**EXHIBIT
      13**





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






















***EMCLAIRE
        FINANCIAL CORP.***
 
 **2006**
 
 **A
        N N U A L**
 **R
        E P O R T**




**Table
                  of Contents**Consolidated
                  Financial Highlights
              1Letter
                  to Stockholders
              2Marketing
                  Information
              5Board
                  of Directors and Executive Management
              7Office
                  Locations and Branch Managers
              8Selected
                  Consolidated Financial Data
              9Management’s
                  Discussion and Analysis ofFinancial
                  Condition and Results of Operations
              10Consolidated
                  Financial Statements
              28Notes
                  to Consolidated Financial Statements
              32Report
                  of Independent Registered Public Accounting Firm
              56Stock
                  and Dividend Information
              57Corporate
                  Information
              58




**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 eleven offices in Venango, Butler,
        Clarion, Clearfield, Elk and Jefferson counties, Pennsylvania. The Bank also
        provides retail brokerage and other investment services through its Farmers
        National Financial Services division. To complement retail operations conducted
        through its bank offices, the Corporation also invests in U.S. Government,
        municipal, mortgage-backed and corporate marketable securities primarily
        through
        its subsidiary bank.


**Consolidated
      Financial Highlights**


*(Dollar
        amounts in thousands, except share data)*
  **At
                    December 31,****Balance
                    Sheet:**
                
                2006
                
                2005
                
                2004
                
                2003
                
                2002Total
                    assets
                
                $
                300,560
                
                $
                275,517
                
                $
                273,380
                
                $
                262,512
                
                $
                238,577Loans
                    receivable, net
                
                
                213,344
                
                
                192,526
                
                
                179,575
                
                
                190,482
                
                
                169,557Deposits
                
                
                244,492
                
                
                230,503
                
                
                232,874
                
                
                217,110
                
                
                204,425Stockholders'
                    equity
                
                
                23,917
                
                
                23,615
                
                
                23,616
                
                
                22,655
                
                
                22,680Stockholders'
                    equity per share
                
                $
                18.86
                
                $
                18.63
                
                $
                18.63
                
                $
                17.87
                
                $
                17.02Common
                    shares outstanding
                
                
                1,267,835
                
                
                1,267,835
                
                
                1,267,835
                
                
                1,267,835
                
                
                1,332,835
  **For
                    the year ended December 31,****Income
                    Statement:**
                
                2006
                
                2005
                
                2004
                
                2003
                
                2002Net
                    interest income
                
                $
                9,291
                
                $
                9,304
                
                $
                8,734
                
                $
                9,308
                
                $
                9,492Noninterest
                    income
                
                
                2,934
                
                
                3,317
                
                
                2,535
                
                
                1,785
                
                
                1,400Net
                    income
                
                
                1,966
                
                
                2,573
                
                
                2,557
                
                
                2,492
                
                
                2,257Basic
                    earnings per share
                
                $
                1.55
                
                $
                2.03
                
                $
                2.02
                
                $
                1.91
                
                $
                1.69Cash
                    dividends per share
                
                $
                1.10
                
                $
                1.02
                
                $
                0.94
                
                $
                1.11
                
                $
                1.03
  **For
                    the year ended December 31,****Key
                    Ratios:**
                
                2006
                
                2005
                
                2004
                
                2003
                
                2002Return
                    on average assets
                
                
                0.69
                %
                
                0.94
                %
                
                0.96
                %
                
                0.99
                %
                
                0.99
                %Return
                    on average equity
                
                
                8.28
                %
                
                10.69
                %
                
                11.08
                %
                
                10.96
                %
                
                10.21
                %Efficiency
                    ratio
                
                
                74.18
                %
                
                69.72
                %
                
                67.11
                %
                
                64.16
                %
                
                64.98
                %







1


**Letter
      to Stockholders**


***DEAR
          SHAREHOLDERS AND FRIENDS:***
 
 I
          am
          pleased to report that during 2006, our company, Emclaire Financial Corp.,
          and
          its wholly-owned subsidiary bank, the Farmers National Bank of Emlenton,
          realized significant growth and sought to improve long-term performance
          and
          enhance stockholder and franchise value. Although certain of these actions
          adversely impacted 2006 earnings, our prospects for continued growth and
          long-term profitability prevail.
 
 ***GROWTH***
 
 Our
          total
          assets eclipsed the $300 million threshold by year end for the first time
          in the
          Bank’s 107 year history. During the year, total assets increased $25 million
          or
          9% to $301 million at December 31, 2006. This significant asset growth
          was
          driven by loan portfolio growth of $21 million funded by increases in customer
          deposits of $14 million and borrowed funds of $11 million.
 
 The
          Bank’s
          loans and deposits, continued to grow for the second consecutive year,
          and over
          the past five years total assets, loans and deposits have increased 39%,
          33% and
          29%, respectively. Equally important, the Corporation continues to increase
          its
          capital base through profitable operations, as total stockholders’ equity
          increased to $23.9 million or approximately 8% of total assets at December
          31,
          2006. As a result, the Corporation and the Bank are well positioned for
          continued growth and expansion.
 
 The
          Board
          of Directors and management continue to be pleased with the Bank’s steady
          balance sheet growth, sound lending culture and loan production base. We
          continue to increase our quality loan portfolio and local deposit base
          through
          prudent community banking practices.
 
 Continued
          infrastructure expansion was realized in 2006 by the opening of a new
          full-service branch office in the Township of Cranberry, Venango County,
          Pennsylvania in November 2006. Further, in December 2006, the Bank purchased
          a
          full-service bank branch office facility in Grove City, Pennsylvania, which
          we
          plan to open in early 2008.
 
 ***PERFORMANCE***
 
 For
          the
          year ended December 31, 2006, the Corporation realized consolidated net
          income
          of $2.0 million or $1.55 per share versus $2.6 million or $2.03 per share
          for
          2005. This $607,000 reduction in net income was primarily due to charges
          realized in the fourth quarter associated with reorganization initiatives
          undertaken during 2006. During mid-2006, the Board of Directors and management
          initiated a strategic review of all aspects of the Bank’s operations. This
          ongoing review led to several reorganization programs resulting in changes
          to
          the way we are organized and operate.
 
 While
          it
          is contrary to our persistent goal of providing increasing operating results
          and
          returns, the fourth quarter charges were part of our objectives to improve
          long-term core profitability. Through these recent efforts, we have enhanced
          the
          efficiency of our operations while reducing operating expenses, leveraged
          available technology investments, and improved core profitability all as
          part of
          our focus on providing continued sound returns to our shareholders and
          providing
          superior customer service.
  2


**Letter
      to Stockholders (continued)**





These
        programs resulted in a pre-tax charge to 2006 earnings totaling $559,000.
        During
        the fourth quarter of 2006, certain employees accepted a voluntary early
        retirement payment, resulting in a pension expense charge of $375,000. In
        addition to these retirement costs, severance and other costs associated
        with
        the reorganization initiatives totaled $184,000. It is anticipated that these
        initiatives will produce ongoing cost savings and contribute to profitability
        in
        future periods.
  During
        2006, net interest margin management remained a key challenge. While the
        balance
        sheet continued the aforementioned steady growth, consolidated net interest
        income saw a modest decline. This was the result of the flat to inverted
        yield
        curve prevailing in the marketplace, and impacting all banking industry
        earnings, as well as continued competition from community banks and other
        financial intermediaries.
 
 Even
        in
        light of the challenges that we have faced in regards to reorganization
        initiatives and the interest rate environment, the Corporation experienced
        positive stock performance during 2006. Your stock closed the year at $29.25
        per
        share, up almost 10% from the prior year end close of $26.60. Further, cash
        dividends increased as regular dividends paid during 2006 totaled $1.10 per
        share representing a 7.8% increase in annual dividends from the $1.02 per
        share
        paid in 2005.
 
 ***TEAMWORK***
 
 Our
        employees, along with our customers, remain our most valuable asset. As noted,
        we made certain management changes during the year. These changes were made
        to
        improve the overall quality of the Corporation’s leadership and to position us
        with the skills and experience necessary to develop a first rate, cohesive
        team
        across all departments and offices of the Bank. Our commitment to developing
        a
        top rate staff to promote sound customer service and education is one of
        our top
        priorities.
 
 In
        June
        2006, William C. Marsh returned to the Corporation in the newly created position
        of Executive Vice President. Bill was previously Chief Financial Officer
        with
        the Corporation and the Bank and has returned to manage finance, accounting
        and
        compliance and to assist me in directing a number of corporate-wide strategic
        initiatives including many of the aforementioned programs. Our familiarity
        with
        Bill and his banking, finance and strategic planning experience will prove
        to be
        valuable as we continue our efforts to grow the Corporation and maintain
        our
        reputation as a first rate organization. It is the Board’s desire for Bill to
        take on increasing responsibilities as we move forward and be part of our
        leadership succession plan. I am pleased to welcome Bill back and welcome
        him to
        the Board of Directors of the Corporation and the Bank.
 
 Also
        in
        June, Paige Kaufman joined the Bank as Vice President of Human Resources.
        Several years ago Paige performed human resource and training consulting
        services for the Bank and we are delighted to have her energy, leadership
        and
        exemplary training skills.
 
 Kathy
        Buzzard joined the Bank in January 2007 as Senior Vice President of Retail
        Banking. In this position, Kathy is responsible for managing the Bank’s branch
        network, marketing and product development efforts, and the financial services
        division. Kathy brings to the Bank a broad range of financial services
        experience having served in leadership positions with other banks and financial
        services companies. With over 20 years of business experience, Kathy has
        strong
        team-building, sales program implementation, system, product development,
        and
        project management skills.
 
 Training
        and setting forth teamwork efforts to encourage open communications between
        departments, offices and between our staff and customers will be one of senior
        management’s key objectives as we move forward.
  3




***FUTURE***
 
 As
        we
        build on and continue with our long range planning initiatives that we have
        established and continue to form, we look towards the future. In last year’s
        Annual Report I noted that we have never wavered from our commitment to
        providing the very best in community banking. That commitment will continue
        as
        we strive towards profitable expansion, involvement in the communities we
        serve
        and in pursuing growth opportunities for our employees. As we move forward,
        our
        business plan is built on the following goals and objectives:
 
 §
              To
                  profitably operate our financial service business for the benefit
                  of
                  retail and business customers in our
                  markets.
 §
              To
                  be a profitable and growth-oriented entity that is committed to
                  quality
                  and building value for the Corporation’s
                  stockholders.
 §
              To
                  distinguish the Corporation from competitors through the quality
                  of the
                  products and services offered to our
                  customers.
 §
              To
                  continually be aware that the Corporation’s success is dependent upon our
                  employees.
 §
              To
                  conduct our businesses with honor and integrity, and to not assume
                  unreasonable risks, regardless of the possible
                  rewards.
 
 More
        specifically, 2007 should bring a return to improved core profitability as
        well
        as continued exploration of external growth opportunities under our current
        community banking model and through related financial services businesses.
        Further, we plan on reviewing all of our current products and services in
        the
        interest of offering a more simplified retail product base while expanding
        into
        a wider range of commercial products and services, including corporate internet
        banking, cash management and merchant services, among other
        possibilities.
 
 ***CLOSING***
 
 We
        strive
        to provide the very best in community banking in the markets that we serve
        and
        believe strongly that there is a place to operate an independent community
        bank
        with long-term stockholder growth prospects. On behalf of your management
        team,
        the staff and Board of Directors I thank you for your continued support as
        we
        strive for growth and consistent, favorable performance.
 
 Very
        truly
        yours,
  
 
 David
        L.
        Cox
 Chairman
        of the Board
 President
        and Chief Executive Officer
 
 
 February
        5, 2007
  4


**Marketing
      Information**


5
 **Marketing
          Information**
 
 
 6
 Board
          of
          Directors
 
 
 7
 Office
          Locations and Branch Managers





8


**Selected
      Consolidated Financial Data**


*(Dollar
        amounts in thousands, except share data)*


**As
                  of December 31,****Financial
                  Condition Data**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Total
                  assets
              
              **$**
              **300,560**
              
              $
              275,517
              
              $
              273,380
              
              $
              262,512
              
              $
              238,577Securities
              
              
              **51,774**
              
              
              56,304
              
              
              63,362
              
              
              49,162
              
              
              48,748Loans
                  receivable, net
              
              
              **213,344**
              
              
              192,526
              
              
              179,575
              
              
              190,482
              
              
              169,557Deposits
              
              
              **244,492**
              
              
              230,503
              
              
              232,874
              
              
              217,110
              
              
              204,425Borrowed
                  funds
              
              
              **30,000**
              
              
              19,500
              
              
              15,000
              
              
              20,700
              
              
              10,000Stockholders'
                  equity
              
              
              **23,917**
              
              
              23,615
              
              
              23,616
              
              
              22,655
              
              
              22,680Stockholders'
                  equity per common share
              
              **$**
              **18.86**
              
              $
              18.63
              
              $
              18.63
              
              $
              17.87
              
              $
              17.02Tangible
                  stockholders' equity per common share
              
              **$**
              **17.74**
              
              $
              17.50
              
              $
              17.48
              
              $
              16.70
              
              $
              15.82**For
                  the year ended December 31,****Operations
                  Data**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002**Interest
                  income
              
              **$**
              **16,259**
              
              $
              14,877
              
              $
              13,953
              
              $
              14,209
              
              $
              14,653Interest
                  expense
              
              
              **6,968**
              
              
              5,573
              
              
              5,219
              
              
              4,901
              
              
              5,161Net
                  interest income
              
              
              **9,291**
              
              
              9,304
              
              
              8,734
              
              
              9,308
              
              
              9,492Provision
                  for loan losses
              
              
              **358**
              
              
              205
              
              
              290
              
              
              330
              
              
              381Net
                  interest income after provision for loan losses
              
              
              **8,933**
              
              
              9,099
              
              
              8,444
              
              
              8,978
              
              
              9,111Noninterest
                  income
              
              
              **2,934**
              
              
              3,317
              
              
              2,535
              
              
              1,785
              
              
              1,400Noninterest
                  expense
              
              
              **9,409**
              
              
              9,146
              
              
              7,909
              
              
              7,522
              
              
              7,420Income
                  before income taxes
              
              
              **2,458**
              
              
              3,270
              
              
              3,070
              
              
              3,241
              
              
              3,091Provision
                  for income taxes
              
              
              **492**
              
              
              697
              
              
              513
              
              
              749
              
              
              834Net
                  income
              
              **$**
              **1,966**
              
              $
              2,573
              
              $
              2,557
              
              $
              2,492
              
              $
              2,257Average
                  common shares outstanding
              
              
              **1,267,835**
              
              
              1,267,835
              
              
              1,267,835
              
              
              1,301,714
              
              
              1,332,835Basic
                  earnings per share
              
              **$**
              **1.55**
              
              $
              2.03
              
              $
              2.02
              
              $
              1.91
              
              $
              1.69Dividends
                  per share (2)
              
              **$**
              **1.10**
              
              $
              1.02
              
              $
              0.94
              
              $
              1.11
              
              $
              1.03**As
                  of or for the year ended December 31,****Other
                  Data**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002*****Performance
                  Ratios***Return
                  on average assets
              
              
              **0.69**
              **%**
              
              0.94
              %
              
              0.96
              %
              
              0.99
              %
              
              0.99
              %Return
                  on average equity
              
              
              **8.28**
              **%**
              
              10.69
              %
              
              11.08
              %
              
              10.96
              %
              
              10.21
              %Yield
                  on interest-earning assets (1)
              
              
              **6.30**
              **%**
              
              6.00
              %
              
              5.81
              %
              
              6.28
              %
              
              6.93
              %Cost
                  of interest-bearing liabilities
              
              
              **3.23**
              **%**
              
              2.70
              %
              
              2.57
              %
              
              2.56
              %
              
              2.99
              %Cost
                  of funds
              
              
              **2.69**
              **%**
              
              2.24
              %
              
              2.15
              %
              
              2.16
              %
              
              2.53
              %Interest
                  rate spread (1)
              
              
              **3.08**
              **%**
              
              3.30
              %
              
              3.24
              %
              
              3.72
              %
              
              3.94
              %Net
                  interest margin (1)
              
              
              **3.68**
              **%**
              
              3.82
              %
              
              3.71
              %
              
              4.18
              %
              
              4.54
              %Efficiency
                  ratio (1) (3)
              
              
              **74.18**
              **%**
              
              69.72
              %
              
              67.11
              %
              
              64.16
              %
              
              64.98
              %Noninterest
                  expense to average assets
              
              
              **3.30**
              **%**
              
              3.33
              %
              
              2.96
              %
              
              2.99
              %
              
              3.25
              %Interest-earning
                  assets to average assets
              
              
              **92.89**
              **%**
              
              92.82
              %
              
              92.86
              %
              
              92.69
              %
              
              94.65
              %Loans
                  to deposits
              
              
              **87.26**
              **%**
              
              83.52
              %
              
              77.11
              %
              
              87.74
              %
              
              82.94
              %Dividend
                  payout ratio (2)
              
              
              **70.93**
              **%**
              
              50.25
              %
              
              46.61
              %
              
              57.98
              %
              
              60.95
              %***Asset
                  Quality Ratios***Non-performing
                  loans to total loans
              
              
              **0.85**
              **%**
              
              0.75
              %
              
              0.46
              %
              
              0.69
              %
              
              0.68
              %Non-performing
                  assets to total assets
              
              
              **0.65**
              **%**
              
              0.57
              %
              
              0.33
              %
              
              0.52
              %
              
              0.49
              %Allowance
                  for loan losses to total loans
              
              
              **0.94**
              **%**
              
              0.96
              %
              
              1.00
              %
              
              0.92
              %
              
              0.93
              %Allowance
                  for loan losses to non-performing loans
              
              
              **110.54**
              **%**
              
              128.72
              %
              
              215.48
              %
              
              133.71
              %
              
              136.81
              %***Capital
                  Ratios***Stockholders'
                  equity to assets
              
              
              **7.96**
              **%**
              
              8.57
              %
              
              8.64
              %
              
              8.63
              %
              
              9.51
              %Tangible
                  stockholders' equity to tangible assets
              
              
              **7.52**
              **%**
              
              8.09
              %
              
              8.15
              %
              
              8.11
              %
              
              8.90
              %Average
                  equity to average assets
              
              
              **8.32**
              **%**
              
              8.75
              %
              
              8.63
              %
              
              9.02
              %
              
              9.69
              %


(1)
            Interest
                income utilized in calculation is on a fully tax equivalent
                basis. (2)
            Includes
                $0.25 per share special cash dividend paid in 2003 and
                2002. (3)
            The
                efficiency ratio is calculated by dividing operating expenses (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 eleven offices in Venango, Butler, Clarion, Clearfield, Elk
          and
          Jefferson 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 a reduction in income for 2006 as consolidated net
          income
          was $2.0 million or $1.55 per share for 2006, compared to net income of
          $2.6
          million or $2.03 per share for 2005.
 
 The
          reduction in net income of $607,000 or 23.6% for the year ended December
          31,
          2006, compared to the same period in 2005, was primarily due to certain
          charges
          associated with strategic reorganization initiatives undertaken in 2006.
          In
          addition, net income was adversely impacted by an increase in the provision
          for
          loan losses and a decrease in noninterest income, partially offset by a
          decrease
          in the provision for income taxes. The increase in the provision for loan
          losses
          was primarily due to growth in the loan portfolio, particularly with respect
          to
          commercial loans. The decrease in noninterest income for 2006 was primarily
          due
          to a reduction in gains on sales of securities. The decrease in the provision
          for income taxes in 2006 was due to lower pre-tax income.
 
 During
          the
          year ended December 31, 2006, the Corporation experienced significant asset
          growth as total assets increased $25.0 million or 9.1% to $300.6 million
          at year
          end from $275.5 million at December 31, 2005. This asset growth was driven
          by
          total loan portfolio growth of $20.8 million or 10.8% funded by increases
          in
          customer deposits of $14.0 million or 6.1% and borrowed funds of $10.5
          million
          or 53.8%.
 10


**Management’s
      Discussion and Analysis of**


**Financial
        Condition and Results of Operations** ***(continued)***


The
        reorganization charges, all of which were realized in the fourth quarter
        of
        2006, were the result of an ongoing strategic review of all aspects of the
        Bank’s operations that was initiated by the Board of Directors and executive
        management in June 2006. This review resulted in certain changes in personnel
        and a streamlining of back room operations to better utilize technology
        investments and to improve operating controls. During the fourth quarter
        of
        2006, the Bank offered a voluntary early retirement program to eligible
        employees resulting in a pension expense charge of $375,000. In addition
        to
        these retirement costs, severance and other costs associated with the
        reorganization totaled $184,000.
 
 **Changes
        in Financial Condition**
 
 Total
        assets increased $25.0 million or 9.1% to $300.6 million at December 31,
        2006
        from $275.5 million at December 31, 2005. This increase was primarily due
        to
        increases in loans receivable and cash and equivalents of $20.8 million and
        $6.4
        million, respectively. Also contributing to the increase in total assets
        was an
        increase in premises and equipment of $1.8 million as the Corporation opened
        a
        new banking office and purchased an existing bank office facility for future
        use. Partially offsetting the net increase in assets was a decrease in
        securities as these funds were utilized, in part, to fund loan
        growth.
 
 The
        increase in the Corporation’s total assets was primarily funded by increases in
        total liabilities of $24.7 million or 9.8% and total stockholders’ equity of
        $302,000 or 1.3%. The increase in total liabilities was primarily due to
        increases in customer deposits of $14.0 million or 6.1% and borrowed funds
        of
        $10.5 million or 53.8%.
 
 **Cash
        and cash equivalents.** These
        accounts increased a combined $6.4 million to $16.7 million at December 31,
        2006
        from $10.4 million at December 31, 2005. 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 higher balance of
        cash
        at year end December 31, 2006 than at the prior year end primarily as a result
        of the flat market interest rate yield curve as management determined that
        investing in overnight funds, rather than longer term bonds or securities,
        provided greater operational flexibility to reinvest such funds in
        higher-yielding loan products.
 
 **Securities.** Securities decreased $4.5 million or 8.0% to $51.8 million at December 31,
        2006
        from $56.3 million at December 31, 2005. The overall decrease in securities
        for
        the year resulted from management deploying funds from securities into loan
        growth and, as noted above, the lack of higher yielding long term investment
        opportunities in the prevailing interest rate environment during the period.
        Further, the Corporation had minimal security purchases during the
        year.
 
 **Loans
        receivable.** Net
        loans
        receivable increased $20.8 million or 10.8% to $213.3 million at December
        31,
        2006 from $192.5 million at December 31, 2005. This increase can be primarily
        attributed to growth in the Corporation’s commercial loan portfolios. Commercial
        real estate loans increased $8.1 million or 15.4% and commercial business
        loans
        increased $6.9 million or 24.7%. 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.


11


**Management’s
        Discussion and Analysis of**
 **Financial
        Condition and Results of Operations** ***(continued)***
 
 
 Also
        contributing to the growth in the loan portfolio was an increase in home
        equity
        loans of $7.4 million or 18.5% due primarily to home equity loan campaigns
        put
        forth during the year. Residential first mortgage loans decreased $1.3 million
        or 2.0% during the year despite strong residential mortgage production. This
        strong residential mortgage production was offset by the sale of $4.0 million
        of
        fixed-rate conforming 30-year mortgages. These loans were sold to the secondary
        market in connection with managing interest rate risk. Other consumer loans
        were
        flat during the period.
 
 **Non-performing
        assets.** Non-performing
        assets include non-accrual loans and real estate acquired through foreclosure
        (REO). Non-performing assets increased $381,000 to $1.9 million or 0.65%
        of
        total assets at December 31, 2006 from $1.6 million or 0.57% of total assets
        at
        December 31, 2005. Non-performing assets consisted of non-performing loans
        and
        REO of $1.8 million and $98,000, respectively, at December 31, 2006 and $1.5
        million and $106,000, respectively, at December 31, 2005. Non-performing
        assets
        at both year end dates were associated primarily with one larger credit
        relationship.
 
 **Federal
        bank stocks.** Federal
        bank stocks were comprised of FHLB stock and FRB stock of $1.9 million and
        $333,000, respectively, at December 31, 2006. 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, 2006 compared to
        December 31, 2005 can be attributed to an increase in FHLB borrowings during
        2006.
 
 **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 2006 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 increased $1.8 million or 30.0% to $8.0 million at December
        31,
        2006 from $6.1 million at December 31, 2005. The net increase resulted from
        capital expenditures of $2.7 million. During 2006, the Corporation constructed
        a
        new branch office at a cost of $1.4 million. This office opened in November
        2006. In December 2006, the Corporation purchased a full service banking
        facility for $690,000. In addition, during the year, the Corporation added
        a
        drive-through facility to one of its offices and made certain technology
        investments totaling $500,000 and $400,000, respectively. The overall increase
        in premises and equipment during the year was partially offset by normal
        depreciation of fixed assets and the write-off of certain obsolete equipment
        of
        $849,000 and $115,000, respectively.
 
 **Deposits.** Total
        deposits increased $14.0 million or 6.1% to $244.5 million at December 31,
        2006
        from $230.5 million at December 31, 2005. While noninterest-bearing deposits
        remained flat during the year, interest-bearing deposits increased by 7.5%
        principally as the result of certain certificate of deposit specials promoted
        in
        the latter part of the year to fund loan growth and to market the opening
        of the
        new branch office.
 
 **Borrowed
        funds.** Borrowed
        funds, or advances from the FHLB, increased $10.5 million or 53.8% to $30.0
        million at December 31, 2006 from $19.5 million at December 31, 2005. The
        increase in advances was the result of management’s matching long-term borrowed
        funds with loans originated during the second and third quarters of
        2006.


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 $2.0 million, $2.6 million and $2.6
          million
          in 2006, 2005 and 2004, 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,****2006**
                  
                  **2005**
                  
                  **2004****Average**
                  
                  
                  
                  **Yield
                      /**
                  
                  **Average**
                  
                  
                  
                  **Yield
                      /**
                  
                  **Average**
                  
                  
                  
                  **Yield
                      /****Balance**
                  
                  **Interest**
                  
                  **Rate**
                  
                  **Balance**
                  
                  **Interest**
                  
                  **Rate**
                  
                  **Balance**
                  
                  **Interest**
                  
                  **Rate****Interest-earning
                      assets:**Loans,
                      taxable
                  
                  $
                  200,499
                  
                  $
                  13,554
                  
                  
                  6.76
                  %
                  $
                  181,109
                  
                  $
                  12,011
                  
                  
                  6.63
                  %
                  $
                  178,998
                  
                  $
                  11,414
                  
                  
                  6.38
                  %Loans,
                      tax-exempt
                  
                  
                  6,781
                  
                  
                  438
                  
                  
                  6.46
                  %
                  
                  7,052
                  
                  
                  454
                  
                  
                  6.44
                  %
                  
                  7,376
                  
                  
                  478
                  
                  
                  6.48
                  %*Total
                      loans receivable*
                  
                  
                  207,280
                  
                  
                  13,992
                  
                  
                  6.75
                  %
                  
                  188,161
                  
                  
                  12,465
                  
                  
                  6.62
                  %
                  
                  186,374
                  
                  
                  11,892
                  
                  
                  6.38
                  %Securities,
                      taxable
                  
                  
                  37,944
                  
                  
                  1,481
                  
                  
                  3.90
                  %
                  
                  47,075
                  
                  
                  1,714
                  
                  
                  3.64
                  %
                  
                  40,245
                  
                  
                  1,396
                  
                  
                  3.47
                  %Securities,
                      tax-exempt
                  
                  
                  15,250
                  
                  
                  1,013
                  
                  
                  6.64
                  %
                  
                  15,468
                  
                  
                  1,012
                  
                  
                  6.53
                  %
                  
                  15,398
                  
                  
                  1,014
                  
                  
                  6.59
                  %*Total
                      securities*
                  
                  
                  53,194
                  
                  
                  2,494
                  
                  
                  4.69
                  %
                  
                  62,543
                  
                  
                  2,726
                  
                  
                  4.36
                  %
                  
                  55,643
                  
                  
                  2,410
                  
                  
                  4.33
                  %Interest-earning
                      deposits with banks
                  
                  
                  2,608
                  
                  
                  129
                  
                  
                  4.95
                  %
                  
                  2,978
                  
                  
                  81
                  
                  
                  2.72
                  %
                  
                  4,405
                  
                  
                  71
                  
                  
                  1.61
                  %Federal
                      bank stocks
                  
                  
                  1,945
                  
                  
                  94
                  
                  
                  4.83
                  %
                  
                  1,633
                  
                  
                  58
                  
                  
                  3.55
                  %
                  
                  1,753
                  
                  
                  42
                  
                  
                  2.40
                  %*Total
                      interest-earning cash equivalents*
                  
                  
                  4,553
                  
                  
                  223
                  
                  
                  4.90
                  %
                  
                  4,611
                  
                  
                  139
                  
                  
                  3.01
                  %
                  
                  6,158
                  
                  
                  113
                  
                  
                  1.84
                  %**Total
                      interest-earning assets**
                  
                  
                  **265,027**
                  
                  
                  **16,709**
                  
                  
                  **6.30**
                  **%**
                  
                  **255,315**
                  
                  
                  **15,330**
                  
                  
                  **6.00**
                  **%**
                  
                  **248,175**
                  
                  
                  **14,415**
                  
                  
                  **5.81**
                  **%**Cash
                      and due from banks
                  
                  
                  6,922
                  
                  
                  
                  
                  
                  
                  
                  
                  7,399
                  
                  
                  
                  
                  
                  
                  
                  
                  7,175Other
                      noninterest-earning assets
                  
                  
                  13,376
                  
                  
                  
                  
                  
                  
                  
                  
                  12,340
                  
                  
                  
                  
                  
                  
                  
                  
                  11,913Total
                      Assets
                  
                  $
                  285,325
                  
                  
                  
                  
                  
                  
                  
                  $
                  275,054
                  
                  
                  
                  
                  
                  
                  
                  $
                  267,263**Interest-bearing
                      liabilities:**Interest-bearing
                      demand deposits
                  
                  $
                  72,584
                  
                  
                  770
                  
                  
                  1.06
                  %
                  $
                  79,063
                  
                  
                  570
                  
                  
                  0.72
                  %
                  $
                  77,421
                  
                  
                  457
                  
                  
                  0.59
                  %Time
                      deposits
                  
                  
                  120,544
                  
                  
                  5,197
                  
                  
                  4.31
                  %
                  
                  110,829
                  
                  
                  4,324
                  
                  
                  3.90
                  %
                  
                  110,456
                  
                  
                  4,129
                  
                  
                  3.74
                  %*Total
                      interest-bearing deposits*
                  
                  
                  193,128
                  
                  
                  5,967
                  
                  
                  3.09
                  %
                  
                  189,892
                  
                  
                  4,894
                  
                  
                  2.58
                  %
                  
                  187,877
                  
                  
                  4,586
                  
                  
                  2.44
                  %Borrowed
                      funds, short-term
                  
                  
                  1,147
                  
                  
                  53
                  
                  
                  4.62
                  %
                  
                  1,199
                  
                  
                  50
                  
                  
                  4.17
                  %
                  
                  504
                  
                  
                  3
                  
                  
                  0.60
                  %Borrowed
                      funds, long-term
                  
                  
                  21,521
                  
                  
                  948
                  
                  
                  4.40
                  %
                  
                  15,000
                  
                  
                  629
                  
                  
                  4.19
                  %
                  
                  15,000
                  
                  
                  630
                  
                  
                  4.20
                  %*Total
                      borrowed funds*
                  
                  
                  22,668
                  
                  
                  1,001
                  
                  
                  4.42
                  %
                  
                  16,199
                  
                  
                  679
                  
                  
                  4.19
                  %
                  
                  15,504
                  
                  
                  633
                  
                  
                  4.08
                  %**Total
                      interest-bearing liabilities**
                  
                  
                  **215,796**
                  
                  
                  **6,968**
                  
                  
                  **3.23**
                  **%**
                  
                  **206,091**
                  
                  
                  **5,573**
                  
                  
                  **2.70**
                  **%**
                  
                  **203,381**
                  
                  
                  **5,219**
                  
                  
                  **2.57**
                  **%**Noninterest-bearing
                      demand deposits
                  
                  
                  43,556
                  
                  
                  -
                  
                  
                  -
                  
                  
                  42,450
                  
                  
                  -
                  
                  
                  -
                  
                  
                  38,800
                  
                  
                  -
                  
                  
                  -**Funding
                      and cost of funds**
                  
                  
                  **259,352**
                  
                  
                  **6,968**
                  
                  
                  **2.69**
                  **%**
                  
                  **248,541**
                  
                  
                  **5,573**
                  
                  
                  **2.24**
                  **%**
                  
                  **242,181**
                  
                  
                  **5,219**
                  
                  
                  **2.15**
                  **%**Other
                      noninterest-bearing liabilities
                  
                  
                  2,224
                  
                  
                  
                  
                  
                  
                  
                  
                  2,452
                  
                  
                  
                  
                  
                  
                  
                  
                  2,005Total
                      Liabilities
                  
                  
                  261,576
                  
                  
                  
                  
                  
                  
                  
                  
                  250,993
                  
                  
                  
                  
                  
                  
                  
                  
                  244,186Stockholders'
                      Equity
                  
                  
                  23,749
                  
                  
                  
                  
                  
                  
                  
                  
                  24,061
                  
                  
                  
                  
                  
                  
                  
                  
                  23,077Total
                      Liabilities and Stockholders' Equity
                  
                  $
                  285,325
                  
                  
                  
                  
                  
                  
                  
                  $
                  275,054
                  
                  
                  
                  
                  
                  
                  
                  $
                  267,263**Net
                      interest income**
                  
                  
                  
                  
                  **$**
                  **9,741**
                  
                  
                  
                  
                  
                  
                  
                  **$**
                  **9,757**
                  
                  
                  
                  
                  
                  
                  
                  **$**
                  **9,196****Interest
                      rate spread**(difference between weighted average rate on
                      interest-earning  assets and interest-bearing liabilities)
                  
                  
                  
                  
                  
                  
                  
                  
                  **3.08**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **3.30**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **3.24**
                  **%****Net
                        interest margin**(net interest income as a percentage of average
                        interest earning assets)
                  
                  
                  
                  
                  
                  
                  
                  
                  **3.68**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **3.82**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **3.71**
                  **%**




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)*
              
              **2006
                  versus 2005**
              
              **2005
                  versus 2004**Increase
                  (decrease) due to
              
              Increase
                  (decrease) due toVolume
              
              Rate
              
              Total
              
              Volume
              
              Rate
              
              Total**Interest
                  income:**Loans
              
              $
              1,287
              
              $
              240
              
              $
              1,527
              
              $
              115
              
              $
              458
              
              $
              573Securities
              
              
              (428
              )
              
              196
              
              
              (232
              )
              
              300
              
              
              16
              
              
              316Interest-earning
                  deposits with banks
              
              
              (11
              )
              
              59
              
              
              48
              
              
              (28
              )
              
              38
              
              
              10Federal
                  bank stocks
              
              
              13
              
              
              23
              
              
              36
              
              
              (3
              )
              
              19
              
              
              16Total
                  interest-earning assets
              
              
              861
              
              
              518
              
              
              1,379
              
              
              384
              
              
              531
              
              
              915**Interest
                  expense:**Deposits
              
              
              85
              
              
              988
              
              
              1,073
              
              
              50
              
              
              258
              
              
              308Borrowed
                  funds
              
              
              284
              
              
              38
              
              
              322
              
              
              29
              
              
              17
              
              
              46Total
                  interest-bearing liabilities
              
              
              369
              
              
              1,026
              
              
              1,395
              
              
              79
              
              
              275
              
              
              354**Net
                  interest income**
              
              $
              492
              
              $
              (508
              )
              $
              (16
              )
              $
              305
              
              $
              256
              
              $
              561




***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.
  14
 **Management’s
        Discussion and Analysis of**
 **Financial
          Condition and Results of Operations** ***(continued)***
 
  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 2006 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.
 
 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 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.
 15
 **Management’s
        Discussion and Analysis of**
 **Financial
          Condition and Results of Operations** ***(continued)***
 **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
          wells as variances resulting from the Bank’s technology conversions late in
          2004.
 
 The
          provision for income taxes decreased $205,000 or 29.4% to $492,000 for
          2006,
          compared to $697,000 for 2005. Contributing to this change was the decrease
          in
          the Corporation’s pre-tax earnings of $812,000.
   16
 **Management’s
        Discussion and Analysis of**
 **Financial
          Condition and Results of Operations** ***(continued)***
 ***2005
            Results Compared to 2004 Results***
 
 The
            Corporation reported net income of $2.57 million and $2.56 million for
            2005 and
            2004, respectively. The $16,000 or 1.0% increase in net income can be
            attributed
            to increases in net interest income and noninterest income of $570,000
            and
            $782,000, respectively, and a decrease in the provision for loan losses
            of
            $85,000, offset by increases in noninterest expenses and the provision
            for
            income taxes of $1.2 million and $184,000, respectively.
 
 **Net
            interest income.** Tax
            equivalent net interest income increased $561,000 or 6.1% to $9.8 million
            for
            2005, compared to $9.2 million for 2004. This increase in net interest
            income
            can be attributed to an increase in tax equivalent interest income of
            $915,000
            offset by an increase in interest expense of $354,000.
 
 **Interest
            income.** Tax
            equivalent interest income increased $915,000 or 6.4% to $15.3 million
            for 2005,
            compared to $14.4 million for 2004. This increase can be attributed primarily
            to
            increases in interest earned on loans and securities of $573,000 and
            $316,000,
            respectively.
 
 Tax
            equivalent interest earned on loans receivable increased $573,000 or
            4.8% to
            $12.5 million for 2005, compared to $11.9 million for 2004. During that
            time,
            average loans receivable increased $1.8 million or 1.0%, accounting for
            $115,000
            in additional loan interest income. This volume increase was accompanied
            by an
            increase of $458,000 related to the 24 basis point increase in the average
            interest rate earned on the loan portfolio. The increase in the average
            balance
            of loans was primarily due to increased originations of home equity loans
            and
            lines of credit, commercial mortgages and commercial business loans while
            the
            increases in the average yield primarily reflects the recent upward movement
            in
            short-term market interest rates.
 
 Tax
            equivalent interest earned on securities increased $316,000 or 13.1%
            to $2.7
            million for 2005, compared to $2.4 million for 2004 primarily due to
            an increase
            in the average volume. The average volume of these assets increased $6.9
            million
            or 12.4% as a result of the deployment of funds from deposit growth,
            in excess
            of loan demand, into short-term commercial paper, U.S. Government agency
            and
            related entities, mortgage-backed and equity securities.
 
 Interest
            earned on interest-earning deposits with banks, including federal funds
            sold,
            increased $10,000 or 14.1% to $81,000 for 2005, compared to $71,000 for
            2004.
            The average rate of interest-earning deposits increased 111 basis points
            during
            2005 resulting in an increase in interest income of $38,000. Interest
            rates
            earned on interest-earning deposit accounts are influenced by the FRB
            and
            generally fluctuate with changes in the discount rate. During 2005, the
            FRB
            raised the discount rate 200 basis points to 4.25% at December 31, 2005
            from
            2.25% at December 31, 2004. The average volume of these assets decreased
            $1.4
            million or 32.4% as a result of investing excess funds into increased
            loan
            production and a decline in deposits.
 
 Interest
            earned on federal bank stocks increased $16,000 or 38.1% to $58,000 for
            2005,
            compared to $42,000 for 2004. The average rate of federal bank stocks
            increased
            115 basis points during 2005 resulting in an increase in interest income
            of
            $19,000. The average volume of these assets decreased $120,000 or 6.8%
            during
            2005 resulting in a decrease of interest income of $3,000.
 
 **Interest
            expense.** Interest
            expense increased $354,000 or 6.8% to $5.6 million for 2005, compared
            to $5.2
            million for 2004. This increase in interest expense can be attributed
            to
            increases in interest incurred on deposits and borrowed funds of $308,000
            and
            $46,000, respectively.
 17


**Management’s
      Discussion and Analysis of**


**Financial
        Condition and Results of Operations** ***(continued)***
 Deposit
          interest expense increased $308,000 or 6.7% to $4.9 million for 2005, compared
          to $4.6 million for 2004. This increase in interest expense can be attributed
          to
          the increase in average interest-bearing deposits of $2.0 million or 1.1%
          between 2005 and 2004 resulting in additional interest expense of $50,000.
          Contributing to the volume variance was a 14 basis point increase in the
          average
          cost of interest-bearing deposits to 2.58% for 2005 versus 2.44% for 2004
          resulting in an increase in expense due to rate of $258,000. The increase
          in the
          average balance of deposits was primarily due to the general fluctuation
          in
          transactional demand deposit accounts while the increase in the average
          cost was
          due to the recent upward movement in short-term market interest
          rates.
 
 Interest
          expense on borrowed funds increased $46,000 or 7.3% to $679,000 for 2005,
          compared to $633,000 for 2004. This increase was a result of the increase
          in the
          average balance of borrowed funds of $695,000 or 4.5% to $16.2 million
          in 2005
          from $15.5 million in 2004 resulting in additional interest expense of
          $29,000.
          In addition to the volume increase, the average rate on borrowed funds
          increased
          11 basis points to 4.19% for 2005 versus 4.08% for 2004 resulting in an
          increase
          in interest expense due to rate of $17,000. The increase in the average
          balance
          and rate of borrowed funds was primarily a result of the FHLB short-term
          borrowings incurred throughout 2005 primarily to fund loan demand and the
          outflow in deposits.
 
 **Provision
          for loan losses.** The
          provision for loan losses decreased $85,000 or 29.3% to $205,000 for 2005,
          compared to $290,000 for 2004. The Corporation’s allowance for loan losses
          amounted to $1.9 million or 0.96% of the Corporation’s total loan portfolio at
          December 31, 2005, compared to $1.8 million or 1.00% at December 31, 2004.
          The
          allowance for loan losses as a percentage of non-performing loans at December
          31, 2005 and 2004 was 128.72% and 215.48%, respectively. The decrease in
          the
          provision for loan losses from 2004 to 2005 was primarily due to the decrease
          of
          charge-offs and also qualitative factors such as local economics, portfolio
          mix
          and trends.
 
 **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, such as fees on depository accounts, general transaction and
          service
          fees, security and loan gains and losses and earnings on BOLI. Noninterest
          income increased $782,000 or 30.8% to $3.3 million for 2005, compared to
          $2.5
          million for 2004. This can be attributed to increases in fees and service
          charges, commissions on financial services, gains on securities and other
          noninterest income of $298,000, $342,000, $156,000 and $19,000, respectively.
          Offsetting this increase were decreases in gains on the sale of loans and
          earnings on BOLI of $32,000 and $1,000, respectively.
 
 Earnings
          on fees and service charges increased $298,000 or 26.6% to $1.4 million
          for
          2005, compared to $1.1 million for 2004. This increase was primarily the
          result
          of the addition of the Overdraft Privilege Program to our existing product
          and
          service line during April 2005. During the year, the Corporation realized
          an
          increase in overdraft charges of $307,000 to $1.2 million for the year
          ended
          December 31, 2005 compared to $889,000 for the year ended December 31,
          2004.
 
 During
          July 2004, the Corporation entered into an agreement with Blue Vase Securities,
          LLC to provide investment advisory services to our customers, and operates
          as
          Farmers National Financial Services. Blue Vase Securities, LLC is a nation-wide,
          full-service, independent broker/dealer that offers various services such
          as
          investments, insurances, wealth management, advisory services, estate and
          retirement planning and account consolidation. This partnership has enabled
          us
          to provide our customers with financial solutions that extend outside the
          Bank’s
          ordinary deposit products and services. The Corporation earns commissions
          from
          providing this service and recognized an increase of $342,000 in commissions
          to
          $437,000 for the year ended December 31, 2005 compared to $95,000 in
          2004.
  18


**Management’s
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations** ***(continued)***







In
        2004,
        management elected to sell its student loan portfolio based on the low interest
        rate environment and the higher expense associated with the servicing of
        these
        loans. The final sale of this portfolio occurred in 2005. Gains on the sale
        of
        loans decreased $32,000 or 86.5% to $5,000 for the year ended December 31,
        2005
        compared to $37,000 for the year ended December 31, 2004.
 
 In
        2003,
        management began to diversify its security portfolio with an emphasis on
        marketable equity securities of community banks with growth potential,
        increasing dividend yields and the potential to diversify the Corporation’s
        business. In 2005, management continued to realize gains on the diversification
        of the security portfolio. The first investment contributed $628,000 to gains
        on
        securities as management elected to divest this investment into other community
        bank stocks and other funding needs. The second investment, which was an
        involuntary transaction that resulted from the sale of the community bank,
        contributed $198,000 to gains on securities. The Bank also realized gains
        on
        securities from the sale of other equity investments of $31,000.
 
 Other
        noninterest income increased $19,000 or 4.9% to $407,000 for 2005, compared
        to
        $388,000 for 2004. Other noninterest income consists primarily of miscellaneous
        customer fees for ATM and debit card privileges, wire transfer fees, commissions
        on insurance and gains on the sale of foreclosed assets.
 
 **Noninterest
        expense.** Noninterest expense increased $1.2 million or 15.6% to $9.1 million for 2005,
        compared to $7.9 million for 2004. This increase in noninterest expense is
        comprised of increases in compensation and employee benefits, premises and
        equipment expenses and other noninterest expenses of $712,000, $225,000 and
        $305,000, respectively, offset by the reduction in intangible amortization
        expense of $5,000.
 
 The
        largest component of noninterest expense is compensation and employee benefits.
        This expense increased $712,000 or 16.2%. Normal annual salary and wage
        adjustments, increased health insurance and pension costs, higher director’s
        fees, and commissions paid to the financial services representative were
        the
        major components of this increase. Also contributing to the increase was
        the
        addition of a new commercial lender, compliance officer, financial services
        assistant, trainer and credit analyst. Partially offsetting this increase
        was an
        increase in standard loan costs deferred associated with personnel as a result
        of increased loan production.
 
 Premises
        and equipment expense increased $225,000 or 16.2% primarily as a result of
        a
        change in the estimated useful life of an asset which was replaced during
        the
        fourth quarter of 2005 and resulted in additional depreciation expense of
        $108,000. Also contributing to the increase in premises and equipment expenses
        were increases in repairs and maintenance, utilities resulting from higher
        energy costs experienced during the year and maintenance service contracts
        incurred as a result of new technology.
 
 Other
        noninterest expense increased $305,000 or 14.6% primarily as a result of
        increased professional fees, travel and entertainment, loan expenses, collection
        costs, bad checks and other losses, expenses associated with the overdraft
        privilege program and losses associated with reconciling items related to
        a
        correspondent bank relationship. During 2005, the introduction of the overdraft
        privilege program to our product and service line accounted for $47,000 of
        the
        increase in other noninterest expenses. Also contributing to this increase
        was
        the write-off of amounts related to a correspondent bank reconciliation of
        $203,000 resulting from the inefficiencies related to consolidation of their
        offices as well as variances resulting from the Bank’s technology conversions
        late in 2004.
 
 Provision
        for income taxes increased $184,000 or 35.9% to $697,000 for 2005, compared
        to
        $513,000 for 2004. Contributing to this change was the increase in the effective
        tax rate to 21.3% for 2005 from 16.7% for 2004. During 2004, the Corporation
        generated tax credits and reduced federal income tax expense primarily as
        a
        result of the historical renovations to our headquarters located in Emlenton,
        Pennsylvania.





19


**Management’s
      Discussion and Analysis of**


**Financial
        Condition and Results of Operations** ***(continued)***




**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
          Executive Vice President and 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.
 
 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.
 20
 **Management’s
          Discussion and Analysis of**
 **Financial
          Condition and Results of Operations** ***(continued)***
 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, 2006, the
            Corporation’s interest-earning assets maturing or repricing within one year
            totaled $78.5 million while the Corporation’s interest-bearing liabilities
            maturing or repricing within one-year totaled $92.2 million, providing
            an excess
            of interest-bearing liabilities over interest-earning assets of $13.7
            million or
            a negative 4.6% of total assets. At December 31, 2006, the percentage
            of the
            Corporation’s assets to liabilities maturing or repricing within one year was
            85.1%.
 
 The
            following table presents the amounts of interest-earning assets and
            interest-bearing liabilities outstanding as of December 31, 2006 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
                  
                  $
                  52,564
                  
                  $
                  25,877
                  
                  $
                  90,720
                  
                  $
                  47,079
                  
                  $
                  57,181
                  
                  $
                  273,421Total
                      interest-bearing liabilities
                  
                  
                  50,515
                  
                  
                  41,649
                  
                  
                  53,156
                  
                  
                  28,421
                  
                  
                  100,787
                  
                  
                  274,528Maturity
                      or repricing gap during the period
                  
                  $
                  2,049
                  
                  $
                  (15,772
                  )
                  $
                  37,564
                  
                  $
                  18,658
                  
                  $
                  (43,606
                  )
                  $
                  (1,107
                  )Cumulative
                      gap
                  
                  $
                  2,049
                  
                  $
                  (13,723
                  )
                  $
                  23,841
                  
                  $
                  42,499
                  
                  $
                  (1,107
                  )Ratio
                      of gap during the period to total assets
                  
                  
                  0.68
                  %
                  
                  (5.25
                  %)
                  
                  12.50
                  %
                  
                  6.21
                  %
                  
                  (14.51
                  %)Ratio
                      of cumulative gap to total assets
                  
                  
                  0.68
                  %
                  
                  (4.57
                  %)
                  
                  7.93
                  %
                  
                  14.14
                  %
                  
                  (0.37
                  %)Total
                      assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  300,560
  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.
  21


**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, 2006 and 2005, respectively. This analysis
        was
        done assuming that the interest-earning asset and interest-bearing liability
        levels at December 31, 2006 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, 2006
        levels for net interest income.
 Increase
                
                Decrease+100
                
                +200
                
                -100
                
                -200BP
                
                BP
                
                BP
                
                BP2006
                    Net interest income - increase (decrease)
                
                
                
                1.12%
                
                0.73%
                
                (0.33%)
                
                (3.43%)2005
                    Net interest income - increase (decrease)
                
                
                
                0.40%
                
                (0.53%)
                
                (1.45%)
                
                (4.75%)




22


**Management’s
      Discussion and Analysis of**


**Financial
        Condition and Results of Operations** ***(continued)***


**Impact
        of Inflation and Changing Prices**
 
 The
        consolidated financial statements of the Corporation and related notes presented
        herein have been prepared in accordance with accounting principles generally
        accepted in the United States of America which require the measurement of
        financial condition and operating results in terms of historical dollars,
        without considering changes in the relative purchasing power of money over
        time
        due to inflation.
 
 Unlike
        most industrial companies, substantially all of the assets and liabilities
        of a
        financial institution are monetary in nature. As a result, interest rates
        have a
        more significant impact on a financial institution’s performance than the
        effects of general levels of inflation. Interest rates do not necessarily
        move
        in the same direction or in the same magnitude as the prices of goods and
        services since such prices are affected by inflation to a larger degree than
        interest rates. In the current interest rate environment, liquidity and the
        maturity structure of the Corporation’s assets and liabilities are critical to
        the maintenance of acceptable performance levels.
 
 **Capital
        Resources**
 
 Total
        stockholders’ equity increased $302,000 or 1.3% to $23.9 million at December 31,
        2006 from $23.6 million at December 31, 2005. Net income of $2.0 million
        in
        2006, represented a decline in earnings of $607,000 or 23.6% compared to
        last
        year. Returns on average equity and assets were 8.28% and 0.69%, respectively,
        for 2006.
 
 The
        Corporation has maintained a strong capital position with a capital to assets
        ratio of 8.0% at December 31, 2006, a decline compared to the ratio of 8.6%
        a
        year earlier. While continuing to sustain this strong capital position, regular
        quarterly dividends increased to $1.4 million in 2006 from $1.3 million in
        2005.
        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, 2006.
 
 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, 2006, 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 2006, the
        Corporation used its sources of funds primarily to fund loan commitments.
        As of
        December 31, 2006, the Corporation had outstanding loan commitments, including
        undisbursed loans and amounts available under credit lines, totaling $22.6
        million, and standby letters of credit totaling $463,000. 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, 2006, time deposits amounted to $129.5 million or 53.0% of the
        Corporation’s total consolidated deposits, including approximately $58.9
        million, which are scheduled to mature within the next year. Management of
        the
        Corporation believes that they have 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.
 23


**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 limited and
          rare
          extent, through the sale of loans. At December 31, 2006, 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 critical accounting
          policies.
 
 ***Allowance
          for loan losses.*** The
          Corporation considers that the determination of the allowance for loan
          losses
          involves a higher degree of judgment and complexity than its other significant
          accounting policies. The balance in the allowance for loan losses is determined
          based on management’s review and evaluation of the loan portfolio in relation to
          past loss experience, the size and composition of the portfolio, current
          economic events and conditions and other pertinent factors, including
          management’s assumptions as to future delinquencies, recoveries and losses. All
          of these factors may be susceptible to significant change. Among the many
          factors affecting the allowance for loan losses, some are quantitative
          while
          others require qualitative judgment. Although management believes its process
          for determining the allowance adequately considers all of the potential
          factors
          that could potentially result in credit losses, the process includes subjective
          elements and may be susceptible to significant change. To the extent actual
          outcomes differ from management’s estimates, additional provisions for loan
          losses may be required that would adversely impact the Corporation’s financial
          condition or earnings in future periods.
  24


**Management’s
      Discussion and Analysis of**


**Financial
        Condition and Results of Operations** ***(continued)***


**Recent
        Accounting and Regulatory Pronouncements**
 
 In
        March
        2006, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) No. 156, *Accounting
        for Servicing of Financial Assets - An Amendment of FASB Statement No.
        140* (SFAS
        156). SFAS 156 requires that all separately recognized servicing assets and
        servicing liabilities be initially measured at fair value, if practicable.
        The
        statement permits, but does not require, the subsequent measurement of servicing
        assets and servicing liabilities at fair value. SFAS 156 is effective as
        of the
        beginning of an entity’s first fiscal year that begins after September 15, 2006,
        which for the Corporation will be as of the beginning of fiscal 2007. The
        Corporation does not believe that the adoption of SFAS 156 will have a
        significant effect on its consolidated financial statements.
 
 In
        July
        2006, the FASB issued FASB Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes* .
        The
        interpretation clarifies the accounting for uncertainty in income taxes
        recognized in a company’s financial statements in accordance with SFAS 109, *Accounting
        for Income Taxes* .
        Specifically, the pronouncement prescribes a recognition threshold and a
        measurement attributable for the financial statement recognition and measurement
        of a tax position taken or expected to be taken in a tax return. The
        interpretation also provides guidance on the related derecognition,
        classification, interest and penalties, accounting for interim periods,
        disclosure and transition of uncertain tax positions. The interpretation
        is
        effective for fiscal years beginning after December 15, 2006, which for the
        Corporation will be as of the beginning of fiscal 2007. The Corporation does
        not
        believe that the adoption of this interpretation will have a significant
        effect
        on its consolidated financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* (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
        September 2006, the FASB issued SFAS No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement
        Plans* (SFAS
        158), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded
        or underfunded status of pension and other postretirement benefit plans on
        the
        balance sheet. Under SFAS 158, gains and losses, prior service costs and
        credits, and any remaining transition amounts under SFAS 87 and SFAS 106
        that
        have not yet been recognized through net periodic benefit cost will be
        recognized in accumulated other comprehensive income, net of tax effects,
        until
        they are amortized as a component of net periodic cost. The measurement date,
        the date at which the benefit obligation and plan assets are measured, is
        required to be the Corporation’s fiscal year end. SFAS 158 is effective for
        publicly-held companies for fiscal years ending after December 15, 2006,
        except for the measurement date provisions, which are effective for fiscal
        years
        ending after December 15, 2008. The Corporation, in accordance with and in
        connection with the adoption of SFAS 158, recognized $360,000 in accumulated
        other comprehensive income, net of taxes, as of December 31,
        2006.




25


**Management’s
      Discussion and Analysis of**


**Financial
        Condition and Results of Operations** ***(continued)***
 In
          September 2006, the Securities and Exchange Commission (SEC) issued Staff
          Accounting Bulleting No. 108, *Considering
          the Effects of Prior Year Misstatements when Quantifying Misstatements
          in
          Current Year Financial Statements* (SAB
          108). SAB 108 provides interpretive guidance on how the effects of the
          carryover
          or reversal of prior year misstatements should be considered in quantifying
          a
          potential current year misstatement. Prior to SAB 108, companies might
          evaluate
          the materiality of financial-statement misstatements using either the income
          statement or balance sheet approach, with the income statement approach
          focusing
          on new misstatements added in the current year, and the balance sheet approach
          focusing on the cumulative amount of misstatement present in a company’s balance
          sheet. Misstatements that would be material under one approach could be
          viewed
          as immaterial under another approach, and not be corrected. SAB 108 now
          requires
          that companies view financial statement misstatements as material if they
          are
          material according to either the income statement or balance sheet approach.
          SAB
          108 is effective for fiscal years ending after November 15, 2006. The
          Corporation in accordance with and in connection with the adoption of SAB
          108,
          adjusted its beginning retained earnings for 2006 by $120,000 in the
          accompanying consolidated balance sheet.
 
 In
          September 2006, FASB’s 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 Principals
          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 disclosures are required in fiscal years beginning after December 15,
          2007,
          with early adoption permitted. The Corporation is currently evaluating
          the
          impact that the implementation of EITF 06-4 may have on its consolidated
          financial statements.
 
 In
          October
          2006, the FASB issued FSP No. 123(R)-5, *Amendment
          of FASB Staff Position FAS 123(R)-1* (FSP
          123(R)-5). FSP 123(R)-5 amends FSP 123(R)-1 for equity instruments that
          were
          originally issued as employee compensation and then modified, with such
          modification made solely to reflect an equity restructuring that occurs
          when the
          holders are no longer employees. FSP 123(R)-5 is effective for the Corporation
          January 1, 2007. The Corporation does not expect the adoption of FSP 123(R)-5
          to
          have a material impact on its consolidated financial statements.
 
 In
          February 2007, the FASB issued SFAS No. 159, *The
          Fair Value Option for Financial Assets and Financial Liabilities - 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.
  26


**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.
    27
 **Consolidated
          Balance Sheets**
 
 *(Dollar
          amounts in thousands, except share data)*
  **December
                  31,****2006**
              
              **2005****Assets**Cash
                  and due from banks
              
              $
              7,540
              
              $
              9,399Interest
                  earning deposits with banks
              
              
              9,177
              
              
              968Total
                  cash and cash equivalents
              
              
              16,717
              
              
              10,367Securities:Available
                  for sale, at fair value
              
              
              51,774
              
              
              56,289Held
                  to maturity
              
              
              -
              
              
              15Total
                  securities
              
              
              51,774
              
              
              56,304Loans
                  receivable, net of allowance for loan losses of $2,035 and
                  $1,869
              
              
              213,344
              
              
              192,526Federal
                  bank stocks, at cost
              
              
              2,217
              
              
              1,773Bank-owned
                  life insurance
              
              
              4,794
              
              
              4,623Accrued
                  interest receivable
              
              
              1,374
              
              
              1,271Premises
                  and equipment, net
              
              
              7,958
              
              
              6,123Goodwill
              
              
              1,422
              
              
              1,422Other
                  intangible assets
              
              
              -
              
              
              7Prepaid
                  expenses and other assets
              
              
              960
              
              
              1,101**Total
                  Assets**
              
              **$**
              **300,560**
              
              **$**
              **275,517****Liabilities
                  and Stockholders' Equity****Liabilities**Deposits:Non-interest
                  bearing
              
              $
              44,045
              
              $
              44,044Interest
                  bearing
              
              
              200,447
              
              
              186,459Total
                  deposits
              
              
              244,492
              
              
              230,503Borrowed
                  funds:Short-term
              
              
              -
              
              
              4,500Long-term
              
              
              30,000
              
              
              15,000Total
                  borrowed funds
              
              
              30,000
              
              
              19,500Accrued
                  interest payable
              
              
              825
              
              
              607Accrued
                  expenses and other liabilities
              
              
              1,326
              
              
              1,292**Total
                  Liabilities**
              
              
              276,643
              
              
              251,902**Stockholders'
                  Equity**Preferred
                  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
              
              
              10,871
              
              
              10,871Treasury
                  stock, at cost; 128,017 shares
              
              
              (2,653
              )
              
              (2,653
              )Retained
                  earnings
              
              
              14,370
              
              
              13,678Accumulated
                  other comprehensive loss
              
              
              (416
              )
              
              (26
              )**Total
                  Stockholders' Equity**
              
              
              23,917
              
              
              23,615**Total
                  Liabilities and Stockholders' Equity**
              
              **$**
              **300,560**
              
              **$**
              **275,517**




See
        accompanying notes to consolidated financial statements.
 28


**Consolidated
      Statements of Income**





*(Dollar
        amounts in thousands, except share data)*
 **Year
                    ended December 31,****2006**
                
                **2005**
                
                **2004****Interest
                    and dividend income**Loans
                    receivable, including fees
                
                $
                13,856
                
                $
                12,325
                
                $
                11,744Securities:Taxable
                
                
                1,481
                
                
                1,714
                
                
                1,396Exempt
                    from federal income tax
                
                
                699
                
                
                699
                
                
                700Federal
                    bank stocks
                
                
                94
                
                
                58
                
                
                42Deposits
                    with banks
                
                
                129
                
                
                81
                
                
                71**Total
                    interest and dividend income**
                
                
                16,259
                
                
                14,877
                
                
                13,953**Interest
                    expense**Deposits
                
                
                5,967
                
                
                4,894
                
                
                4,586Short-term
                    borrowed funds
                
                
                53
                
                
                50
                
                
                3Long-term
                    borrowed funds
                
                
                948
                
                
                629
                
                
                630**Total
                    interest expense**
                
                
                6,968
                
                
                5,573
                
                
                5,219**Net
                    interest income**
                
                
                9,291
                
                
                9,304
                
                
                8,734Provision
                    for loan losses
                
                
                358
                
                
                205
                
                
                290**Net
                    interest income after provision for loan losses**
                
                
                8,933
                
                
                9,099
                
                
                8,444**Noninterest
                    income**Fees
                    and service charges
                
                
                1,484
                
                
                1,420
                
                
                1,122Commissions
                    on financial services
                
                
                408
                
                
                437
                
                
                95Net
                    gain on sales of loans
                
                
                58
                
                
                5
                
                
                37Net
                    gain on available for sale securities
                
                
                400
                
                
                857
                
                
                701Earnings
                    on bank-owned life insurance
                
                
                195
                
                
                191
                
                
                192Other
                
                
                389
                
                
                407
                
                
                388**Total
                    noninterest income**
                
                
                2,934
                
                
                3,317
                
                
                2,535**Noninterest
                    expense**Compensation
                    and employee benefits
                
                
                5,632
                
                
                5,107
                
                
                4,395Premises
                    and equipment
                
                
                1,637
                
                
                1,611
                
                
                1,386Intangible
                    amortization expense
                
                
                7
                
                
                31
                
                
                36Other
                
                
                2,133
                
                
                2,397
                
                
                2,092**Total
                    noninterest expense**
                
                
                9,409
                
                
                9,146
                
                
                7,909**Income
                    before provision for income taxes**
                
                
                2,458
                
                
                3,270
                
                
                3,070Provision
                    for income taxes
                
                
                492
                
                
                697
                
                
                513**Net
                    income**
                
                **$**
                **1,966**
                
                **$**
                **2,573**
                
                **$**
                **2,557****Basic
                    earnings per share**
                
                **$**
                **1.55**
                
                **$**
                **2.03**
                
                **$**
                **2.02****Average
                    common shares outstanding**
                
                
                **1,267,835**
                
                
                **1,267,835**
                
                
                **1,267,835**
  See
          accompanying notes to consolidated financial statements.
 29


**Consolidated
      Statements of Changes in Stockholders’ Equity**


*(Dollar
        amounts in thousands, except share data)*
 **Year
                    ended December 31, 2006, 2005 and
                    2004****Accumulated****Additional**
                
                
                
                
                
                **Other**
                
                **Total****Common**
                
                **Paid-in**
                
                **Treasury**
                
                **Retained**
                
                **Comprehensive**
                
                **Stockholders'****Stock**
                
                **Capital**
                
                **Stock**
                
                **Earnings**
                
                **Income
                    (Loss)**
                
                **Equity****Balance
                    at January 1, 2004**
                
                **$**
                **1,745**
                
                **$**
                **10,871**
                
                **$**
                **(2,653**
                **)**
                **$**
                **11,033**
                
                **$**
                **1,659**
                
                **$**
                **22,655**Comprehensive
                    income:Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                2,557
                
                
                
                
                
                2,557Change
                    in net unrealized gains on securities
                    available for sale, net of taxes
                    of ($207)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (404
                )
                
                (404
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,153Dividends
                    declared, $0.94 per share
                
                
                
                
                
                
                
                
                
                
                
                (1,192
                )
                
                
                
                
                (1,192
                )**Balance
                    at December 31, 2004**
                
                
                **1,745**
                
                
                **10,871**
                
                
                **(2,653**
                **)**
                
                **12,398**
                
                
                **1,255**
                
                
                **23,616**Comprehensive
                    income:Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                2,573
                
                
                
                
                
                2,573Change
                    in net unrealized gains (losses) on securities
                    available for sale, net of taxes
                    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**
                **)**
                
                **23,615**Cumulative
                  effect of adjustments resultingfrom
                  the adoption of SAB No. 108
                
                
                
                
                
                
                
                
                
                
                
                120
                
                
                
                
                
                120**Adjusted
                    balance at December 31, 2005**
                
                
                **1,745**
                
                
                **10,871**
                
                
                **(2,653**
                **)**
                
                **13,798**
                
                
                **(26**
                **)**
                
                **23,735**Comprehensive
                    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**
                
                **$**
                **(416**
                **)**
                **$**
                **23,917**
  See
        accompanying notes to consolidated financial statements.
 30


**Consolidated
        Statements of Cash Flows**
 
 *(Dollar
        amounts in thousands)*


**Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004****Cash
                  flows from operating activities**Net
                  income
              
              $
              1,966
              
              $
              2,573
              
              $
              2,557Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization of premises and equipment
              
              
              849
              
              
              855
              
              
              703Provision
                  for loan losses
              
              
              358
              
              
              205
              
              
              290Amortization
                  of premiums and accretion of discounts, net
              
              
              32
              
              
              94
              
              
              223Amortization
                  of intangible assets and mortgage servicing rights
              
              
              14
              
              
              37
              
              
              36Realized
                  gain on sales of available for sale securities, net
              
              
              (400
              )
              
              (857
              )
              
              (701
              )Net
                  gains on sales of loans
              
              
              (58
              )
              
              (5
              )
              
              (37
              )Proceeds
                  from the sale of loans held for sale
              
              
              -
              
              
              546
              
              
              3,541Earnings
                  on bank-owned life insurance, net
              
              
              (171
              )
              
              (175
              )
              
              (176
              )(Increase)
                  decrease in accrued interest receivable
              
              
              (103
              )
              
              (68
              )
              
              67(Increase)
                  decrease in prepaid expenses and other assets
              
              
              (84
              )
              
              572
              
              
              (6
              )Increase
                  in accrued interest payable
              
              
              218
              
              
              30
              
              
              100Increase
                  (decrease) in accrued expenses and other liabilities
              
              
              35
              
              
              (176
              )
              
              (421
              )**Net
                  cash provided by operating activities**
              
              
              2,656
              
              
              3,631
              
              
              6,176**Cash
                  flows from investing activities**Loan
                  originations and principal collections, net
              
              
              (25,147
              )
              
              (13,286
              )
              
              6,628Proceeds
                  from the sale of loans
              
              
              3,998
              
              
              -
              
              
              -Available
                  for sale securities:Sales
              
              
              1,089
              
              
              1,646
              
              
              945Maturities,
                  repayments and calls
              
              
              5,848
              
              
              8,809
              
              
              13,299Purchases
              
              
              (2,076
              )
              
              (4,552
              )
              
              (28,549
              )Held
                  to maturity securities:Sales
              
              
              14
              
              
              -
              
              
              -Maturities,
                  repayments and calls
              
              
              1
              
              
              1
              
              
              1(Purchase)
                  redemption of federal bank stocks
              
              
              (444
              )
              
              (42
              )
              
              251Purchase
                  of customer relationship intangible
              
              
              -
              
              
              -
              
              
              (20
              )Purchases
                  of premises and equipment
              
              
              (2,684
              )
              
              (1,300
              )
              
              (682
              )**Net
                  cash used in investing activities**
              
              
              (19,401
              )
              
              (8,724
              )
              
              (8,127
              )**Cash
                  flows from financing activities**Net
                  increase (decrease) in deposits
              
              
              13,989
              
              
              (2,371
              )
              
              15,764Increase
                  in long-term borrowed funds
              
              
              15,000
              
              
              -
              
              
              -Increase
                  (decrease) of overnight borrowed funds
              
              
              (4,500
              )
              
              4,500
              
              
              (5,700
              )Dividends
                  paid on common stock
              
              
              (1,394
              )
              
              (1,293
              )
              
              (1,192
              )**Net
                  cash provided by financing activities**
              
              
              23,095
              
              
              836
              
              
              8,872Net
                  increase (decrease) in cash and cash equivalents
              
              
              6,350
              
              
              (4,257
              )
              
              6,921Cash
                  and cash equivalents at beginning of period
              
              
              10,367
              
              
              14,624
              
              
              7,703Cash
                  and cash equivalents at end of period
              
              $
              16,717
              
              $
              10,367
              
              $
              14,624**Supplemental
                  information:**Interest
                  paid
              
              $
              6,750
              
              $
              5,543
              
              $
              5,119Income
                  taxes paid
              
              
              686
              
              
              442
              
              
              295**Supplemental
                  noncash disclosures:**Transfers
                  from loans to foreclosed real estate
              
              
              50
              
              
              106
              
              
              69




See
        accompanying notes to consolidated financial statements.
 31


**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 $1.1 million
        and $2.1 million were required to meet regulatory reserve and clearing
        requirements at December 31, 2006 and 2005, 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.


32


**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.
  33


**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 loses. 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 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 carry 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.
  34


**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 $98,000 and $106,000 at December
          31, 2006 and 2005, respectively.
 
 ***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 bases of the various balance sheet assets and liabilities
          and gives
          current recognition to changes in tax rate and laws.
 
 ***Basic
          Earnings Per Common Share.*** The
          Corporation maintains a simple capital structure with no common stock
          equivalents. As such earnings per share computations are based on the weighted
          average number of common shares outstanding for the respective reporting
          periods. The Corporation’s capital structure contains no potentially dilutive
          securities.
 
 ***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.
 
 ***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.
  35
 **Notes
          to Consolidated Financial Statements** ***(continued)***
 **1.**  **Summary
            of Significant Accounting Policies (continued)**
 
 ***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 are 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 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. See
            Note 13 for additional information on the adoptions of SFAS 158.
 
 ***Recent
            Accounting and Regulatory Pronouncements.*** In
            March
            2006, the Financial Accounting Standards Board (FASB) issued Statement
            of
            Financial Accounting Standards (SFAS) No. 156, *Accounting
            for Servicing of Financial Assets - An Amendment of FASB Statement No.
            140 (SFAS
            156)* .
            SFAS 156
            requires that all separately recognized servicing assets and servicing
            liabilities be initially measured at fair value, if practicable. The
            statement
            permits, but does not require, the subsequent measurement of servicing
            assets
            and servicing liabilities at fair value. SFAS 156 is effective as of
            the
            beginning of an entity’s first fiscal year that begins after September 15, 2006,
            which for the Corporation will be as of the beginning of fiscal 2007.
            The
            Corporation does not believe that the adoption of SFAS 156 will have
            a
            significant effect on its consolidated financial statements.
 
 In
            July
            2006, the FASB issued FASB Interpretation No. 48, *Accounting
            for Uncertainty in Income Taxes* .
            The
            interpretation clarifies the accounting for uncertainty in income taxes
            recognized in a company’s financial statements in accordance with SFAS 109,
            Accounting for Income Taxes. Specifically, the pronouncement prescribes
            a
            recognition threshold and a measurement attributable for the financial
            statement
            recognition and measurement of a tax position taken or expected to be
            taken in a
            tax return. The interpretation also provides guidance on the related
            derecognition, classification, interest and penalties, accounting for
            interim
            periods, disclosure and transition of uncertain tax positions. The
            interpretation is effective for fiscal years beginning after December
            15, 2006,
            which for the Corporation will be as of the beginning of fiscal 2007.
            The
            Corporation does not believe that the adoption of this interpretation
            will have
            a significant effect on its consolidated financial statements.
  36
 **Notes
            to Consolidated Financial Statements** ***(continued)***
 
 **1.**  **Summary
            of Significant Accounting Policies (continued)**
 
 In
            September 2006, the FASB issued SFAS No. 157, *Fair
            Value Measurements* (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
            September 2006, FASB’s 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 Principals
            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 disclosures are required in fiscal years beginning after December
            15, 2007,
            with early adoption permitted. The Corporation is currently evaluating
            the
            impact that the implementation of EITF 06-4 may have on its consolidated
            financial statements.
 
 In
            October
            2006, the FASB issued FSP No. 123(R)-5, *Amendment
            of FASB Staff Position FAS 123(R)-1* (FSP
            123(R)-5). FSP 123(R)-5 amends FSP 123(R)-1 for equity instruments that
            were
            originally issued as employee compensation and then modified, with such
            modification made solely to reflect an equity restructuring that occurs
            when the
            holders are no longer employees. FSP 123(R)-5 is effective for the Corporation
            January 1, 2007. The Corporation does not expect the adoption of FSP
            123(R)-5 to
            have a material impact on its consolidated financial statements.
 
 In
            February 2007, the FASB issued SFAS No. 159, *The
            Fair Value Option for Financial Assets and Financial Liabilities - 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)***





**2.**  **Securities**


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


*(Dollar
                  amounts in thousands)*
              
              Amortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              gains
              
              losses
              
              value**Available
                  for sale:****December
                  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**December
                  31, 2005:**U.S.
                  Government agencies and related entities
              
              $
              34,353
              
              $
              -
              
              $
              (818
              )
              $
              33,535Mortgage-backed
                  securities
              
              
              3,046
              
              
              -
              
              
              (124
              )
              
              2,922Municipal
                  securities
              
              
              14,685
              
              
              664
              
              
              -
              
              
              15,349Corporate
                  securities
              
              
              2,249
              
              
              4
              
              
              (4
              )
              
              2,249Equity
                  securities
              
              
              1,995
              
              
              383
              
              
              (144
              )
              
              2,234$
              56,328
              
              $
              1,051
              
              $
              (1,090
              )
              $
              56,289**Held
                  to maturity:****December
                  31, 2005:**Mortgage-backed
                  securities
              
              $
              15
              
              $
              -
              
              $
              (1
              )
              $
              14$
              15
              
              $
              -
              
              $
              (1
              )
              $
              14Sales
                  of available for sale securities were as follows:*(Dollar
                  amounts in thousands)*
              
              
              2006
              
              
              2005
              
              
              2004Proceeds
              
              $
              1,089
              
              $
              1,646
              
              $
              945Gross
                  gains
              
              
              400
              
              
              857
              
              
              701Tax
                  provision related to gains
              
              
              136
              
              
              291
              
              
              238






The
      following table summarizes scheduled maturities of the Corporation’s securities
      as of December 31, 2006:


*(Dollar
                  amounts in thousands)*
              
              Available
                  for saleAmortizedcost
              
              
              
              FairvalueDue
                  in one year or less
              
              $
              6,500
              
              
              
              
              $
              6,423Due
                  after one year through five years
              
              
              24,127
              
              
              
              
              
              23,601Due
                  after five through ten years
              
              
              4,082
              
              
              
              
              
              4,002Due
                  after ten years
              
              
              13,767
              
              
              
              
              
              14,323No
                  scheduled maturity
              
              
              3,382
              
              
              
              
              
              3,425$
              51,858
              
              
              
              
              $
              51,774




38


**Notes
      to Consolidated Financial Statements** ***(continued)***





**2.**  **Securities
        (continued)**
 
 Expected
        maturities may differ from contractual maturities because issuers may have
        the
        right to call or prepay obligations with or without call or prepayment
        penalties.
 
 Securities
        with carrying values of $12.4 million and $11.4 million as of December 31,
        2006
        and 2005, 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, 2006
        and
        2005 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
                
                TotalDescription
                    of Securities
                
                FairValue
                
                UnrealizedLoss
                
                FairValue
                
                UnrealizedLoss
                
                FairValue
                
                UnrealizedLoss**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
                )**December
                    31, 2005:**U.S.
                    Government agencies and related entities
                
                $
                17,031
                
                $
                (318
                )
                $
                16,504
                
                $
                (500
                )
                $
                33,535
                
                $
                (818
                )Mortgage-backed
                    securities
                
                
                702
                
                
                (34
                )
                
                2,220
                
                
                (91
                )
                
                2,922
                
                
                (124
                )Municipal
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Corporate
                    securities
                
                
                -
                
                
                -
                
                
                745
                
                
                (4
                )
                
                745
                
                
                (4
                )Equity
                    securities
                
                
                1,126
                
                
                (139
                )
                
                215
                
                
                (5
                )
                
                1,341
                
                
                (144
                )$
                18,859
                
                $
                (491
                )
                $
                19,684
                
                $
                (600
                )
                $
                38,543
                
                $
                (1,090
                )
  As
        of
        December 31, 2006, there were 38 securities in an unrealized loss
        position.
 Unrealized
          losses on available for sale securities have not been recognized into income
          because the issuers’ bonds are of high credit quality (rated AA or higher),
          management has the intent and ability to hold for the foreseeable future
          and the
          decline in the fair value is largely due to an increase in market interest
          rates. The fair value is expected to recover as the bonds approach maturity
          dates and/or market rates decline.
  39


**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)*
              
              2006
              
              2005**Mortgage
                  loans on real estate:**Residential
                  first mortgages
              
              $
              64,662
              
              $
              66,011Home
                  equity loans and lines of credit
              
              
              47,330
              
              
              39,933Commercial
                  real estate
              
              
              61,128
              
              
              52,990173,120
              
              
              158,934**Other
                  loans:**Commercial
                  business
              
              
              34,588
              
              
              27,732Consumer
              
              
              7,671
              
              
              7,72942,259
              
              
              35,461**Total
                  loans, gross**
              
              
              215,379
              
              
              194,395**Less
                  allowance for loan losses**
              
              
              2,035
              
              
              1,869**Total
                  loans, net**
              
              $
              213,344
              
              $
              192,526




Following
        is an analysis of the changes in the allowance for loan losses for the years
        ended December 31:
 *(Dollar
                    amounts in thousands)*
                
                2006
                
                2005
                
                2004Balance
                    at the beginning of the year
                
                $
                1,869
                
                $
                1,810
                
                $
                1,777Provision
                    for loan losses
                
                
                358
                
                
                205
                
                
                290Charge-offs
                
                
                (221
                )
                
                (197
                )
                
                (318
                )Recoveries
                
                
                29
                
                
                51
                
                
                61Balance
                    at the end of the year
                
                $
                2,035
                
                $
                1,869
                
                $
                1,810
  Non-performing
          loans, which include primarily non-accrual loans, were $1.8 million and
          $1.5
          million at December 31, 2006 and 2005, respectively. The Corporation is
          not
          committed to lend significant additional funds to debtors whose loans are
          on
          non-accrual status. At December 31, 2006 and 2005, the recorded investment
          in
          loans considered to be impaired, requiring an allowance for loan loss,
          was
          $461,000 and $999,000, respectively, against which approximately $166,000
          and
          $100,000, respectively, 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 2006, 2005 and 2004, impaired
          loans
          averaged $946,000, $1.2 million and $635,000, respectively. The Corporation
          recognized interest income on impaired loans of approximately $14,000,
          $95,000
          and $27,000, on a cash basis, during 2006, 2005 and 2004, 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 $52.7 million and
          $52.1
          million as of December 31, 2006 and 2005, respectively, are pledged as
          qualifying collateral. The Corporation is in compliance will all FHLB credit
          policies at December 31, 2006.
  40


**Notes
      to Consolidated Financial Statements** ***(continued)***


**3.**  **Loans
        Receivable (continued)**
 
 The
        Corporation was servicing residential mortgage loans with unpaid principal
        balances of $6.3 million and $2.4 million at December 31, 2006 and 2005,
        respectively, for a third party investor. In addition, the Corporation was
        servicing commercial loans with unpaid principle balances of $6.0 million
        and
        $5.5 million at December 2006 and 2005, 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 $1.9 million and $333,000, respectively, at December 31, 2006, and $1.4
        million and $333,000, respectively, at December 31, 2005.
  **5.**  **Premises
        and Equipment**  Premises
        and equipment at December 31 are summarized by major classification as
        follows:


*(Dollar
                  amounts in thousands)*
              
              2006
              
              2005Land
              
              $
              1,088
              
              $
              349Buildings
                  and improvements
              
              
              5,894
              
              
              4,738Leasehold
                  improvements
              
              
              696
              
              
              696Furniture,
                  fixtures and equipment
              
              
              4,279
              
              
              4,411Software
              
              
              1,735
              
              
              1,389Construction
                  in progress
              
              
              688
              
              
              91414,381
              
              
              12,495Less
                  accumulated depreciation and amortization
              
              
              6,423
              
              
              6,372$
              7,958
              
              $
              6,123




Depreciation
        and amortization expense for the years ended December 31, 2006, 2005 and
        2004
        were $849,000, $855,000 and $703,000, respectively.




41


**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, 2006, 2005 and 2004 was $112,000, $109,000 and $108,000,
          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)*
                
                Amount2007
                
                $
                1152008
                
                
                1202009
                
                
                1222010
                
                
                1122011
                
                
                76Thereafter
                
                
                29$
                574
  **6.**  **Goodwill
          and Intangible Assets**
 
 The
          following table summarizes the Corporation’s acquired goodwill and intangible
          assets as of December 31:
 *(Dollar
                  amounts in thousands)*
              
              **2006**
              
              **2005**Gross
                  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
              
              
              13Total
              
              $
              2,682
              
              $
              1,260
              
              $
              2,682
              
              $
              1,253
  Goodwill
        resulted from two previous branch acquisitions and is no longer amortized.
        Aggregate amortization expense for 2006, 2005 and 2004 was $7,000, $31,000
        and
        $36,000 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 $1.2
          million
          and $1.4 million at December 31, 2006 and 2005, respectively. During 2006,
          total
          principal additions and total principal repayments associated with these
          loans
          were $172,000 and $363,000, respectively. Deposits from principal officers
          and
          directors held by the Bank at December 31, 2006 and 2005 totaled $2.4 million
          and $3.3 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 2006, 2005 and 2004, amounts paid
          to
          affiliates for such services totaled $117,000, $55,000 and $104,000,
          respectively.
  42


**Notes
      to Consolidated Financial Statements** ***(continued)***





**8.**  **Deposits**
 
 The
        following table summarizes the Corporation’s deposits as of December
        31:


*(Dollar
                  amounts in thousands)*
              
              2006
              
              2005Weighted
              
              
              
              
              
              WeightedType
                  of accounts
              
              average
                  rate
              
              Amount
              
              %
              
              average
                  rate
              
              Amount
              
              %Non-interest
                  bearing deposits
              
              -
              $
              44,045
              
              18.0%
              
              -
              $
              44,044
              
              19.1%Interest
                  bearing demand deposits
              
              0.69%
              
              70,951
              
              29.0%
              
              0.70%
              
              74,067
              
              32.1%Time
                  deposits
              
              4.59%
              
              129,496
              
              53.0%
              
              4.13%
              
              112,392
              
              48.8%2.63%
              $
              244,492
              
              100.0%
              
              2.24%
              $
              230,503
              
              100.0%




The
      Corporation had a total of $33.0 million and $25.9 million in time deposits
      of
      $100,000 or more at December 31, 2006 and 2005, respectively.


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


*(Dollar
                  amounts in thousands)*
              
              Amount
              
              %2007
              
              $
              58,859
              
              
              45.5%2008
              
              
              30,166
              
              
              23.3%2009
              
              
              8,635
              
              
              6.7%2010
              
              
              7,347
              
              
              5.7%2011
              
              
              9,631
              
              
              7.4%Thereafter
              
              
              14,858
              
              
              11.5%$
              129,496
              
              
              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)*
                
                2006
                
                2005Weighted
                
                
                
                
                
                
                
                WeightedAverage
                
                Average
                
                average
                
                
                
                Average
                
                Average
                
                averageBalance
                
                Balance
                
                Rate
                
                rate
                
                Balance
                
                Balance
                
                Rate
                
                rate**FHLB
                  advances:**Due
                    within 12 months
                
                $
                -
                
                $
                1,147
                
                
                4.90
                %
                
                4.62
                %
                $
                4,500
                
                $
                1,199
                
                
                3.75
                %
                
                4.17
                %Due
                    beyond 12 months but within 5 years
                
                
                5,000
                
                
                5,000
                
                
                4.61
                %
                
                4.68
                %
                
                -
                
                
                -
                
                
                -
                
                
                -Due
                    beyond 5 years but within 10 years
                
                
                25,000
                
                
                16,521
                
                
                4.45
                %
                
                4.32
                %
                
                15,000
                
                
                15,000
                
                
                4.13
                %
                
                4.19
                %$
                30,000
                
                $
                22,668
                
                
                
                
                
                
                
                $
                19,500
                
                $
                16,199
  43


**Notes
      to Consolidated Financial Statements** ***(continued)***





**9.**  **Borrowed
        Funds (continued)**
 
 The
        Corporation had outstanding advances with the FHLB of $30.0 million and $19.5
        million at December 31, 2006 and 2005, respectively. The $30.0 million in
        outstanding borrowed funds at December 31, 2006 consists of six advances
        with
        the FHLB. These advances mature between November 2011 and August 2016. Three
        $5.0 million borrowings have fixed rates of 4.61%, 3.74% and 4.04%,
        respectively, and are callable quarterly based on a strike rate of 8.0% compared
        to the three month LIBOR rate. 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%. If these advances convert to an
        adjustable rate borrowing, the Corporation has the opportunity to repay the
        advances without penalty at the conversion date.
 
 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, 2006 was $110.6 million.
 
 **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, 2006, $2.5 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, 2006, the Corporation had an outstanding balance on this
        line of
        $850,000.
  44


**Notes
        to Consolidated Financial Statements** ***(continued)***
 
 **10.**  **Insurance
          of Accounts and Regulatory Matters (continued)**
 
 ***Minimum
          Regulatory Capital Requirements***
 
 The
          Corporation (on a consolidated basis) and the Bank are subject to various
          regulatory capital requirements administered by the federal banking agencies.
          Failure to meet minimum capital requirements can initiate certain mandatory
          and
          possibly additional discretionary actions by regulators that, if undertaken,
          could have a direct material effect on the Corporation’s and the Bank’s
          financial statements. Under capital adequacy guidelines and the regulatory
          framework for prompt corrective action, the Corporation and the Bank must
          meet
          specific capital guidelines that involve quantitative measures of their
          assets,
          liabilities and certain off-balance-sheet items as calculated under regulatory
          accounting practices. The capital amounts and classification are also subject
          to
          qualitative judgments by the regulators about components, risk weightings,
          and
          other factors. Prompt corrective action provisions are not applicable to
          bank
          holding companies.
 
 Quantitative
          measures established by regulation to ensure capital adequacy require the
          Corporation and the Bank to maintain minimum amounts and ratios (set forth
          in
          the following table) of total and Tier 1 capital (as defined in the regulations)
          to risk-weighted assets (as defined) and of Tier 1 capital (as defined)
          to
          average assets (as defined). As of December 31, 2006 and 2005, the Corporation
          and the Bank met all capital adequacy requirements to which they are
          subject.
 
 As
          of
          December 31, 2006, the most recent notification from the FDIC categorized
          the
          Bank as well capitalized under the regulatory framework for prompt corrective
          action. To be categorized as well capitalized, an institution must maintain
          minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
          as set
          forth in the following table. There are no conditions or events since the
          notification that management believes have changed the Bank’s
          category.
 
 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, 2006
              
              December
                  31, 2005Consolidated
              
              Bank
              
              Consolidated
              
              BankAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio**Total
                  capital to risk weighted assets:**Actual
              
              $
              24,964
              
              
              11.34
              %
              $
              23,096
              
              
              10.62
              %
              $
              24,196
              
              
              12.36
              %
              $
              22,175
              
              
              11.44
              %For
                  capital adequacy purposes
              
              
              17,617
              
              
              8.00
              %
              
              17,401
              
              
              8.00
              %
              
              15,662
              
              
              8.00
              %
              
              15,501
              
              
              8.00
              %To
                  be well capitalized
              
              
              N/A
              
              
              N/A
              
              
              21,752
              
              
              10.00
              %
              
              N/A
              
              
              N/A
              
              
              19,376
              
              
              10.00
              %**Tier
                  1 capital to risk-weighted assets:**Actual
              
              $
              22,910
              
              
              10.40
              %
              $
              21,060
              
              
              9.68
              %
              $
              22,212
              
              
              11.35
              %
              $
              20,312
              
              
              10.48
              %For
                  capital adequacy purposes
              
              
              8,809
              
              
              4.00
              %
              
              8,701
              
              
              4.00
              %
              
              7,831
              
              
              4.00
              %
              
              7,751
              
              
              4.00
              %To
                  be well capitalized
              
              
              N/A
              
              
              N/A
              
              
              13,051
              
              
              6.00
              %
              
              N/A
              
              
              N/A
              
              
              11,626
              
              
              6.00
              %**Tier
                  1 capital to average assets:**Actual
              
              $
              22,910
              
              
              8.07
              %
              $
              21,060
              
              
              7.14
              %
              $
              22,212
              
              
              8.13
              %
              $
              20,312
              
              
              7.51
              %For
                  capital adequacy purposes
              
              
              11,356
              
              
              4.00
              %
              
              11,793
              
              
              4.00
              %
              
              10,926
              
              
              4.00
              %
              
              10,824
              
              
              4.00
              %To
                  be well capitalized
              
              
              N/A
              
              
              N/A
              
              
              14,741
              
              
              5.00
              %
              
              N/A
              
              
              N/A
              
              
              13,530
              
              
              5.00
              %





45
  **Notes
        to Consolidated Financial Statements *(continued)***
 
 **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)
                
                2006
                
                2005
                
                2004Current
                
                $
                445
                
                $
                556
                
                $
                538Deferred
                
                
                47
                
                
                141
                
                
                (25
                )$
                492
                
                $
                697
                
                $
                513
  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)*
                
                2006
                
                2005
                
                2004%
                    Pre-tax
                
                
                
                %
                    Pre-tax
                
                
                
                %
                    Pre-taxAmount
                
                Income
                
                Amount
                
                Income
                
                Amount
                
                IncomeProvision
                    at statutory tax rate
                
                $
                836
                
                
                34.0
                %
                $
                1,112
                
                
                34.0
                %
                $
                1,044
                
                
                34.0
                %Increase
                    (decrease) resulting from:Tax
                    free interest, net of disallowance
                
                
                (304
                )
                
                (12.4
                %)
                
                (313
                )
                
                (9.6
                %)
                
                (319
                )
                
                (10.4
                %)Earnings
                    on BOLI
                
                
                (58
                )
                
                (2.4
                %)
                
                (59
                )
                
                (1.8
                %)
                
                (53
                )
                
                (1.7
                %)Other,
                    net
                
                
                18
                
                
                0.7
                %
                
                (43
                )
                
                (1.3
                %)
                
                (159
                )
                
                (5.2
                %)Provision
                
                $
                492
                
                
                20.0
                %
                $
                697
                
                
                21.3
                %
                $
                513
                
                
                16.7
                %
  46
 Notes
        to
        Consolidated Financial Statements
*(continued)*
 
 **12.
        Income Taxes (continued)**
 
 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)*
                
                2006
                
                2005**Deferred
                    tax assets:**Provision
                    for loan losses
                
                $
                638
                
                $
                582SFAS
                    158 pension accrual
                
                
                185
                
                
                -Tax
                    credits
                
                
                148
                
                
                202Intangible
                    assets
                
                
                115
                
                
                130Accrued
                    pension cost
                
                
                77
                
                
                42Net
                    unrealized loss on securities
                
                
                28
                
                
                13Loss
                    on securities
                
                
                -
                
                
                40Deferred
                    loan fees
                
                
                -
                
                
                10Other
                
                
                33
                
                
                3Gross
                    deferred tax assets
                
                
                1,224
                
                
                1,022**Deferred
                    tax liabilities:**-Depreciation
                
                
                360
                
                
                318Stock
                    gain
                
                
                172
                
                
                184Prepaid
                    expenses
                
                
                58
                
                
                68Deferred
                    loan fees
                
                
                26
                
                
                -Loan
                    servicing
                
                
                19
                
                
                5Other
                
                
                53
                
                
                64Gross
                    deferred tax liabilities
                
                
                688
                
                
                639Net
                    deferred tax asset
                
                $
                536
                
                $
                383
  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.
 
 As
        discussed under Recently Adopted Accounting Standards in Note 1, 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.
  47
 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)*
                
                2006
                
                2005
                
                2004**Change
                    in plan assets:**Fair
                    value of plan assets at beginning of year
                
                $
                3,037
                
                $
                2,818
                
                $
                2,483Actual
                    return on plan assets
                
                
                296
                
                
                164
                
                
                204Employer
                    contribution
                
                
                280
                
                
                135
                
                
                209Benefits
                    paid
                
                
                (88
                )
                
                (80
                )
                
                (78
                )Fair
                    value of plan assets at end of year
                
                
                3,525
                
                
                3,037
                
                
                2,818**Change
                    in benefit obligation:**Benefit
                    obligation at beginning of year
                
                
                3,926
                
                
                3,276
                
                
                2,912Service
                    cost
                
                
                213
                
                
                188
                
                
                158Interest
                    cost
                
                
                237
                
                
                214
                
                
                187Actuarial
                    loss
                
                
                (40
                )
                
                154
                
                
                97Effect
                    of plan amendment
                
                
                144
                
                
                -
                
                
                -Effect
                    of change in assumptions
                
                
                -
                
                
                174
                
                
                -Benefits
                    paid
                
                
                (88
                )
                
                (80
                )
                
                (78
                )Benefit
                    obligation at end of year
                
                
                4,392
                
                
                3,926
                
                
                3,276Funded
                    status (plan assets less benefit obligation)
                
                
                (867
                )
                
                (889
                )
                
                (458
                )Unrecognized
                    prior service cost
                
                
                (303
                )
                
                (486
                )
                
                (517
                )Unrecognized
                    net actuarial gain
                
                
                847
                
                
                1,283
                
                
                923Unrecognized
                    transition asset
                
                
                -
                
                
                (48
                )
                
                (56
                )**Accrued
                    pension cost**
                
                $
                (323
                )
                $
                (140
                )
                $
                (108
                )
  48
 **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
                    Benefits2006
                
                2005Prepaid
                    benefit cost
                
                $
                -
                
                $
                -Accrued
                    benefit cost
                
                
                (323
                )
                
                (140
                )Intangible
                    assets
                
                
                -
                
                
                -Accumulated
                    other comprehensive loss
                
                
                (544
                )
                
                -Net
                    amount recognized
                
                $
                (867
                )
                $
                (140
                )
  The
        accumulated benefit obligation for all defined benefit pension plans was
        $3.8
        million and $3.1 million at year end 2006 and 2005, respectively.
 
 The
        components of the periodic pension costs are as follows:
 *(Dollar
                      amounts in thousands)*
                  
                  2006
                  
                  2005
                  
                  2004Service
                      cost
                  
                  $
                  213
                  
                  $
                  188
                  
                  $
                  158Interest
                      cost
                  
                  
                  237
                  
                  
                  214
                  
                  
                  187Expected
                      return on plan assets
                  
                  
                  (268
                  )
                  
                  (246
                  )
                  
                  (209
                  )Transition
                      asset
                  
                  
                  (8
                  )
                  
                  (8
                  )
                  
                  (8
                  )Prior
                      service costs
                  
                  
                  32
                  
                  
                  19
                  
                  
                  (10
                  )Effect
                      of Special Termination Benefits
                  
                  
                  274
                  
                  
                  -
                  
                  
                  -Net
                      periodic pension cost
                  
                  $
                  480
                  
                  $
                  167
                  
                  $
                  118
 
 Weighted-average
        actuarial assumptions include the following:
 2006
                  
                  2005
                  
                  2004Discount
                      rate for benefit obligations and net cost
                  
                  
                  6.00
                  %
                  
                  6.30
                  %
                  
                  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
                  %
 49
 **Notes
        to Consolidated Financial Statements *(continued)***
 **13.**  **Employee
          Benefit Plans (continued)**
 
 The
        Corporation’s pension plan asset allocation at year end 2006 and 2005, target
        allocation for 2007, and expected long-term rate of return by asset category
        are
        as follows:
 Asset
                    Category
                
                Target
                    Allocation
                
                Percentage
                    of Plan Assets at Year End
                
                Weighted-Average
                    Expected Long-Term Rate of Return2007
                
                2006
                
                2005
                
                2006Equity
                    Securities
                
                52%
                
                52%
                
                55%
                
                6.0%Debt
                    Securities
                
                18%
                
                12%
                
                14%
                
                2.0%Other
                
                30%
                
                36%
                
                31%
                
                0.5%100%
                
                100%
                
                8.5%
  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 $250,000 to its pension plan
        in
        2007.
 
 Estimated
        future benefit payments, which reflect expected future service, as appropriate,
        are as follows:
 *(Dollar
                    amounts in thousands)*For
                    year ended December 31,
                  
                  Pension
                      Benefits2007
                  
                  $
                  852008
                  
                  
                  862009
                  
                  
                  1042010
                  
                  
                  1322011
                  
                  
                  1492012-2016
                  
                  
                  1,263Thereafter
                  
                  
                  2,573Benefit
                      Obligation
                  
                  $
                  4,392
  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. 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.
  50
 **Notes
        to Consolidated Financial Statements
*(continued)***
 
  **13.**  **Employee
        Benefit Plans (continued)**
 
 ***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 2006, 2005 and 2004 were $76,000, $75,000 and
        $67,000, respectively.
 
 ***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 62. As of December
        31,
        2006 and 2005, the Corporation’s SERP liability was $161,000 and $122,000,
        respectively. For the years ended December 31, 2006, 2005 and 2004, the
        Corporation recognized SERP expense of $39,000, $40,000 and $38,000,
        respectively.
 
 **14.**  **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)*
                
                2006
                
                2005Carrying
                
                Fair
                
                Carrying
                
                Fairamount
                
                value
                
                amount
                
                value**Financial
                    assets:**Cash
                    and cash equivalents
                
                $
                16,717
                
                $
                16,717
                
                $
                10,367
                
                $
                10,367Securities
                
                
                51,774
                
                
                51,774
                
                
                56,304
                
                
                56,303Loans
                    receivable
                
                
                213,344
                
                
                210,362
                
                
                192,526
                
                
                190,596Federal
                    bank stocks
                
                
                2,217
                
                
                2,217
                
                
                1,773
                
                
                1,773Accrued
                    interest receivable
                
                
                1,374
                
                
                1,374
                
                
                1,271
                
                
                1,271**Financial
                    liabilities:**Deposits
                
                
                244,492
                
                
                243,328
                
                
                230,503
                
                
                228,720Borrowed
                    funds
                
                
                30,000
                
                
                29,668
                
                
                19,500
                
                
                19,039Accrued
                    interest payable
                
                
                825
                
                
                825
                
                
                607
                
                
                607
  51
 **Notes
        to Consolidated Financial Statements*(continued)***
 
 **14.**  **Financial
        Instruments (continued)**
 
 ***Fair
        Value of 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)*20062005Fixed RateVariable RateFixed RateVariable RateCommitments to make loans$189$3,064$280$143Unused lines of credit77118,5881,19215,516$960$21,652$1,472$15,659
 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.
  52
 **Notes
        to Consolidated Financial Statements
*(continued)***
 
 **14.**  **Financial
        Instruments (continued)**
 
 ***Off-Balance
        Sheet 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 $463,000 and $629,000 at December 31, 2006
        and
        2005, respectively.
 
 **15.**  **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)*
                
                2006
                
                2005**Assets:**Cash
                    and cash equivalents
                
                $
                40
                
                $
                306Securities
                    available for sale
                
                
                3,235
                
                
                2,088Equity
                    in net assets of subsidiary bank
                
                
                21,828
                
                
                21,558Other
                    assets
                
                
                -
                
                
                7Total
                    Assets
                
                $
                25,103
                
                $
                23,959**Liabilities
                    and Stockholders' Equity:**Accrued
                    expenses and other liabilities
                
                $
                1,186
                
                $
                344Stockholders'
                    Equity
                
                
                23,917
                
                
                23,615Total
                    Liabilities and Stockholders' Equity
                
                $
                25,103
                
                $
                23,959
  **Condensed
                    Statements of Operations**
                
                Year
                    ended December 31,*(Dollar
                    amounts in thousands)*
                
                2006
                
                2005
                
                2004**Income:**Dividends
                    from subsidiary
                
                $
                1,349
                
                $
                721
                
                $
                1,192Investment
                    income
                
                
                488
                
                
                917
                
                
                758Total
                    income
                
                
                1,837
                
                
                1,638
                
                
                1,950**Expense:**Interest
                    Expense
                
                
                26
                
                
                -
                
                
                -Noninterest
                    expense
                
                
                100
                
                
                83
                
                
                41Total
                    expense
                
                
                126
                
                
                83
                
                
                41Income
                    before income taxes and equity in undistributedoperating
                    results of subsidiary
                
                
                1,711
                
                
                1,555
                
                
                1,909Equity
                    in undistributed net income of subsidiary
                
                
                405
                
                
                1,241
                
                
                831Income
                    before income taxes
                
                
                2,116
                
                
                2,796
                
                
                2,740Income
                    tax expense
                
                
                150
                
                
                223
                
                
                183**Net
                    income**
                
                $
                1,966
                
                $
                2,573
                
                $
                2,557
 
 53
 **Notes
        to Consolidated Financial Statements
*(continued)***
 
 15. Emclaire
        Financial Corp. - Condensed Financial Statements, Parent Corporation Only
        (continued)
  **Condensed
                  Statements of Cash Flows**
              
              Year
                  ended December 31,*(Dollar
                  amounts in thousands)*
              
              2006
              
              2005
              
              2004**Operating
                  activities:**Net
                  income
              
              $
              1,966
              
              $
              2,573
              
              $
              2,557Adjustments
                  to reconcile net income to net cash providedby
                  operating activities:Equity
                  in undistributed operating results of subsidiary
              
              
              (405
              )
              
              (1,241
              )
              
              (831
              )Other,
                  net
              
              
              (300
              )
              
              (803
              )
              
              (1,332
              )Net
                  cash provided by operating activities
              
              
              1,261
              
              
              529
              
              
              394**Investing
                  activities:**Purchases
                  of securities
              
              
              (1,797
              )
              
              (99
              )
              
              (131
              )Proceeds
                  from the sale of available for sale securities
              
              
              814
              
              
              1,060
              
              
              945Net
                  cash (used in) provided by investing activities
              
              
              (983
              )
              
              961
              
              
              814**Financing
                  activities:**Net
                  change in borrowings
              
              
              850
              
              
              -
              
              
              -Dividends
                  paid
              
              
              (1,394
              )
              
              (1,293
              )
              
              (1,192
              )Net
                  cash used in financing activities
              
              
              (544
              )
              
              (1,293
              )
              
              (1,192
              )(Decrease)
                  Increase in cash and cash equivalents
              
              
              (266
              )
              
              197
              
              
              16Cash
                  and cash equivalents at beginning of period
              
              
              306
              
              
              109
              
              
              93Cash
                  and cash equivalents at end of period
              
              $
              40
              
              $
              306
              
              $
              109
  **16.**  **Other
        Comprehensive Loss**
 
 Other
        comprehensive loss components and related taxes were as follows:
 *(Dollar
                      amounts in thousands)*
                  
                  **2006**
                  
                  **2005**
                  
                  **2004**Unrealized
                      holding gains (losses) on available for sale securities
                  
                  $
                  356
                  
                  $
                  (1,084
                  )
                  $
                  90Reclassification
                      adjustment for gains later recognized in income
                  
                  
                  (400
                  )
                  
                  (857
                  )
                  
                  (701
                  )Net
                      unrealized losses
                  
                  
                  (44
                  )
                  
                  (1,941
                  )
                  
                  (611
                  )Tax
                      effect
                  
                  
                  (14
                  )
                  
                  660
                  
                  
                  207Other
                      comprehensive loss
                  
                  $
                  (30
                  )
                  $
                  (1,281
                  )
                  $
                  (404
                  )
  54
  **17.**
              **Other
                  Noninterest Income and
                  Expense**
 
 Other
        noninterest income includes customer bank card processing fee income of
        $232,000, $209,000 and $173,000 for 2006, 2005 and 2004,
        respectively.
 
 The
        following summarizes the Corporation’s other noninterest expenses for the years
        ended December 31:
 *(Dollar
                      amounts in thousands)*
                  
                  2006
                  
                  2005
                  
                  2004Professional
                      fees
                  
                  $
                  323
                  
                  $
                  292
                  
                  $
                  223Customer
                      bank card processing
                  
                  
                  231
                  
                  
                  241
                  
                  
                  239Printing
                      and supplies
                  
                  
                  214
                  
                  
                  150
                  
                  
                  147Correspondent
                      and courier fees
                  
                  
                  195
                  
                  
                  189
                  
                  
                  190Postage
                      and freight
                  
                  
                  162
                  
                  
                  148
                  
                  
                  157Marketing
                      and advertising
                  
                  
                  154
                  
                  
                  109
                  
                  
                  114Pennsylvania
                      shares and use taxes
                  
                  
                  148
                  
                  
                  142
                  
                  
                  202Travel,
                      entertainment and conferences
                  
                  
                  135
                  
                  
                  140
                  
                  
                  84Telephone
                      and data communications
                  
                  
                  116
                  
                  
                  272
                  
                  
                  327Other
                  
                  
                  455
                  
                  
                  714
                  
                  
                  409**Total
                      other noninterest expenses**
                  
                  **$**
                  **2,133**
                  
                  **$**
                  **2,397**
                  
                  **$**
                  **2,092**
  **18.**  **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
                  
                  Quarter**2006:**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**2005:**Interest
                      income
                  
                  $
                  3,544
                  
                  $
                  3,782
                  
                  $
                  3,733
                  
                  $
                  3,818Interest
                      expense
                  
                  
                  1,354
                  
                  
                  1,342
                  
                  
                  1,405
                  
                  
                  1,472Net
                      interest income
                  
                  
                  2,190
                  
                  
                  2,440
                  
                  
                  2,328
                  
                  
                  2,346Provision
                      for loan losses
                  
                  
                  60
                  
                  
                  45
                  
                  
                  40
                  
                  
                  60Net
                      interest income after provision for loan losses
                  
                  
                  2,130
                  
                  
                  2,395
                  
                  
                  2,288
                  
                  
                  2,286Noninterest
                      income
                  
                  
                  655
                  
                  
                  757
                  
                  
                  920
                  
                  
                  985Noninterest
                      expense
                  
                  
                  2,087
                  
                  
                  2,330
                  
                  
                  2,386
                  
                  
                  2,343Income
                      before income taxes
                  
                  
                  698
                  
                  
                  822
                  
                  
                  822
                  
                  
                  928Provision
                      for income taxes
                  
                  
                  131
                  
                  
                  168
                  
                  
                  159
                  
                  
                  239Net
                      income
                  
                  $
                  567
                  
                  $
                  654
                  
                  $
                  663
                  
                  $
                  689Basic
                      earnings per share
                  
                  $
                  0.45
                  
                  $
                  0.52
                  
                  $
                  0.52
                  
                  $
                  0.54
  55
 **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 as of December 31, 2006 and 2005, and the related
        consolidated statements of income, changes in stockholders’ equity and cash
        flows for the years then ended. These consolidated financial statements are
        the
        responsibility of the Corporation’s management. Our responsibility is to express
        an opinion on the 2006 and 2005 consolidated financial statements based on
        our
        audits. The consolidated financial statements of Emclaire Financial Corp.
        and
        its subsidiary, as of and for the year ended December 31, 2004 were audited
        by
        other auditors whose report, dated March 10, 2005, expressed an unqualified
        opinion on those statements.
 
 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 2006 and 2005 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, 2006 and 2005, and
        the
        results of their operations and their cash flows for the years then ended,
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 As
        discussed in Note 13 to the consolidated financial statements, the Corporation
        changed its method of accounting for defined benefit pension and other
        postretirement plans in 2006.
 
 As
        discussed in Note 12 to the financial statements, 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.”
 
 
  Beard
        Miller Company LLP
 Pittsburgh,
        Pennsylvania
 March
        5,
        2007
 
 56
  **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.**
                **Boenning
                    and Scattergood**
                **Parker
                    Hunter, Inc.**100
                    Light Street, 8th Floor
                4
                    Tower Bridge, Suite 300
                600
                    Grant Street - Suite 3100Baltimore,
                    MD 21202
                200
                    Bar Harbor Drive
                Pittsburgh,
                    PA 15219Telephone:
                    (800) 638-7411
                West
                    Conshonhocken, PA 19428
                Telephone:
                    (412) 562-8000Telephone:
                    (610) 862-5360
 **Stock
        Price and Cash Dividend Information**
 
 The
        bid
        and ask price of the Corporation’s common stock were $28.75 and $30.95,
        respectively, as of February 14, 2007. 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**
                
                **Cash****High**
                
                **Low**
                
                **Close**
                
                **Dividend****2006:**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**2005:**Fourth
                    quarter
                
                $
                30.25
                
                $
                26.50
                
                $
                26.60
                
                $
                0.27Third
                    quarter
                
                
                31.00
                
                
                29.00
                
                
                30.00
                
                
                0.25Second
                    quarter
                
                
                31.75
                
                
                28.00
                
                
                30.25
                
                
                0.25First
                    quarter
                
                
                28.50
                
                
                26.30
                
                
                28.50
                
                
                0.25
  **Number
        of Stockholders and Shares Outstanding**
 
 As
        of
        December 31, 2006, there were approximately 708 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.
 
 57
 **Corporate
        Headquarters**
 
 Emclaire
        Financial Corp.
 612
        Main
        Street
 Emlenton,
        PA 16373
 Phone:  724-867-2311
 Website:  www.
        emclairefinancial.com or www.farmersnb.com
 
 **Subsidiary
        Bank**
 
 The
        Farmers National Bank of Emlenton
 
 **Annual
        Meeting**
 
 The
        annual
        meeting of the Corporation’s stockholders will be held at 9:00 a.m., on
        Wednesday, April 25, 2007, 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, Executive Vice President and 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**
 
 Elias,
        Matz, Tiernan and Herrick L.L.P.
 12 th Floor
 734
        15 th Street,
        N.W.
 Washington,
        DC 20005
 
 **Registrar
        and Transfer Agent**
 
 Illinois
        Stock Transfer Company
 209
        West
        Jackson Boulevard, Suite 903
 Chicago,
        IL 60606
 www.ilstockstransfer.com
 800-757-5755
 58
  
 **EMCLAIRE
        FINANCIAL CORP.**
 612
        Main
        Street
 Emlenton,
        Pennsylvania 16373
 Phone:
        (724) 867-2311