              3.97
                                              %
                                              
                                              
                                              124,254
                                              
                                              
                                              
                                              43.3
                                              %1.61
                                              %
                                              
                                              $
                                              385,325
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              
                                              2.21
                                              %
                                              
                                              $
                                              286,647
                                              
                                              
                                              
                                              100.0
                                              %





The
Corporation had a total of $49.3 million and $38.8 million in time deposits of
$100,000 or more at December 31, 2009 and 2008, respectively.


F-23





Notes to Consolidated Financial Statements(continued)





10.
            Deposits
      (continued)





Scheduled
maturities of time deposits for the next five years are as follows:





(Dollar amounts in
    thousands)
                          
                          Amount
                          
                          
                          %2010
                          
                          $
                          53,007
                          
                          
                          
                          32.3
                          %2011
                          
                          
                          32,521
                          
                          
                          
                          19.8
                          %2012
                          
                          
                          20,370
                          
                          
                          
                          12.4
                          %2013
                          
                          
                          39,620
                          
                          
                          
                          24.1
                          %2014
                          
                          
                          16,084
                          
                          
                          
                          9.8
                          %Thereafter
                          
                          
                          2,604
                          
                          
                          
                          1.6
                          %$
                          164,207
                          
                          
                          
                          100.0
                          %





11.
            Borrowed
      Funds





The
following table summarizes the Corporation’s borrowed funds as of and for the
year ended December 31:





(Dollar amounts in thousands)
                        
                        2009
                        
                        
                        2008Weighted
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        WeightedAverage
                        
                        
                        Average
                        
                        
                        average
                        
                        
                        
                        
                        
                        Average
                        
                        
                        Average
                        
                        
                        averageBalance
                        
                        
                        Balance
                        
                        
                        Rate
                        
                        
                        rate
                        
                        
                        Balance
                        
                        
                        Balance
                        
                        
                        Rate
                        
                        
                        rateDue
      within 12 months
                        
                        $
                        5,000
                        
                        
                        $
                        15,611
                        
                        
                        
                        2.69
                        %
                        
                        
                        0.79
                        %
                        
                        $
                        13,188
                        
                        
                        $
                        10,096
                        
                        
                        
                        2.20
                        %
                        
                        
                        1.80
                        %Due
      beyond 12 months but within 5 years
                        
                        
                        15,000
                        
                        
                        
                        15,000
                        
                        
                        
                        4.13
                        %
                        
                        
                        4.19
                        %
                        
                        
                        15,000
                        
                        
                        
                        15,000
                        
                        
                        
                        4.13
                        %
                        
                        
                        4.19
                        %Due
      beyond 5 years but within 10 years
                        
                        
                        20,000
                        
                        
                        
                        20,000
                        
                        
                        
                        4.64
                        %
                        
                        
                        4.69
                        %
                        
                        
                        20,000
                        
                        
                        
                        20,000
                        
                        
                        
                        4.64
                        %
                        
                        
                        4.71
                        %$
                        40,000
                        
                        
                        $
                        50,611
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        48,188
                        
                        
                        $
                        45,096





Short-term
borrowed funds at December 31, 2009 consisted of a $5.0 million advance on a
line of credit with Atlantic Central Bankers Bank.  The line of credit
has an interest rate equal to the greater of 4.75% or prime plus
0.5%.





Long-term
borrowed funds at December 31, 2009 consist of seven, $5.0 million term
advances.  The term advances mature between November 2011 and October
2017.  If these advances convert to adjustable rate borrowings, the
Corporation has the opportunity to repay the advances without penalty at or
after the conversion date.  All borrowings from the FHLB are secured
by a blanket lien of qualified collateral.





The
initial three $5.0 million borrowings have rates of 4.61%, 3.74% and 4.04%,
respectively, although the rates may adjust quarterly at the option of the FHLB
to the then three month LIBOR plus 20, 22 or 25 basis points, respectively, but
only if the three month LIBOR exceeds 8.0%.


F-24





Notes to Consolidated Financial Statements(continued)





11.
            Borrowed
      Funds (continued)





In
addition, the Corporation borrowed four additional $5.0 million 10 year term
advances at initial interest rates of 4.98%, 4.83%,4.68% and 4.09%,
respectively.  Two of these borrowings are fixed for the first two
years of the term after which the rates may adjust at the option of the FHLB to
the then three month LIBOR rate plus 24 basis points.  The third
borrowing is also fixed for the first two years of the initial term after which
the rates may adjust at the option of the FHLB to the then three month LIBOR
plus 24 basis points, but only if the three month LIBOR exceeds
6.0%.  The final borrowing is fixed for the first three years of the
term after which the rates may adjust at the option of the FHLB to the then
three month LIBOR rate plus 13 basis points.





Scheduled
maturities of borrowed funds for the next five years are as
follows:





(Dollar amounts in
    thousands)
                              
                              Amount2010
                              
                              $
                              5,0002011
                              
                              
                              5,0002012
                              
                              
                              5,0002013
                              
                              
                              5,0002014
                              
                              
                              -Thereafter
                              
                              
                              20,000$
                              40,000





The Bank
maintains a credit arrangement with the FHLB as a source of additional
liquidity.  The total maximum borrowing capacity with the FHLB,
excluding loans outstanding, at December 31, 2009 was $130.3
million.  In addition, the Corporation has $500,000 and the Bank has
$2.0 million of funds available on unused lines of credit through another
correspondent bank.





12.
            Insurance
      of Accounts and Regulatory Matters





Insurance
of Accounts





The
deposits of the Bank have historically been insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000 per insured depositor, except
certain types of retirement accounts, which are insured up to $250,000 per
insured depositor.  On October 3, 2008, the maximum amount insured
under FDIC deposit insurance was temporarily increased from $100,000 to $250,000
per insured depositor through December 31, 2009.  In May 2009, the
FDIC extended this increased insurance level of $250,000 per depositor through
December 31, 2013.  After December 31, 2013, the standard insurance
amount will return to $100,000 for all deposit categories except certain
retirement accounts, which will continue to be insured up to $250,000 per
insured depositor.  To provide this insurance, the Bank must pay an
annual premium and is required to maintain certain minimum levels of regulatory
capital as outlined below.





Additionally,
the Bank has elected to participate in the FDIC’s Temporary Liquidity Guarantee
Program.  Under this program, all noninterest bearing deposit
transaction accounts, lawyers’ trust accounts and NOW accounts that pay interest
rates equal to or less than 50 basis points and public funds held in noninterest
bearing accounts with balances over $250,000 will also be fully insured through
June 30, 2010.


F-25





Notes to Consolidated Financial Statements(continued)





12.
            Insurance
      of Accounts and Regulatory Matters
(continued)





Restrictions
on Dividends, Loans and Advances





The Bank
is subject to a regulatory dividend restriction that generally limits the amount
of dividends that can be paid by the Bank to the Corporation.  Prior
regulatory approval is required if the total of all dividends declared in any
calendar year exceeds net profits (as defined in the regulations) for the year
combined with net retained earnings (as defined) for the two preceding calendar
years.  In addition, dividends paid by the Bank to the Corporation
would be prohibited if the effect thereof would cause the Bank’s capital to be
reduced below applicable minimum capital requirements.  As of December
31, 2009, $2.0 million of undistributed earnings of the Corporation was
available for distribution of dividends without prior regulatory
approval.





Loans or
advances from the Bank to the Corporation are limited to 10% of the Bank’s
capital stock and surplus on a secured basis.  Funds available for
loans or advances by the Bank to the Corporation amounted to approximately $2.7
million.  The Corporation has a $2.2 million commercial line of credit
available at the Bank for the primary purpose of purchasing qualified equity
investments.  At December 31, 2009, the Corporation had an outstanding
balance on this line of $1.1 million.





Minimum
Regulatory Capital Requirements





The
Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies.  Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Corporation’s
and the Bank’s financial statements.  Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices.  The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.  Prompt corrective action provisions are not applicable to
bank holding companies.





Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts and ratios (set forth in
the following table) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to
average assets (as defined).





As of
December 31, 2009, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action.  To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the following table.  There are no conditions or
events since the notification that management believes have changed the Bank’s
category.




F-26





Notes to Consolidated Financial Statements(continued)





12.
            Insurance
      of Accounts and Regulatory Matters
(continued)





The
following table sets forth certain information concerning regulatory capital of
the consolidated Corporation and the Bank as of the dates
presented:





(Dollar
      amounts in thousands)
                              
                              December
      31, 2009
                              
                              
                              December
      31, 2008Consolidated
                              
                              
                              Bank
                              
                              
                              Consolidated
                              
                              
                              BankAmount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              RatioTotal
      capital to risk-weighted assets:Actual
                              
                              $
                              34,838
                              
                              
                              
                              12.53
                              %
                              
                              $
                              37,224
                              
                              
                              
                              13.54
                              %
                              
                              $
                              38,727
                              
                              
                              
                              13.85
                              %
                              
                              $
                              36,069
                              
                              
                              
                              13.01
                              %For
      capital adequacy purposes
                              
                              
                              22,242
                              
                              
                              
                              8.00
                              %
                              
                              
                              21,987
                              
                              
                              
                              8.00
                              %
                              
                              
                              22,369
                              
                              
                              
                              8.00
                              %
                              
                              
                              22,174
                              
                              
                              
                              8.00
                              %To
      be well capitalized
                              
                              
                              N/A
                              
                              
                              
                              N/A
                              
                              
                              
                              27,484
                              
                              
                              
                              10.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/A
                              
                              
                              
                              27,718
                              
                              
                              
                              10.00
                              %Tier
      1 capital to risk-weighted assets:Actual
                              
                              $
                              31,636
                              
                              
                              
                              11.38
                              %
                              
                              $
                              34,022
                              
                              
                              
                              12.38
                              %
                              
                              $
                              36,386
                              
                              
                              
                              13.01
                              %
                              
                              $
                              33,422
                              
                              
                              
                              12.06
                              %For
      capital adequacy purposes
                              
                              
                              11,121
                              
                              
                              
                              4.00
                              %
                              
                              
                              10,994
                              
                              
                              
                              4.00
                              %
                              
                              
                              11,184
                              
                              
                              
                              4.00
                              %
                              
                              
                              11,087
                              
                              
                              
                              4.00
                              %To
      be well capitalized
                              
                              
                              N/A
                              
                              
                              
                              N/A
                              
                              
                              
                              16,491
                              
                              
                              
                              6.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/A
                              
                              
                              
                              16,631
                              
                              
                              
                              6.00
                              %Tier
      1 capital to average assets:Actual
                              
                              $
                              31,636
                              
                              
                              
                              6.91
                              %
                              
                              $
                              34,022
                              
                              
                              
                              7.48
                              %
                              
                              $
                              36,386
                              
                              
                              
                              10.88
                              %
                              
                              $
                              33,422
                              
                              
                              
                              9.21
                              %For
      capital adequacy purposes
                              
                              
                              18,320
                              
                              
                              
                              4.00
                              %
                              
                              
                              18,186
                              
                              
                              
                              4.00
                              %
                              
                              
                              13,382
                              
                              
                              
                              4.00
                              %
                              
                              
                              14,523
                              
                              
                              
                              4.00
                              %To
      be well capitalized
                              
                              
                              N/A
                              
                              
                              
                              N/A
                              
                              
                              
                              22,732
                              
                              
                              
                              5.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/A
                              
                              
                              
                              18,154
                              
                              
                              
                              5.00
                              %





13.
            Commitments
      and Legal Contingencies





In the
ordinary course of business, the Corporation has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements.  In addition, the Corporation is
involved in certain claims and legal actions arising in the ordinary course of
business.  The outcome of these claims and actions are not presently
determinable; however, in the opinion of the Corporation’s management, after
consulting legal counsel, the ultimate disposition of these matters will not
have a material adverse effect on the consolidated financial
statements.





14.
            Income
      Taxes





The
      Corporation and the Bank file a consolidated federal income tax
      return.  The provision for income taxes for the years ended
      December 31 is comprised of the
following:





(Dollar amounts in
    thousands)
                    
                    2009
                    
                    
                    2008Current
                    
                    $
                    344
                    
                    
                    $
                    789Deferred
                    
                    
                    (286
                    )
                    
                    
                    (433
                    )$
                    58
                    
                    
                    $
                    356


F-27





Notes to Consolidated Financial Statements(continued)





14.
            Income
      Taxes (continued)





A
reconciliation between the provision for income taxes and the amount computed by
multiplying operating results before income taxes by the statutory federal
income tax rate of 34% for the years ended December 31 is as
follows:





(Dollar amounts in thousands)
                            
                            2009
                            
                            
                            2008% Pre-tax
                            
                            
                            
                            
                            
                            % Pre-taxAmount
                            
                            
                            Income
                            
                            
                            Amount
                            
                            
                            IncomeProvision
      at statutory tax rate
                            
                            $
                            543
                            
                            
                            
                            34.0
                            %
                            
                            $
                            947
                            
                            
                            
                            34.0
                            %Increase
      (decrease) resulting from:Tax
      free interest, net of disallowance
                            
                            
                            (396
                            )
                            
                            
                            (24.8
                            )%
                            
                            
                            (270
                            )
                            
                            
                            (9.7
                            )%Earnings
      on BOLI
                            
                            
                            (69
                            )
                            
                            
                            (4.3
                            )%
                            
                            
                            (68
                            )
                            
                            
                            (2.4
                            )%Effect
      of extraordinary gain
                            
                            
                            -
                            
                            
                            
                            0.0
                            %
                            
                            
                            (308
                            )
                            
                            
                            (11.1
                            )%Other,
      net
                            
                            
                            (20
                            )
                            
                            
                            (1.3
                            )%
                            
                            
                            55
                            
                            
                            
                            2.0
                            %Provision
                            
                            $
                            58
                            
                            
                            
                            3.6
                            %
                            
                            $
                            356
                            
                            
                            
                            12.8
                            %





The tax
effects of temporary differences between the financial reporting basis and
income tax basis of assets and liabilities that are included in the net deferred
tax asset as of December 31 relate to the following:





(Dollar amounts in
    thousands)
                        
                        2009
                        
                        
                        2008Deferred
      tax assets:Allowance
      for loan losses
                        
                        $
                        990
                        
                        
                        $
                        848Securities
      impairment
                        
                        
                        438
                        
                        
                        
                        133SFAS
      158 pension accrual
                        
                        
                        376
                        
                        
                        
                        633Intangible
      assets
                        
                        
                        183
                        
                        
                        
                        87Other
                        
                        
                        104
                        
                        
                        
                        6Accrued
      pension cost
                        
                        
                        79
                        
                        
                        
                        252Stock
      options
                        
                        
                        77
                        
                        
                        
                        49Nonaccrual
      loan interest income
                        
                        
                        52
                        
                        
                        
                        -Accrued
      contract termination fees
                        
                        
                        -
                        
                        
                        
                        122Gross
      deferred tax assets
                        
                        
                        2,299
                        
                        
                        
                        2,130Deferred
      tax liabilities:-
                        
                        
                        
                        -Depreciation
                        
                        
                        567
                        
                        
                        
                        446Stock
      gain
                        
                        
                        172
                        
                        
                        
                        172Net
      unrealized gains on securities
                        
                        
                        153
                        
                        
                        
                        79Prepaid
      expenses
                        
                        
                        123
                        
                        
                        
                        91Deferred
      loan fees
                        
                        
                        63
                        
                        
                        
                        57Purchase
      accounting adjustments
                        
                        
                        62
                        
                        
                        
                        75Loan
      servicing
                        
                        
                        14
                        
                        
                        
                        20Gross
      deferred tax liabilities
                        
                        
                        1,154
                        
                        
                        
                        940Net
      deferred tax asset
                        
                        $
                        1,145
                        
                        
                        $
                        1,190


F-28





Notes to Consolidated Financial Statements(continued)





14.
            Income
      Taxes (continued)





In
accordance with relevant accounting guidance, the Corporation determined that it
was not required to establish a valuation allowance for deferred tax assets
since it is more likely than not that the deferred tax asset will be realized
through carry-back to taxable income in prior years, future reversals of
existing taxable temporary differences, tax strategies and, to a lesser extent,
future taxable income.  The Corporation’s net deferred tax asset is
recorded in the consolidated financial statements as a component of other
assets.





At
December 31, 2009 and December 31, 2008, the Corporation had no unrecognized tax
benefits recorded.  The Corporation does not expect the total amount
of unrecognized tax benefits to significantly increase within the next twelve
months.  The Corporation recognizes interest and penalties on
unrecognized tax benefits in income taxes expense in its Consolidated Statements
of Income.





The
Corporation and the Bank are subject to U.S. federal income tax as well as a
capital-based franchise tax in the Commonwealth of Pennsylvania.  The
Corporation and the Bank are no longer subject to examination by taxing
authorities for years before 2006.


F-29





Notes to Consolidated Financial Statements(continued)





15.
            Employee
      Benefit Plans





Defined
Benefit Plan





The
Corporation provides pension benefits for eligible employees through a defined
benefit pension plan.  Substantially all employees participate in the
retirement plan on a non-contributing basis, and are fully vested after three
years of service.  Effective January 1, 2009, the plan was closed to
new participants.  The Corporation uses December 31 as the measurement
date for its plan.  Information pertaining to changes in obligations
and funded status of the defined benefit pension plan for the years ended
December 31 is as follows:





(Dollar amounts in
    thousands)
                    
                    2009
                    
                    
                    2008Change
      in plan assets:Fair
      value of plan assets at beginning of year
                    
                    $
                    3,226
                    
                    
                    $
                    3,883Actual
      (loss) return on plan assets
                    
                    
                    673
                    
                    
                    
                    (727
                    )Employer
      contribution
                    
                    
                    350
                    
                    
                    
                    335Benefits
      paid
                    
                    
                    (262
                    )
                    
                    
                    (265
                    )Fair
      value of plan assets at end of year
                    
                    
                    3,987
                    
                    
                    
                    3,226Change
      in benefit obligation:Benefit
      obligation at beginning of year
                    
                    
                    5,115
                    
                    
                    
                    4,508Service
      cost
                    
                    
                    296
                    
                    
                    
                    233Interest
      cost
                    
                    
                    281
                    
                    
                    
                    285Actuarial
      loss
                    
                    
                    -
                    
                    
                    
                    8Effect
      of change in assumptions
                    
                    
                    (299
                    )
                    
                    
                    346Benefits
      paid
                    
                    
                    (262
                    )
                    
                    
                    (265
                    )Benefit
      obligation at end of year
                    
                    
                    5,131
                    
                    
                    
                    5,115Funded
      status (plan assets less benefit obligation)
                    
                    
                    (1,144
                    )
                    
                    
                    (1,889
                    )Unrecognized
      prior service cost
                    
                    
                    (210
                    )
                    
                    
                    (241
                    )Unrecognized
      net actuarial gain
                    
                    
                    1,314
                    
                    
                    
                    2,104Accrued
      pension cost
                    
                    $
                    (40
                    )
                    
                    $
                    (26
                    )Amounts
      recognized in accumulated other comprehensive loss, net of tax, consists
      of:Accumulated
      net actuarial loss
                    
                    $
                    867
                    
                    
                    $
                    1,388Accumulated
      prior service benefit
                    
                    
                    (138
                    )
                    
                    
                    (159
                    )Amount
      recognized, end of year
                    
                    $
                    729
                    
                    
                    $
                    1,229





The
following table presents the Corporation’s pension plan assets measured and
recorded at estimated fair value on a recurring basis and their level within the
estimated fair value hierarchy as described in Note 17 as of December 31,
2009:





(Dollar amounts in thousands)
                    
                    
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)Quoted Prices in
                    
                    
                    Significant
                    
                    
                    (Level 3)Active Markets
                    
                    
                    Other
                    
                    
                    Significantfor Identical
                    
                    
                    Observable
                    
                    
                    UnobservableDescription
                    
                    Total
                    
                    
                    Assets
                    
                    
                    Inputs
                    
                    
                    InputsCash
      and cash equivalents
                    
                    $
                    545
                    
                    
                    $
                    545
                    
                    
                    $
                    -
                    
                    
                    $
                    -Fixed
      income
                    
                    
                    1,660
                    
                    
                    
                    -
                    
                    
                    
                    1,660
                    
                    
                    
                    -Equity
      mutual funds - domestic
                    
                    
                    1,581
                    
                    
                    
                    1,581
                    
                    
                    
                    -
                    
                    
                    
                    -Equity
      mutual funds - international
                    
                    
                    201
                    
                    
                    
                    201
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    3,987
                    
                    
                    $
                    2,327
                    
                    
                    $
                    1,660
                    
                    
                    $
                    -


F-30





Notes to Consolidated Financial Statements(continued)





15.
            Employee
      Benefit Plans (continued)





Amounts
recognized in balance sheet as of December 31 consist of:





(Dollar amounts in thousands)
                        
                        Pension Benefits2009
                        
                        
                        2008Accrued
      benefit cost
                        
                        $
                        (40
                        )
                        
                        $
                        (26
                        )Accumulated
      other comprehensive loss
                        
                        
                        (1,104
                        )
                        
                        
                        (1,863
                        )Net
      amount recognized
                        
                        $
                        (1,144
                        )
                        
                        $
                        (1,889
                        )





The
accumulated benefit obligation for the defined benefit pension plan was $5.1
million at both December 31, 2009 and 2008.





The
components of the periodic pension costs for the years ended December 31 are as
follows:





(Dollar amounts in thousands)
                      
                      2009
                      
                      
                      2008Service
      cost
                      
                      $
                      296
                      
                      
                      $
                      233Interest
      cost
                      
                      
                      281
                      
                      
                      
                      285Expected
      return on plan assets
                      
                      
                      (258
                      )
                      
                      
                      (305
                      )Amortization
      of prior service cost and actuarial expense
                      
                      
                      44
                      
                      
                      
                      (12
                      )Net
      periodic pension cost
                      
                      $
                      363
                      
                      
                      $
                      201





Weighted-average
actuarial assumptions for the years ended December 31 include the
following:





2009
                        
                        
                        2008Discount
      rate for net periodic benefit cost
                        
                        
                        6.00
                        %
                        
                        
                        6.50
                        %Discount
      rate for benefit obligations
                        
                        
                        6.00
                        %
                        
                        
                        6.00
                        %Rate
      of increase in future compensation levels
                        
                        
                        3.50
                        %
                        
                        
                        3.50
                        %Expected
      rate of return on plan assets
                        
                        
                        7.75
                        %
                        
                        
                        7.75
                        %





The
Corporation’s pension plan asset allocation at December 31, 2009 and 2008,
target allocation for 2010, and expected long-term rate of return by asset
category are as follows:





Asset Category
                              
                              Target
                                Allocation
                              
                              
                              Percentage of Plan Assets at
                                Year End
                              
                              
                              Weighted-AverageExpectedLong-Term Rate of Return2010
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009Equity
      Securities
                              
                              
                              43
                              %
                              
                              
                              43
                              %
                              
                              
                              47
                              %
                              
                              
                              5.5
                              %Debt
      Securities
                              
                              
                              43
                              %
                              
                              
                              43
                              %
                              
                              
                              24
                              %
                              
                              
                              1.8
                              %Other
                              
                              
                              14
                              %
                              
                              
                              14
                              %
                              
                              
                              29
                              %
                              
                              
                              0.5
                              %100
                              %
                              
                              
                              100
                              %
                              
                              
                              100
                              %
                              
                              
                              7.75
                              %


F-31







Notes to Consolidated Financial Statements(continued)





15.
            Employee
      Benefit Plans (continued)





The
intent of the Plan is to provide a range of investment options for building a
diversified asset allocation strategy that will provide the highest likelihood
of meeting the aggregate actuarial projections.  In selecting the
options and asset allocation strategy, the Corporation has determined that the
benefits of reduced portfolio risk are best received through asset style
diversification.  The following asset classes or investment categories
are utilized to meet the Plan’s objectives:  Small company stock,
International stock, Mid-cap stock, Large company stock, Diversified bond, Money
Market/Stable Value and Cash.





The
Corporation expects to contribute approximately $425,000 to its pension plan in
2010.





Estimated
future benefit payments, which reflect expected future service, as appropriate,
are as follows:





(Dollar amounts in thousands)
                            
                            PensionFor year ended December 31,
                            
                            Benefits2010
                            
                            $
                            2032011
                            
                            
                            1842012
                            
                            
                            2092013
                            
                            
                            2232014
                            
                            
                            2132015-2019
                            
                            
                            1,471Thereafter
                            
                            
                            2,628Benefit
      Obligation
                            
                            $
                            5,131





Certain
accounting guidance requires an employer to recognize the funded status of its
defined benefit pension plan as a net asset or liability in its consolidated
balance sheet with an offsetting amount in accumulated other comprehensive
income, and to recognize changes in that funded status in the year in which
changes occur through comprehensive income.  As of December 31, 2009,
the Corporation’s liability under this guidance was $1.1 million and the charge
to accumulated other comprehensive income was $729,000, net of
taxes.  Additionally, the guidance requires an employer to measure the
funded status of its defined benefit pension plan as of the date of its year-end
financial statements.  The Corporation measures the funded status at
December 31.





Defined
Contribution Plan





The
Corporation maintains a defined contribution 401(k) Plan.  Employees
are eligible to participate by providing tax-deferred contributions up to 20% of
qualified compensation.  Employee contributions are vested at all
times.  The Corporation provides a matching contribution of up to 4%
of the participant’s salary.  Matching contributions for 2009 and 2008
were $153,000 and $150,000, respectively.


F-32





Notes to Consolidated Financial Statements(continued)





15.
            Employee
      Benefit Plans (continued)





Supplemental
Executive Retirement Plan





During
2003, the Corporation established a Supplemental Executive Retirement Plan
(SERP) to provide certain additional retirement benefits to participating
executive officers.  The SERP was adopted in order to provide benefits
to such executives whose benefits are reduced under the Corporation’s
tax-qualified benefit plans pursuant to limitations under the Internal Revenue
Code.  The SERP is subject to certain vesting provisions and provides
that the executives shall receive a supplemental retirement benefit if the
executive’s employment is terminated after reaching the normal retirement age of
65.  As of December 31, 2009 and 2008, the Corporation’s SERP
liability was $417,000 and $285,000, respectively.  For the years
ended December 31, 2009 and 2008, the Corporation recognized SERP expense of
$132,000 and $69,000, respectively.





16.
            Stock
      Compensation Plans





The
Corporation’s 2007 Stock Incentive Plan and Trust (the Plan), which is
shareholder-approved, permits the grant of restricted stock awards and options
to its directors, officers and employees for up to 177,496 shares of common
stock.  Incentive stock options, non-incentive or compensatory stock
options and share awards may be granted under the Plan.  The exercise
price of each option shall at least equal the market price of a share of common
stock on the date of grant and have a contractual term of ten
years.  Options shall vest and become exercisable at the rate, to the
extent and subject to such limitations as may be specified by the
Corporation.  Compensation cost related to share-based payment
transactions must be recognized in the financial statements with measurement
based upon the fair value of the equity or liability instruments
issued.  During 2009 and 2008, 6,750 and 14,500 options were granted
under the plan, respectively.  In addition, during 2009 and 2008, the
Corporation granted restricted stock awards of 6,750 and 4,500 shares,
respectively, with a face value of $91,000 and $101,000, respectively, based on
the grant date stock prices of $13.50 and $22.50, respectively.  These
options and restricted stock awards are 100% vested on the third anniversary of
the date of grant.  For the year ended December 31, 2009 and 2008, the
Corporation recognized $121,000 and $113,000, respectively, in stock
compensation expense.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:





Weighted-average for the yearended December 31,
                  
                  2009
                  
                  
                  2008Dividend
      yield
                  
                  
                  4.15
                  %
                  
                  
                  5.28
                  %Expected
      life
                  
                  10
      years
                  
                  
                  10
      yearsExpected
      volatility
                  
                  
                  17.87
                  %
                  
                  
                  12.40
                  %Risk-free
      interest rate
                  
                  
                  3.47
                  %
                  
                  
                  4.05
                  %





The
expected volatility is based on historical stock price
fluctuations.  The risk-free interest rates for periods within the
contractual life of the awards are based on the U.S. Treasury yield curve in
effect at the time of the grant.  The expected life is based on the
maximum term of the options.  The dividend yield assumption is based
on the Corporation’s history and expectation of dividend
payouts.


F-33





Notes to Consolidated Financial Statements(continued)





16.
            Stock
      Compensation Plans (continued)





A summary
of option activity under the Plan as of December 31, 2009, and changes during
the period then ended is presented below:





Weighted-AverageWeighted-Average
                                  
                                  
                                  Aggregate
                                  
                                  
                                  Remaining TermOptions
                                  
                                  
                                  Exercise Price
                                  
                                  
                                  Intrinsic Value
                                  
                                  
                                  (in years)Outstanding
      as of January 1, 2009
                                  
                                  
                                  94,000
                                  
                                  
                                  $
                                  25.66
                                  
                                  
                                  
                                  
                                  
                                  
                                  8.7Granted
                                  
                                  
                                  6,750
                                  
                                  
                                  
                                  13.50
                                  
                                  
                                  
                                  
                                  
                                  
                                  10.0Forfeited
                                  
                                  
                                  (4,500
                                  )
                                  
                                  
                                  26.00
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Outstanding
      as of December 31, 2009
                                  
                                  
                                  96,250
                                  
                                  
                                  $
                                  24.79
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  7.8Exercisable
      as of December 31, 2009
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -





A summary
of the status of the Corporation’s nonvested option shares as of December 31,
2009, and changes during the period then ended is presented below:





Weighted-AverageOptions
                        
                        
                        Grant-date Fair ValueNonvested
      at January 1, 2009
                        
                        
                        94,000
                        
                        
                        $
                        3.13Granted
                        
                        
                        6,750
                        
                        
                        
                        1.75Forfeited
                        
                        
                        (4,500
                        )
                        
                        
                        3.39Nonvested
      as of December 31, 2009
                        
                        
                        96,250
                        
                        
                        $
                        3.02





As of
December 31, 2009, there was $218,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over the next three
years.





17.
            Fair
      Values of Financial Instruments





Management
uses its best judgment in estimating the fair value of the Corporation’s
financial instruments; however, there are inherent weaknesses in any estimation
technique.  Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Corporation could have realized in a sale transaction on the dated
indicated.  The estimated fair value amounts have been measured as of
their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates.  As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at year-end.





Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date.  There are three levels of inputs that may be
used to measure fair value.


F-34





Notes to Consolidated Financial Statements(continued)





17.
            Fair
      Values of Financial Instruments
(continued)





Level
1:  Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities.





Level 2:  Quoted
prices in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the asset or
liability.





Level 3:  Prices or
valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e. supported with little or no market
activity).





An asset
or liability’s level is based on the lowest level of input that is significant
to the fair value measurement.





The
Corporation used the following methods and significant assumptions to estimate
the fair value of each type of financial instrument:





Available for sales
securities – Fair value on available for sale securities were determined
by a third party pricing service using quoted prices for identical instruments
or similar instruments.  In some instances, the fair value of certain
securities cannot be determined using these techniques due to the lack of
relevant market data.  As such, these securities are valued using an
alternative technique utilizing other observable inputs and are classified
within Level 2 of the fair value hierarchy.





Impaired loans –Fair value
on impaired loans is measured using the estimate fair market value of the
collateral less the estimate costs to sell.  Fair value of the loan’s
collateral is typically determined by appraisals or independent
valuation.  Management’s ongoing review of appraisal information may
result in additional discounts or adjustments to valuation based upon more
recent market sales activity or more current appraisal information derived from
properties of similar type and/or locale.  As of December 31, 2009 the
fair value consists of loan balances of $590,000, net of a valuation allowance
of $128,000.  Additional provision for loan losses of $128,000 was
recorded during the year ended December 31, 2009.


F-35





Notes to Consolidated Financial Statements(continued)





17.
            Fair
      Values of Financial Instruments
(continued)





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





(Dollar amounts in thousands)
                  
                  
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)Quoted Prices in
                  
                  
                  Significant
                  
                  
                  (Level 3)Active Markets
                  
                  
                  Other
                  
                  
                  Significantfor Identical
                  
                  
                  Observable
                  
                  
                  UnobservableDescription
                  
                  Total
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  InputsDecember
      31, 2009:U.S.
      Treasury and federal agency
                  
                  $
                  3,001
                  
                  
                  $
                  -
                  
                  
                  $
                  3,001
                  
                  
                  $
                  -U.S.
      government sponsored entities and agencies
                  
                  
                  50,797
                  
                  
                  
                  -
                  
                  
                  
                  50,797
                  
                  
                  
                  -Mortgage-backed
      securities: residential
                  
                  
                  16,530
                  
                  
                  
                  -
                  
                  
                  
                  16,530
                  
                  
                  
                  -Collateralized
      mortgage obligations
                  
                  
                  5,130
                  
                  
                  
                  -
                  
                  
                  
                  5,130
                  
                  
                  
                  -State
      and political subdivision
                  
                  
                  26,967
                  
                  
                  
                  -
                  
                  
                  
                  26,967
                  
                  
                  
                  -Equity
      securities
                  
                  
                  2,818
                  
                  
                  
                  2,093
                  
                  
                  
                  725
                  
                  
                  
                  -$
                  105,243
                  
                  
                  $
                  2,093
                  
                  
                  $
                  103,150
                  
                  
                  $
                  -December
      31, 2008:U.S.
      government sponsored entities and agencies
                  
                  $
                  20,077
                  
                  
                  $
                  -
                  
                  
                  $
                  20,077
                  
                  
                  $
                  -Mortgage-backed
      securities: residential
                  
                  
                  17,218
                  
                  
                  
                  -
                  
                  
                  
                  17,218
                  
                  
                  
                  -Collateralized
      mortgage obligations
                  
                  
                  13,162
                  
                  
                  
                  -
                  
                  
                  
                  13,162
                  
                  
                  
                  -State
      and political subdivision
                  
                  
                  13,808
                  
                  
                  
                  -
                  
                  
                  
                  13,808
                  
                  
                  
                  -Corporate
      securities
                  
                  
                  3,984
                  
                  
                  
                  -
                  
                  
                  
                  3,984
                  
                  
                  
                  -Equity
      securities
                  
                  
                  3,194
                  
                  
                  
                  3,194
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  71,443
                  
                  
                  $
                  3,194
                  
                  
                  $
                  68,249
                  
                  
                  $
                  -





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





(Dollar amounts in thousands)
                  
                  
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)Quoted Prices in
                  
                  
                  Significant
                  
                  
                  (Level 3)Active Markets
                  
                  
                  Other
                  
                  
                  Significantfor Identical
                  
                  
                  Observable
                  
                  
                  UnobservableDescription
                  
                  Total
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  InputsDecember
      31, 2009:Impaired
      loans
                  
                  $
                  462
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  462$
                  462
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  462December
      31, 2008:Impaired
      loans
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -$
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -


F-36





Notes to Consolidated Financial Statements(continued)





17.
            Fair
      Values of Financial Instruments
(continued)





The
following table sets forth the carrying amount and fair value of the
Corporation’s financial instruments included in the consolidated balance sheet
as of December 31:





(Dollar amounts in thousands)
                        
                        2009
                        
                        
                        2008Carrying amount
                        
                        
                        Fair value
                        
                        
                        Carrying amount
                        
                        
                        Fair valueFinancial
      assets:Cash
      and cash equivalents
                        
                        $
                        38,952
                        
                        
                        $
                        38,952
                        
                        
                        $
                        16,571
                        
                        
                        $
                        16,571Securities
                        
                        
                        105,243
                        
                        
                        
                        105,243
                        
                        
                        
                        71,443
                        
                        
                        
                        71,443Loans
      receivable
                        
                        
                        292,615
                        
                        
                        
                        298,197
                        
                        
                        
                        264,838
                        
                        
                        
                        272,662Federal
      bank stocks
                        
                        
                        4,125
                        
                        
                        
                        4,125
                        
                        
                        
                        3,797
                        
                        
                        
                        3,797Accrued
      interest receivable
                        
                        
                        1,574
                        
                        
                        
                        1,574
                        
                        
                        
                        1,519
                        
                        
                        
                        1,519Financial
      liabilities:Deposits
                        
                        
                        385,325
                        
                        
                        
                        389,443
                        
                        
                        
                        286,647
                        
                        
                        
                        290,533Borrowed
      funds
                        
                        
                        40,000
                        
                        
                        
                        43,258
                        
                        
                        
                        48,188
                        
                        
                        
                        52,510Accrued
      interest payable
                        
                        
                        711
                        
                        
                        
                        711
                        
                        
                        
                        761
                        
                        
                        
                        761Off-balance
      sheet commitments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -





This
information should not be interpreted as an estimate of the fair value of the
entire Corporation since a fair value calculation is only provided for a limited
portion of the Corporation’s assets and liabilities.  Due to a wide
range of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Corporation’s disclosures and those of other
companies may not be meaningful.  The following methods and
assumptions were used to estimate fair values of the Corporation’s financial
instruments at December 31, 2009 and 2008:





Carrying
amount is the estimated fair value for cash and cash equivalents, securities,
federal bank stocks, accrued interest receivable and payable, demand deposits,
borrowed funds, and variable rate loans or deposits that reprice frequently and
fully.  For fixed rate loans or deposits and for variable rate loans
or deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk.  Fair value of debt is based on current rates
for similar financing.





Estimates
of the fair value of off-balance sheet items were not made because of the
short-term nature of these arrangements and the credit standing of the
counterparties.  Also, unfunded loan commitments relate principally to
variable rate commercial loans.


F-37





Notes to Consolidated Financial Statements(continued)





17.
            Fair
      Values of Financial Instruments
(continued)





Off-Balance
Sheet Financial Instruments





The
Corporation is party to credit related financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and commercial letters of credit.  Commitments to extend credit
involve, to a varying degree, elements of credit and interest rate risk in
excess of amounts recognized in the consolidated balance sheets.  The
Corporation’s exposure to credit loss in the event of non-performance by the
other party for commitments to extend credit is represented by the contractual
amount of these commitments, less any collateral value obtained.  The
Corporation uses the same credit policies in making commitments as for
on-balance sheet instruments.  The Corporation’s distribution of
commitments to extend credit approximates the distribution of loans receivable
outstanding.





The
following table presents the notional amount of the Corporation’s off-balance
sheet commitment financial instruments as of December 31:





(Dollar amounts in thousands)
                            
                            2009
                            
                            
                            2008Fixed Rate
                            
                            
                            Variable Rate
                            
                            
                            Fixed Rate
                            
                            
                            Variable RateCommitments
      to make loans
                            
                            $
                            2,436
                            
                            
                            $
                            2,592
                            
                            
                            $
                            596
                            
                            
                            $
                            1,664Unused
      lines of credit
                            
                            
                            5,386
                            
                            
                            
                            35,697
                            
                            
                            
                            1,367
                            
                            
                            
                            18,636$
                            7,822
                            
                            
                            $
                            38,289
                            
                            
                            $
                            1,963
                            
                            
                            $
                            20,300





Commitments
to make loans are generally made for periods of 30 days or less.  The
fixed rate loan commitments have interest rates ranging from 4.00% to 11.25% and
maturities ranging from 5 to 30 years at both year end
dates.  Commitments to extend credit include agreements to lend to a
customer as long as there is no violation of any condition established in the
contract.  These commitments generally have fixed expiration dates or
other termination clauses and may require payment of a
fee.  Commitments to extend credit also include unfunded commitments
under commercial and consumer lines of credit, revolving credit lines and
overdraft protection agreements.  These lines of credit may be
collateralized and usually do not contain a specified maturity date and may be
drawn upon to the total extent to which the Corporation is
committed.





Standby
letters of credit are conditional commitments issued by the Corporation usually
for commercial customers to guarantee the performance of a customer to a third
party.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.  The Corporation generally holds collateral supporting
those commitments if deemed necessary.  Standby letters of credit were
$1.5 million and $1.1 million at December 31, 2009 and 2008,
respectively.  The current amount of the liability as of December 31,
2009 and 2008 for guarantees under standby letters of credit issued is not
material.


F-38





Notes to Consolidated Financial Statements(continued)





18.
            Emclaire
      Financial Corp. – Condensed Financial Statements, Parent Corporation
      Only





Following
are condensed financial statements for the parent company as of and for the
years ended December 31:





Condensed Balance Sheets(Dollar amounts in thousands)
                                              
                                              2009
                                              
                                              
                                              2008Assets:Cash
      and cash equivalents
                                              
                                              $
                                              58
                                              
                                              
                                              $
                                              68Securities
      available for sale
                                              
                                              
                                              2,758
                                              
                                              
                                              
                                              3,138Equity
      in net assets of subsidiary bank
                                              
                                              
                                              39,994
                                              
                                              
                                              
                                              34,222Other
      assets
                                              
                                              
                                              426
                                              
                                              
                                              
                                              7Total
      Assets
                                              
                                              $
                                              43,236
                                              
                                              
                                              $
                                              37,435Liabilities
      and Stockholders' Equity:Short-term
      borrowed funds with affiliated subsidiary
                                              
                                              $
                                              1,100
                                              
                                              
                                              $
                                              1,100Other
      short-term borrowed funds
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              -Accrued
      expenses and other liabilities
                                              
                                              
                                              102
                                              
                                              
                                              
                                              212Stockholders'
      equity
                                              
                                              
                                              37,034
                                              
                                              
                                              
                                              36,123Total
      Liabilities and Stockholders' Equity
                                              
                                              $
                                              43,236
                                              
                                              
                                              $
                                              37,435





Condensed Statements of Income(Dollar amounts in thousands)
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Income:Dividends
      from subsidiary bank
                                                        
                                                        $
                                                        2,195
                                                        
                                                        
                                                        $
                                                        2,555Investment
      income
                                                        
                                                        
                                                        105
                                                        
                                                        
                                                        
                                                        149Total
      income
                                                        
                                                        
                                                        2,300
                                                        
                                                        
                                                        
                                                        2,704Expense:Interest
      expense
                                                        
                                                        
                                                        118
                                                        
                                                        
                                                        
                                                        68Noninterest
      expense
                                                        
                                                        
                                                        1,675
                                                        
                                                        
                                                        
                                                        331Total
      expense
                                                        
                                                        
                                                        1,793
                                                        
                                                        
                                                        
                                                        399Net
      income before income taxes and equity in undistributedoperating
      results of subsidiary
                                                        
                                                        
                                                        507
                                                        
                                                        
                                                        
                                                        2,305Equity
      in undistributed net income of subsidiary
                                                        
                                                        
                                                        456
                                                        
                                                        
                                                        
                                                        1,113Net
      income before income taxes and extraordinary item
                                                        
                                                        
                                                        963
                                                        
                                                        
                                                        
                                                        3,418Provision
      for income taxes
                                                        
                                                        
                                                        (576
                                                        )
                                                        
                                                        
                                                        (59
                                                        )Net
      income before extraordinary item
                                                        
                                                        
                                                        1,539
                                                        
                                                        
                                                        
                                                        3,477Extraordinary
      item, loss on business combination
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,047
                                                        )Net
      income
                                                        
                                                        $
                                                        1,539
                                                        
                                                        
                                                        $
                                                        2,430


F-39





Notes to Consolidated Financial Statements(continued)





18.
              Emclaire
      Financial Corp. – Condensed Financial Statements, Parent Corporation Only
      (continued)





Condensed Statements of Cash Flows(Dollar amounts in thousands)
                                            
                                            2009
                                            
                                            
                                            2008Operating
      activities:Net
      income
                                            
                                            $
                                            1,539
                                            
                                            
                                            $
                                            2,430Adjustments
      to reconcile net income to net cash providedby
      operating activities:Equity
      in undistributed operating results of subsidiary
                                            
                                            
                                            (456
                                            )
                                            
                                            
                                            (1,113
                                            )Securities
      impairment loss recognized in earnings
                                            
                                            
                                            898
                                            
                                            
                                            
                                            -Other,
      net
                                            
                                            
                                            (589
                                            )
                                            
                                            
                                            501Net
      cash provided by operating activities
                                            
                                            
                                            1,392
                                            
                                            
                                            
                                            1,818Investing
      activities:Purchases
      of securities
                                            
                                            
                                            (8
                                            )
                                            
                                            
                                            (129
                                            )Investment
      in subsidiaries
                                            
                                            
                                            (5,000
                                            )
                                            
                                            
                                            (11,253
                                            )Net
      cash used in investing activities
                                            
                                            
                                            (5,008
                                            )
                                            
                                            
                                            (11,382
                                            )Financing
      activities:Net
      change in borrowings
                                            
                                            
                                            5,000
                                            
                                            
                                            
                                            -Proceeds
      from sale of preferred stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7,412Issuance
      of warrants
                                            
                                            
                                            -
                                            
                                            
                                            
                                            88Proceeds
      from sale of common stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,753Dividends
      paid
                                            
                                            
                                            (1,394
                                            )
                                            
                                            
                                            (1,704
                                            )Net
      cash provided by financing activities
                                            
                                            
                                            3,606
                                            
                                            
                                            
                                            9,549Decrease
      in cash and cash equivalents
                                            
                                            
                                            (10
                                            )
                                            
                                            
                                            (15
                                            )Cash
      and cash equivalents at beginning of period
                                            
                                            
                                            68
                                            
                                            
                                            
                                            83Cash
      and cash equivalents at end of period
                                            
                                            $
                                            58
                                            
                                            
                                            $
                                            68





19.
            Other
      Comprehensive Income (Loss)





Other
comprehensive income (loss) components and related taxes for the years ended
December 31 were as follows:





(Dollar amounts in thousands)
                              
                              2009
                              
                              
                              2008Unrealized
      holding gains (losses) on available for sale securities
                              
                              $
                              185
                              
                              
                              $
                              (11
                              )Reclassification
      adjustment for losses recognized in income, net
                              
                              
                              34
                              
                              
                              
                              391Amortization
      of pension prior service cost
                              
                              
                              (31
                              )
                              
                              
                              (30
                              )Amortization
      of pension net actuarial gain (loss)
                              
                              
                              790
                              
                              
                              
                              (1,368
                              )Net
      unrealized gains (losses)
                              
                              
                              978
                              
                              
                              
                              (1,018
                              )Tax
      expense (benefit)
                              
                              
                              (333
                              )
                              
                              
                              346Other
      comprehensive income (loss)
                              
                              $
                              645
                              
                              
                              $
                              (672
                              )


F-40





Notes to Consolidated Financial Statements(continued)





20.
            Other
      Noninterest Income and Expense





Other
noninterest income includes customer bank card processing fee income of $403,000
and $292,000 for 2009 and 2008, respectively.





The
following summarizes the Corporation’s other noninterest expenses for the years
ended December 31:





(Dollar
      amounts in thousands)
                          
                          2009
                          
                          
                          2008Printing
      and supplies
                          
                          $
                          352
                          
                          
                          $
                          213Customer
      bank card processing
                          
                          
                          274
                          
                          
                          
                          256Telephone
      and data communications
                          
                          
                          196
                          
                          
                          
                          143Travel,
      entertainment and conferences
                          
                          
                          192
                          
                          
                          
                          176Internet
      banking and bill pay
                          
                          
                          186
                          
                          
                          
                          125Postage
      and freight
                          
                          
                          180
                          
                          
                          
                          185Pennsylvania
      shares and use taxes
                          
                          
                          176
                          
                          
                          
                          147Contributions
                          
                          
                          171
                          
                          
                          
                          140Correspondent
      bank and courier fees
                          
                          
                          156
                          
                          
                          
                          165Subscriptions
                          
                          
                          145
                          
                          
                          
                          121Marketing
      and advertising
                          
                          
                          130
                          
                          
                          
                          150Examinations
                          
                          
                          104
                          
                          
                          
                          93Contract
      termination fee
                          
                          
                          -
                          
                          
                          
                          360Other
                          
                          
                          246
                          
                          
                          
                          114Total
      other noninterest expenses
                          
                          $
                          2,508
                          
                          
                          $
                          2,388


F-41





Notes to Consolidated Financial Statements(continued)





21.
            Quarterly
      Financial Data (unaudited)





The
following is a summary of selected quarterly data for the years ended December
31:





(Dollar
      amounts in thousands, except share data)
                              
                              First
                              
                              
                              Second
                              
                              
                              Third
                              
                              
                              FourthQuarter
                              
                              
                              Quarter
                              
                              
                              Quarter
                              
                              
                              Quarter2009:Interest
      income
                              
                              $
                              5,011
                              
                              
                              $
                              4,789
                              
                              
                              $
                              5,112
                              
                              
                              $
                              5,422Interest
      expense
                              
                              
                              1,950
                              
                              
                              
                              1,810
                              
                              
                              
                              1,860
                              
                              
                              
                              1,962Net
      interest income
                              
                              
                              3,061
                              
                              
                              
                              2,979
                              
                              
                              
                              3,252
                              
                              
                              
                              3,460Provision
      for loan losses
                              
                              
                              297
                              
                              
                              
                              540
                              
                              
                              
                              240
                              
                              
                              
                              290Net
      interest income after provision for loan losses
                              
                              
                              2,764
                              
                              
                              
                              2,439
                              
                              
                              
                              3,012
                              
                              
                              
                              3,170Noninterest
      income
                              
                              
                              720
                              
                              
                              
                              919
                              
                              
                              
                              12
                              
                              
                              
                              1,179Noninterest
      expense
                              
                              
                              2,622
                              
                              
                              
                              2,896
                              
                              
                              
                              3,255
                              
                              
                              
                              3,845Income
      (loss) before income taxes
                              
                              
                              862
                              
                              
                              
                              462
                              
                              
                              
                              (231
                              )
                              
                              
                              504Provision
      for (benefit from) income taxes
                              
                              
                              194
                              
                              
                              
                              54
                              
                              
                              
                              (221
                              )
                              
                              
                              31Net
      income (loss)
                              
                              
                              668
                              
                              
                              
                              408
                              
                              
                              
                              (10
                              )
                              
                              
                              473Accumulated
      preferred stock dividends and discount accretion
                              
                              
                              98
                              
                              
                              
                              98
                              
                              
                              
                              98
                              
                              
                              
                              99Net
      income available to common stockholders
                              
                              $
                              570
                              
                              
                              $
                              310
                              
                              
                              $
                              (108
                              )
                              
                              $
                              374Basic
      earnings per common share
                              
                              $
                              0.40
                              
                              
                              $
                              0.22
                              
                              
                              $
                              (0.08
                              )
                              
                              $
                              0.262008:Interest
      income
                              
                              $
                              4,520
                              
                              
                              $
                              4,563
                              
                              
                              $
                              4,847
                              
                              
                              $
                              5,163Interest
      expense
                              
                              
                              1,977
                              
                              
                              
                              1,999
                              
                              
                              
                              2,117
                              
                              
                              
                              2,075Net
      interest income
                              
                              
                              2,543
                              
                              
                              
                              2,564
                              
                              
                              
                              2,730
                              
                              
                              
                              3,088Provision
      for loan losses
                              
                              
                              60
                              
                              
                              
                              85
                              
                              
                              
                              140
                              
                              
                              
                              215Net
      interest income after provision for loan losses
                              
                              
                              2,483
                              
                              
                              
                              2,479
                              
                              
                              
                              2,590
                              
                              
                              
                              2,873Noninterest
      income
                              
                              
                              660
                              
                              
                              
                              496
                              
                              
                              
                              620
                              
                              
                              
                              711Noninterest
      expense
                              
                              
                              2,413
                              
                              
                              
                              2,293
                              
                              
                              
                              2,296
                              
                              
                              
                              4,030Income
      (loss) before income taxesand
      extraordinary item
                              
                              
                              730
                              
                              
                              
                              682
                              
                              
                              
                              914
                              
                              
                              
                              (446
                              )Provision
      for (benefit from) income taxes
                              
                              
                              171
                              
                              
                              
                              141
                              
                              
                              
                              198
                              
                              
                              
                              (154
                              )Income
      (loss) before extraordinary item
                              
                              
                              559
                              
                              
                              
                              541
                              
                              
                              
                              716
                              
                              
                              
                              (292
                              )Extraordinary
      item, gain on business combination
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              906Net
      income
                              
                              $
                              559
                              
                              
                              $
                              541
                              
                              
                              $
                              716
                              
                              
                              $
                              614Basic
      earnings per common share
                              
                              $
                              0.44
                              
                              
                              $
                              0.43
                              
                              
                              $
                              0.56
                              
                              
                              $
                              0.43





Increased
noninterest expense during the third and fourth quarters of 2009 was primarily
related to costs associated with the Titusville branch purchase as discussed in
Note 2 and the Corporation’s proposed stock offering that was
withdrawn.





The
increase in noninterest expense between the third and fourth quarters of 2008
was primarily related to severance charges totaling $590,000 recorded in the
fourth quarter of 2008, principally associated with the retirement of the
Corporation’s former Chairman of the Board, President and Chief Executive
Officer and contract termination fees of $360,000 recognized in the fourth
quarter of 2008 in connection with an ATM processing conversion completed during
2009.


F-42