EXHIBIT
13




Annual
Report to Stockholders for the fiscal year ended December 31, 2007























Corporate
Profile
 
 Emclaire
Financial Corp. (OTCBB: EMCF),
a publicly traded Pennsylvania corporation and bank holding company, provides a
wide 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 Farmers National Bank of Emlenton
is an FDIC-insured national banking association, which conducts business through
twelve offices in Venango, Butler, Clarion, Clearfield, Elk, Jefferson and
Mercer counties, Pennsylvania.  The Bank also provides retail
brokerage and other investment services through its Farmers National Financial
Services division.  To complement consumer and commercial banking
activities conducted through its banking offices, the Corporation also invests
in U.S. Government, municipal, mortgage-backed and corporate marketable
securities primarily through its subsidiary bank.
  Farmers
National Bank of Emlenton Market Area
  
  Table
      of ContentsConsolidated Financial
      Highlights
                
                
                1Shareholder Letter
                
                
                2Board of Directors and Executive
      Management
                
                
                8Selected Consolidated Financial
      Data
                
                
                9Management’s Discussion and Analysis
      ofFinancial Condition and Results of
      Operations
                
                
                10Consolidated Financial
    Statements
                
                
                27Notes to Consolidated Financial
      Statements
                
                
                31Report of Independent Registered Public
      Accounting Firm
                
                
                59Stock and Dividend
    Information
                
                
                60Corporate Information
                
                
                61




Consolidated Financial Highlights (Dollar
amounts in thousands, except share data)
 At
      December 31,Balance
      Sheet:
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004
                  
                  
                  2003Total
      assets
                  
                  $
                  311,720
                  
                  
                  $
                  300,560
                  
                  
                  $
                  275,517
                  
                  
                  $
                  273,380
                  
                  
                  $
                  262,512Loans
      receivable, net
                  
                  
                  229,819
                  
                  
                  
                  213,344
                  
                  
                  
                  192,526
                  
                  
                  
                  179,575
                  
                  
                  
                  190,482Deposits
                  
                  
                  244,262
                  
                  
                  
                  244,492
                  
                  
                  
                  230,503
                  
                  
                  
                  232,874
                  
                  
                  
                  217,110Borrowed
      funds
                  
                  
                  40,400
                  
                  
                  
                  30,000
                  
                  
                  
                  19,500
                  
                  
                  
                  15,000
                  
                  
                  
                  20,700Stockholders'
      equity
                  
                  
                  24,703
                  
                  
                  
                  23,917
                  
                  
                  
                  23,615
                  
                  
                  
                  23,616
                  
                  
                  
                  22,655Stockholders'
      equity per common share
                  
                  $
                  19.48
                  
                  
                  $
                  18.86
                  
                  
                  $
                  18.63
                  
                  
                  $
                  18.63
                  
                  
                  $
                  17.87Market
      value per common share
                  
                  $
                  25.75
                  
                  
                  $
                  29.25
                  
                  
                  $
                  26.60
                  
                  
                  $
                  26.25
                  
                  
                  $
                  25.75Common
      shares outstanding
                  
                  
                  1,267,835
                  
                  
                  
                  1,267,835
                  
                  
                  
                  1,267,835
                  
                  
                  
                  1,267,835
                  
                  
                  
                  1,267,835Income
      Statement:Net
      interest income
                  
                  $
                  9,969
                  
                  
                  $
                  9,291
                  
                  
                  $
                  9,304
                  
                  
                  $
                  8,734
                  
                  
                  $
                  9,308Noninterest
      income
                  
                  
                  2,943
                  
                  
                  
                  2,934
                  
                  
                  
                  3,317
                  
                  
                  
                  2,535
                  
                  
                  
                  1,785Net
      income
                  
                  
                  2,697
                  
                  
                  
                  1,966
                  
                  
                  
                  2,573
                  
                  
                  
                  2,557
                  
                  
                  
                  2,492Basic
      and diluted earnings per common share
                  
                  $
                  2.13
                  
                  
                  $
                  1.55
                  
                  
                  $
                  2.03
                  
                  
                  $
                  2.02
                  
                  
                  $
                  1.91Cash
      dividends per common share
                  
                  $
                  1.54
                  
                  
                  $
                  1.10
                  
                  
                  $
                  1.02
                  
                  
                  $
                  0.94
                  
                  
                  $
                  1.11Key
      Ratios:Return
      on average assets
                  
                  
                  0.90
                  %
                  
                  
                  0.69
                  %
                  
                  
                  0.94
                  %
                  
                  
                  0.96
                  %
                  
                  
                  0.99
                  %Return
      on average equity
                  
                  
                  11.13
                  %
                  
                  
                  8.28
                  %
                  
                  
                  10.69
                  %
                  
                  
                  11.08
                  %
                  
                  
                  10.96
                  %Net
      interest margin
                  
                  
                  3.73
                  %
                  
                  
                  3.68
                  %
                  
                  
                  3.82
                  %
                  
                  
                  3.71
                  %
                  
                  
                  4.18
                  %Non-performing
      assets to total assets
                  
                  
                  0.35
                  %
                  
                  
                  0.65
                  %
                  
                  
                  0.57
                  %
                  
                  
                  0.33
                  %
                  
                  
                  0.52
                  %Efficiency
      ratio
                  
                  
                  68.66
                  %
                  
                  
                  74.18
                  %
                  
                  
                  69.72
                  %
                  
                  
                  67.11
                  %
                  
                  
                  64.16
                  %
  
  1




Shareholder Letter


Dear
      Fellow Shareholder:

              
              During
      a period of internal transition and growth and external market turmoil for
      the financial services industry, Emclaire Financial Corp. and its wholly
      owned subsidiary bank, the Farmers National Bank of Emlenton, delivered
      record financial performance in 2007.  We continue to prove that
      an independent community bank headquartered in rural Western Pennsylvania
      can consistently realize sound returns for shareholders, provide safe and
      competitive banking services for the customers and communities we serve,
      and offer promising career opportunities for our employees.
              
              In
      recent years, your board of directors and management team have set forth
      certain broad objectives and strategies to continue to move the
      Corporation forward and enhance financial and operational
      performance.  These broad objectives encompass profitably
      growing our financial institution while managing risk and holding true to
      the culture and tradition that has brought us to where we are today and
      expect to be in the future.  Herein we will set forth how we
      successfully executed these strategies of profitability, growth, quality
      and culture to achieve our record financial results for 2007 while
      persisting to build a first-class organization
            graphic




Profitability
 
 The
Corporation’s financial success during 2007 and in recent years is reflected in
our record earnings and the positive performance of our common
stock.
 
 Earnings.The Corporation
realized consolidated net income of $2.7 million or $2.13 per share for 2007,
versus $2.0 million or $1.55 per share for 2006.  The 2007 results
reflected a return on average equity of 11.13%.  While results for
2006 included certain one-time charges associated with strategic reorganization
initiatives undertaken in that year, the Corporation experienced improved core
financial performance through increased net interest and noninterest income and
by controlling noninterest expenses between 2007 and 2006.
 
 Net
interest income increased $678,000 to $10.0 million for 2007 compared to $9.3
million for 2006.  This 7.3% increase can be attributed to continued
growth in the Bank’s loan portfolios, particularly commercial loans, and
disciplined asset liability management practices.  These practices
included regimented pricing of loan and deposit products and a tactical focus on
maintaining core deposit accounts.  This growth and these initiatives
provided for an increase in the Corporation’s net interest margin to 3.73% for
2007 versus 3.68% for 2006.  This improvement occurred during a period
when the market interest rate yield curve was relatively flat to negatively
inverted, an extremely difficult rate environment in which to manage a financial
institution’s margins.
 
 Excluding
security sale gains, which we consider non-recurring income, noninterest
revenues increased $202,000 or 8.0% between 2007 and the prior
year.  As we continue to explore ways to diversify our revenue streams
and mitigate our reliance on net interest revenues, we have experienced
increases in both customer service fees and financial services division
commissions.
 
 Excluding
consideration of the one-time 2006 reorganization charges, the Corporation
experienced only a modest increase in noninterest expenses of $314,000 or 3.5%
between 2007 and the prior year.  During 2007, we realized some of the
ongoing savings as a result of the 2006 reorganization initiatives while
focusing on controlling all expenses.  Operating expenses increased
primarily as a result of the opening of the new Cranberry office in late 2006
and professional fees associated with required Sarbanes-Oxley compliance
initiatives pursued during 2007.




2




Shareholder
Letter
 continued




We spent
much of 2007 focused on increasing core revenues while controlling operating
costs.  This focus will continue as we seek new opportunities to
efficiently deliver new and traditional banking services.
 
 Stock
Performance.  One of the Corporation’s cornerstone goals is to
be a profitable and growth-oriented entity that is committed to quality and
building value for our stockholders.  As an example, if you invested
$1,000 in the Corporation’s common stock five years ago, at year end 2002, and
reinvested cash dividends, the value of your original investment would have
increased more than 46% to $1,462 by December 31, 2007.  This
represents a 9.2% average annual return over that period.
 
 While
2007’s turbulent financial markets saw declines in the values of stock prices of
banks and other financial institutions in excess of 30%, the Corporation’s
common stock did not see this significant drop in value and ended the year at a
modest 12% decline from the closing price at the end of 2006.
 
 Since
2002, we have increased our regular annual cash dividend on our common stock by
more than 38% to $1.19 per share for 2007 compared to $0.86 per common share in
2002.  Regular cash dividends increased 8% between 2007 and
2006.  In connection with our record financial performance in 2007 and
our ongoing capital management initiatives, during the fourth quarter we
declared and paid a special cash dividend of $0.35 per common
share.  This is the third special cash dividend that we have paid
since 2001; in addition to the 2007 special dividend, we paid a special cash
dividend of $0.25 per share in 2002 and again in 2003.
 
 We are
proud of our overall stock performance and our favorable dividend policy
resulting from our solid core earnings.  While we build value, we
intend to pursue controlled growth and prudent business practices to continue to
provide a safe investment alternative with positive market returns.
 
 
 
  
 
 Growth
 
 We have
and will continue to pursue growth on all fronts, not only internally through
organic balance sheet growth in loans and deposits, but through expanding our
branch network.  The Corporation continues to explore expansion of our
core banking business through the acquisition of branches and smaller
institutions, expanding our financial services division and investigating other
financial services delivery channels and businesses.
  3




Shareholder
Letter
 continued
  Balance Sheet
Growth.  For the year ended December 31, 2007, we experienced
modest asset growth with total assets reaching $311.7 million at year
end.  The $11.2 million or 3.7% increase in assets was principally
driven by loan growth funded by borrowed funds and, to a lesser extent, the
employment of cash.
 
 Customer
deposits remained relatively flat during 2007 ending the year at $244.3 million
as we sought to eliminate higher priced less profitable certificate of deposit
accounts and replace these with core demand deposit accounts.  The
decline in certificate accounts of $10.0 million during the year was offset by
increases in noninterest bearing and interest bearing demand deposits of $3.0
million and $6.7 million, respectively.  During the year, we sought to
expand existing customer balances through cross-selling and negotiated pricing
on relationship accounts.  We experienced demand deposit customer
growth in existing branches and in our new Cranberry office where we cultivated
new deposits of $3.1 million.  This new office has grown to $6.3
million in deposits since opening in the fourth quarter of 2006.
 
 We remain
successful at lending within the markets we serve and during 2007 expanded all
loan portfolios.  During the year, all classes of loans grew as we
continued our shift to more profitable commercial lending.  The
Corporation’s total loans ended the year at $229.8 million versus $213.3 million
at year end 2006.
 
 Our
corporate banking group increased commercial real estate loans $10.5 million or
17.1% to $71.6 million at December 31, 2007.  Commercial business
loans ended the year at $35.6 million up $978,000 from $34.6 million at year end
2006.  This growth was the result of focused in-market relationship
lending efforts by our commercial lending and branch banking
teams.  At December 31, 2007, commercial loans comprised 47% of the
Bank’s total loan portfolios compared to 29% at December 31,
2001.  This successful shift has been a direct result of our
strategies to identify and expand key business relationships in all of our
markets.  While we still consider consumer lending through our branch
network as one key to growth, our accomplishments in business lending have
proven more profitable.
 
 Our
consumer loan portfolios reached record levels as well in 2007, as residential
first mortgage, home equity and installment loans ended the year at $65.7
million, $49.4 million and $9.7 million, respectively, up 1.6%, 4.4% and 26.2%,
respectively.  This excludes $13.0 million of off-balance sheet loans
that we have originated and service at December 31, 2007.  We
experienced nice growth in our installment loan portfolio given a successful
automobile loan promotion during the third and fourth quarters of
2007.
 
 New Branch
Offices.  In November 2006, we opened our eleventh branch
office in the Township of Cranberry, Pennsylvania.  Since inception,
this office has generated new consumer loans of $3.1 million and deposits of
$6.3 million.  This office has provided us with additional market
coverage in our home county, Venango County, and has provided a platform for
further commercial business development.  During 2007, our corporate
banking division originated $2.1 million in commercial loans through this
office.
 
 In April
2008, we will open our twelfth office in Grove City, Pennsylvania with high
expectations.  Strategically expanding to the Grove City area makes
sense in a number of regards.  This market is contiguous to the Bank’s
existing markets, there is an opportunity to penetrate current banking market
share, particularly with deposits, as the need for a community bank presence
exists and this expansion moves us closer to other growing communities in
Western Pennsylvania.











4




Shareholder
Letter
 continued
 It is
important to note that we continue to improve core profitability and operating
efficiencies while expanding and investing in de novo branch
offices.  There are fundamental startup operating costs associated
with the opening of each new office.  Some of these costs are
one-time, but ongoing period costs remain, and we estimate that it takes three
to five years for a new office to break even in the markets that we
operate.  It takes this time to generate loans and deposits to levels
that cover basic office working expenses.  It is important to note
that we are improving overall consolidated profitability while covering these
startup costs and investing in advantageous expansion.
 
 Quality
 
 While
continually looking towards profitable growth, we remain grounded by maintaining
a culture of sound policies, procedures and systems to promote the highest in
asset quality, internal controls and integrity.
 
 We
remained insulated from the well-chronicled national market conditions that
impacted the overall financial services industry during 2007.  The
Bank has never provided sub-prime mortgage products and for the most part rural
and Western Pennsylvania did not experience the sub-prime or real estate crises
experienced in other parts of the country.
 
 Asset
Quality.  Not only did we continue to realize stable growth in
all loan portfolios, the credit quality of these portfolios remained strong as
measured by any industry standards.  The ratio of non-performing
assets to total assets was a mere 0.35%, and the allowance for loan losses to
non-performing loans provided coverage of 227%, at December 31,
2007.  We view the quality of our loan portfolio, including the
systems surrounding the loan origination and monitoring processes, as one of the
true ideals of the Corporation.  Our credit culture and corresponding
training are diligently pursued and part of the way we lend.
 
 Compliance.  During
the year, we complied with the early requirements of Sarbanes-Oxley section 404
for non-accelerated filers.  We also significantly enhanced our
compliance function by establishing an internal compliance council whereby all
internal functional areas are represented to address compliance requirements for
corresponding banking disciplines.  We made advances in core business
processes by improving how we utilize our information technology
systems.  These initiatives will continue in 2008 and beyond as we
seek to better serve our customers and support deposit and lending delivery
channels.
  
  Integrity.  We
have consistently conducted our business with honor and integrity and do not
assume unreasonable risks, regardless of the possible rewards. Integrity
and attention to quality through sound systems, controls and asset quality
management are the Corporation’s foundation for current and future
success.
  5




Shareholder
Letter
 continued


Culture
 
 Much of
our effort in 2007 was focused on proactive succession planning, building an
experienced management team, marketing initiatives, staff development and
community involvement activities.
 
 Succession.In June 2007, the
Corporation announced a management transition whereby William C. Marsh was named
President and Chief Executive Officer of the Bank.  Mr. Marsh will
remain as Treasurer and Chief Financial Officer of the Corporation and David L.
Cox will serve as Chairman of the Board of the Bank and continue in his role
with the Corporation.  Mr. Marsh’s promotion from within will
facilitate the Corporation’s long term expansion plan by sharing executive
responsibilities and permitting the team to focus on growth and strategic
initiatives as well as management of the daily operations of the
Bank.
 
 Management
Team.We have assembled an experienced executive management
team capable of responding to daily challenges while focusing on strategic
initiatives.  Senior Vice President, Chief Lending Officer, Raymond M.
Lawton, continues to successfully manage the delicate balance between loan
growth and asset quality.  He has created a credit culture that has
positioned the Bank to navigate safely through a turbulent mortgage
market.  Senior Vice President, Operations, Kathleen L. Buzzard,
transitioned from Retail Banking to Operations mid-year in 2007.  Her
extensive knowledge of branch banking, deposit products, and technology has
proved valuable in not only improving operating efficiencies, but also in team
building between the Operations Center and Branch Banking.  Paige H.
Turk was recently promoted to Senior Vice President, Director of Human Resources
and Marketing.  Her ability to communicate clearly and consistently to
employees and customers has positioned the human resources and marketing
functions to perform at a highly integrated level resulting in enhanced customer
relationship management.
  
  Marketing.Our
definition and story - our brand, will also significantly impact the management
of customer relationships.  Our brand speaks to our purpose and is
communicated in a way that will connect with consumer’s standards so they value
their affiliation with the Bank.  Our marketing plan is to keep our
brand fresh and compelling in a competitive market.  That, combined
with a customer service standard that is rooted in professional competence,
strong product knowledge, and a commitment to engage customers in enduring
relationships, has resulted in a consistent, credible and exemplary brand
statement.  Our look may be fresh and updated, but our roots run deep
and will remain firmly planted in integrity and trust.
 
 Staff
Development/Training.  We continue to invest in employee
development and training at all levels of the organization.  Service
Training and Leadership Development are key initiatives to support the
continuation of accountability and excellent performance.  We
successfully enhanced the performance planning and review process for all
employees during 2007 to include higher levels of performance feedback,
coaching, communication of standards and ongoing position
documentation.  Our goal is to sustain a culture where communication
and motivation drive accountability and excellence in performance.
  6




Shareholder Letter
 continued
 Community
Involvement.  We believe that our responsibility to train
individuals and provide meaningful information carries over into our communities
as well.  We are proud to provide community education programs on
Fraud Prevention, Get Smart about Credit, Teaching Children to Save, and Tips
for First-Time Home Buyers.  We will continue to research and present
relevant educational programs to assist our customers, neighbors and
communities.  Our responsibility to support the communities we serve
is also reflected in a host of community involvement activities ranging from
food bank collections to raising money for families or individuals in
need.  We are successful not only because our financial statements
reflect stability and continued profitability, but also because we have helped
to make the communities we call home responsive, stable and
strong.
 
 In late
2007, the Bank lost a valuable advocate and supporter when Bernadette Crooks
passed away on New Year’s Eve.  Bernadette served on the board of the
Corporation and the Bank for almost twenty years before retiring in
2004.  She will clearly remain part of the Bank’s rich
history.  We will miss Bernadette’s dedication, attention to detail
and interest in all things Farmers.  With respect, we express our
deepest condolences to her family and closest friends.
 
 We strive
to provide and enhance shareholder value and believe strongly that there is a
place for an independent community bank with long-term shareholder growth
prospects.  We will never waiver from our commitment to providing the
very best in community banking.  On behalf of your management team,
the staff and Board of Directors, we thank you for your ongoing investment and
support.
 
 Very
truly yours,
 
 
 signature
                signatureDavid
      L. Cox
                William
      C. MarshEmclaire
      Financial Corp
                Emclaire
      Financial CorpChairman
      of the Board, President and
                Treasurer
      andChief
      Executive Officer
                Chief
      Financial OfficerFarmers
      National Bank of Emlenton
                Farmers
      National Bank of EmlentonChairman
      of the Board
                President
      andChief
      Executive Officer
  February
27, 2008
   7


Board of
Directors and Executive Management







8




Selected Consolidated Financial
      Highlights(Dollar
      amounts in thousands, except share data)As
      of December 31,Financial Condition
      Data
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Total
      assets
              
              $
              311,720
              
              
              $
              300,560
              
              
              $
              275,517
              
              
              $
              273,380
              
              
              $
              262,512Securities
              
              
              51,919
              
              
              
              51,774
              
              
              
              56,304
              
              
              
              63,362
              
              
              
              49,162Loans
      receivable, net
              
              
              229,819
              
              
              
              213,344
              
              
              
              192,526
              
              
              
              179,575
              
              
              
              190,482Deposits
              
              
              244,262
              
              
              
              244,492
              
              
              
              230,503
              
              
              
              232,874
              
              
              
              217,110Borrowed
      funds
              
              
              40,400
              
              
              
              30,000
              
              
              
              19,500
              
              
              
              15,000
              
              
              
              20,700Stockholders'
      equity
              
              
              24,703
              
              
              
              23,917
              
              
              
              23,615
              
              
              
              23,616
              
              
              
              22,655Stockholders'
      equity per common share
              
              $
              19.48
              
              
              $
              18.86
              
              
              $
              18.63
              
              
              $
              18.63
              
              
              $
              17.87Tangible
      stockholders' equity per common share
              
              $
              18.36
              
              
              $
              17.74
              
              
              $
              17.50
              
              
              $
              17.48
              
              
              $
              16.70For
      the year ended December 31,Operations
      Data
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Interest
      income
              
              $
              17,855
              
              
              $
              16,259
              
              
              $
              14,877
              
              
              $
              13,953
              
              
              $
              14,209Interest
      expense
              
              
              7,886
              
              
              
              6,968
              
              
              
              5,573
              
              
              
              5,219
              
              
              
              4,901Net
      interest income
              
              
              9,969
              
              
              
              9,291
              
              
              
              9,304
              
              
              
              8,734
              
              
              
              9,308Provision
      for loan losses
              
              
              256
              
              
              
              358
              
              
              
              205
              
              
              
              290
              
              
              
              330Net
      interest income after provision for loan losses
              
              
              9,713
              
              
              
              8,933
              
              
              
              9,099
              
              
              
              8,444
              
              
              
              8,978Noninterest
      income
              
              
              2,943
              
              
              
              2,934
              
              
              
              3,317
              
              
              
              2,535
              
              
              
              1,785Noninterest
      expense
              
              
              9,164
              
              
              
              9,409
              
              
              
              9,146
              
              
              
              7,909
              
              
              
              7,522Income
      before income taxes
              
              
              3,492
              
              
              
              2,458
              
              
              
              3,270
              
              
              
              3,070
              
              
              
              3,241Provision
      for income taxes
              
              
              795
              
              
              
              492
              
              
              
              697
              
              
              
              513
              
              
              
              749Net
      income
              
              $
              2,697
              
              
              $
              1,966
              
              
              $
              2,573
              
              
              $
              2,557
              
              
              $
              2,492Average
      common shares outstanding
              
              
              1,267,835
              
              
              
              1,267,835
              
              
              
              1,267,835
              
              
              
              1,267,835
              
              
              
              1,301,714Basic
      and diluted earnings per share
              
              $
              2.13
              
              
              $
              1.55
              
              
              $
              2.03
              
              
              $
              2.02
              
              
              $
              1.91Dividends
      per share (1)
              
              $
              1.54
              
              
              $
              1.10
              
              
              $
              1.02
              
              
              $
              0.94
              
              
              $
              1.11As
      of or for the year ended December 31,Other
      Data
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Performance
      RatiosReturn
      on average assets
              
              
              0.90
              %
              
              
              0.69
              %
              
              
              0.94
              %
              
              
              0.96
              %
              
              
              0.99
              %Return
      on average equity
              
              
              11.13
              %
              
              
              8.28
              %
              
              
              10.69
              %
              
              
              11.08
              %
              
              
              10.96
              %Yield
      on interest-earning assets (2)
              
              
              6.55
              %
              
              
              6.30
              %
              
              
              6.00
              %
              
              
              5.81
              %
              
              
              6.28
              %Cost
      of interest-bearing liabilities
              
              
              3.46
              %
              
              
              3.23
              %
              
              
              2.70
              %
              
              
              2.57
              %
              
              
              2.56
              %Cost
      of funds
              
              
              2.89
              %
              
              
              2.69
              %
              
              
              2.24
              %
              
              
              2.15
              %
              
              
              2.16
              %Interest
      rate spread (2)
              
              
              3.09
              %
              
              
              3.08
              %
              
              
              3.30
              %
              
              
              3.24
              %
              
              
              3.72
              %Net
      interest margin (2)
              
              
              3.73
              %
              
              
              3.68
              %
              
              
              3.82
              %
              
              
              3.71
              %
              
              
              4.18
              %Efficiency
      ratio (2) (3)
              
              
              68.66
              %
              
              
              74.18
              %
              
              
              69.72
              %
              
              
              67.11
              %
              
              
              64.16
              %Noninterest
      expense to average assets
              
              
              3.06
              %
              
              
              3.30
              %
              
              
              3.33
              %
              
              
              2.96
              %
              
              
              2.99
              %Interest-earning
      assets to average assets
              
              
              93.13
              %
              
              
              92.89
              %
              
              
              92.82
              %
              
              
              92.86
              %
              
              
              92.69
              %Loans
      to deposits
              
              
              94.09
              %
              
              
              87.26
              %
              
              
              83.52
              %
              
              
              77.11
              %
              
              
              87.74
              %Dividend
      payout ratio (1)
              
              
              72.39
              %
              
              
              70.93
              %
              
              
              50.25
              %
              
              
              46.61
              %
              
              
              57.98
              %Asset
      Quality RatiosNon-performing
      loans to total loans
              
              
              0.41
              %
              
              
              0.85
              %
              
              
              0.75
              %
              
              
              0.46
              %
              
              
              0.69
              %Non-performing
      assets to total assets
              
              
              0.35
              %
              
              
              0.65
              %
              
              
              0.57
              %
              
              
              0.33
              %
              
              
              0.52
              %Allowance
      for loan losses to total loans
              
              
              0.93
              %
              
              
              0.94
              %
              
              
              0.96
              %
              
              
              1.00
              %
              
              
              0.92
              %Allowance
      for loan losses to non-performing loans
              
              
              226.58
              %
              
              
              110.54
              %
              
              
              128.72
              %
              
              
              215.48
              %
              
              
              133.71
              %Capital
      RatiosStockholders'
      equity to assets
              
              
              7.92
              %
              
              
              7.96
              %
              
              
              8.57
              %
              
              
              8.64
              %
              
              
              8.63
              %Tangible
      stockholders' equity to tangible assets
              
              
              7.50
              %
              
              
              7.52
              %
              
              
              8.09
              %
              
              
              8.15
              %
              
              
              8.11
              %Average
      equity to average assets
              
              
              8.08
              %
              
              
              8.32
              %
              
              
              8.75
              %
              
              
              8.63
              %
              
              
              9.02
              %




(1)
              Includes
      special cash dividend or $0.35 per share and $0.25 per share paid in 2007
      and 2003, respectively.
 (2)
              Interest
      income utilized in calculation is on a fully tax equivalent
      basis.(3)
              The
      efficiency ratio is calculated by dividing noninterest expense (less
      intangible amortization) by net interest income (on a fully tax equivalent
      basis) and noninterest income.  The efficiency ratio gives a
      measure of how effectively a financial institution is
      operating.






9




Management’s Discussion and Analysis
of
 Financial
Condition and Results of Operations




The
following discussion and analysis represents a review of Emclaire Financial
Corp.’s consolidated financial condition and results of
operations.  This review should be read in conjunction with the
consolidated financial statements presented later in this report.
 
 Business
Summary
 
 Emclaire
Financial Corp. (the Corporation) is a Pennsylvania corporation and bank holding
company that provides a full range of retail and commercial financial products
and services to customers in Western Pennsylvania through its wholly owned
subsidiary bank, the Farmers National Bank of Emlenton (the Bank).
 
 The Bank
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 twelve offices in Venango, Butler, Clarion,
Clearfield, Elk, Jefferson and Mercer counties, Pennsylvania.  The
Corporation and the Bank are headquartered in Emlenton,
Pennsylvania.  Farmers National Financial Services, formed in 2004, is
a division of the Bank that offers retail brokerage and other investment
services to customers in the Bank’s market area.
 
 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, as a registered
bank holding company, is subject to regulation by the Federal Reserve
Board.
 
 Overview
 
 The
Corporation reported an increase in income for 2007 as consolidated net income
amounted to $2.7 million or $2.13 per share, compared to net income of $2.0
million or $1.55 per share for 2006.
 
 The
increase in net income of $731,000 or 37.2% for the year ended December 31, 2007
was primarily due to an increase in net interest income and decreases in the
provision for loan losses and noninterest expense, partially offset by an
increase in the provision for income taxes.  Net interest income
increased as a result of growth in the loan portfolio, particularly with respect
to commercial loans.  Noninterest expense decreased as certain charges
associated with strategic reorganization initiatives were experienced in
2006.  These 2006 charges included $375,000 in pension expense for
employees who took part in an early retirement program as well as $184,000 for
severance, other benefits and legal costs associated with the reorganization.
Excluding these one-time reorganization charges, noninterest expense increased
modestly primarily as a result of the opening of a new banking office in
November 2006 and professional fees associated with Sarbanes-Oxley
compliance.  The provision for income taxes increased due to increased
pre-tax income.
 
 During the
year ended December 31, 2007, the Corporation experienced asset growth of 3.7%
as total assets increased $11.2 million or 3.7% to $311.7 million at year end
from $300.6 million at December 31, 2006.  This asset growth was
driven by total loan portfolio growth of $16.5 million or 7.7% funded by a
decrease in cash and equivalents of $6.2 million or 37.3% and an increase in
borrowed funds of $10.4 million or 34.7%.
  10




Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)


Changes in Financial
Condition
 
 Total
assets increased $11.2 million or 3.7% to $311.7 million at December 31, 2007
from $300.6 million at December 31, 2006.  This increase was primarily
due to increases in loans receivable of $16.5 million, partially offset by a
decrease in cash and equivalents of $6.2 million.
 
 The
increase in the Corporation’s total assets was primarily funded by increases in
total liabilities of $10.4 million or 3.7% and total stockholders’ equity of
$786,000 or 3.3%.  The increase in total liabilities was primarily due
to an increase in borrowed funds of $10.4 million or 34.7%.
 
 Cash and cash
equivalents.  These accounts decreased a combined $6.2 million
to $10.5 million at December 31, 2007 from $16.7 million at December 31,
2006.  These accounts are typically 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.  The Corporation maintained a lower balance of cash at
year end December 31, 2007 than at the prior year end primarily as a result of
loan growth experienced during the year and the purchase of commercial paper
late in the year.
 
 Securities.  Securities
increased $145,000 or 0.3% to $51.9 million at December 31, 2007 from $51.8
million at December 31, 2006.  The overall increase in securities for
the year resulted from the purchase of commercial paper late in the year,
partially offset by management deploying funds from security maturities, calls
and repayments into loan growth during the year.
 
 Loans
receivable.Net loans receivable increased $16.5 million or
7.7% to $229.8 million at December 31, 2007 from $213.3 million at December 31,
2006, resulting from strong loan production of $82.0 million during
2007.  This increase can be primarily attributed to growth in the
Corporation’s commercial loan portfolios.  Commercial real estate
loans increased $10.5 million or 17.1% and commercial business loans increased
$1.0 million or 2.8%.  This growth in commercial loans can be
attributed to the production success of the Bank’s Corporate Banking Group
established during 2004 and the related continued market penetration in larger
communities served by the Bank.
 
 Also
contributing to the growth in the loan portfolio was an increase in home equity
loans of $2.1 million or 4.4% due primarily to home equity loan campaigns put
forth during the year.  In addition, consumer loans increased $2.0
million or 26.2% due to an auto loan campaign during the
year.  Residential first mortgage loans increased $1.0 million or 1.6%
during the year, net of $1.7 million of loans sold, due to strong residential
mortgage production of $11.6 million.
 
 Non-performing
assets.Non-performing assets include non-accrual loans, loans
90 days past due and still accruing, and real estate acquired through
foreclosure (REO).  Non-performing assets decreased $858,000 to $1.1
million or 0.35% of total assets at December 31, 2007 from $1.9 million or 0.65%
of total assets at December 31, 2006 primarily as the result of the full payoff
of one larger credit relationship during the year.  Non-performing
assets consisted of non-performing loans and REO of $1.0 million and $129,000,
respectively, at December 31, 2007 and $1.8 million and $98,000, respectively,
at December 31, 2006.  At December 31, 2007 non-performing assets
consisted primarily of residential mortgage loans.
 
 11
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  Federal bank
stocks.  Federal bank stocks were comprised of FHLB stock and
FRB stock of $2.3 million and $333,000, respectively, at December 31,
2007.  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.  The increase at December 31, 2007 compared to December 31,
2006 can be attributed to an increase in FHLB borrowings during
2007.
 
 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 2007 were associated with the increase in the cash surrender
value of the policies, partially offset by certain administrative
expenses.
 
 Premises and
equipment.  Premises and equipment decreased $54,000 to $7.9
million at December 31, 2007 from $8.0 million at December 31,
2006.  The overall decrease in premises and equipment during the year
was due to the normal depreciation of fixed assets of $663,000, partially offset
by capital expenditures of $609,000.  Capital expenditures during the
year consisted primarily of investments in technology and improvements made at
the full service banking facility purchased in December of 2006.
 
 Deposits.Total
deposits decreased $230,000 to $244.3 million at December 31, 2007 from $244.5
million at December 31, 2006.  While noninterest-bearing deposits
increased $3.1 million or 7.0% during the year, interest-bearing deposits
decreased by $3.3 million or 1.6%.  This change in the deposit
composition resulted principally from the Corporation’s focus on maintaining
core deposit accounts and establishing strong relationship accounts while
allowing certain high rate certificates of deposit to mature.  In
addition, the Bank opened a new office in November 2006.  At December
31, 2007, this office had total deposits of $6.3 million with $3.1 million
generated in 2007.  Of these deposits, $625,000 is noninterest-bearing
and $5.7 million is interest-bearing.
 
 Borrowed
funds.  Borrowed funds, or advances from the FHLB, increased
$10.4 million or 34.7% to $40.4 million at December 31, 2007 from $30.0 million
at December 31, 2006.  The increase in advances was the result of
management matching $5.0 million in long-term borrowed funds with loans
originated during the third quarter of 2007.  In addition, short-term
borrowings of $5.4 million were utilized in funding loan growth and purchasing
commercial paper late in the year.
  12
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  Changes in Results of
Operations
 
 The
Corporation reported net income of $2.7 million, $2.0 million and $2.6 million
in 2007, 2006 and 2005, 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.
  (Dollar
      amounts in thousands)
                
                Year
      ended December 31,2007
                
                
                2006
                
                
                2005Average
                
                
                
                Yield
      /
                
                
                Average
                
                
                
                Yield
      /
                
                
                Average
                
                
                
                
                Yield
      /Balance
                
                Interest
                
                Rate
                
                
                Balance
                
                Interest
                
                Rate
                
                
                Balance
                
                
                Interest
                
                RateInterest-earning
      assets:Loans,
      taxable
                
                $
                215,771
                
                $
                15,006
                
                
                6.95
                %
                
                $
                200,499
                
                $
                13,554
                
                
                6.76
                %
                
                $
                181,109
                
                
                $
                12,011
                
                
                6.63
                %Loans,
      tax-exempt
                
                
                6,286
                
                
                407
                
                
                6.47
                %
                
                
                6,781
                
                
                438
                
                
                6.46
                %
                
                
                7,052
                
                
                
                454
                
                
                6.44
                %Total
      loans receivable
                
                
                222,057
                
                
                15,413
                
                
                6.94
                %
                
                
                207,280
                
                
                13,992
                
                
                6.75
                %
                
                
                188,161
                
                
                
                12,465
                
                
                6.62
                %Securities,
      taxable
                
                
                36,882
                
                
                1,571
                
                
                4.26
                %
                
                
                37,944
                
                
                1,481
                
                
                3.90
                %
                
                
                47,075
                
                
                
                1,714
                
                
                3.64
                %Securities,
      tax-exempt
                
                
                14,750
                
                
                996
                
                
                6.75
                %
                
                
                15,250
                
                
                1,013
                
                
                6.64
                %
                
                
                15,468
                
                
                
                1,012
                
                
                6.53
                %Total
      securities
                
                
                51,632
                
                
                2,567
                
                
                4.97
                %
                
                
                53,194
                
                
                2,494
                
                
                4.69
                %
                
                
                62,543
                
                
                
                2,726
                
                
                4.36
                %Interest-earning
      deposits with banks
                
                
                3,209
                
                
                166
                
                
                5.17
                %
                
                
                2,608
                
                
                129
                
                
                4.95
                %
                
                
                2,978
                
                
                
                81
                
                
                2.72
                %Federal
      bank stocks
                
                
                2,315
                
                
                144
                
                
                6.22
                %
                
                
                1,945
                
                
                94
                
                
                4.83
                %
                
                
                1,633
                
                
                
                58
                
                
                3.55
                %Total
      interest-earning cash equivalents
                
                
                5,524
                
                
                310
                
                
                5.61
                %
                
                
                4,553
                
                
                223
                
                
                4.90
                %
                
                
                4,611
                
                
                
                139
                
                
                3.01
                %Total
      interest-earning assets
                
                
                279,213
                
                
                18,290
                
                
                6.55
                %
                
                
                265,027
                
                
                16,709
                
                
                6.30
                %
                
                
                255,315
                
                
                
                15,330
                
                
                6.00
                %Cash
      and due from banks
                
                
                5,952
                
                
                
                
                
                
                
                
                
                6,922
                
                
                
                
                
                
                
                
                
                7,399Other
      noninterest-earning assets
                
                
                14,649
                
                
                
                
                
                
                
                
                
                13,376
                
                
                
                
                
                
                
                
                
                12,340Total
      Assets
                
                $
                299,814
                
                
                
                
                
                
                
                
                $
                285,325
                
                
                
                
                
                
                
                
                $
                275,054Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                
                $
                73,364
                
                
                956
                
                
                1.30
                %
                
                $
                72,584
                
                
                770
                
                
                1.06
                %
                
                $
                79,063
                
                
                
                570
                
                
                0.72
                %Time
      deposits
                
                
                121,889
                
                
                5,484
                
                
                4.50
                %
                
                
                120,544
                
                
                5,197
                
                
                4.31
                %
                
                
                110,829
                
                
                
                4,324
                
                
                3.90
                %Total
      interest-bearing deposits
                
                
                195,253
                
                
                6,440
                
                
                3.30
                %
                
                
                193,128
                
                
                5,967
                
                
                3.09
                %
                
                
                189,892
                
                
                
                4,894
                
                
                2.58
                %Borrowed
      funds, short-term
                
                
                1,208
                
                
                33
                
                
                2.73
                %
                
                
                1,147
                
                
                53
                
                
                4.62
                %
                
                
                1,199
                
                
                
                50
                
                
                4.17
                %Borrowed
      funds, long-term
                
                
                31,233
                
                
                1,413
                
                
                4.52
                %
                
                
                21,521
                
                
                948
                
                
                4.40
                %
                
                
                15,000
                
                
                
                629
                
                
                4.19
                %Total
      borrowed funds
                
                
                32,441
                
                
                1,446
                
                
                4.46
                %
                
                
                22,668
                
                
                1,001
                
                
                4.42
                %
                
                
                16,199
                
                
                
                679
                
                
                4.19
                %Total
      interest-bearing liabilities
                
                
                227,694
                
                
                7,886
                
                
                3.46
                %
                
                
                215,796
                
                
                6,968
                
                
                3.23
                %
                
                
                206,091
                
                
                
                5,573
                
                
                2.70
                %Noninterest-bearing
      demand deposits
                
                
                45,086
                
                
                -
                
                
                -
                
                
                
                43,556
                
                
                -
                
                
                -
                
                
                
                42,450
                
                
                
                -
                
                
                -Funding
      and cost of funds
                
                
                272,780
                
                
                7,886
                
                
                2.89
                %
                
                
                259,352
                
                
                6,968
                
                
                2.69
                %
                
                
                248,541
                
                
                
                5,573
                
                
                2.24
                %Other
      noninterest-bearing liabilities
                
                
                2,810
                
                
                
                
                
                
                
                
                
                2,224
                
                
                
                
                
                
                
                
                
                2,452Total
      Liabilities
                
                
                275,590
                
                
                
                
                
                
                
                
                
                261,576
                
                
                
                
                
                
                
                
                
                250,993Stockholders'
      Equity
                
                
                24,224
                
                
                
                
                
                
                
                
                
                23,749
                
                
                
                
                
                
                
                
                
                24,061Total
      Liabilities and Stockholders' Equity
                
                $
                299,814
                
                
                
                
                
                
                
                
                $
                285,325
                
                
                
                
                
                
                
                
                $
                275,054Net
      interest income
                
                
                
                
                $
                10,404
                
                
                
                
                
                
                
                
                $
                9,741
                
                
                
                
                
                
                
                
                
                $
                9,757Interest rate
      spread(difference betweenweighted
      average rate on interest-earningassets
      and interest-bearing liabilities)
                
                
                
                
                
                3.09
                %
                
                
                
                
                
                
                
                
                3.08
                %
                
                
                
                
                
                
                
                
                
                3.30
                %Net interest
      margin(net interestincome
      as a percentage of averageinterest-earning
      assets)
                
                
                
                
                
                
                
                
                3.73
                %
                
                
                
                
                
                
                
                
                3.68
                %
                
                
                
                
                
                
                
                
                
                3.82
                %
  13
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  Analysis of Changes in Net Interest
Income.  The following table analyzes the changes in interest
income and interest expense in terms of: (1) changes in volume of
interest-earning assets and interest-bearing liabilities and (2) changes in
yields and rates.  The table reflects the extent to which changes in
the Corporation’s interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume).  The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances.  Changes in interest income on loans and securities reflect
the changes in interest income on a fully tax equivalent basis.
  (Dollar
      amounts in thousands)
                
                2007
      versus 2006
                
                
                2006
      versus 2005Increase
      (decrease) due to
                
                
                Increase
      (decrease) due toVolume
                
                
                Rate
                
                
                Total
                
                
                Volume
                
                
                Rate
                
                
                TotalInterest
      income:Loans
                
                $
                1,018
                
                
                $
                403
                
                
                $
                1,421
                
                
                $
                1,287
                
                
                $
                240
                
                
                $
                1,527Securities
                
                
                (75
                )
                
                
                148
                
                
                
                73
                
                
                
                (428
                )
                
                
                196
                
                
                
                (232
                )Interest-earning
      deposits with banks
                
                
                31
                
                
                
                6
                
                
                
                37
                
                
                
                (11
                )
                
                
                59
                
                
                
                48Federal
      bank stocks
                
                
                20
                
                
                
                30
                
                
                
                50
                
                
                
                13
                
                
                
                23
                
                
                
                36Total
      interest-earning assets
                
                
                994
                
                
                
                587
                
                
                
                1,581
                
                
                
                861
                
                
                
                518
                
                
                
                1,379Interest
      expense:Deposits
                
                
                66
                
                
                
                407
                
                
                
                473
                
                
                
                85
                
                
                
                988
                
                
                
                1,073Borrowed
      funds
                
                
                436
                
                
                
                9
                
                
                
                445
                
                
                
                284
                
                
                
                38
                
                
                
                322Total
      interest-bearing liabilities
                
                
                502
                
                
                
                416
                
                
                
                918
                
                
                
                369
                
                
                
                1,026
                
                
                
                1,395Net
      interest income
                
                $
                492
                
                
                $
                171
                
                
                $
                663
                
                
                $
                492
                
                
                $
                (508
                )
                
                $
                (16
                )
 
 
 2007
Results Compared to 2006 Results
 
 The
Corporation reported net income of $2.7 million and $2.0 million for 2007 and
2006, respectively.  The $731,000 or 37.2% increase in net income can
primarily be attributed to an increase in net interest income of $678,000 and
decreases in the provision for loan losses and noninterest expense of $102,000
and $245,000, respectively.  Partially offsetting these favorable
comparisons, the provision for income taxes increased $303,000.
 
 In
addition, 2006 operating results were adversely impacted as the Corporation
realized one-time charges associated with strategic reorganization
initiatives.  Excluding these one-time charges, the Corporation
experienced a modest income in noninterest expense for 2007.
 
 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 $663,000 to $10.4 million for 2007, compared to $9.7 million
for 2006.  This increase in net interest income can be attributed to
an increase in tax equivalent interest income of $1.6 million partially offset
by an increase in interest expense of $918,000.
 
 Interest
income.  Tax equivalent interest income increased $1.6 million
or 9.5% to $18.3 million for 2007, compared to $16.7 million for
2006.  This increase can be attributed to an increase in interest
earned on loans, securities, interest-earning deposits and federal bank stocks
of $1.4 million, $73,000, $37,000 and $50,000, respectively.
  14
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
 Tax
equivalent interest earned on loans receivable increased $1.4 million or 10.2%
to $15.4 million for 2007, compared to $14.0 million for 2006.  During
that time, average loans increased $14.8 million or 7.1%, accounting for $1.0
million in additional loan interest income.  The increase in average
loans outstanding can be attributed to the aforementioned commercial and home
equity loan growth experienced during 2007 as well as the positive impact in
2007 of loan growth in 2006.  Additionally, the interest rate earned
on loans increased as market interest rates for lending were more favorable in
2007 compared to 2006 and the yield on loans increased 19 basis points to 6.94%
for 2007, versus 6.75% for 2006 contributing $403,000 in additional interest
income.  Contributing to the increase in the yield on loans between
the periods was the collection of $125,000 of interest and late fees due
associated with the payoff of previously non-performing commercial loans during
the year that had been on non-accrual status.  In connection with the
loan payoffs, the Corporation received all principal and interest due under the
contractual terms of the loan agreements and interest collected was recorded as
loan interest income during the year.  In addition, the Corporation
recognized $42,000 in prepayment fees resulting from the early payoff of a large
commercial mortgage in the fourth quarter of 2007.
 
 Tax
equivalent interest earned on securities increased $73,000 or 2.9% to $2.6
million for 2007, compared to $2.5 million for 2006.  The average
yield on securities increased by 28 basis points as a result of certain lower
yielding securities maturing.  Partially offsetting the increase in
interest income associated with the yield increase was the decrease in the
average volume of these assets of $1.6 million or 2.9% primarily as a result of
the utilization of these funds for loan growth.
 
 Interest
earned on interest-earning deposit accounts increased $37,000 to $166,000 for
2007, compared to $129,000 for 2006, as a result of a higher yield realized on
higher average balances maintained.  Interest earned on federal bank
stocks increased $50,000 to $144,000 for 2007, compared to $94,000 for 2006 as a
result of higher volume and higher yield.
 
 Interest
expense.  Interest expense increased $918,000 or 13.2% to $7.9
million for 2007, compared to $7.0 million for 2006.  This increase in
interest expense can be attributed to an increase in interest incurred on
deposits and borrowed funds of $473,000 and $445,000, respectively.
 
 Deposit
interest expense increased $473,000 or 7.9% to $6.4 million for 2007, compared
to $6.0 million for 2006.  This increase in deposit interest expense
was principally rate driven as the cost of interest-bearing deposits increased
21 basis points to 3.30% for 2007 versus 3.09% for 2006 contributing $407,000 in
additional expense.  The increase in the interest rate on deposits can
be attributed to the Corporation offering certain higher priced certificate
products in the fourth quarter of 2006.  The average volume of
deposits increased by $2.1 million or 1.1% contributing an additional $66,000 in
interest expense.
 
 Interest
expense on borrowed funds increased $445,000 to $1.5 million for 2007, compared
to $1.0 million for 2006 due to $15.0 million of FHLB long term borrowings
placed in the second and third quarters of 2006 and $5.0 million of FHLB long
term borrowings placed in the fourth quarter of 2007.  The Corporation
utilized these borrowings primarily to fund loan growth.
 
 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
collectibility of the loan portfolio.
 
 The
provision for loan losses decreased $102,000 or 28.5% to $256,000 for 2007,
compared to $358,000 for 2006.  The Corporation’s allowance for loan
losses amounted to $2.2 million or 0.93% of the Corporation’s total loan
portfolio at December 31, 2007, compared to $2.0 million or 0.94% at December
31, 2006.  The allowance for loan losses as a percentage of
non-performing loans at December 31, 2007 and 2006 was 226.6% and 110.5%,
respectively.  The decrease in the provision for loan losses from 2006
to 2007 was primarily due to a lower allowance for loan losses necessary in
connection with the aforementioned payoff of previously non-performing large
commercial loans during the year.
 
 15
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  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, security and loan gains and losses, and earnings on
BOLI.  Noninterest income increased a modest $9,000, remaining stable
at $2.9 million for 2007 and 2006.  This increase can be primarily
attributed to increases in fees and service charges, commissions on financial
services, earnings on BOLI, and other noninterest income of $65,000, $40,000,
$24,000 and $98,000, respectively.    Partially offsetting
the increase in noninterest income were decreases in gains on loan sales and
gains on available for sale securities of $25,000 and $193,000,
respectively.  This decrease in gains on available for sale securities
resulted primarily from the 2006 gains realized of $372,000 as management
elected to divest a community bank stock investment.  During 2007, the
Corporation realized $166,000 in gains from the sale of another community bank
stock investment as a result of that banks merger with a larger financial
institution.
 
 Noninterest
expense.  Noninterest expense decreased $245,000 or 2.6% to
$9.2 million for 2007, compared to $9.4 million for 2006.  This
decrease in noninterest expense was comprised of decreases in compensation and
employee benefits, premises and equipment and intangible amortization expense of
$542,000, $48,000 and $7,000, respectively, partially offset by an increase in
other expenses of $352,000.
 
 The
largest component of noninterest expense, compensation and employee benefits,
decreased $542,000 or 9.6%.  This decrease was primarily the result of
the Corporation realizing non-recurring charges of $559,000 relating to the
aforementioned reorganization during 2006.  These charges included
$375,000 in pension expense for employees who took part in an early retirement
program as well as $184,000 for severance, other benefits and legal costs
associated with the reorganization.  Excluding these one-time charges,
the Corporation realized a slight increase in compensation and employee benefits
resulting from normal salary and wage adjustments and increases in 401(k) match
expense, training expense, director’s fees, incentive expense and stock option
expense.  Mitigating these increases was the realization of ongoing
savings in salaries and wages and employee benefits resulting from the 2006
reorganization.
 
 Premises
and equipment expense decreased $48,000 or 2.9% as the Corporation focused on
controlling expenses.  This decrease was primarily the result of lower
equipment and software depreciation.  The decrease in equipment
depreciation resulted from the write-off of an asset determined to be obsolete
during 2006.  Partially offsetting these decreases were increased
occupancy costs related to a new branch location opened during the fourth
quarter of 2006.
 
 Other
expense increased $352,000 or 16.5% primarily due to increases in professional
fees, travel, entertainment and conferences and telephone expenses of $174,000,
$43,000 and $41,000, respectively.  Also contributing to this increase
was an increase in other noninterest expense of $70,000 primarily consisting of
increases in subscriptions, credit bureau expense, and internet banking expense
of $41,000, $25,000 and $26,000, respectively.  The increase in
professional fees resulted primarily from fees associated with required
Sarbanes-Oxley compliance initiatives pursued during 2007.
 
 The
provision for income taxes increased $303,000 or 61.6% to $795,000 for 2007,
compared to $492,000 for 2006, primarily due to the increase in the
Corporation’s pre-tax earnings of $1.0 million.  In addition, the
Corporation’s effective tax rate was 22.8% for 2007, compared with 20.0% for
2006.
 
 16
  Management’s
Discussion and Analysis of
 Financial Condition and Results of Operations
(continued)
  2006
Results Compared to 2005 Results
 
 The
Corporation reported net income of $2.0 million and $2.6 million for 2006 and
2005, respectively.  The $607,000 or 23.6% decrease in net income can
be attributed to decreases in net interest income and noninterest income of
$13,000 and $383,000, respectively, and increases in the provision for loan
losses and noninterest expense of $153,000 and $263,000,
respectively.  Partially offsetting these unfavorable comparisons, the
provision for income taxes decreased $205,000.
 
 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 decreased $16,000 to $9.7 million for 2006.  This decrease in
net interest income can be attributed to an increase in tax equivalent interest
income of $1.4 million and a corresponding increase in interest
expense.
 
 Interest
income.  Tax equivalent interest income increased $1.4 million
or 9.0% to $16.7 million for 2006, compared to $15.3 million for
2005.  This increase can be attributed to an increase in interest
earned on loans, interest-earning deposits and federal bank stocks of $1.5
million, $48,000 and $36,000, respectively, partially offset by a $232,000
decrease in interest earned on securities.
 
 Tax
equivalent interest earned on loans receivable increased $1.5 million or 12.2%
to $14.0 million for 2006, compared to $12.5 million for 2005.  During
that time, average loans increased $19.1 million or 10.2%, accounting for $1.3
million in additional loan interest income.  Additionally, the
interest rate earned on loans increased as market interest rates for lending
were more favorable in 2006 compared to 2005 and the yield on loans increased 13
basis points to 6.75% for 2006, versus 6.62% for 2005 contributing $240,000 in
additional interest income.  The increase in average loans outstanding
can be attributed to the aforementioned commercial and home equity loan growth
experienced during 2006 as well as the positive impact in 2006 of loan growth in
2005.
 
 Tax
equivalent interest earned on securities decreased $232,000 or 8.5% to $2.5
million for 2006, compared to $2.7 million for 2005.  The average
volume of these assets decreased $9.3 million or 14.9% primarily as a result of
the utilization of these funds for loan growth.  The average yield on
securities increased by 33 basis points, as a result of certain lower yielding
securities maturing, partially offsetting the decline in interest income
associated with the volume decline.
 
 Interest
earned on interest-earning deposit accounts increased $48,000 to $129,000 for
2006, compared to $81,000 for 2005, as a result of a higher yield realized
partially offset by lower average balances maintained.  Interest
earned on federal bank stocks increased $36,000 to $94,000 for 2006, compared to
$58,000 for 2005 as a result of a higher volume and higher yield.
 
 Interest
expense.  Interest expense increased $1.4 million or 25.0% to
$7.0 million for 2006, compared to $5.6 million for 2005.  This
increase in interest expense can be attributed to an increase in interest
incurred on deposits and borrowed funds of $1.1 million and $322,000,
respectively.
 
 Deposit
interest expense increased $1.1 million or 21.9% to $6.0 million for 2006,
compared to $4.9 million for 2005.  This increase in deposit interest
expense was principally rate driven as the cost of interest-bearing deposits
increased 51 basis points to 3.09% for 2007 versus 2.58% for 2005 contributing
$988,000 in additional expense.  The average volume of deposits
increased modestly by $3.2 million or 1.7% contributing to an additional $85,000
in interest expense.  The increase in the interest rate on deposits
can be attributed to the increase in short term market interest rates during
2006 and 2005 as well as to the Corporation offering certain higher priced
certificate products during 2006.
 
 17
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
 Interest
expense on borrowed funds increased $322,000 to $1.0 million for 2006, compared
to $679,000 for 2005 due to $15.0 million of FHLB long term borrowings placed in
the second and third quarters of 2006.
 
 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
collectibility of the loan portfolio.
 
 The
provision for loan losses increased $153,000 to $358,000 for 2006, compared to
$205,000 for 2005.  The Corporation’s allowance for loan losses
amounted to $2.0 million or 0.94% of the Corporation’s total loan portfolio at
December 31, 2006, compared to $1.9 million or 0.96% at December 31,
2005.  The allowance for loan losses as a percentage of non-performing
loans at December 31, 2006 and 2005 was 110.5% and 128.7%,
respectively.  The increase in the provision for loan losses from 2005
to 2006 was primarily due to the aforementioned growth in the loan
portfolio.
 
 Noninterest
income.  Noninterest income includes items that are 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, security and
loan gains and losses, and earnings on BOLI.  Noninterest income
decreased $383,000 or 11.6% to $2.9 million for 2006, compared to $3.3 million
for 2005.  This decrease can be primarily attributed to a decrease in
gains on the sale of securities of $457,000.  This decrease resulted
primarily from the 2005 gains realized of $628,000 as management elected to
divest a community bank stock investment.  In 2006, the Corporation
realized $372,000 in gains from the sale of this particular
investment.  Also contributing to the decrease was a 2005 involuntary
transaction that resulted from the sale of a community bank which contributed
$198,000 to gains on the sale of securities.  Partially offsetting the
decrease in noninterest income were increases in fee and service income of
$64,000 and gains on the sale of loans of $53,000 as management sold $4.0
million of 30-year fixed rate conforming mortgage loans.
 
 Noninterest
expense.  Noninterest expense increased $263,000 or 2.9% to
$9.4 million for 2006, compared to $9.1 million for 2005.  This
increase in noninterest expense is comprised of increases in compensation and
employee benefits and premises and equipment of $525,000 and $26,000,
respectively, partially offset by reductions in intangible amortization expense
and other expenses of $24,000 and $264,000, respectively.
 
 The
largest component of noninterest expense is compensation and employee
benefits.  This expense increased $525,000 or 10.2%.  This
increase was primarily the result of the Corporation realizing charges relating
to the aforementioned reorganization.  These charges included $375,000
in pension expense for employees who took part in an early retirement program as
well as $184,000 for severance, other benefits and legal costs associated with
the reorganization.
 Premises
and equipment expense increased $26,000 or 1.6% as a result of increased
occupancy costs related to a new drive-thru facility as well as a new branch
location.  Also contributing to the increase was the write-off of an
asset determined to be obsolete.
 
 Other
expense decreased $264,000 or 11.0% primarily due to a decrease in telephone
expenses of $155,000 as the Corporation received credit from its telephone
vendor for billing errors.  Also contributing to this decrease was a
$203,000 write-off of amounts related to a correspondent bank reconciliation in
2005, which resulted from inefficiencies related to consolidation of their
offices as well as variances resulting from the Bank’s technology conversions
late in 2004.
 
 18
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  The
provision for income taxes decreased $205,000 or 29.4% to $492,000 for 2006,
compared to $697,000 for 2005, primarily due to the decrease in the
Corporation’s pre-tax earnings of $812,000.
 
 Market Risk
Management
 
 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 and the
Chief Financial Officer, 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.
 
 19
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
 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.
 
 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, 2007, the
Corporation’s interest-earning assets maturing or repricing within one year
totaled  $72.7 million while the Corporation’s interest-bearing
liabilities maturing or repricing within one-year totaled $93.2 million,
providing an excess of interest-bearing liabilities over interest-earning assets
of $20.5 million or a negative 6.6% of total assets.  At December 31,
2007, the percentage of the Corporation’s assets to liabilities maturing or
repricing within one year was 78.1%.
 
 The
following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 2007 which are
expected to mature, prepay or reprice in each of the future time periods
presented:
  (Dollar
      amounts in thousands)
                
                Due
      in
                
                
                Due
      within
                
                
                Due
      within
                
                
                Due
      within
                
                
                Due
      insix
      months
                
                
                six
      months
                
                
                one
      to
                
                
                three
      to
                
                
                overor
      less
                
                
                to
      one year
                
                
                three
      years
                
                
                five
      years
                
                
                five
      years
                
                
                TotalTotal
      interest-earning assets
                
                $
                47,171
                
                
                $
                25,554
                
                
                $
                74,212
                
                
                $
                43,505
                
                
                $
                89,942
                
                
                $
                280,384Total
      interest-bearing liabilities
                
                
                58,930
                
                
                
                34,224
                
                
                
                57,827
                
                
                
                37,169
                
                
                
                96,516
                
                
                
                284,666Maturity
      or repricing gap during the period
                
                $
                (11,759
                )
                
                $
                (8,670
                )
                
                $
                16,385
                
                
                $
                6,336
                
                
                $
                (6,574
                )
                
                $
                (4,282
                )Cumulative
      gap
                
                $
                (11,759
                )
                
                $
                (20,429
                )
                
                $
                (4,044
                )
                
                $
                2,292
                
                
                $
                (4,282
                )Ratio
      of gap during the period to total assets
                
                
                (3.77%
                )
                
                
                (2.78%
                )
                
                
                5.26
                %
                
                
                2.03
                %
                
                
                (2.11%
                )Ratio
      of cumulative gap to total assets
                
                
                (3.77%
                )
                
                
                (6.55%
                )
                
                
                (1.30%
                )
                
                
                0.74
                %
                
                
                (1.37%
                )Total
      assets
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                311,720
  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.
 
 20
  Management’s
Discussion and Analysis of
 Financial Condition
and Results of Operations (continued)
  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.
 
 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, 2007 and 2006, respectively.  This
analysis was done assuming that the interest-earning asset and interest-bearing
liability levels at December 31, 2007 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, 2007 levels for net interest income.
  Increase
                
                
                Decrease+100
                
                
                
                +200
                
                
                
                -100
                
                
                
                -200BP
                
                
                BP
                
                
                BP
                
                
                BP2007
      Net interest income - increase (decrease)
                
                
                0.26
                %
                
                
                (0.66
                %)
                
                
                2.24
                %
                
                
                5.15
                %2006
      Net interest income - increase (decrease)
                
                
                1.12
                %
                
                
                0.73
                %
                
                
                (0.33
                %)
                
                
                (3.43
                %)
 
 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.
  21
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  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 $786,000 or 3.3% to $24.7 million at December 31,
2007 from $23.9 million at December 31, 2006.  Net income of $2.7
million in 2007, represented an increase in earnings of $731,000 or 37.2%
compared to last year.  Returns on average equity and assets were
11.13% and 0.90%, respectively, for 2007.
 
 The
Corporation has maintained a strong capital position with a capital to assets
ratio of 7.9% at December 31, 2007, a slight decline compared to the ratio of
8.0% a year earlier.  While continuing to sustain this strong capital
position, dividends increased to $2.0 million in 2007 from $1.4 million in
2006.  Stockholders have taken part in the Corporation’s dividend
reinvestment plan introduced during 2003 with 40% of registered shareholder
accounts active in the plan at December 31, 2007.
 
 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, 2007, 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
2007, the Corporation used its sources of funds primarily to fund loan
commitments.  As of December 31, 2007, the Corporation had outstanding
loan commitments, including undisbursed loans and amounts available under credit
lines, totaling $30.7 million, and standby letters of credit totaling
$869,000.  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, 2007, time deposits amounted to $119.5 million or 48.9% of the
Corporation’s total consolidated deposits, including approximately $56.2
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.  The
following table presents the Corporation’s contractual obligations as of
December 31, 2007:
  (Dollar
      amounts in thousands)
                
                Less
      than 1 year
                
                
                1 -
      3 years
                
                
                3 -
      5 years
                
                
                Over
      5 years
                
                
                TotalTime
      deposits
                
                $
                56,263
                
                
                $
                34,234
                
                
                $
                18,603
                
                
                $
                10,437
                
                
                $
                119,537Borrowed
      funds
                
                
                5,400
                
                
                
                -
                
                
                
                10,000
                
                
                
                25,000
                
                
                
                40,400Lease
      obligations
                
                
                120
                
                
                
                234
                
                
                
                105
                
                
                
                -
                
                
                
                459Estimated
      future pension payments
                
                
                254
                
                
                
                461
                
                
                
                422
                
                
                
                3,371
                
                
                
                4,508Total
                
                $
                62,037
                
                
                $
                34,929
                
                
                $
                29,130
                
                
                $
                38,808
                
                
                $
                164,904
 
  22
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  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, 2007, the Corporation’s
borrowing capacity with the FHLB, net of funds borrowed, was $110.6
million.
 
 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.
 
 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 a critical
accounting policy.
 
 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.
   23
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  Recent Accounting and
Regulatory Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair ValueMeasurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements.  SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new guidance
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and for interim periods within those fiscal
years.  The Corporation is currently evaluating the potential impact,
if any, of the adoption of SFAS 157 on its consolidated financial
statements.
 
 In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, Effective Date of FASB Statement No.
157 (FSP 157-b), that would permit a one-year deferral in applying the
measurement provisions of SFAS 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair
value in an entity’s financial statements on a recurring basis (at least
annually).  Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of SFAS
157 to that item is deferred until fiscal years beginning after November 15,
2008 and interim periods within those fiscal years.  This deferral
does not apply, however, to an entity that applies SFAS 157 in interim or annual
financial statements before proposed FSP 157-b is finalized.  The
Corporation is currently evaluating the potential impact, if any, of the
adoption of FSP 157-b on its consolidated financial statements.
 
 In
September 2006, FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No.
06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life
Insurance  Arrangements (EITF 06-4).  EITF 06-4
requires the recognition of a liability related to the postretirement benefits
covered by an endorsement split-dollar life insurance
arrangement.  The consensus highlights that the employer (who is also
the policyholder) has a liability for the benefit it is providing to its
employee.  As such, if the policyholder has agreed to maintain the
insurance policy in force for the employee’s benefit during his or her
retirement, then the liability recognized during the employee’s active service
period should be based on the future cost of insurance to be incurred during the
employee’s retirement.  Alternatively, if the policy holder has agreed
to provide the employee with a death benefit, then the liability for the future
death benefit should be recognized by following the guidance in SFAS 106 or
Accounting Principles Board (APB) Opinion No. 12, as appropriate.  For
transition, an entity can choose to apply the guidance using either of the
following approaches: (a) a change in accounting principle through retrospective
application to all periods presented or (b) a change in accounting principle
through a cumulative-effect adjustment to the balance in retained earnings at
the beginning of the year of adoption.  The EITF is effective in
fiscal years beginning after December 15, 2007, with early adoption
permitted.  The Corporation does not expect the implementation of EITF
06-4 to have a material impact on its consolidated financial
statements.
 
 In
September 2006, FASB’s EITF issued EITF Issue No. 06-5, Accounting for Purchases of Life
Insurance – Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance(EITF 06-5).  The scope of EITF 06-5 consists of six separate
issues relating to accounting for life insurance policies purchased by entities
protecting against the loss of key persons.  The six issues are
clarifications of previously issued guidance on FASB Technical Bulletin No.
85-4.  EITF 06-5 is effective for fiscal years beginning after
December 15, 2006.  The implementation of EITF 06-5 had no effect on
the Corporation’s consolidated financial statements.
 
 24
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and FinancialLiabilities– Including an amendment of FASB
Statement No. 115 (SFAS 159).  SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS 159 is effective for the Corporation January 1,
2008.  The Corporation is evaluating the impact that the adoption of
SFAS 159 will have on its consolidated financial statements.
 
 In
November 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. (SAB) 109, Written Loan Commitments Recorded at
Fair Value Through Earnings(SAB 109).  SAB 109 expresses the
views of the staff regarding written loan commitments that are accounted for at
fair value through earnings under generally accepted accounting
principles.  To make the staff’s views consistent with current
authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB
No. 105, Application of
Accounting Principles to Loan Commitments.  Specifically, SAB
109 revises the SEC staff’s views on incorporating expected net future cash
flows related to loan servicing activities in the fair value measurement of a
written loan commitment.  SAB 109 retains the staff’s views on
incorporating expected net future cash flows related to internally-developed
intangible assets in the fair value measurement of a written loan
commitment.  The staff expects registrants to apply the views in
Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15,
2007.  The Corporation does not expect SAB 109 to have a material
impact on its consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
141R).  SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree.  SFAS 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  The guidance will become effective for fiscal years
beginning after December 15, 2008.  This new pronouncement will impact
the Corporation’s accounting for business combinations completed beginning
January 1, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements – An Amendment of ARB No. 51(SFAS
160).  SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  The guidance will become effective for fiscal years
beginning after December 15, 2008.  The Corporation believes that this
new pronouncement will have an immaterial impact on its consolidated financial
statements.
 
 In
December 2007, the SEC issued SAB No. 110 (SAB 110) to amend and replace
Question 6 of Section D.2 of Topic 14, Share-Based Payment, of the
SAB series.  Question 6 of Section D.2 Topic 14 expresses the views of
the staff regarding the use of the “simplified” method for share option grants
prior to December 31, 2007.  SAB 110 allows public companies which do
not have historically sufficient experience to provide a reasonable estimate to
continue use of the “simplified” method for estimating the expected term of
“plain vanilla” share option grants after December 31, 2007.  SAB 110
is effective January 1, 2008.
   25
 Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations (continued)
  Forward Looking
Statements
 
 Discussions
of certain matters in this Annual Report 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.  These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Corporation operates, projections of future performance and potential future
credit experience.  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,
accounting principles or guidelines, legislative and regulatory changes,
government monetary and fiscal policies, real estate markets, financial services
industry competition, attracting and retaining key personnel, regulatory actions
and other risks detailed in the Corporation’s reports filed with the 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.
  
 26
  Consolidated Balance Sheets
 (Dollar amounts in thousands, except
share data)
  December
      31,2007
                
                
                2006AssetsCash
      and due from banks
                
                $
                10,288
                
                
                $
                7,540Interest
      earning deposits with banks
                
                
                195
                
                
                
                9,177Total
      cash and cash equivalents
                
                
                10,483
                
                
                
                16,717Securities
      available for sale, at fair value
                
                
                51,919
                
                
                
                51,774Loans
      receivable, net of allowance for loan losses of $2,157 and
      $2,035
                
                
                229,819
                
                
                
                213,344Federal
      bank stocks, at cost
                
                
                2,662
                
                
                
                2,217Bank-owned
      life insurance
                
                
                4,987
                
                
                
                4,794Accrued
      interest receivable
                
                
                1,365
                
                
                
                1,374Premises
      and equipment, net
                
                
                7,904
                
                
                
                7,958Goodwill
                
                
                1,422
                
                
                
                1,422Prepaid
      expenses and other assets
                
                
                1,159
                
                
                
                960Total
      Assets
                
                $
                311,720
                
                
                $
                300,560Liabilities
      and Stockholders' EquityLiabilitiesDeposits:Non-interest
      bearing
                
                $
                47,111
                
                
                $
                44,045Interest
      bearing
                
                
                197,151
                
                
                
                200,447Total
      deposits
                
                
                244,262
                
                
                
                244,492Borrowed
      funds:Short-term
                
                
                5,400
                
                
                
                -Long-term
                
                
                35,000
                
                
                
                30,000Total
      borrowed funds
                
                
                40,400
                
                
                
                30,000Accrued
      interest payable
                
                
                771
                
                
                
                825Accrued
      expenses and other liabilities
                
                
                1,584
                
                
                
                1,326Total
      Liabilities
                
                
                287,017
                
                
                
                276,643Stockholders'
      EquityPreferred
      stock, $1.00 par value, 3,000,000 shares authorized; none
      issued
                
                
                -
                
                
                
                -Common
      stock, $1.25 par value, 12,000,000 shares authorized;1,395,852
      shares issued, 1,267,835 shares outstanding
                
                
                1,745
                
                
                
                1,745Additional
      paid-in capital
                
                
                10,902
                
                
                
                10,871Treasury
      stock, at cost; 128,017 shares
                
                
                (2,653
                )
                
                
                (2,653
                )Retained
      earnings
                
                
                15,114
                
                
                
                14,370Accumulated
      other comprehensive loss
                
                
                (405
                )
                
                
                (416
                )Total
      Stockholders' Equity
                
                
                24,703
                
                
                
                23,917Total
      Liabilities and Stockholders' Equity
                
                $
                311,720
                
                
                $
                300,560
 
 
 See
accompanying notes to consolidated financial statements.
 
 
 27
 
 
 Consolidated
Statements of Income
 (Dollar amounts in thousands, except
share data)
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Interest
      and dividend incomeLoans
      receivable, including fees
                
                $
                15,287
                
                
                $
                13,856
                
                
                $
                12,325Securities:Taxable
                
                
                1,571
                
                
                
                1,481
                
                
                
                1,714Exempt
      from federal income tax
                
                
                687
                
                
                
                699
                
                
                
                699Federal
      bank stocks
                
                
                144
                
                
                
                94
                
                
                
                58Deposits
      with banks
                
                
                166
                
                
                
                129
                
                
                
                81Total
      interest and dividend income
                
                
                17,855
                
                
                
                16,259
                
                
                
                14,877Interest
      expenseDeposits
                
                
                6,440
                
                
                
                5,967
                
                
                
                4,894Short-term
      borrowed funds
                
                
                33
                
                
                
                53
                
                
                
                50Long-term
      borrowed funds
                
                
                1,413
                
                
                
                948
                
                
                
                629Total
      interest expense
                
                
                7,886
                
                
                
                6,968
                
                
                
                5,573Net
      interest income
                
                
                9,969
                
                
                
                9,291
                
                
                
                9,304Provision
      for loan losses
                
                
                256
                
                
                
                358
                
                
                
                205Net
      interest income after provision for loan losses
                
                
                9,713
                
                
                
                8,933
                
                
                
                9,099Noninterest
      incomeFees
      and service charges
                
                
                1,549
                
                
                
                1,484
                
                
                
                1,420Commissions
      on financial services
                
                
                448
                
                
                
                408
                
                
                
                437Net
      gain on sales of loans
                
                
                33
                
                
                
                58
                
                
                
                5Net
      gain on available for sale securities
                
                
                207
                
                
                
                400
                
                
                
                857Earnings
      on bank-owned life insurance
                
                
                219
                
                
                
                195
                
                
                
                191Other
                
                
                487
                
                
                
                389
                
                
                
                407Total
      noninterest income
                
                
                2,943
                
                
                
                2,934
                
                
                
                3,317Noninterest
      expenseCompensation
      and employee benefits
                
                
                5,090
                
                
                
                5,632
                
                
                
                5,107Premises
      and equipment
                
                
                1,589
                
                
                
                1,637
                
                
                
                1,611Intangible
      amortization expense
                
                
                -
                
                
                
                7
                
                
                
                31Other
                
                
                2,485
                
                
                
                2,133
                
                
                
                2,397Total
      noninterest expense
                
                
                9,164
                
                
                
                9,409
                
                
                
                9,146Income
      before provision for income taxes
                
                
                3,492
                
                
                
                2,458
                
                
                
                3,270Provision
      for income taxes
                
                
                795
                
                
                
                492
                
                
                
                697Net
      income
                
                $
                2,697
                
                
                $
                1,966
                
                
                $
                2,573Earnings
      per shareBasic
                
                $
                2.13
                
                
                $
                1.55
                
                
                $
                2.03Diluted
                
                $
                2.13
                
                
                $
                1.55
                
                
                $
                2.03
 
 
 See
accompanying notes to consolidated financial statements.
   28
 
 Consolidated
Statements of Changes in Stockholders' Equity
 (Dollar amounts in thousands, except
share data)
  AccumulatedAdditional
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  TotalCommon
                  
                  
                  Paid-in
                  
                  
                  Treasury
                  
                  
                  Retained
                  
                  
                  Comprehensive
                  
                  
                  Stockholders'Stock
                  
                  
                  Capital
                  
                  
                  Stock
                  
                  
                  Earnings
                  
                  
                  Income
      (Loss)
                  
                  
                  EquityBalance
      at January 1, 2005
                  
                  $
                  1,745
                  
                  
                  $
                  10,871
                  
                  
                  $
                  (2,653
                  )
                  
                  $
                  12,398
                  
                  
                  $
                  1,255
                  
                  
                  $
                  23,616Comprehensive
      income:Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,573
                  
                  
                  
                  
                  
                  
                  
                  2,573Change
      in net unrealized gains (losses) onsecurities
      available for sale, net oftaxes
      of ($660)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,281
                  )
                  
                  
                  (1,281
                  )Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,292Dividends
      declared, $1.02 per share
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,293
                  )
                  
                  
                  
                  
                  
                  
                  (1,293
                  )Balance
      at December 31, 2005
                  
                  
                  1,745
                  
                  
                  
                  10,871
                  
                  
                  
                  (2,653
                  )
                  
                  
                  13,678
                  
                  
                  
                  (26
                  )
                  
                  
                  23,615Cumulative
      effect of adjustments resultingfrom
      the adoption of SAB No. 108
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  120
                  
                  
                  
                  
                  
                  
                  
                  120Adjusted
      balance at December 31, 2005
                  
                  
                  1,745
                  
                  
                  
                  10,871
                  
                  
                  
                  (2,653
                  )
                  
                  
                  13,798
                  
                  
                  
                  (26
                  )
                  
                  
                  23,735Comprehensive
      income:Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,966
                  
                  
                  
                  
                  
                  
                  
                  1,966Change
      in net unrealized losses onsecurities
      available for sale, net oftaxes
      of ($14)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (30
                  )
                  
                  
                  (30
                  )Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,936Adjustment
      to initially apply SFASNo.
      158, net of taxes of ($185)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (360
                  )
                  
                  
                  (360
                  )Dividends
      declared, $1.10 per share
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,394
                  )
                  
                  
                  
                  
                  
                  
                  (1,394
                  )Balance
      at December 31, 2006
                  
                  
                  1,745
                  
                  
                  
                  10,871
                  
                  
                  
                  (2,653
                  )
                  
                  
                  14,370
                  
                  
                  
                  (416
                  )
                  
                  
                  23,917Comprehensive
      income:Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,697
                  
                  
                  
                  
                  
                  
                  
                  2,697Change
      in net unrealized losses onsecurities
      available for sale, net oftaxes
      of ($22)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (43
                  )
                  
                  
                  (43
                  )Change
      in funded status of definedbenefit
      plan, net of taxes of $27
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  54
                  
                  
                  
                  54Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,708Stock
      compensation expense, net of taxes of $16
                  
                  
                  
                  31
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  31Dividends
      declared, $1.54 per share
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,953
                  )
                  
                  
                  
                  
                  
                  
                  (1,953
                  )Balance
      at December 31, 2007
                  
                  $
                  1,745
                  
                  
                  $
                  10,902
                  
                  
                  $
                  (2,653
                  )
                  
                  $
                  15,114
                  
                  
                  $
                  (405
                  )
                  
                  $
                  24,703
 
 
  See
accompanying notes to consolidated financial statements.
 
 
 29
 
 Consolidated
Statements of Cash Flows
 (Dollar amounts in
thousands)
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Cash
      flows from operating activitiesNet
      income
                
                $
                2,697
                
                
                $
                1,966
                
                
                $
                2,573Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
                
                
                663
                
                
                
                849
                
                
                
                855Provision
      for loan losses
                
                
                256
                
                
                
                358
                
                
                
                205Amortization
      of premiums and accretion of discounts, net
                
                
                7
                
                
                
                32
                
                
                
                94Amortization
      of intangible assets and mortgage servicing rights
                
                
                17
                
                
                
                14
                
                
                
                37Realized
      gain on sales of available for sale securities, net
                
                
                (207
                )
                
                
                (400
                )
                
                
                (857
                )Net
      gains on sales of loans
                
                
                (33
                )
                
                
                (58
                )
                
                
                (5
                )Originations
      of loans sold
                
                
                (1,737
                )
                
                
                (4,008
                )
                
                
                -Proceeds
      from the sale of loans
                
                
                1,756
                
                
                
                3,998
                
                
                
                -Stock
      compensation expense
                
                
                31
                
                
                
                -
                
                
                
                -Proceeds
      from the sale of loans held for sale
                
                
                -
                
                
                
                -
                
                
                
                546Earnings
      on bank-owned life insurance, net
                
                
                (193
                )
                
                
                (171
                )
                
                
                (175
                )(Increase)
      decrease in accrued interest receivable
                
                
                9
                
                
                
                (103
                )
                
                
                (68
                )(Increase)
      decrease in deferred taxes
                
                
                156
                
                
                
                47
                
                
                
                (506
                )(Increase)
      decrease in prepaid expenses and other assets
                
                
                (372
                )
                
                
                (131
                )
                
                
                1,078Increase
      (decrease) in accrued interest payable
                
                
                (54
                )
                
                
                218
                
                
                
                30Increase
      (decrease) in accrued expenses and other liabilities
                
                
                334
                
                
                
                35
                
                
                
                (176
                )Net
      cash provided by operating activities
                
                
                3,330
                
                
                
                2,646
                
                
                
                3,631Cash
      flows from investing activitiesLoan
      originations and principal collections, net
                
                
                (16,727
                )
                
                
                (21,139
                )
                
                
                (13,286
                )Available
      for sale securities:Sales
                
                
                1,472
                
                
                
                1,089
                
                
                
                1,646Maturities,
      repayments and calls
                
                
                17,006
                
                
                
                5,848
                
                
                
                8,809Purchases
                
                
                (18,478
                )
                
                
                (2,076
                )
                
                
                (4,552
                )Held
      to maturity securities:Sales
                
                
                -
                
                
                
                14
                
                
                
                -Maturities,
      repayments and calls
                
                
                -
                
                
                
                1
                
                
                
                1Purchase
      of federal bank stocks
                
                
                (445
                )
                
                
                (444
                )
                
                
                (42
                )Purchases
      of premises and equipment
                
                
                (609
                )
                
                
                (2,684
                )
                
                
                (1,300
                )Net
      cash used in investing activities
                
                
                (17,781
                )
                
                
                (19,391
                )
                
                
                (8,724
                )Cash
      flows from financing activitiesNet
      increase (decrease) in deposits
                
                
                (230
                )
                
                
                13,989
                
                
                
                (2,371
                )Proceeds
      from issuance of long-term debt
                
                
                5,000
                
                
                
                15,000
                
                
                
                -Net
      change in short-term borrowings
                
                
                5,400
                
                
                
                (4,500
                )
                
                
                4,500Dividends
      paid on common stock
                
                
                (1,953
                )
                
                
                (1,394
                )
                
                
                (1,293
                )Net
      cash provided by financing activities
                
                
                8,217
                
                
                
                23,095
                
                
                
                836Net
      increase (decrease) in cash and cash equivalents
                
                
                (6,234
                )
                
                
                6,350
                
                
                
                (4,257
                )Cash
      and cash equivalents at beginning of period
                
                
                16,717
                
                
                
                10,367
                
                
                
                14,624Cash
      and cash equivalents at end of period
                
                $
                10,483
                
                
                $
                16,717
                
                
                $
                10,367Supplemental
      information:Interest
      paid
                
                $
                7,940
                
                
                $
                6,750
                
                
                $
                5,543Income
      taxes paid
                
                
                626
                
                
                
                686
                
                
                
                442Supplemental
      noncash disclosures:Transfers
      from loans to foreclosed real estate
                
                
                253
                
                
                
                50
                
                
                
                106
    See
accompanying notes to consolidated financial statements.
  30
  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 subsidiary, the Farmers National Bank of Emlenton (the
Bank).  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, 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 and the valuation of
deferred tax assets.  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 2 discusses the type of securities that the
Corporation invests in.  Note 3 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 approximately $60,000 and $1.1 million were required to meet regulatory
reserve and clearing requirements at December 31, 2007 and 2006,
respectively.  Such balances do not earn interest.
 
 Securities.Securities
include investments primarily in bonds and notes and are classified as either
available for sale or held to maturity at the time of purchase based on
management’s intent.  Securities for which the Corporation has the
positive intent and ability to hold to maturity are classified as held to
maturity and are reported at amortized cost.  Securities that are not
classified as held to maturity,  including equity securities with
readily determinable fair values, are classified as available for sale and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in accumulated other comprehensive income.
   31
  Notes
to Consolidated Financial Statements (continued)
 1.
              Summary
      of Significant Accounting Policies
(continued)
 
 Securities
(continued).Purchase premiums and discounts on securities are
recognized in interest income using the interest method over the term of the
securities.  Declines in the fair value of securities below their cost
that are deemed other than temporary result in the security being written down
to fair value on an individual basis.  Any related write-downs are
included in operations.  Gains and losses on the sale of securities
are recorded on the trade date and are determined using the specific
identification method and are included in operations in the period
sold.
 
 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.
 
 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.
   32
  Notes
to Consolidated Financial Statements (continued)
  1.
              Summary
      of Significant Accounting Policies
(continued)
 
 Allowance for
Loan Losses (continued).The allowance consists of specific,
general and unallocated components.  The specific component relates to
loans that are classified as either 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.
 
 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.
 
 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 on a straight-line basis over their estimated lives, generally less
than 10 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.
   33
  Notes
to Consolidated Financial Statements (continued)
  1.
              Summary
      of Significant Accounting Policies
(continued)
 
 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.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 $129,000 and $98,000
at December 31, 2007 and 2006, 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.
 
 Earnings Per
Common Share.Basic earnings per common share (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 on 84,000 shares of common stock were included
in computing diluted earnings per share because their effects were
dilutive.
 
 Comprehensive
Income.  Comprehensive income includes net income from
operating results and the net change in accumulated other comprehensive
income.  Accumulated other comprehensive income 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.  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.
   34
  Notes
to Consolidated Financial Statements (continued)
  1.
              Summary
      of Significant Accounting Policies
(continued)
 
 Stock
Compensation Plans.In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payments(SFAS
123(R)).  SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial
statements.  That cost will be measured based on the fair value of the
equity or liability instruments issued.  SFAS 123(R) 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.  SFAS 123(R) is a replacement of SFAS
123, Accounting for
Stock-Based Compensation,and supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees,and its related interpretive guidance.  The effect
of the statement requires entities 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.  SFAS 123(R) permits entities to use
any option-pricing model that meets the fair value objective in the statement.
Effective January 1, 2007, the Corporation adopted SFAS 123(R).
 
 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.
 
 Advertising.  Advertising
costs are expensed as incurred.
 
 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.The Corporation, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements(SAB 108), adjusted its beginning retained earnings for fiscal
2006 in the accompanying consolidated balance sheet.  The provisions
of SAB 108 were effective for the Corporation for its December 31, 2006 year
end.  See Note 12 for additional information on the adoption of SAB
108.
 
 The
Corporation adopted Financial Accounting Standard Interpretation (FIN) No. 48,
Accounting for Uncertainty in
Income Taxes,(FIN 48), effective January 1, 2007.  The
adoption had no impact on the Corporation’s consolidated financial
statements.  At January 1, 2007 and December 31, 2007, the Corporation
had no FIN 48 unrecognized tax benefits recorded.
  35
  Notes
to Consolidated Financial Statements (continued)
  1.
              Summary
      of Significant Accounting Policies
(continued)
 
 Recently Adopted
Accounting Standards (continued).The Corporation adopted
Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106 and 132(R), (SFAS 158), effective December 31,
2006.  The adoption of SFAS 158 resulted in the Corporation recording
an additional accrued pension liability of $545,000 and a charge of $360,000,
net of taxes, to accumulated other comprehensive income at December 31,
2006.  As of December 31, 2007, the Corporation’s liability under SFAS
was $465,000 and the charge to accumulated other comprehensive income was
$306,000, net of taxes.  See Note 13 for additional information on the
adoptions of SFAS 158.
 
 The
Corporation adopted SFAS 123(R), Share-Based Payment,which
requires that compensation cost related to share-based payment transactions be
recognized in the financial statements with measurement based upon the fair
value of the equity or liability instruments issued.  For the year
ended December 31, 2007, the Corporation recognized $31,000, net of taxes, in
compensation expense for stock options.
 
 Recent Accounting
and Regulatory Pronouncements.In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair ValueMeasurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements.  SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new guidance
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and for interim periods within those fiscal
years.  The Corporation is currently evaluating the potential impact,
if any, of the adoption of SFAS 157 on its consolidated financial
statements.
 
 In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, Effective Date of FASB Statement No.
157 (FSP 157-b), that would permit a one-year deferral in applying the
measurement provisions of SFAS 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair
value in an entity’s financial statements on a recurring basis (at least
annually).  Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of SFAS
157 to that item is deferred until fiscal years beginning after November 15,
2008 and interim periods within those fiscal years.  This deferral
does not apply, however, to an entity that applies SFAS 157 in interim or annual
financial statements before proposed FSP 157-b is finalized.  The
Corporation is currently evaluating the potential impact, if any, of the
adoption of FSP 157-b on its consolidated financial statements.
   36
  Notes
to Consolidated Financial Statements (continued)
  1.
              Summary
      of Significant Accounting Policies
(continued)
 
 Recent Accounting
and Regulatory Pronouncements (continued).In September 2006,
FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split Dollar Life
Insurance  Arrangements (EITF 06-4).  EITF 06-4
requires the recognition of a liability related to the postretirement benefits
covered by an endorsement split-dollar life insurance
arrangement.  The consensus highlights that the employer (who is also
the policyholder) has a liability for the benefit it is providing to its
employee.  As such, if the policyholder has agreed to maintain the
insurance policy in force for the employee’s benefit during his or her
retirement, then the liability recognized during the employee’s active service
period should be based on the future cost of insurance to be incurred during the
employee’s retirement.  Alternatively, if the policy holder has agreed
to provide the employee with a death benefit, then the liability for the future
death benefit should be recognized by following the guidance in SFAS 106 or
Accounting Principles Board (APB) Opinion No. 12, as appropriate.  For
transition, an entity can choose to apply the guidance using either of the
following approaches: (a) a change in accounting principle through retrospective
application to all periods presented or (b) a change in accounting principle
through a cumulative-effect adjustment to the balance in retained earnings at
the beginning of the year of adoption.  The EITF is effective in
fiscal years beginning after December 15, 2007, with early adoption
permitted.  The Corporation does not expect the implementation of EITF
06-4 to have a material impact on its consolidated financial
statements.
 
 In
September 2006, FASB’s EITF issued EITF Issue No. 06-5, Accounting for Purchases of Life
Insurance – Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance(EITF 06-5).  The scope of EITF 06-5 consists of six separate
issues relating to accounting for life insurance policies purchased by entities
protecting against the loss of key persons.  The six issues are
clarifications of previously issued guidance on FASB Technical Bulletin No.
85-4.  EITF 06-5 is effective for fiscal years beginning after
December 15, 2006.  The implementation of EITF 06-5 had no effect on
the Corporation’s consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and FinancialLiabilities– Including an amendment of FASB
Statement No. 115 (SFAS 159).  SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS 159 is effective for the Corporation January 1,
2008.  The Corporation is evaluating the impact that the adoption of
SFAS 159 will have on its consolidated financial statements.
   37
  Notes
to Consolidated Financial Statements (continued)
  1.
              Summary
      of Significant Accounting Policies
(continued)
 
 Recent Accounting
and Regulatory Pronouncements (continued).In November 2007,
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. (SAB) 109, Written Loan
Commitments Recorded at Fair Value Through Earnings(SAB
109).  SAB 109 expresses the views of the staff regarding written loan
commitments that are accounted for at fair value through earnings under
generally accepted accounting principles.  To make the staff’s views
consistent with current authoritative accounting guidance, SAB 109 revises and
rescinds portions of SAB No. 105, Application of Accounting Principles
to Loan Commitments.  Specifically, SAB 109 revises the SEC
staff’s views on incorporating expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan
commitment.  SAB 109 retains the staff’s views on incorporating
expected net future cash flows related to internally-developed intangible assets
in the fair value measurement of a written loan commitment.  The staff
expects registrants to apply the views in Question 1 of SAB 109 on a prospective
basis to derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007.  The Corporation does not expect
SAB 109 to have a material impact on its consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
141R).  SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree.  SFAS 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  The guidance will become effective for fiscal years
beginning after December 15, 2008.  This new pronouncement will impact
the Corporation’s accounting for business combinations completed beginning
January 1, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements – An Amendment of ARB No. 51(SFAS
160).  SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  The guidance will become effective for fiscal years
beginning after December 15, 2008.  The Corporation believes that this
new pronouncement will have an immaterial impact on its consolidated financial
statements.
 
 In
December 2007, the SEC issued SAB No. 110 (SAB 110) to amend and replace
Question 6 of Section D.2 of Topic 14, Share-Based Payment, of the
SAB series.  Question 6 of Section D.2 Topic 14 expresses the views of
the staff regarding the use of the “simplified” method for share option grants
prior to December 31, 2007.  SAB 110 allows public companies which do
not have historically sufficient experience to provide a reasonable estimate to
continue use of the “simplified” method for estimating the expected term of
“plain vanilla” share option grants after December 31, 2007.  SAB 110
is effective January 1, 2008.
   38
  Notes
to Consolidated Financial Statements (continued)
 2.
                Securities
  The
following table summarizes the Corporation’s securities as of December
31:
  (Dollar
      amounts in thousands)
                  
                  Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  gains
                  
                  
                  losses
                  
                  
                  valueAvailable for
      sale:December
      31, 2007:U.S.
      Government agencies and related entities
                  
                  $
                  29,356
                  
                  
                  $
                  37
                  
                  
                  $
                  (59
                  )
                  
                  $
                  29,334Mortgage-backed
      securities
                  
                  
                  1,932
                  
                  
                  
                  -
                  
                  
                  
                  (48
                  )
                  
                  
                  1,884Municipal
      securities
                  
                  
                  13,685
                  
                  
                  
                  566
                  
                  
                  
                  -
                  
                  
                  
                  14,251Corporate
      securities
                  
                  
                  2,939
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,939Equity
      securities
                  
                  
                  4,156
                  
                  
                  
                  -
                  
                  
                  
                  (645
                  )
                  
                  
                  3,511$
                  52,068
                  
                  
                  $
                  603
                  
                  
                  $
                  (752
                  )
                  
                  $
                  51,919December
      31, 2006:U.S.
      Government agencies and related entities
                  
                  $
                  31,354
                  
                  
                  $
                  -
                  
                  
                  $
                  (606
                  )
                  
                  $
                  30,748Mortgage-backed
      securities
                  
                  
                  2,434
                  
                  
                  
                  -
                  
                  
                  
                  (95
                  )
                  
                  
                  2,339Municipal
      securities
                  
                  
                  14,688
                  
                  
                  
                  574
                  
                  
                  
                  -
                  
                  
                  
                  15,262Corporate
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Equity
      securities
                  
                  
                  3,382
                  
                  
                  
                  176
                  
                  
                  
                  (132
                  )
                  
                  
                  3,425$
                  51,858
                  
                  
                  $
                  750
                  
                  
                  $
                  (833
                  )
                  
                  $
                  51,774




Sales
      of available for sale securities were as follows:(Dollar
      amounts in thousands)
              
              2007
              
              
              2006
              
              
              2005Proceeds
              
              $
              1,472
              
              
              $
              1,089
              
              
              $
              1,646Gross
      gains
              
              
              207
              
              
              
              400
              
              
              
              857Tax
      provision related to gains
              
              
              70
              
              
              
              136
              
              
              
              291




The
      following table summarizes scheduled maturities of the Corporation’s
      securities as of December 31, 2007:(Dollar
      amounts in thousands)
              
              Available
      for saleAmortized
              
              
              Faircost
              
              
              valueDue
      in one year or less
              
              $
              13,268
              
              
              $
              13,254Due
      after one year through five years
              
              
              16,053
              
              
              
              16,019Due
      after five through ten years
              
              
              3,330
              
              
              
              3,344Due
      after ten years
              
              
              15,261
              
              
              
              15,791No
      scheduled maturity
              
              
              4,156
              
              
              
              3,511$
              52,068
              
              
              $
              51,919




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.
   39
  Notes to
Consolidated Financial Statements (continued)
   2.
                Securities (continued)
 
 Securities
with carrying values of $11.5 million and $12.4 million as of December 31, 2007
and 2006, 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, 2007 and
2006 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, 2007:U.S.
      Government agencies and related entities
                
                $
                -
                
                
                $
                -
                
                
                $
                20,804
                
                
                $
                (59
                )
                
                $
                20,804
                
                
                $
                (59
                )Mortgage-backed
      securities
                
                
                -
                
                
                
                -
                
                
                
                1,884
                
                
                
                (48
                )
                
                
                1,884
                
                
                
                (48
                )Municipal
      securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Corporate
      securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Equity
      securities
                
                
                888
                
                
                
                (184
                )
                
                
                2,557
                
                
                
                (461
                )
                
                
                3,445
                
                
                
                (645
                )$
                888
                
                
                $
                (184
                )
                
                $
                25,245
                
                
                $
                (568
                )
                
                $
                26,133
                
                
                $
                (752
                )December
      31, 2006:U.S.
      Government agencies and related entities
                
                $
                1,224
                
                
                $
                (23
                )
                
                $
                29,524
                
                
                $
                (583
                )
                
                $
                30,748
                
                
                $
                (606
                )Mortgage-backed
      securities
                
                
                -
                
                
                
                -
                
                
                
                2,339
                
                
                
                (95
                )
                
                
                2,339
                
                
                
                (95
                )Municipal
      securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Corporate
      securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Equity
      securities
                
                
                1,262
                
                
                
                (57
                )
                
                
                960
                
                
                
                (75
                )
                
                
                2,222
                
                
                
                (132
                )$
                2,486
                
                
                $
                (80
                )
                
                $
                32,823
                
                
                $
                (753
                )
                
                $
                35,309
                
                
                $
                (833
                )
  Management
evaluates securities for other than temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability
of the corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
  As
of December 31, 2007, there were 34 securities in an unrealized loss
position.  These unrealized losses are considered to be temporary
impairments.  A decline in the value of the debt securities is due
only to interest rate fluctuations, rather then erosion of
quality.  As a result, the payment of contractual cash flows,
including principal repayment, is not at risk.  As management has the
intent and ability to hold these investments until market recovery or maturity,
none of the debt securities are deemed to be other than temporary.
  Equity
securities owned by the Corporation consist of common stock of various financial
services providers that have traditionally been high-performing
stocks.  As a result of recent market volatility in financial stocks
from news of sub-prime lending problems, the fair value of most of the stocks
held are “under water” as of December 31, 2007, and as such, could be considered
to be impaired.  The Corporation does not invest in these securities
with the intent to sell them for a profit in the
near-term.  Management believes these securities have potential to
appreciate in value over the long-term, while providing for a reasonable
dividend yield.  In addition, stocks can be cyclical and will
experience some down periods.  Historically, bank stocks have
sustained cyclical losses followed by periods of substantial
gains.  Based on these circumstances and the ability and intent to
hold these securities for a reasonable period of time sufficient for a recovery
of fair value, the Corporation does not consider these investments to be other
than temporarily impaired at December 31, 2007.
   40
  Notes to Consolidated Financial Statements
(continued)
  3.
                Loans
      Receivable
 
 The
following table summarizes the Corporation’s loans receivable as of December
31:
  (Dollar
      amounts in thousands)
                  
                  2007
                  
                  
                  2006Mortgage
      loans on real estate:Residential
      first mortgages
                  
                  $
                  65,706
                  
                  
                  $
                  64,662Home
      equity loans and lines of credit
                  
                  
                  49,426
                  
                  
                  
                  47,330Commercial
      real estate
                  
                  
                  71,599
                  
                  
                  
                  61,128186,731
                  
                  
                  
                  173,120Other
      loans:Commercial
      business
                  
                  
                  35,566
                  
                  
                  
                  34,588Consumer
                  
                  
                  9,679
                  
                  
                  
                  7,67145,245
                  
                  
                  
                  42,259Total
      loans, gross
                  
                  
                  231,976
                  
                  
                  
                  215,379Less
      allowance for loan losses
                  
                  
                  2,157
                  
                  
                  
                  2,035Total
      loans, net
                  
                  $
                  229,819
                  
                  
                  $
                  213,344
 
 Following
is an analysis of the changes in the allowance for loan losses for the years
ended December 31:
   (Dollar
      amounts in thousands)
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Balance
      at the beginning of the year
                  
                  $
                  2,035
                  
                  
                  $
                  1,869
                  
                  
                  $
                  1,810Provision
      for loan losses
                  
                  
                  256
                  
                  
                  
                  358
                  
                  
                  
                  205Charge-offs
                  
                  
                  (164
                  )
                  
                  
                  (221
                  )
                  
                  
                  (197
                  )Recoveries
                  
                  
                  30
                  
                  
                  
                  29
                  
                  
                  
                  51Balance
      at the end of the year
                  
                  $
                  2,157
                  
                  
                  $
                  2,035
                  
                  
                  $
                  1,869
 
 Non-performing
loans, which include primarily non-accrual loans, were $1.0 million and $1.8
million at December 31, 2007 and 2006, respectively.  The Corporation
is not committed to lend significant additional funds to debtors whose loans are
on non-accrual status.  At December 31, 2007 there was no recorded
investment in loans considered to be impaired.  At December 31, 2006,
the recorded investment in loans considered to be impaired, requiring an
allowance for loan loss, was $461,000, against which approximately $166,000 of
the allowance for loan losses was allocated.  Additionally, in 2006,
there was one impaired loan for $452,000 that did not require an allowance for
loan loss.  During 2007, 2006 and 2005, impaired loans averaged
$255,000, $946,000 and $1.2 million, respectively.  The Corporation
recognized interest income on impaired loans of approximately $98,000, $14,000
and $95,000, on a cash basis, during 2007, 2006 and 2005,
respectively.  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 $50.0 million
and $52.7 million as of December 31, 2007 and 2006, respectively, are pledged as
qualifying collateral.  The Corporation is in compliance with all FHLB
credit policies at December 31, 2007.
   41
  Notes to
Consolidated Financial Statements (continued)
  3.
                Loans
      Receivable (continued)
 
 The
Corporation was servicing residential mortgage loans with unpaid principal
balances of $7.7 million and $6.3 million at December 31, 2007 and 2006,
respectively, for a third party investor.  In addition, the
Corporation was servicing commercial loans with unpaid principal balances of
$5.3 million and $6.0 million at December 2007 and 2006, 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.
 
 4.
                Federal
      Bank Stocks
 
 The
      Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and
      the Federal Reserve Bank of Cleveland (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 $2.3 million and $333,000, respectively, at December 31,
      2007, and $1.9 million and $333,000, respectively, at December 31,
      2006.
 
 5.
                Premises
      and Equipment
 
 Premises
      and equipment at December 31 are summarized by major classification as
      follows:
 
  (Dollar
      amounts in thousands)
                  
                  2007
                  
                  
                  2006Land
                  
                  $
                  1,088
                  
                  
                  $
                  1,088Buildings
      and improvements
                  
                  
                  5,955
                  
                  
                  
                  5,894Leasehold
      improvements
                  
                  
                  733
                  
                  
                  
                  696Furniture,
      fixtures and equipment
                  
                  
                  4,428
                  
                  
                  
                  4,279Software
                  
                  
                  1,878
                  
                  
                  
                  1,735Construction
      in progress
                  
                  
                  908
                  
                  
                  
                  68814,990
                  
                  
                  
                  14,381Less
      accumulated depreciation and amortization
                  
                  
                  7,086
                  
                  
                  
                  6,423$
                  7,904
                  
                  
                  $
                  7,958
  Depreciation
and amortization expense for the years ended December 31, 2007, 2006 and 2005
were $663,000, $849,000 and $855,000, respectively.
   42
  Notes to
Consolidated Financial Statements (continued)
  5.
                Premises
      and Equipment (continued)
 
 Rent
expense under non-cancelable operating lease agreements for the years ended
December 31, 2007, 2006 and 2005 was $115,000, $112,000 and $109,000,
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)
                  
                  Amount2008
                  
                  $
                  1202009
                  
                  
                  1222010
                  
                  
                  1122011
                  
                  
                  762012
                  
                  
                  29Thereafter
                  
                  
                  -$
                  459
 
 6.
                Goodwill
      and Intangible Assets
 
 The
following table summarizes the Corporation’s acquired goodwill and intangible
assets as of    December 31:
  Goodwill
      and Intangible Assets:(Dollar
      amounts in thousands)
                  
                  2007
                  
                  
                  2006Gross
      Carrying Amount
                  
                  Accumulated
      Amortization
                  
                  Gross
      Carrying Amount
                  
                  Accumulated
      AmortizationGoodwill
                  
                  $
                  1,422
                  
                  
                  $
                  -
                  
                  
                  $
                  1,422
                  
                  
                  $
                  -Core
      deposit intangibles
                  
                  
                  1,240
                  
                  
                  
                  1,240
                  
                  
                  
                  1,240
                  
                  
                  
                  1,240Other
      customer relationship intangibles
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  20Total
                  
                  $
                  2,682
                  
                  
                  $
                  1,260
                  
                  
                  $
                  2,682
                  
                  
                  $
                  1,260
 
 Goodwill
resulted from two previous branch acquisitions and is no longer
amortized.  There was no aggregate amortization expense for
2007.  Aggregate amortization expense for 2006 and 2005 was $7,000 and
$31,000, respectively.
 
 7.
                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 $1.2 million at December 31, 2007 and 2006,
respectively.  During 2007, total principal additions and total
principal repayments associated with these loans were $350,000 and $282,000,
respectively.  Deposits from principal officers and directors held by
the Bank at December 31, 2007 and 2006 totaled $2.4 million and $2.4 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 2007, 2006 and 2005, amounts
paid to affiliates for such services totaled $120,000, $117,000 and $55,000,
respectively.
   43
  Notes to
Consolidated Financial Statements (continued)
  8.
                Deposits
 
 The
following table summarizes the Corporation’s deposits as of December
31:
  (Dollar
      amounts in thousands)
                  
                  2007
                  
                  
                  2006Weighted
                  
                  
                  
                  
                  
                  
                  
                  
                  WeightedType
      of accounts
                  
                  average
      rate
                  
                  
                  Amount
                  
                  
                  %
                  
                  
                  average
      rate
                  
                  
                  Amount
                  
                  
                  %Non-interest
      bearing deposits
                  
                  
                  -
                  
                  
                  $
                  47,111
                  
                  
                  
                  19.3
                  %
                  
                  
                  -
                  
                  
                  $
                  44,045
                  
                  
                  
                  18.0
                  %Interest
      bearing demand deposits
                  
                  
                  1.28
                  %
                  
                  
                  77,614
                  
                  
                  
                  31.8
                  %
                  
                  
                  0.69
                  %
                  
                  
                  70,951
                  
                  
                  
                  29.0
                  %Time
      deposits
                  
                  
                  4.48
                  %
                  
                  
                  119,537
                  
                  
                  
                  48.9
                  %
                  
                  
                  4.59
                  %
                  
                  
                  129,496
                  
                  
                  
                  53.0
                  %2.60
                  %
                  
                  $
                  244,262
                  
                  
                  
                  100.0
                  %
                  
                  
                  2.63
                  %
                  
                  $
                  244,492
                  
                  
                  
                  100.0
                  %
 
 The
Corporation had a total of $32.7 million and $33.0 million in time deposits of
$100,000 or more at December 31, 2007 and 2006, respectively.
 
 Scheduled
maturities of time deposits for the next five years are as follows:
  (Dollar
      amounts in thousands)
                  
                  Amount
                  
                  
                  %2008
                  
                  $
                  56,263
                  
                  
                  
                  47.1
                  %2009
                  
                  
                  19,777
                  
                  
                  
                  16.5
                  %2010
                  
                  
                  14,457
                  
                  
                  
                  12.1
                  %2011
                  
                  
                  9,425
                  
                  
                  
                  7.9
                  %2012
                  
                  
                  9,178
                  
                  
                  
                  7.7
                  %Thereafter
                  
                  
                  10,437
                  
                  
                  
                  8.7
                  %$
                  119,537
                  
                  
                  
                  100.0
                  %
 
 9.
                Borrowed
      Funds
 
 The
following table summarizes the Corporation’s borrowed funds as of and for the
year ended December 31:
  (Dollar
      amounts in thousands)
                  
                  2007
                  
                  
                  2006Weighted
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  WeightedAverage
                  
                  
                  Average
                  
                  
                  average
                  
                  
                  
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  averageBalance
                  
                  
                  Balance
                  
                  
                  Rate
                  
                  
                  rate
                  
                  
                  Balance
                  
                  
                  Balance
                  
                  
                  Rate
                  
                  
                  rateFHLB
      advances:Due
      within 12 months
                  
                  $
                  5,400
                  
                  
                  $
                  1,208
                  
                  
                  
                  4.58
                  %
                  
                  
                  2.73
                  %
                  
                  $
                  -
                  
                  
                  $
                  1,147
                  
                  
                  
                  4.90
                  %
                  
                  
                  4.62
                  %Due
      beyond 12 months but within 5 years
                  
                  
                  10,000
                  
                  
                  
                  10,000
                  
                  
                  
                  4.18
                  %
                  
                  
                  4.24
                  %
                  
                  
                  5,000
                  
                  
                  
                  5,000
                  
                  
                  
                  4.61
                  %
                  
                  
                  4.68
                  %Due
      beyond 5 years but within 10 years
                  
                  
                  25,000
                  
                  
                  
                  21,233
                  
                  
                  
                  4.52
                  %
                  
                  
                  4.66
                  %
                  
                  
                  25,000
                  
                  
                  
                  16,521
                  
                  
                  
                  4.45
                  %
                  
                  
                  4.32
                  %$
                  40,400
                  
                  
                  $
                  32,441
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  30,000
                  
                  
                  $
                  22,668
   44
  Notes to
Consolidated Financial Statements (continued)
 9.
                Borrowed
      Funds (continued)
 
 The
Corporation had outstanding advances with the FHLB of $40.4 million and $30.0
million at December 31, 2007 and 2006, respectively.  Borrowed funds
at December 31, 2007 consist of seven, $5.0 million term advances and $5.4
million in overnight borrowings with the FHLB.  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, defined principally as 80 percent of the carrying value of
first mortgage loans on owner-occupied residential properties and 95 percent of
the market value of U.S. Government and federal agency securities.
 
 The
initial three $5.0 million borrowings have fixed rates of 4.61%, 3.74% and
4.04%, respectively, after which the rates may adjust 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%.
 
 During
2006, the Corporation entered into agreements with the FHLB to borrow three
additional $5.0 million 10 year term advances at initial interest rates of
4.98%, 4.83% and 4.68%, respectively.  Two of these borrowings in 2006
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 in 2006 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%.
 
 During
2007, the Corporation entered into an agreement with the FHLB to borrow an
additional $5.0 million for a 10 year term at an initial interest rate of
4.09%.  This 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)
                  
                  Amount2008
                  
                  $
                  5,4002009
                  
                  
                  -2010
                  
                  
                  -2011
                  
                  
                  5,0002012
                  
                  
                  5,000Thereafter
                  
                  
                  25,000$
                  40,400
 
 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, 2007 was $96.7
million.
  45
  Notes to
Consolidated Financial Statements (continued)
  10.
                Insurance
      of Accounts and Regulatory Matters
 
 Insurance
of Accounts
 
 The
Federal Deposit Insurance Corporation (FDIC) insures deposits of account holders
up to $100,000 per insured depositor.  In addition, federal law
provides up to $250,000 in insurance coverage for deposits held in Individual
Retirement Accounts (IRAs).  To provide this insurance, the Bank must
pay an annual premium.  In connection with the insurance of deposits,
the Bank is required to maintain certain minimum levels of regulatory capital as
outlined below.
 
 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, 2007, $2.1 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 percent 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
$1.1 million.  The Corporation has a $1.1 million commercial line of
credit available at the Bank for the primary purpose of purchasing qualified
equity investments.  At December 31, 2007, 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).
 
 46
 
  Notes to Consolidated
Financial Statements (continued)
 10.
                Insurance
      of Accounts and Regulatory Matters
(continued)
 
 As of
December 31, 2007, the most recent notification from the FDIC categorized the
Bank as adequately capitalized under the regulatory framework for prompt
corrective action.  To be categorized as adequately 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.
 
 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, 2007
                  
                  
                  December
      31, 2006Consolidated
                  
                  
                  Bank
                  
                  
                  Consolidated
                  
                  
                  BankAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioTotal
      capital to risk weighted assets:Actual
                  
                  $
                  25,002
                  
                  
                  
                  10.54
                  %
                  
                  $
                  23,357
                  
                  
                  
                  9.95
                  %
                  
                  $
                  24,964
                  
                  
                  
                  11.34
                  %
                  
                  $
                  23,096
                  
                  
                  
                  10.62
                  %For
      capital adequacy purposes
                  
                  
                  18,974
                  
                  
                  
                  8.00
                  %
                  
                  
                  18,771
                  
                  
                  
                  8.00
                  %
                  
                  
                  17,617
                  
                  
                  
                  8.00
                  %
                  
                  
                  17,401
                  
                  
                  
                  8.00
                  %To
      be well capitalized
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  23,464
                  
                  
                  
                  10.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  21,752
                  
                  
                  
                  10.00
                  %Tier
      1 capital to risk-weighted assets:Actual
                  
                  $
                  23,075
                  
                  
                  
                  9.73
                  %
                  
                  $
                  21,260
                  
                  
                  
                  9.06
                  %
                  
                  $
                  22,910
                  
                  
                  
                  10.40
                  %
                  
                  $
                  21,060
                  
                  
                  
                  9.68
                  %For
      capital adequacy purposes
                  
                  
                  9,487
                  
                  
                  
                  4.00
                  %
                  
                  
                  9,385
                  
                  
                  
                  4.00
                  %
                  
                  
                  8,809
                  
                  
                  
                  4.00
                  %
                  
                  
                  8,701
                  
                  
                  
                  4.00
                  %To
      be well capitalized
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  14,078
                  
                  
                  
                  6.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  13,051
                  
                  
                  
                  6.00
                  %Tier
      1 capital to average assets:Actual
                  
                  $
                  23,075
                  
                  
                  
                  7.73
                  %
                  
                  $
                  21,260
                  
                  
                  
                  7.08
                  %
                  
                  $
                  22,910
                  
                  
                  
                  8.07
                  %
                  
                  $
                  21,060
                  
                  
                  
                  7.14
                  %For
      capital adequacy purposes
                  
                  
                  11,936
                  
                  
                  
                  4.00
                  %
                  
                  
                  12,007
                  
                  
                  
                  4.00
                  %
                  
                  
                  11,356
                  
                  
                  
                  4.00
                  %
                  
                  
                  11,793
                  
                  
                  
                  4.00
                  %To
      be well capitalized
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  15,008
                  
                  
                  
                  5.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  14,741
                  
                  
                  
                  5.00
                  %
 
 At
December 31, 2007, the Bank was categorized as adequately capitalized with a
total risk-based ratio of 9.95%.  The Bank monitors these capital
ratios on a monthly basis and based on expected 2008 earnings less dividends,
the Bank expects to be categorized as well capitalized by January 31,
2008.
 
 11.
                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.
 
 12.
                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)
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Current
                  
                  $
                  639
                  
                  
                  $
                  445
                  
                  
                  $
                  556Deferred
                  
                  
                  156
                  
                  
                  
                  47
                  
                  
                  
                  141$
                  795
                  
                  
                  $
                  492
                  
                  
                  $
                  697
 47
  Notes to Consolidated Financial
Statements (continued)
 12.
                  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)
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005%
      Pre-tax
                      
                      
                      
                      
                      
                      %
      Pre-tax
                      
                      
                      
                      
                      
                      %
      Pre-taxAmount
                      
                      
                      Income
                      
                      
                      Amount
                      
                      
                      Income
                      
                      
                      Amount
                      
                      
                      IncomeProvision
      at statutory tax rate
                      
                      $
                      1,187
                      
                      
                      
                      34.0
                      %
                      
                      $
                      836
                      
                      
                      
                      34.0
                      %
                      
                      $
                      1,112
                      
                      
                      
                      34.0
                      %Increase
      (decrease) resulting from:Tax
      free interest, net of disallowance
                      
                      
                      (288
                      )
                      
                      
                      (8.2
                      %)
                      
                      
                      (304
                      )
                      
                      
                      (12.4
                      %)
                      
                      
                      (313
                      )
                      
                      
                      (9.6
                      %)Earnings
      on BOLI
                      
                      
                      (65
                      )
                      
                      
                      (1.9
                      %)
                      
                      
                      (58
                      )
                      
                      
                      (2.4
                      %)
                      
                      
                      (59
                      )
                      
                      
                      (1.8
                      %)Other,
      net
                      
                      
                      (39
                      )
                      
                      
                      (1.1
                      %)
                      
                      
                      18
                      
                      
                      
                      0.7
                      %
                      
                      
                      (43
                      )
                      
                      
                      (1.3
                      %)Provision
                      
                      $
                      795
                      
                      
                      
                      22.8
                      %
                      
                      $
                      492
                      
                      
                      
                      20.0
                      %
                      
                      $
                      697
                      
                      
                      
                      21.3
                      %
  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)
                    
                    2007
                    
                    
                    2006Deferred
      tax assets:Provision
      for loan losses
                    
                    $
                    680
                    
                    
                    $
                    638SFAS
      158 pension accrual
                    
                    
                    158
                    
                    
                    
                    185Tax
      credits
                    
                    
                    -
                    
                    
                    
                    148Intangible
      assets
                    
                    
                    101
                    
                    
                    
                    115Accrued
      pension cost
                    
                    
                    73
                    
                    
                    
                    77Net
      unrealized loss on securities
                    
                    
                    51
                    
                    
                    
                    28Other
                    
                    
                    33
                    
                    
                    
                    33Gross
      deferred tax assets
                    
                    
                    1,096
                    
                    
                    
                    1,224Deferred
      tax liabilities:-
                    
                    
                    
                    -Depreciation
                    
                    
                    354
                    
                    
                    
                    360Stock
      gain
                    
                    
                    172
                    
                    
                    
                    172Prepaid
      expenses
                    
                    
                    72
                    
                    
                    
                    58Deferred
      loan fees
                    
                    
                    55
                    
                    
                    
                    26Loan
      servicing
                    
                    
                    21
                    
                    
                    
                    19Other
                    
                    
                    46
                    
                    
                    
                    53Gross
      deferred tax liabilities
                    
                    
                    720
                    
                    
                    
                    688Net
      deferred tax asset
                    
                    $
                    376
                    
                    
                    $
                    536
 
 The
Corporation determined that it was not required to establish a valuation
allowance for deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes,
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, 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.
  48
  Notes to Consolidated
Financial Statements (continued)
  12.
                  Income
      Taxes (continued)
 
 The
adoption of FIN 48 at January 1, 2007 had no impact on the Corporation’s
financial statements.  At January 1, 2007 and December 31, 2007, the
Corporation had no FIN 48 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.
 
 In
September 2006, the SEC released SAB 108.  The transition provisions
of SAB 108 permit the Corporation to adjust for the cumulative effect on
retained earnings of immaterial errors relating to prior years.  SAB
108 also requires the adjustment of any prior quarterly financial statements
within the fiscal year of adoption for the effects of such errors on the
quarters when the information is next presented.  Such adjustments do
not require previously filed reports with the SEC to be amended.  In
accordance with SAB 108, the Corporation has adjusted beginning retained
earnings for fiscal 2006 in the accompanying consolidated balance sheet as
described below.  The Corporation considers this adjustment to be
immaterial to prior periods.
 
 In
connection with adopting SAB 108, the Corporation recorded an adjustment to its
opening balance sheet for the year ended December 31, 2006.  This
adjustment, the cumulative effect of which was $120,000, increased retained
earnings, reduced accrued income taxes payable and was recorded to properly
reflect current taxes payable.  During prior year periods, certain tax
reserve amounts accumulated in connection with preparing tax provision
estimates.  These tax reserves were not considered material to prior
period consolidated financial statements; however, in evaluating the current tax
position of the Corporation, management determined that these reserves were not
necessary and, accordingly, made the aforementioned adjustment.
 
 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 2004.
 
 49
 
  Notes to Consolidated
Financial Statements (continued)
 13.
                  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 five
years of service.  The Corporation uses December 31 as the measurement
date for its plans.  Information pertaining to changes in obligations
and funded status of the defined benefit pension plan is as
follows:
  (Dollar
      amounts in thousands)
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Change
      in plan assets:Fair
      value of plan assets at beginning of year
                    
                    $
                    3,525
                    
                    
                    $
                    3,037
                    
                    
                    $
                    2,818Actual
      return on plan assets
                    
                    
                    246
                    
                    
                    
                    296
                    
                    
                    
                    164Employer
      contribution
                    
                    
                    360
                    
                    
                    
                    280
                    
                    
                    
                    135Benefits
      paid
                    
                    
                    (248
                    )
                    
                    
                    (88
                    )
                    
                    
                    (80
                    )Fair
      value of plan assets at end of year
                    
                    
                    3,883
                    
                    
                    
                    3,525
                    
                    
                    
                    3,037Change
      in benefit obligation:Benefit
      obligation at beginning of year
                    
                    
                    4,392
                    
                    
                    
                    3,926
                    
                    
                    
                    3,276Service
      cost
                    
                    
                    238
                    
                    
                    
                    213
                    
                    
                    
                    188Interest
      cost
                    
                    
                    262
                    
                    
                    
                    237
                    
                    
                    
                    214Actuarial
      (gain)/loss
                    
                    
                    118
                    
                    
                    
                    (40
                    )
                    
                    
                    154Effect
      of plan amendment
                    
                    
                    -
                    
                    
                    
                    144
                    
                    
                    
                    -Effect
      of change in assumptions
                    
                    
                    (255
                    )
                    
                    
                    -
                    
                    
                    
                    174Benefits
      paid
                    
                    
                    (247
                    )
                    
                    
                    (88
                    )
                    
                    
                    (80
                    )Benefit
      obligation at end of year
                    
                    
                    4,508
                    
                    
                    
                    4,392
                    
                    
                    
                    3,926Funded
      status (plan assets less benefit obligation)
                    
                    
                    (625
                    )
                    
                    
                    (867
                    )
                    
                    
                    (889
                    )Unrecognized
      prior service cost
                    
                    
                    (271
                    )
                    
                    
                    (303
                    )
                    
                    
                    (486
                    )Unrecognized
      net actuarial gain
                    
                    
                    736
                    
                    
                    
                    847
                    
                    
                    
                    1,283Unrecognized
      transition asset
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (48
                    )Accrued
      pension cost
                    
                    $
                    (160
                    )
                    
                    $
                    (323
                    )
                    
                    $
                    (140
                    )Amounts
      recognized in accumulated othercomprehensive
      loss, net of tax, consists of:Accumulated
      net actuarial gain
                    
                    $
                    485
                    
                    
                    $
                    559
                    
                    
                    $
                    -Accumulated
      prior service benefit
                    
                    
                    (179
                    )
                    
                    
                    (199
                    )
                    
                    
                    -Amount
      recognized, end of year
                    
                    $
                    306
                    
                    
                    $
                    360
                    
                    
                    $
                    -
  50
  Notes to Consolidated Financial
Statements (continued)
  13.
                  Employee
      Benefit Plans (continued)
 
 Amounts
recognized in the year end balance sheet consist of:
  (Dollar
      amounts in thousands)
                    
                    Pension
      Benefits2007
                    
                    
                    2006Prepaid
      benefit cost
                    
                    $
                    -
                    
                    
                    $
                    -Accrued
      benefit cost
                    
                    
                    (160
                    )
                    
                    
                    (323
                    )Intangible
      assets
                    
                    
                    -
                    
                    
                    
                    -Accumulated
      other comprehensive loss
                    
                    
                    (465
                    )
                    
                    
                    (544
                    )Net
      amount recognized
                    
                    $
                    (625
                    )
                    
                    $
                    (867
                    )
 
 The
accumulated benefit obligation for all defined benefit pension plans was $4.5
million and $3.8 million at year end 2007 and 2006, respectively.
 
 The
components of the periodic pension costs are as follows:
  (Dollar
      amounts in thousands)
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Service
      cost
                    
                    $
                    238
                    
                    
                    $
                    213
                    
                    
                    $
                    188Interest
      cost
                    
                    
                    262
                    
                    
                    
                    237
                    
                    
                    
                    214Expected
      return on plan assets
                    
                    
                    (303
                    )
                    
                    
                    (268
                    )
                    
                    
                    (246
                    )Transition
      asset
                    
                    
                    -
                    
                    
                    
                    (8
                    )
                    
                    
                    (8
                    )Prior
      service costs
                    
                    
                    -
                    
                    
                    
                    32
                    
                    
                    
                    19Effect
      of Special Termination Benefits
                    
                    
                    -
                    
                    
                    
                    274
                    
                    
                    
                    -Net
      periodic pension cost
                    
                    $
                    197
                    
                    
                    $
                    480
                    
                    
                    $
                    167
 Weighted-average
actuarial assumptions include the following:
  2007
                  
                  
                  2006
                  
                  
                  2005Discount
      rate for benefit obligations and net cost
                  
                  
                  6.50
                  %
                  
                  
                  6.00
                  %
                  
                  
                  6.30
                  %Rate
      of increase in future compensation levels
                  
                  
                  4.50
                  %
                  
                  
                  4.50
                  %
                  
                  
                  4.50
                  %Expected
      rate of return on plan assets
                  
                  
                  8.50
                  %
                  
                  
                  8.50
                  %
                  
                  
                  8.50
                  %
     Asset
      Category
                  
                  Target
      Allocation
                  
                  
                  Percentage
      of Plan Assets at Year End
                  
                  Weighted-Average
      Expected
                    Long-Term
      Rate of Return2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2007Equity
      Securities
                  
                  
                  54
                  %
                  
                  
                  54
                  %
                  
                  52
                  %
                  
                  
                  6.0
                  %Debt
      Securities
                  
                  
                  21
                  %
                  
                  
                  21
                  %
                  
                  12
                  %
                  
                  
                  2.0
                  %Other
                  
                  
                  30
                  %
                  
                  
                  25
                  %
                  
                  36
                  %
                  
                  
                  0.5
                  %100
                  %
                  
                  100
                  %
                  
                  
                  8.5
                  %
 51
  Notes to
Consolidated Financial Statements (continued)
  13.
                    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 $335,000 to its pension plan in
2008.
 
 Estimated
future benefit payments, which reflect expected future service, as appropriate,
are as follows:
  (Dollar
      amounts in thousands)For
      year ended December 31,
                      
                      Pension
      Benefits2008
                      
                      $
                      2542009
                      
                      
                      2472010
                      
                      
                      2142011
                      
                      
                      1952012
                      
                      
                      2272013-2017
                      
                      
                      1,397Thereafter
                      
                      
                      1,974Benefit
      Obligation
                      
                      $
                      4,508
  The
      Corporation adopted SFAS 158 effective December 31, 2006.  SFAS
      158 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.  The
      provisions of SFAS 158 are to be applied on a prospective basis;
      therefore, prior periods presented are not restated.  The
      adoption of SFAS 158 resulted in the Corporation recording an additional
      accrued pension liability of $545,000 and a charge of $360,000, net of
      taxes, to accumulated other comprehensive income.  As of
      December 31, 2007, the Corporation’s liability under SFAS 158 was $465,000
      and the charge to accumulated other comprehensive income was $306,000, net
      of taxes.  Additionally, SFAS 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 2007, 2006
and 2005 were $130,000, $76,000 and $75,000, respectively.
  52
  Notes to Consolidated Financial
Statements (continued)
  13.
                    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, 2007 and 2006, the Corporation’s SERP
liability was $215,000 and $161,000, respectively.  For the years
ended December 31, 2007, 2006 and 2005, the Corporation recognized SERP expense
of $54,000, $39,000 and $40,000, respectively.
 
 14.
                    Stock
      Compensation Plans
 
 In May
2007, the Corporation adopted the 2007 Stock Incentive Plan and Trust. Under the
Plan, the Corporation may grant options to its directors, officers and employees
for up to 177,496 shares of common stock.  Incentive stock options,
non-incentive or compensatory stock options and share awards may be granted
under the Plan.  The exercise price of each option shall at least
equal the market price of a share of common stock on the date of grant and have
a contractual term of ten years.  Options shall vest and become
exercisable at the rate, to the extent and subject to such limitations as may be
specified by the Corporation.  Effective January 1, 2007, the
Corporation adopted SFAS No. 123(R), Share-Based Payment, which requires that
compensation cost related to share-based payment transactions be recognized in
the financial statements with measurement based upon the fair value of the
equity or liability instruments issued.  During 2007, 84,000 of
options were granted which vest over a three year period.  For the
year ended December 31, 2007, the Corporation recognized $31,000, net of taxes,
in compensation expense for stock options.
 
 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:
  Year
      endedDecember
      31, 2007Dividend
      yield
                    
                    4.46%Expected
      life
                    
                    10
      yearsExpected
      volatility
                    
                    14.09%Risk-free
      interest rate
                    
                    5.10%
  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.
  53
  Notes to Consolidated Financial
Statements (continued)
  14.
                    Stock
      Compensation Plans (continued)
 
 A summary
of option activity under the Plan as of December 31, 2007, and changes during
the period then ended is presented below:
  Weighted-AverageWeighted-Average
                    
                    
                    Aggregate
                    
                    
                    Remaining
      TermOptions
                    
                    
                    Exercise
      Price
                    
                    
                    Intrinsic
      Value
                    
                    
                    (in
      years)Outstanding
      at the beginning of the year
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    
                    
                    
                    -Granted
                    
                    
                    84,000
                    
                    
                    
                    26.00
                    
                    
                    
                    
                    
                    
                    9.5Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    -Outstanding
      as of December 31, 2007
                    
                    
                    84,000
                    
                    
                    $
                    26.00
                    
                    
                    $
                    -
                    
                    
                    
                    9.5Exercisable
      as of December 31, 2007
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
  A summary
of the status of the Corporation’s nonvested shares as of December 31, 2007, and
changes during the period then ended is presented below:
  Weighted-AverageOptions
                      
                      
                      Grant-date
      Fair ValueNonvested
      at the beginning of the year
                      
                      
                      -
                      
                      
                      $
                      -Granted
                      
                      
                      84,000
                      
                      
                      
                      3.39Vested
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -Nonvested
      as of December 31, 2007
                      
                      
                      84,000
                      
                      
                      $
                      3.39




As of
December 31, 2007, there was $254,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over a average period of
2.5 years.
 
 15.
              Financial
      Instruments
 
 Fair
Value of Financial Instruments
 
 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)
                
                2007
                
                
                2006Carrying
      amount
                
                
                Fair
      value
                
                
                Carrying
      amount
                
                
                Fair
      valueFinancial
      assets:Cash
      and cash equivalents
                
                $
                10,483
                
                
                $
                10,483
                
                
                $
                16,717
                
                
                $
                16,717Securities
                
                
                51,919
                
                
                
                51,919
                
                
                
                51,774
                
                
                
                51,774Loans
      receivable
                
                
                229,819
                
                
                
                229,262
                
                
                
                213,344
                
                
                
                210,362Federal
      bank stocks
                
                
                2,662
                
                
                
                2,662
                
                
                
                2,217
                
                
                
                2,217Accrued
      interest receivable
                
                
                1,365
                
                
                
                1,365
                
                
                
                1,374
                
                
                
                1,374Financial
      liabilities:Deposits
                
                
                244,262
                
                
                
                245,829
                
                
                
                244,492
                
                
                
                243,328Borrowed
      funds
                
                
                40,400
                
                
                
                41,644
                
                
                
                30,000
                
                
                
                29,668Accrued
      interest payable
                
                
                771
                
                
                
                771
                
                
                
                825
                
                
                
                825


54




Notes to Consolidated Financial
Statements (continued)




15.
              Financial
      Instruments (continued)
 
 The
methods and assumptions used to estimate fair value are described as
follows:
 
 Carrying
amount is the estimated fair value for cash and cash equivalents, short-term
borrowings, federal bank stocks, accrued interest receivable and payable, demand
deposits, short-term debt, and variable rate loans or deposits that reprice
frequently and fully.  Security fair values are based on market prices
or dealer quotes, and if no such information is available, on the rate and term
of the security and information about the issuer.  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 values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values.  Fair value of
loans held for sale is based on market quotes.  Fair value of debt is
based on current rates for similar financing.  The fair value of
off-balance sheet items is based on the current fees or cost that would be
charged to enter into or terminate such arrangements and is not
material.
 
 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 statement of financial
condition.  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)
                
                2007
                
                
                2006Fixed
      Rate
                
                
                Variable
      Rate
                
                
                Fixed
      Rate
                
                
                Variable
      RateCommitments
      to make loans
                
                $
                1,054
                
                
                $
                3,844
                
                
                $
                189
                
                
                $
                3,064Unused
      lines of credit
                
                
                182
                
                
                
                25,611
                
                
                
                771
                
                
                
                18,588$
                1,236
                
                
                $
                29,455
                
                
                $
                960
                
                
                $
                21,652




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.




55




Notes to Consolidated
Financial Statements (continued)




15.
              Financial
      Instruments (continued)
 
 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
$869,000 and $463,000 at December 31, 2007 and 2006,
respectively.  The current amount of the liability as of December 31,
2007 and 2006 for guarantees under standby letters of credit issued is not
material.
 
 16.
              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
      Statements of Financial Condition
              
              
              
              
              December
      31,(Dollar
      amounts in thousands)
              
              
              
              
              2007
              
              
              2006Assets:Cash
      and cash equivalents
              
              
              
              
              $
              83
              
              
              $
              40Securities
      available for sale
              
              
              
              
              
              3,188
              
              
              
              3,235Equity
      in net assets of subsidiary bank
              
              
              
              
              
              22,704
              
              
              
              21,828Other
      assets
              
              
              
              
              
              -
              
              
              
              -Total
      Assets
              
              
              
              
              $
              25,975
              
              
              $
              25,103Liabilities
      and Stockholders' Equity:Accrued
      expenses and other liabilities
              
              
              
              
              $
              1,272
              
              
              $
              1,186Stockholders'
      equity
              
              
              
              
              
              24,703
              
              
              
              23,917Total
      Liabilities and Stockholders' Equity
              
              
              
              
              $
              25,975
              
              
              $
              25,103Condensed
      Statements of Operations
              
              Year
      ended December 31,(Dollar
      amounts in thousands)
              
              2007
              
              
              2006
              
              
              2005Income:Dividends
      from subsidiary
              
              $
              2,159
              
              
              $
              1,349
              
              
              $
              721Investment
      income
              
              
              312
              
              
              
              488
              
              
              
              917Total
      income
              
              
              2,471
              
              
              
              1,837
              
              
              
              1,638Expense:Interest
      expense
              
              
              81
              
              
              
              26
              
              
              
              -Noninterest
      expense
              
              
              201
              
              
              
              100
              
              
              
              83Total
      expense
              
              
              282
              
              
              
              126
              
              
              
              83Income
      before income taxes and equity in undistributedoperating
      results of subsidiary
              
              
              2,189
              
              
              
              1,711
              
              
              
              1,555Equity
      in undistributed net income of subsidiary
              
              
              501
              
              
              
              405
              
              
              
              1,241Income
      before income taxes
              
              
              2,690
              
              
              
              2,116
              
              
              
              2,796Income
      tax expense
              
              
              (7
              )
              
              
              150
              
              
              
              223Net
      income
              
              $
              2,697
              
              
              $
              1,966
              
              
              $
              2,573




56




Notes to Consolidated
Financial Statements (continued)




16.
              Emclaire
      Financial Corp. – Condensed Financial Statements, Parent Corporation Only
      (continued)


Condensed
      Statements of Cash Flows
              
              Year
      ended December 31,(Dollar
      amounts in thousands)
              
              2007
              
              
              2006
              
              
              2005Operating
      activities:Net
      income
              
              $
              2,697
              
              
              $
              1,966
              
              
              $
              2,573Adjustments
      to reconcile net income to net cash providedby
      operating activities:Equity
      in undistributed operating results of subsidiary
              
              
              (501
              )
              
              
              (405
              )
              
              
              (1,241
              )Other,
      net
              
              
              (109
              )
              
              
              (300
              )
              
              
              (803
              )Net
      cash provided by operating activities
              
              
              2,087
              
              
              
              1,261
              
              
              
              529Investing
      activities:Purchases
      of securities
              
              
              (1,039
              )
              
              
              (1,797
              )
              
              
              (99
              )Proceeds
      from the sale of available for sale securities
              
              
              698
              
              
              
              814
              
              
              
              1,060Net
      cash (used in) provided by investing activities
              
              
              (341
              )
              
              
              (983
              )
              
              
              961Financing
      activities:Net
      change in borrowings
              
              
              250
              
              
              
              850
              
              
              
              -Dividends
      paid
              
              
              (1,953
              )
              
              
              (1,394
              )
              
              
              (1,293
              )Net
      cash used in financing activities
              
              
              (1,703
              )
              
              
              (544
              )
              
              
              (1,293
              )(Decrease)
      Increase in cash and cash equivalents
              
              
              43
              
              
              
              (266
              )
              
              
              197Cash
      and cash equivalents at beginning of period
              
              
              40
              
              
              
              306
              
              
              
              109Cash
      and cash equivalents at end of period
              
              $
              83
              
              
              $
              40
              
              
              $
              306




17.
              Other
      Comprehensive Loss
 
 Other
comprehensive loss components and related taxes were as follows:
  (Dollar
      amounts in thousands)
                
                2007
                
                
                2006
                
                
                2005Unrealized
      holding gains (losses) on available for sale securities
                
                $
                142
                
                
                $
                356
                
                
                $
                (1,084
                )Reclassification
      adjustment for gains later recognized in income
                
                
                (207
                )
                
                
                (400
                )
                
                
                (857
                )Amortization
      of pension prior service cost
                
                
                (31
                )
                
                
                -
                
                
                
                -Amortization
      of pension net actuarial loss
                
                
                112
                
                
                
                -
                
                
                
                -Net
      unrealized losses
                
                
                16
                
                
                
                (44
                )
                
                
                (1,941
                )Tax
      effect
                
                
                (5
                )
                
                
                14
                
                
                
                660Other
      comprehensive loss
                
                $
                11
                
                
                $
                (30
                )
                
                $
                (1,281
                )




57




Notes to Consolidated
Financial Statements (continued)




18.
              Other
      Noninterest Income and Expense
 
 Other
noninterest income includes customer bank card processing fee income of
$267,000, $232,000 and $209,000 for 2007, 2006 and 2005,
respectively.
 
 The
following summarizes the Corporation’s other noninterest expenses for the years
ended December 31:
  (Dollar
      amounts in thousands)
                
                2007
                
                
                2006
                
                
                2005Professional
      fees
                
                $
                497
                
                
                $
                323
                
                
                $
                292Customer
      bank card processing
                
                
                263
                
                
                
                231
                
                
                
                241Correspondent
      bank and courier fees
                
                
                204
                
                
                
                214
                
                
                
                150Printing
      and supplies
                
                
                178
                
                
                
                195
                
                
                
                189Travel,
      entertainment and conferences
                
                
                178
                
                
                
                162
                
                
                
                148Marketing
      and advertising
                
                
                175
                
                
                
                154
                
                
                
                109Telephone
      and data communications
                
                
                157
                
                
                
                148
                
                
                
                142Postage
      and freight
                
                
                156
                
                
                
                135
                
                
                
                140Pennsylvania
      shares and use taxes
                
                
                152
                
                
                
                116
                
                
                
                272Other
                
                
                525
                
                
                
                455
                
                
                
                714Total
      other noninterest expenses
                
                $
                2,485
                
                
                $
                2,133
                
                
                $
                2,397
  19.
                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
                
                
                Quarter2007:Interest
      income
                
                $
                4,312
                
                
                $
                4,416
                
                
                $
                4,535
                
                
                $
                4,592Interest
      expense
                
                
                2,003
                
                
                
                1,918
                
                
                
                1,939
                
                
                
                2,026Net
      interest income
                
                
                2,309
                
                
                
                2,498
                
                
                
                2,596
                
                
                
                2,566Provision
      for loan losses
                
                
                45
                
                
                
                30
                
                
                
                45
                
                
                
                136Net
      interest income after provision for loan losses
                
                
                2,264
                
                
                
                2,468
                
                
                
                2,551
                
                
                
                2,430Noninterest
      income
                
                
                730
                
                
                
                772
                
                
                
                696
                
                
                
                745Noninterest
      expense
                
                
                2,310
                
                
                
                2,336
                
                
                
                2,255
                
                
                
                2,263Income
      before income taxes
                
                
                684
                
                
                
                904
                
                
                
                992
                
                
                
                912Provision
      for income taxes
                
                
                133
                
                
                
                197
                
                
                
                238
                
                
                
                227Net
      income
                
                $
                551
                
                
                $
                707
                
                
                $
                754
                
                
                $
                685Basic
      earnings per share
                
                $
                0.43
                
                
                $
                0.56
                
                
                $
                0.59
                
                
                $
                0.542006:Interest
      income
                
                $
                3,744
                
                
                $
                3,931
                
                
                $
                4,240
                
                
                $
                4,344Interest
      expense
                
                
                1,482
                
                
                
                1,614
                
                
                
                1,855
                
                
                
                2,017Net
      interest income
                
                
                2,262
                
                
                
                2,317
                
                
                
                2,385
                
                
                
                2,327Provision
      for loan losses
                
                
                31
                
                
                
                47
                
                
                
                90
                
                
                
                190Net
      interest income after provision for loan losses
                
                
                2,231
                
                
                
                2,270
                
                
                
                2,295
                
                
                
                2,137Noninterest
      income
                
                
                727
                
                
                
                769
                
                
                
                793
                
                
                
                645Noninterest
      expense
                
                
                2,214
                
                
                
                2,253
                
                
                
                2,264
                
                
                
                2,678Income
      before income taxes
                
                
                744
                
                
                
                786
                
                
                
                824
                
                
                
                104Provision
      for income taxes
                
                
                159
                
                
                
                184
                
                
                
                132
                
                
                
                17Net
      income
                
                $
                585
                
                
                $
                602
                
                
                $
                692
                
                
                $
                87Basic
      earnings per share
                
                $
                0.46
                
                
                $
                0.47
                
                
                $
                0.55
                
                
                $
                0.07
  58
 Report of Independent Registered Public Accounting
Firm
   
  Audit
Committee, Board of Directors and Stockholders
 Emclaire
Financial Corp.
 Emlenton,
Pennsylvania
 
 We have
audited the accompanying consolidated balance sheets of Emclaire Financial Corp.
and its subsidiary (the “Corporation”) as of December 31, 2007 and 2006, and the
related consolidated statements of income, changes in stockholders’ equity and
cash flows for each of the years in the three-year period ended December 31,
2007.  The Corporation’s management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
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 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 audits 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 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
its subsidiary as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
 
 As
discussed in Note 1 to the consolidated financial statements, on January 1,
2006, the Corporation has given retroactive effect to the change to the dual
method of quantifying misstatements of prior year financial
statements.  The dual method is required by SEC Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements.”  Also, on December 31, 2006, the Corporation changed its
method of accounting for defined benefit pension and other postretirement plans
by adopting Statement of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R).”
  
 Beard
Miller Company LLP
 Pittsburgh,
Pennsylvania
 March 19,
2008
  59
  Listings
and Markets
 
 Emclaire
Financial Corp. common stock is traded on the Over the Counter Bulletin Board
(OTCBB) under the symbol “EMCF”.  The listed market makers for the
Corporation’s common stock include:
   Ferris,
      Baker Watts, Inc.
                  100 Light Street, 8th Floor
                  Baltimore, MD 21202
                  Telephone: (800) 638-7411
                Boenning and Scattergood
                  4 Tower Bridge, Suite 300
                  200 Bar Harbor Drive
                  West Conshonhocken, PA 19428
                  Telephone: (610) 862-5360
                Parker
      Hunter, Inc.
                  600 Grant Street –
      Suite 3100
                  Pittsburgh, PA 15219
                  Telephone: (412) 562-8000
   Stock Price and Cash Dividend
Information
 
 The bid
and ask price of the Corporation’s common stock were $25.25 and $25.90,
respectively, as of February 15, 2008.  The Corporation traditionally
has paid regular quarterly cash dividends.
 
 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
                
                
                Dividend2007:Fourth
      quarter
                
                $
                28.25
                
                
                $
                25.20
                
                
                $
                25.75
                
                
                $
                0.67Third
      quarter
                
                
                27.75
                
                
                
                25.00
                
                
                
                25.60
                
                
                
                0.29Second
      quarter
                
                
                27.00
                
                
                
                23.50
                
                
                
                25.25
                
                
                
                0.29First
      quarter
                
                
                31.00
                
                
                
                26.75
                
                
                
                27.25
                
                
                
                0.292006:Fourth
      quarter
                
                $
                30.00
                
                
                $
                25.30
                
                
                $
                29.25
                
                
                $
                0.29Third
      quarter
                
                
                29.00
                
                
                
                25.00
                
                
                
                25.90
                
                
                
                0.27Second
      quarter
                
                
                29.00
                
                
                
                25.75
                
                
                
                27.00
                
                
                
                0.27First
      quarter
                
                
                27.25
                
                
                
                25.05
                
                
                
                26.00
                
                
                
                0.27
  Number
of Stockholders and Shares Outstanding
 
 As of
December 31, 2007, there were approximately 679 stockholders of record and
1,267,835 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.
 
 Dividend
Reinvestment and Stock Purchase Plan
 
 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.
  60
 Corporate Information
   Corporate
Headquarters
 
 Emclaire
Financial Corp.
 612 Main
Street
 Emlenton,
PA 16373
 Phone:
724-867-2311
 Website:
www. emclairefinancial.com
 
 Subsidiary
Bank
 
 The
Farmers National Bank of Emlenton
 Website:  www.farmersnb.com
 
 Annual
Meeting
 
 The annual
meeting of the Corporation’s stockholders will be held at 9:00 a.m., on
Wednesday, April 23, 2008, at the main office building in Emlenton, Pennsylvania
16373.
 
 Stockholder
and Investor Information
 
 Copies of
annual reports, quarterly reports and related stockholder literature are
available upon written request without charge to
stockholders.  Requests should be addressed to William C. Marsh, Chief
Financial Officer, Emclaire Financial Corp., 612 Main Street, Emlenton,
Pennsylvania 16373.
 
 In
addition, other public filings of the Corporation, including the Annual Report
on Form 10-K, can be obtained from the Securities and Exchange Commission’s web
site at http://www.sec.gov.
 
 Independent
Registered Public Accounting Firm
 
 Beard
Miller Company LLP
 P.O. Box
101086
 Pittsburgh,
PA 15237
 
 Special
Counsel
 
 Patton
Boggs, L.L.P.
 2550 M
Street, N.W.
 Washington,
DC 20037
 
 Registrar
and Transfer Agent
 
 Illinois
Stock Transfer Company
 209 West
Jackson Boulevard, Suite 903
 Chicago,
IL 60606
 www.ilstocktransfer.com
 800-757-5755
  61
  NOTES
      62