UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended: December 31, 2011

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

For the transition period from:  to 

Commission File Number: 000-18464

 

EMCLAIRE FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania		25-1606091
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

612 Main Street, Emlenton, PA		16373
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number: (724) 867-2311

 

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

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

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o.

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

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

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

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

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

As of June 30, 2011, the aggregate value of the 1,489,239 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 258,169 shares held by the directors and officers of the Registrant as a group, was approximately $24.8 million. This figure is based on the last sales price of $16.62 per share of the Registrant’s Common Stock on June 30, 2011. The number of outstanding shares of common stock as of March 23, 2012, was 1,751,908.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

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EMCLAIRE FINANCIAL CORP.
  
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PART I
Item 1. Business			K-1
Item 1A. Risk Factors			K-18
Item 1B. Unresolved Staff Comments			K-18
Item 2. Properties			K-18
Item 3. Legal Proceedings			K-18
Item 4. Mine Safety Disclosures			K-18
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			K-19
Item 6. Selected Financial Data			K-19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			K-20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			K-31
Item 8. Financial Statements and Supplementary Data			K-31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			K-31
Item 9A. Controls and Procedures			K-31
Item 9B. Other Information			K-32
PART III
Item 10. Directors, Executive Officers and Corporate Governance			K-33
Item 11. Executive Compensation			K-33
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			K-33
Item 13. Certain Relationships and Related Transactions, and Director Independence			K-33
Item 14. Principal Accountant Fees and Services			K-33
PART IV
Item 15. Exhibits and Financial Statement Schedules			K-34
SIGNATURES AND CERTIFICATIONS			K-36

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

PART I

Item 1. Business

General

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

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

The Bank is subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency (OCC), which is the Bank’s chartering authority, and the Federal Deposit Insurance Corporation (FDIC), which insures customer deposits held by the Bank to the full extent provided by law. The Bank is a member of the Federal Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (BHCA), and a financial holding company under the Gramm-Leach Bliley Act of 1999 (GLBA).

At December 31, 2011, the Corporation had $491.9 million in total assets, $50.7 million in stockholders’ equity, $312.5 million in net loans and $416.5 million in deposits.

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Lending Activities

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

One-to-Four Family Mortgage Loans.  The Bank offers first mortgage loans secured by one-to-four family residences located mainly in the Bank’s primary lending area. One-to-four family mortgage loans amounted to 29.6% of the total loan portfolio at December 31, 2011. Typically such residences are single-family owner occupied units. The Bank is an approved, qualified lender for the Federal Home Loan Mortgage Corporation (FHLMC). As a result, the Bank may sell loans to and service loans for the FHLMC in market conditions and circumstances where this is advantageous in managing interest rate risk.

Home Equity Loans.  The Bank originates home equity loans secured by single-family residences. Home equity loans amounted to 22.5% of the total loan portfolio at December 31, 2011. These loans may be either a single advance fixed-rate loan with a term of up to 20 years, or a variable rate revolving line of credit. These loans are made only on owner-occupied single-family residences.

Commercial Business and Commercial Real Estate Loans.  Commercial lending constitutes a significant portion of the Bank’s lending activities. Commercial business and commercial real estate loans amounted to 43.9% of the total loan portfolio at December 31, 2011. Commercial real estate loans generally consist of loans granted for commercial purposes secured by commercial or other nonresidential real estate. Commercial loans consist of secured and unsecured loans for such items as capital assets, inventory, operations and other commercial purposes.

Consumer Loans.  Consumer loans generally consist of fixed-rate term loans for automobile purchases, home improvements not secured by real estate, capital and other personal expenditures. The Bank also offers unsecured revolving personal lines of credit and overdraft protection. Consumer loans amounted to 4.0% of the total loan portfolio at December 31, 2011.

Loans to One Borrower.  National banks are subject to limits on the amount of credit that they can extend to one borrower. Under current law, loans to one borrower are limited to an amount equal to 15% of unimpaired capital and surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and surplus if the loan is secured by readily marketable collateral. At December 31, 2011, the Bank’s loans to one borrower limit based upon 15% of unimpaired capital was $6.8 million. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2011, the Bank’s largest single lending relationship had an outstanding balance of $6.8 million. The Bank’s next largest single lending relationship had an outstanding balance of $5.6 million. These loans were performing in accordance with their loan terms at December 31, 2011.

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

(Dollar amounts in thousands)		2011								2010								2009								2008								2007
		Dollar Amount				%				Dollar Amount				%				Dollar Amount				%				Dollar Amount				%				Dollar Amount				%
Mortgage loans on real estate:
Residential first mortgages		$	93,610				29.6	%		$	84,575				27.3	%		$	74,099				25.0	%		$	74,130				27.7	%		$	65,706				28.3	%
Home equity loans and lines of credit			71,238				22.5	%			75,458				24.3	%			77,284				26.1	%			57,454				21.5	%			49,426				21.3	%
Commercial			94,765				30.0	%			93,028				30.0	%			89,952				30.4	%			85,689				32.1	%			71,599				30.9	%
Total real estate loans			259,613				82.1	%			253,061				81.6	%			241,335				81.5	%			217,273				81.3	%			186,731				80.5	%
Other loans:
Commercial business			43,826				13.9	%			43,780				14.1	%			41,588				14.1	%			40,787				15.2	%			35,566				15.3	%
Consumer			12,642				4.0	%			13,443				4.3	%			12,894				4.4	%			9,429				3.5	%			9,679				4.2	%
Total other loans			56,468				17.9	%			57,223				18.4	%			54,482				18.5	%			50,216				18.7	%			45,245				19.5	%
Total loans receivable			316,081				100.0	%			310,284				100.0	%			295,817				100.0	%			267,489				100.0	%			231,976				100.0	%
Less:
Allowance for loan losses			3,536								4,132								3,202								2,651								2,157
Net loans receivable		$	312,545							$	306,152							$	292,615							$	264,838							$	229,819

The following table sets forth the final maturity of loans in the Corporation’s portfolio as of December 31, 2011. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year.

(Dollar amounts in thousands)		Due in one year or less				Due from one to five years				Due from five to ten years				Due after ten years				Total
Residential mortgages		$	800			$	1,962			$	10,000			$	80,848			$	93,610
Home equity loans and lines of credit			828				4,976				24,015				41,419				71,238
Commercial mortgages			942				4,562				18,402				70,859				94,765
Commercial business			2,914				7,885				3,798				29,229				43,826
Consumer			444				6,328				1,191				4,679				12,642
		$	5,928			$	25,713			$	57,406			$	227,034			$	316,081

The following table sets forth the dollar amount of the Corporation’s fixed and adjustable rate loans with maturities greater than one year as of December 31, 2011:

(Dollar amounts in thousands)		Fixed rates				Adjustable rates
Residential mortgage		$	77,500			$	15,310
Home equity loans and lines of credit			56,332				14,078
Commercial mortgage			14,318				79,505
Commercial business			22,523				18,389
Consumer			7,399				4,799
		$	178,072			$	132,081

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

Delinquencies and Classified Assets

Delinquent Loans and Other Real Estate Acquired Through Foreclosure (OREO).  Typically, a loan is considered past due and a late charge is assessed when the borrower has not made a payment within fifteen

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days from the payment due date. When a borrower fails to make a required payment on a loan, the Corporation attempts to cure the deficiency by contacting the borrower. The initial contact with the borrower is made shortly after the seventeenth day following the due date for which a payment was not received. In most cases, delinquencies are cured promptly.

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

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure less costs to sell, thereby establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less the cost to sell the property. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The Corporation generally attempts to sell its OREO properties as soon as practical upon receipt of clear title.

As of December 31, 2011, the Corporation’s non-performing assets amounted to $5.9 million or 1.19% of the Corporation’s total assets compared to $7.0 million or 1.45% of the Corporation’s total assets at December 31, 2010. Non-performing assets at December 31, 2011 included non-accrual loans, loans past due 90 days and OREO of $5.5 million, $66,000 and $307,000, respectively. Included in non-accrual loans at December 31, 2011 were eight loans totaling $794,000 considered to be troubled debt restructurings. Interest income of $432,000 would have been recorded in 2011 if the nonaccrual loans had been current and performing during the entire period. Interest of $310,000 on these loans was included in income during 2011.

Classified Assets.  Regulations applicable to insured institutions require the classification of problem assets as “substandard,” “doubtful,” or “loss” depending upon the existence of certain characteristics as discussed below. A category designated “special mention” must also be maintained for assets currently not requiring the above classifications but having potential weakness or risk characteristics that could result in future problems. An asset is classified as substandard if not adequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset is characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable. Assets classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted.

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

The Corporation regularly reviews the problem loans and other assets in its portfolio to determine whether any require classification in accordance with the Corporation’s policy and applicable regulations. As of December 31, 2011, the Corporation’s classified and criticized assets amounted to $11.8 million or 2.4% of total assets, with $7.3 million classified as substandard and $4.5 million identified as special mention.

Included in classified and criticized assets at December 31, 2011 are two large loans exhibiting credit deterioration impacting the ability of the borrowers to comply with their present loan repayment terms on a timely basis.

The first loan, with an outstanding balance of $2.9 million at December 31, 2011, was originated for the construction of a hotel, restaurant and retail plaza secured by such property, the borrower’s personal residence, a separate residence and a separate farm. The hotel, restaurant and retail plaza are complete and operational. However, cash flows from operations have not been consistent and are impacted by the seasonal nature of the

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hotel. In addition, the borrower does not have other liquid sources of cash flow. As a result, the borrower has listed substantial real estate holdings for sale. At December 31, 2011, the loan was current but identified as special mention. Ultimately, due to the estimated value of the borrower’s significant real estate holdings, the Bank does not currently expect to incur a loss on this loan.

The second loan, with an outstanding balance of $2.1 million at December 31, 2011, is a consumer installment loan for the purpose of consolidating various personal debts. This loan is secured by a lien on the primary residence of the borrower discussed above, an assigned life insurance policy and the assignment of patent royalty income. Due to business difficulties and decreased royalty income, payments on the loan have not always been timely. At December 31, 2011, the loan was non-performing and classified as substandard. As a result of the estimated value of the lien on the property owned by the first borrower, the estimated cash flow of royalty income and the borrower’s business prospects, the Bank does not currently expect to incur a loss on this loan.

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

(Dollar amounts in thousands)		2011				2010				2009				2008				2007
Non-performing loans		$	5,565			$	6,611			$	2,418			$	1,011			$	952
Total as a percentage of gross loans			1.76	%			2.13	%			0.82	%			0.38	%			0.41	%
Repossessions			—				—				40				—				—
Real estate acquired through foreclosure			307				373				173				50				129
Total as a percentage of total assets			0.06	%			0.08	%			0.05	%			0.01	%			0.04	%
Total non-performing assets		$	5,872			$	6,984			$	2,631			$	1,061			$	1,081
Total non-performing assets as a percentage of total assets			1.19	%			1.45	%			0.56	%			0.28	%			0.35	%
Allowance for loan losses as a percentage of non-performing loans			63.54	%			62.50	%			132.42	%			262.22	%			226.58	%

Allowance for Loan Losses.  Management establishes allowances for estimated losses on loans based upon its evaluation of the pertinent factors underlying the types and quality of loans; historical loss experience based on volume and types of loans; trend in portfolio volume and composition; level and trend on non-performing assets; detailed analysis of individual loans for which full collectability may not be assured; determination of the existence and realizable value of the collateral and guarantees securing such loans and the current economic conditions affecting the collectability of loans in the portfolio. The Corporation analyzes its loan portfolio at least quarterly for valuation purposes and to determine the adequacy of its allowance for losses. Based upon the factors discussed above, management believes that the Corporation’s allowance for losses as of December 31, 2011 of $3.5 million was adequate to cover probable incurred losses in the portfolio at such time.

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

(Dollar amounts in thousands)		2011				2010				2009				2008				2007
Balance at beginning of period		$	4,132			$	3,202			$	2,651			$	2,157			$	2,035
Provision for loan losses			420				1,306				1,367				500				256
Allowance for loan losses of ECSLA			—				—				—				206				—
Charge-offs:
Residential mortgage loans			(224	)			(40	)			(35	)			(10	)			(48	)
Home equity loans and lines of credit			(188	)			(45	)			—				—				—
Commercial mortgage loans			(200	)			(61	)			(477	)			(82	)			(34	)
Commercial business loans			(415	)			(216	)			(264	)			—				(22	)
Consumer loans			(67	)			(190	)			(83	)			(160	)			(60	)
			(1,094	)			(552	)			(859	)			(252	)			(164	)
Recoveries:
Residential mortgage loans			3				2				—				—				1
Home equity loans and lines of credit			1				2				—				—				—
Commercial mortgage loans			—				147				—				—				—
Commercial business loans			63				5				7				15				16
Consumer loans			11				20				36				25				13
			78				176				43				40				30
Net charge-offs			(1,016	)			(376	)			(816	)			(212	)			(134	)
Balance at end of period		$	3,536			$	4,132			$	3,202			$	2,651			$	2,157
Ratio of net charge-offs to average loans outstanding			0.32	%			0.12	%			0.29	%			0.08	%			0.06	%
Ratio of allowance to total loans at end of period			1.12	%			1.33	%			1.08	%			0.99	%			0.93	%

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

(Dollar amounts in thousands) Loan Categories:		2011								2010								2009								2008								2007
		Dollar Amount				Percent of loans in each category to total loans				Dollar Amount				Percent of loans in each category to total loans				Dollar Amount				Percent of loans in each category to total loans				Dollar Amount				Percent of loans in each category to total loans				Dollar Amount				Percent of loans in each category to total loans
Commercial, financial and agricultural		$	590				13.9	%		$	1,323				14.1	%		$	448				14.1	%		$	431				15.2	%		$	387				15.3	%
Commercial mortgages			1,737				30.0	%			1,707				30.0	%			1,891				30.4	%			1,369				32.1	%			1,068				30.9	%
Residential mortgages			832				29.6	%			398				27.3	%			356				25.0	%			363				27.7	%			309				28.3	%
Home equity loans			320				22.5	%			572				24.3	%			452				26.1	%			467				21.5	%			368				21.3	%
Consumer loans			57				4.0	%			132				4.3	%			51				4.4	%			73				3.5	%			79				4.2	%
Unallocated			—				—				—				—				4				—				(52	)			—				(54	)			—
		$	3,536				100	%		$	4,132				100	%		$	3,202				100	%		$	2,651				100	%		$	2,157				100	%

Investment Activities

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

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

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The following table sets forth certain information regarding the fair value, weighted average yields and contractual maturities of the Corporation’s securities as of December 31, 2011:

(Dollar amounts in thousands)		Due in 1 year or less				Due from 1 to 3 years				Due from 3 to 5 years				Due from 5 to 10 years				Due after 10 years				No scheduled maturity				Total
U.S. Treasury and federal agency		$	—			$	—			$	—			$	3,822			$	638			$	—			$	4,460
U.S. government sponsored entities and agencies			—				—				33,515				8,005				—				—				41,520
Mortgage-backed securities: residential			—				166				3				1				37,308				—				37,478
State and political subdivision			—				1,152				4,114				27,143				4,591				—				37,000
Equity securities			—				—				—				—				—				2,696				2,696
Estimated fair value		$	—			$	1,318			$	37,632			$	38,971			$	42,537			$	2,696			$	123,154
Weighted average yield(1)			0.00	%			4.56	%			2.05	%			4.10	%			3.90	%			3.04	%			3.39	%

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

(Dollar amounts in thousands)		2011				2010				2009
U.S. Treasury and federal agency		$	4,460			$	6,729			$	3,001
U.S. government sponsored entities and agencies			41,520				62,362				50,797
Mortgage-backed securities: residential			37,478				19,380				16,530
Collateralized mortgage obligations			—				922				5,130
State and political subdivision			37,000				33,902				26,967
Equity securities			2,696				2,525				2,818
		$	123,154			$	125,820			$	105,243

For additional information regarding the Corporation’s investment portfolio see “Note 4 — Securities” on page F-14 to the consolidated financial statements.

Sources of Funds

General.  Deposits are the primary source of the Bank’s funds for lending and investing activities. Secondary sources of funds are derived from loan repayments, investment maturities and borrowed funds. Loan repayments can be considered a relatively stable funding source, while deposit activity is greatly influenced by interest rates and general market conditions. The Bank also has access to funds through other various sources. For a description of the Bank’s sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” in item 7.

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

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

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

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

		2011												2010
(Dollar amounts in thousands) Type of accounts		Weighted average rate				Amount				%				Weighted average rate				Amount				%
Non-interest bearing deposits			—			$	84,871				20.4	%			—			$	75,941				18.5	%
Interest bearing demand deposits			0.19	%			186,107				44.7	%			0.28	%			188,910				46.1	%
Time deposits			2.98	%			145,490				34.9	%			3.25	%			144,807				35.4	%
			1.13	%		$	416,468				100.0	%			1.28	%		$	409,658				100.0	%

The following table sets forth maturities of the Corporation’s certificates of deposit of $100,000 or more at December 31, 2011 by time remaining to maturity:

(Dollar amounts in thousands)		Amount
Less than three months		$	2,397
Over three months to six months			5,468
Over six months to twelve months			5,116
Over twelve months			41,478
		$	54,459

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

(Dollar amounts in thousands)		2011				2010
Ending balance		$	20,000			$	30,000
Average balance			25,482				36,488
Maximum balance			30,000				40,000
Average rate			4.65	%			4.56	%

For additional information regarding the Corporation’s deposit base and borrowed funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Deposits and Borrowed Funds” in item 7 and “Note 10 — Deposits” on page F-24 and “Note 11 — Borrowed Funds” on page F-25 to the consolidated financial statements.

Subsidiary Activity

The Corporation has two wholly owned subsidiaries, the Bank and the Title Company. As of December 31, 2011, the Bank and the Title Company had no subsidiaries.

Personnel

At December 31, 2011, the Bank had 118 full time equivalent employees. There is no collective bargaining agreement between the Bank and its employees, and the Bank believes its relationship with its employees to be satisfactory.

Competition

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

Supervision and Regulation

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

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

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

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

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

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

The GLBA amended portions of the BHCA to authorize bank holding companies to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. In order to undertake these activities, a bank holding company must become a financial holding company by submitting to the appropriate FRB a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. The Corporation submitted the declaration of election to become a financial holding company with the FRB of Cleveland in February 2007, and the election became effective in March 2007.

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

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

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

The Bank.  As a national banking association, the Bank is subject to primary supervision, examination and regulation by the OCC. The Bank is also subject to regulations of the FDIC as administrator of the Deposit Insurance Fund (DIF) and the FRB. If, as a result of an examination of the Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other

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aspects of the Bank’s operations are unsatisfactory or that the Bank is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the Bank’s growth, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate the Bank’s deposit insurance in the absence of action by the OCC and upon a finding that the Bank is operating in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that the Bank’s conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.

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

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

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act.  On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform and consumer protection act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions, and changes the jurisdictions of existing bank regulatory agencies. The new law also establishes an independent federal consumer protection bureau within the Federal Reserve. The following discussion summarizes significant aspects of the new law. Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear.

The following aspects of the financial reform and consumer protection act are related to the operations of the Bank:

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The following aspects of the financial reform and consumer protection act are related to the operations of the Corporation:

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Anti-Money Laundering.  All financial institutions, including national banks, are subject to federal laws that are designed to prevent the use of the U.S. financial system to fund terrorist activities. Financial institutions operating in the United States must develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. The Bank has established policies and procedures to ensure compliance with these provisions.

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

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

Dividends and Other Transfers of Funds.  Dividends from the Bank constitute the principal source of income to the Corporation. The Corporation is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Corporation. In addition, the Bank’s regulators have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.

Limitations on Transactions with Affiliates.  Transactions between national banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a national bank includes any company or entity which controls the national bank or that is controlled by a company that controls the national bank. In a holding company context, the holding company of a national bank (such as the Corporation) and any companies which are controlled by such holding company are affiliates of the national bank. Generally, Section 23A limits the extent to which the national bank of its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least favorable, to the national bank as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a national bank to an affiliate.

In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal shareholders of the national bank and its affiliates. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% shareholder of a national bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the national bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to

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employees of the bank and (ii) does not give preference to any director, executive officer or principal shareholder, or certain affiliated interests of either, over other employees of the national bank. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a national bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. The Bank currently is subject to Section 22(g) and (h) of the Federal Reserve Act and at December 31, 2011, was in compliance with the above restrictions.

Loans to One Borrower Limitations.  With certain limited exceptions, the maximum amount that a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At December 31, 2011, the Bank’s loans-to-one-borrower limit was $6.8 million based upon the 15% of unimpaired capital and surplus measurement. The Bank may grant credit to borrowers in excess of the legal lending limit as part of the Legal Lending Limit Pilot Program approved by the OCC which allows the Bank to exceed its legal lending limit within certain parameters. At December 31, 2011, the Bank’s largest single lending relationship had an outstanding balance of $6.8 million. The Bank’s next largest single lending relationship had an outstanding balance of $5.6 million at December 31, 2011.

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

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

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

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

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

(Dollar amounts in thousands)		December 31, 2011																December 31, 2010
		Consolidated								Bank								Consolidated								Bank
		Amount				Ratio				Amount				Ratio				Amount				Ratio				Amount				Ratio
Total capital to risk-weighted assets:
Actual		$	50,512				17.85	%		$	45,550				16.25	%		$	37,912				13.34	%		$	40,850				14.52	%
For capital adequacy purposes			22,636				8.00	%			22,422				8.00	%			22,738				8.00	%			22,504				8.00	%
To be well capitalized			N/A				N/A				28,027				10.00	%			N/A				N/A				28,130				10.00	%
Tier 1 capital to risk-weighted assets:
Actual		$	47,008				16.61	%		$	42,046				15.00	%		$	34,388				12.10	%		$	37,326				13.27	%
For capital adequacy purposes			11,318				4.00	%			11,211				4.00	%			11,369				4.00	%			11,252				4.00	%
To be well capitalized			N/A				N/A				16,816				6.00	%			N/A				N/A				16,878				6.00	%
Tier 1 capital to average assets:
Actual		$	47,008				9.71	%		$	42,046				8.69	%		$	34,388				7.23	%		$	37,326				7.92	%
For capital adequacy purposes			19,362				4.00	%			19,347				4.00	%			19,034				4.00	%			18,858				4.00	%
To be well capitalized			N/A				N/A				24,183				5.00	%			N/A				N/A				23,572				5.00	%

Prompt Corrective Action and Other Enforcement Mechanisms.  Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 2011, the Bank exceeded the required ratios for classification as “well capitalized.”

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

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

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

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reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.

Insurance of Accounts.  The Bank’s deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. Risk Category I is the lowest risk category while Risk Category IV is the highest risk category.

In 2010, the Dodd-Frank Act revised the statutory authorities governing the FDIC’s management of the DIF. Among other things, the Dodd-Frank Act (1) raised the minimum fund reserve ratio from 1.15% to 1.35%, (2) requires the fund reserve ratio to reach 1.35% by September 30, 2020, (3) eliminated the requirement that the FDIC provides dividends from the DIF when the reserve ratio is between 1.35% and 1.50%, (4) removed the 1.50% cap on the reserve ratio, (5) granted the FDIC the sole discretion in determining whether to suspend or limit the declaration or payment of dividends and (6) changed the assessment base for banks from insured deposits to the average total assets of the bank minus the average tangible equity of the bank during the assessment period. In December 2010, the FDIC set the minimum reserve ratio at 2.00%. In addition, the FDIC adopted a Restoration Plan that, among other things, (1) eliminated the uniform 3 basis point increase in initial assessment rates that were scheduled to take effect on January 1, 2011, (2) pursued further rulemaking in 2011 regarding the method used to offset the effect on banks with less than $10 billion in assets of the requirement that the reserve ratio reach 1.35% and (3) at least semiannually, will update its projections for the DIF and increase or decrease assessment rates if needed. On February 7, 2011 the FDIC adopted final rules to implement the dividend provisions of the Dodd-Frank Act, changed the assessment base and set new assessment rates. In addition, as part of its final rules, the FDIC made certain assessment rate adjustments by (1) altering the unsecured debt adjustment by adding an adjustment for long-term debt issued by another insured depository institution and (2) eliminating the secured liability adjustment, which changed the brokered deposit adjustment to conform to the change in the assessment base. The new assessment rates became effective April 1, 2011. The new initial base assessment rates range from 2.5 to 9 basis points for Category I banks to 35 basis points for Category IV banks.

The FDIC may further increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the Risk Category for the Bank or in the assessment rates could have an adverse effect on the Bank’s earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (FICO), a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. The current annualized assessment rate is 0.660 basis points or approximately 0.165 basis points per quarter. These assessments will continue until the Financing Corporation bonds mature in 2019.

The enactment of the Emergency Economic Stabilization Act of 2008 temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective on October 3, 2008. On May 20, 2009, the FDIC extended this increased insurance level to $250,000 per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased the FDIC insurance coverage to $250,000 per depositor.

On October 14, 2008, the FDIC announced its temporary Transaction Account Guarantee Program (TAGP), which provided full coverage for noninterest-bearing transaction deposit accounts at FDIC-insured institutions that agreed to participate in the program. The unlimited coverage applied to all personal and business checking deposit accounts that do not earn interest, which include demand deposit accounts, low-interest NOW accounts (NOW accounts that cannot earn more than 0.25% interest), Official Items and IOLTA accounts. A 10 basis point surcharge was added to a participating institution’s current insurance assessment in order to fully cover all transaction accounts. This unlimited insurance coverage was temporary and was originally scheduled to expire on December 31, 2009. On August 26, 2009, the FDIC extended the program

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through June 30, 2010 and it was again extended through December 31, 2010. The deposit insurance surcharge was increased from 10 to 25 basis points for institutions electing to continue in the TAGP. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance to noninterest-bearing transaction deposit accounts. It does not apply to accounts earning any level of interest with the exception of IOLTA accounts. As this unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010.

On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. This special assessment was collected on September 30, 2009. Based on the Bank’s assets and Tier 1 capital at that time, the assessment totaled $178,000.

On November 12, 2009, the FDIC adopted a final rule requiring insured institutions to prepay approximately three years of estimated insurance assessments. The prepayment allowed the FDIC to strengthen the cash position of the DIF immediately without impacting earnings of the industry. Payment of the prepaid assessment, which totaled $2.1 million, along with the payment of the regular third quarter assessment was due on December 30, 2009.

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

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

The Community Reinvestment Act (CRA) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last examination for CRA compliance, as of April 21, 2008, the Bank was rated “satisfactory.”

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

The Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act of 2003 (FACTA), requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and give consumers more control of their credit data. It also reauthorizes a federal ban on state laws that interfere with corporate credit granting and marketing practices. In connection with the FACTA, financial institution regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received from an affiliate to make a solicitation to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations. A consumer’s election to opt out would be applicable for at least five years.

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

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

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

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

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

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

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

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

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

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

Federal Home Loan Bank System.  The Bank is a member of the FHLB. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2011, the Bank was in compliance with the stock requirements.

Federal Reserve System.  The FRB requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking) and non-personal time deposits. At December 31, 2011, the Bank was in compliance with these requirements.

Item 1A. Risk Factors

Not required as the Corporation is a smaller reporting company.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Corporation owns no real property but utilizes the main office of the Bank, which is owned by the Bank. The Corporation’s and the Bank’s executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Corporation pays no rent or other form of consideration for the use of this facility.

The Bank owns and leases numerous other premises for use in conducting business activities. The Bank considers these facilities owned or occupied under lease to be adequate. For additional information regarding the Bank’s properties, see “Note 7 — Premises and Equipment” on page F-22 to the consolidated financial statements.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

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

Market, Holder and Dividend Information

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

Boenning and Scattergood, Inc. 4 Tower Bridge, Suite 300 200 Bar Harbor Drive West Conshohocken, PA 19428 Telephone: (800) 889-6440		Janney Montgomery Scott LLC 1801 Market Street Philadelphia, PA 19103-1675 Telephone: (215) 665-6000		Monroe Securities, Inc. 100 North Riverside Plaza Suite 1620 Chicago, IL 60606 Telephone: (312) 327-2530

The Corporation has traditionally paid regular quarterly cash dividends. Future dividends will be determined by the Board of Directors after giving consideration to the Corporation’s financial condition, results of operations, tax status, industry standards, economic conditions, regulatory requirements and other factors.

The following table sets forth the high and low sale and quarter-end closing market prices of our common stock for the last two years as reported by the Nasdaq Capital Market as well as cash dividends paid for the quarterly periods presented.

		Market Price												Cash Dividend
		High				Low				Close
2011:
Fourth quarter		$	16.35			$	14.80			$	15.95			$	0.16
Third quarter			18.05				15.00				16.35				0.16
Second quarter			18.50				15.69				16.62				0.16
First quarter			18.99				16.37				17.25				0.16
2010:
Fourth quarter		$	17.30			$	15.81			$	16.35			$	0.14
Third quarter			18.00				15.55				16.50				0.14
Second quarter			16.50				14.36				15.85				0.14
First quarter			15.20				13.19				14.51				0.14

As of March 1, 2012, there were approximately 713 stockholders of record and 1,751,908 shares of common stock entitled to vote, receive dividends and considered outstanding for financial reporting purposes. The number of stockholders of record does not include the number of persons or entities who hold their stock in nominee or “street” name.

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

Purchases of Equity Securities

The Corporation did not repurchase any of its equity securities in the year ended December 31, 2011.

Item 6. Selected Financial Data

Not required as the Corporation is a smaller reporting company.

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

The following discussion and analysis represents a review of the Corporation’s consolidated financial condition and results of operations for the years ended December 31, 2011 and 2010. This review should be read in conjunction with the consolidated financial statements beginning on page F-1.

Overview

The Corporation reported an increase in net income available to common stockholders of $640,000 for 2011 as consolidated net income available to common stockholders amounted to $3.3 million or $1.98 per common share for 2011, compared to $2.7 million or $1.85 per common share for 2010. Net income available to common stockholders was impacted by the following:

Changes in Financial Condition

Total assets increased $10.0 million or 2.1% to $491.9 million at December 31, 2011 from $481.9 million at December 31, 2010. This increase primarily related to increases in cash and equivalents and net loans receivable of $9.2 million and $6.4 million, respectively. Partially offsetting these increases, investment securities and other assets decreased $2.7 million and $1.9 million, respectively.

The Corporation’s asset growth was primarily driven by increases in customer deposits of $6.8 million and stockholders’ equity of $11.6 million. Partially offsetting these increases, borrowed funds decreased $10.0 million.

Cash and cash equivalents.  These accounts increased $9.2 million or 48.2% to $28.2 million at December 31, 2011 from $19.0 million at December 31, 2010. This increase primarily related to proceeds from investment security calls received in late December 2011, which were not redeployed into securities or loans before year-end. Typically, cash accounts are increased by net operating results, deposits by customers into savings and checking accounts, loan and security repayments and proceeds from borrowed funds. Decreases result from customer deposit withdrawals, new loan originations or other loan fundings, security purchases, repayments of borrowed funds and cash dividends to stockholders.

Securities.  Securities decreased $2.7 million or 2.1% to $123.2 million at December 31, 2011 from $125.8 million at December 31, 2010. This decrease was partly related to the utilization of cash received from investment security calls to fund loan originations rather than security purchases. Partially offsetting this deployment strategy, net unrealized gains associated with the investment portfolio increased $4.2 million to $4.5 million at December 31, 2011 from $260,000 at December 31, 2010 primarily due to the decline in market interest rates during 2011.

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Loans receivable.  Net loans receivable increased $6.4 million or 2.1% to $312.5 million at December 31, 2011 from $306.2 million at December 31, 2010 as residential first mortgages increased $9.0 million or 10.7%, commercial real estate loans increased $1.7 million or 1.9% and commercial business loans increased $46,000, partially offset by a $4.2 million or 5.6% decrease in home equity loans and lines of credit and an $801,000 decrease in consumer loans.

Non-performing assets.  Non-performing assets include non-accrual loans, loans 90 days past due and still accruing, repossessions and real estate owned. Non-performing assets were $5.9 million or 1.19% of total assets at December 31, 2011 compared to $7.0 million or 1.45% of total assets at December 31, 2010. Non-performing assets consisted of non-performing loans and real estate owned of $5.6 million and $307,000, respectively, at December 31, 2011 and $6.6 million and $373,000, respectively, at December 31, 2010. At December 31, 2011, non-performing loans consisted primarily of consumer, commercial mortgage and residential mortgage loans.

Federal bank stocks.  Federal bank stocks were comprised of FHLB stock and FRB stock of $2.7 million and $984,000, respectively, at December 31, 2011. 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 FHLB notified member banks in December 2008 that it was suspending dividend payments and the repurchase of capital stock; however, due to its improved financial condition, since the fourth quarter of 2010, the FHLB has repurchased a portion of the Bank’s excess capital stock each quarter. The repurchases totaled $611,000 and $173,000, respectively, for the years ended December 31, 2011 and 2010.

Bank-owned life insurance (BOLI).  The Corporation maintains single premium life insurance policies on 20 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 2011 were associated with an increase in the cash surrender value of the policies, partially offset by certain administrative expenses.

Premises and equipment.  Premises and equipment decreased $215,000 or 2.3% to $9.0 million at December 31, 2011 from $9.2 million at December 31, 2010. The overall decrease in premises and equipment during the year was due to normal depreciation and amortization of $798,000, partially offset by capital expenditures of $583,000.

Goodwill.  Goodwill was $3.7 million at December 31, 2011 and 2010. Goodwill is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Management evaluated goodwill and concluded that no impairment existed at December 31, 2011.

Core deposit intangible.  The core deposit intangible was $1.6 million at December 31, 2011. In connection with the assumption of deposits through the 2009 Titusville branch purchase, the Bank recorded a core deposit intangible of $2.8 million. This asset represents the long-term value of the core deposits acquired. Fair value was determined using a third-party valuation expert specializing in estimating fair values of core deposit intangibles. The fair value was derived using an industry standard financial instrument present value methodology. All-in costs and runoff balances by year were discounted by comparable term FHLB advance rates, used as an alternative cost of funds measure. This intangible asset amortizes utilizing the double declining balance method of amortization over a weighted average estimated life of nine years. The core deposit intangible asset is not estimated to have a significant residual value. The Corporation recorded $441,000 and $564,000 of intangible amortization in 2011 and 2010, respectively.

Deposits.  Total deposits increased $6.8 million or 1.7% to $416.5 million at December 31, 2011 from $409.7 million at December 31, 2010. Noninterest bearing deposits increased $8.9 million or 11.8% during the year while interest bearing deposits decreased $2.1 million.

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Borrowed funds.  Borrowed funds decreased $10.0 million or 33.3% to $20.0 million at December 31, 2011 from $30.0 million at December 31, 2010 due to the aforementioned $5.0 million prepayment of a long term FHLB advance and a $5.0 million paydown related to a line of credit with a correspondent bank.

Stockholders’ equity.  Stockholders’ equity increased $11.6 million or 29.7% to $50.7 million at December 31, 2011 from $39.1 million at December 31, 2010 resulting primarily from the issuance of 290,004 shares or $4.6 million of common stock associated with a private placement to accredited investors. Also contributing to the increase, the Corporation received a $10.0 million investment from the U.S. Treasury Department under the Small Business Lending Fund (SBLF), a portion of which was used to fully redeem the $7.5 million of preferred stock issued to the U.S. Treasury in association with its participation in the Capital Repurchase Program (CPP) of the Troubled Asset Relief Program (TARP). Retained earnings increased $2.2 million related to net income less preferred and common stock dividends and accumulated other comprehensive income increased $2.2 million resulting from a change in the net unrealized losses on securities available for sale and to a lesser extent the funded status of the Corporation’s defined benefit plan.

Changes in Results of Operations

The Corporation reported net income before accumulated preferred stock dividends and discount accretion of $3.8 million and $3.1 million in 2011 and 2010, 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.

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

		Year ended December 31,
		2011												2010
(Dollar amounts in thousands)		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
Interest-earning assets:
Loans, taxable		$	296,551			$	16,935				5.71	%		$	291,358			$	17,570				6.03	%
Loans, tax-exempt			12,521				650				5.19	%			6,661				396				5.95	%
Total loans receivable			309,072				17,585				5.69	%			298,019				17,966				6.03	%
Securities, taxable			91,306				2,370				2.59	%			96,286				2,528				2.63	%
Securities, tax-exempt			36,213				1,848				5.10	%			29,626				1,662				5.61	%
Total securities			127,519				4,218				3.31	%			125,912				4,190				3.33	%
Interest-earning deposits with banks			24,679				173				0.70	%			26,636				277				1.04	%
Federal bank stocks			3,873				55				1.42	%			4,212				46				1.09	%
Total interest-earning cash equivalents			28,552				228				0.80	%			30,848				323				1.05	%
Total interest-earning assets			465,143				22,031				4.73%				454,779				22,479				4.94%
Cash and due from banks			2,534												2,406
Other noninterest-earning assets			21,628												22,669
Total Assets		$	489,305											$	479,854
Interest-bearing liabilities:
Interest-bearing demand deposits		$	182,038				492				0.27	%		$	171,932				826				0.48	%
Time deposits			149,794				4,196				2.80	%			154,726				4,580				2.96	%
Total interest-bearing deposits			331,832				4,688				1.41	%			326,658				5,406				1.65	%
Borrowed funds, short-term			3,414				159				4.66	%			5,022				241				4.80	%
Borrowed funds, long-term			22,068				1,025				4.64	%			31,466				1,422				4.52	%
Total borrowed funds			25,482				1,184				4.65	%			36,488				1,663				4.56	%
Total interest-bearing liabilities			357,314				5,872				1.64%				363,146				7,069				1.95%
Noninterest-bearing demand deposits			82,697				—				—				74,082				—				—
Funding and cost of funds			440,011				5,872				1.33%				437,228				7,069				1.62%
Other noninterest-bearing liabilities			3,879												3,550
Total Liabilities			443,890												440,778
Stockholders’ Equity			45,415												39,076
Total Liabilities and Stockholders’ Equity		$	489,305											$	479,854
Net interest income						$	16,159											$	15,410
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)											3.09%												2.99%
Net interest margin (net interest income as a percentage of average interest-earning assets)											3.47%												3.39%

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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.

		2011 versus 2010
		Increase (decrease) due to
(Dollar amounts in thousands)		Volume				Rate				Total
Interest income:
Loans		$	651			$	(1,032	)		$	(381	)
Securities			53				(25	)			28
Interest-earning deposits with banks			(19	)			(85	)			(104	)
Federal bank stocks			(4	)			13				9
Total interest-earning assets			681				(1,129	)			(448	)
Interest expense:
Deposits			84				(802	)			(718	)
Borrowed funds			(511	)			32				(479	)
Total interest-bearing liabilities			(427	)			(770	)			(1,197	)
Net interest income		$	1,108			$	(359	)		$	749

2011 Results Compared to 2010 Results

The Corporation reported net income before accumulated preferred stock dividends and discount accretion of $3.8 million and $3.1 million for 2011 and 2010, respectively. The $764,000 or 24.9% increase in net income was attributed to an increase in net interest income of $624,000 and a decrease in provision for loan losses of $886,000, partially offset by a decrease in noninterest income of $365,000 and increases in noninterest expense and provision for income taxes of $232,000 and $149,000, respectively.

Net interest income.  The primary source of the Corporation’s revenue is net interest income. Net interest income is the difference between interest income on earning assets such as loans and securities, and interest expense on liabilities, such as deposits and borrowed funds, used to fund the earning assets. Net interest income is impacted by the volume and composition of interest-earning assets and interest-bearing liabilities, and changes in the level of interest rates. Tax equivalent net interest income increased $749,000 or 4.9% to $16.2 million for 2011, compared to $15.4 million for 2010. This increase in net interest income can be attributed to a decrease in interest expense of $1.2 million, partially offset by a decrease in tax equivalent interest income of $448,000.

Interest income.  Tax equivalent interest income decreased $448,000 or 2.0% to $22.0 million for 2011, compared to $22.5 million for 2010. This decrease can be attributed to decreases in interest earned on loans and interest earning deposits of $381,000 and $104,000, respectively, partially offset by increases in interest earned on securities and federal bank stocks of $28,000 and $9,000, respectively.

Tax equivalent interest earned on loans receivable decreased $381,000 or 2.1% to $17.6 million for 2011, compared to $18.0 million for 2010. During that time, the yield on loans decreased 34 basis points to 5.69% for 2011, versus 6.03% for 2010 causing a $1.0 million decrease in interest income. Offsetting this unfavorable yield decline, average loans increased $11.1 million or 3.7%, generating $651,000 of additional loan interest income.

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Tax equivalent interest earned on securities increased $28,000 to $4.2 million for 2011 and 2010. During this time, average securities increased $1.6 million or 1.3% accounting for $53,000 in additional security interest income. The average yield on securities decreased 2 basis points to 3.31% for 2011, versus 3.33% for 2010 causing a $25,000 decrease in interest income.

Interest earned on interest-earning deposit accounts decreased $104,000 or 37.5% to $173,000 for 2011, compared to $277,000 for 2010. The average yield on these accounts decreased 34 basis points or 32.7% resulting in an $85,000 decrease in interest income. Average interest-earning deposits decreased $2.0 million or 7.3%. This decrease caused a $19,000 decrease in interest income.

Interest earned on federal bank stocks increased $9,000 or 19.6% to $55,000 for 2011, compared to $46,000 for 2010.

Interest expense.  Interest expense decreased $1.2 million or 16.9% to $5.9 million for 2011, compared to $7.1 million for 2010. This decrease can be attributed to decreases in interest incurred on interest-bearing deposits and borrowed funds of $718,000 and $479,000, respectively.

Deposit interest expense decreased $718,000 or 13.3% to $4.7 million for 2011, compared to $5.4 million for 2010. The rate on interest-bearing deposits decreased by 24 basis points or 14.5% to 1.41% for 2011 versus 1.65% for 2010 accounting for an $802,000 decrease in interest expense. Average interest-bearing deposits increased $5.2 million or 1.6% accounting for $84,000 in additional interest expense.

Interest expense on borrowed funds decreased $479,000 or 28.8% to $1.2 million for 2011 compared to $1.7 million for 2010. Average borrowed funds decreased $11.0 million or 30.2% accounting for a decrease in interest expense of $511,000. The average rate on borrowed funds increased 9 basis points to 4.65% for 2011 versus 4.56% for 2010. This increase in rate accounted for $32,000 of additional interest expense.

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 probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.

Nonperforming loans decreased $1.0 million or 15.8% to $5.6 million at December 31, 2011 from $6.6 million at December 31, 2010. This decrease was primarily due to an $800,000 principal payment made on one problem loan during the third quarter of 2011. While 2011 charge-offs increased to $1.1 million in 2011 compared to $552,000 in 2010, a significant portion of the charge-offs experienced during 2011 related to four loans with prior specific reserves allocated. While these charge-offs resulted in an increase in the Corporation’s historical loss experience, the decrease in specific reserves was greater than the result of increasing general reserves triggered by these charge-offs. Specific reserves totaling $568,000 had been allocated during the fourth quarter of 2010 associated with the previously mentioned problem loan resolved during 2011.

The provision for loan losses decreased $886,000 or 67.8% to $420,000 for 2011, compared to $1.3 million for 2010. The Corporation’s allowance for loan losses amounted to $3.5 million or 1.12% of the Corporation’s total loan portfolio at December 31, 2011, compared to $4.1 million or 1.33% of total loans at December 31, 2010. The allowance for loan losses as a percentage of non-performing loans at December 31, 2011 and 2010 was 63.5% and 62.5%, respectively.

Noninterest income.  Noninterest income includes revenue that is not related to interest rates, but rather to services rendered and activities conducted in the financial services industry, including fees on depository accounts, general transaction and service fees, commissions on financial services, title premiums, security and loan gains and losses, and earnings on BOLI. Noninterest income decreased $365,000 or 8.7% to $3.8 million for 2011, compared to $4.2 million for 2010. This decrease was primarily due to a decrease in net gains on securities available for sale from $975,000 in 2010 to $482,000 in 2011. Included in the 2010 and 2011 gains, $565,000 and $355,000, respectively, were related to balance sheet management strategies whereby securities were sold to prepay long term FHLB advances and associated security gains were used to offset the

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prepayment penalties related to the early retirement of the advances. Also contributing to the decrease in noninterest income, commissions on financial services decreased $180,000 or 25.7% due partly to a decrease in the number of representatives in the division. Partially offsetting these decreases, interchange fee income and customer service fees increased $216,000 and $71,000, respectively, primarily related to deposit account growth.

Noninterest expense.  Noninterest expense increased $232,000 or 1.7% to $14.0 million for 2011, compared to $13.8 million for 2010. This increase in noninterest expense was comprised of increases in compensation and employee benefits, premises and equipment, professional fees and other expenses, partially offset by decreases in FDIC insurance and intangible amortization.

The largest component of noninterest expense, compensation and employee benefits, increased $248,000 or 3.6% to $7.1 million for 2011, compared to $6.9 million for 2010. This increase was primarily related to normal compensation increases and higher incentive program payouts.

Premises and equipment expense increased $55,000 or 2.6% to $2.2 million for 2011, compared to $2.1 million for 2010, primarily related to increased equipment service contract expenses and increased costs associated with the fourth quarter 2010 purchase of the Titusville, Pennsylvania branch office building.

The Corporation recognized $441,000 of intangible amortization in 2011 compared to $564,000 in 2010 associated with a core deposit intangible asset of $2.8 million that was recorded related to the 2009 branch acquisition.

Professional fees increased $158,000 or 28.8% to $706,000 for 2011, compared to $548,000 for 2010. This increase was primarily related to increased legal and accounting fees due in part to increased loan workout costs and additional internal audits performed during 2011.

FDIC expense decreased $160,000 or 28.1% to $410,000 for 2011, compared to $570,000 for 2010. This was primarily the result of legislative changes that adjusted the assessment base, which reduced the assessment rate.

Other noninterest expense increased $54,000 or 1.7% to $3.2 million for 2011, compared to $3.1 million for 2010. Included in this category were $334,000 and $557,000 in 2011 and 2010, respectively, related to prepayment penalties assessed on the aforementioned early retirement of FHLB advances. Contributing to the increase in other noninterest expense, contributions, loan costs and collection costs increased $51,000, $42,000 and $38,000, respectively.

The provision for income taxes increased $149,000 to $950,000 for 2011, compared to $801,000 for 2010 due to higher pre-tax income.

Market Risk Management

Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. The Corporation is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Corporation does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets.

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

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

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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 within internal policy limits of between a positive and negative 15% 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.

Based on certain assumptions provided by a federal regulatory agency, at December 31, 2011, the Corporation’s interest-earning assets maturing or repricing within one year totaled $167.0 million while the Corporation’s interest-bearing liabilities maturing or repricing within one year totaled $137.2 million, providing an excess of interest-earning assets over interest-bearing liabilities of $29.8 million or 6.05% of total assets. At December 31, 2011, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 121.7%.

The following table presents the amounts of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2011 which are expected to mature, prepay or reprice in each of the future time periods presented:

(Dollar amounts in thousands)		Due in six months or less				Due within six months to one year				Due within one to three years				Due within three to five years				Due in over five years				Total
Total interest-earning assets		$	107,311			$	59,663			$	143,707			$	95,799			$	62,097			$	468,577
Total interest-bearing liabilities			86,867				50,350				102,640				59,645				52,095				351,597
Interest rate sensitivity gap		$	20,444			$	9,313			$	41,067			$	36,154			$	10,002			$	116,980
Cumulative rate sensitivity gap		$	20,444			$	29,757			$	70,824			$	106,978			$	116,980
Ratio of gap during the period to total interest earning assets			4.36	%			1.99	%			8.76	%			7.72	%			2.13	%
Ratio of cumulative gap to total interest earning assets			4.36	%			6.35	%			15.11	%			22.83	%			24.96	%

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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.

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 Board of Directors 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 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 provided by a federal regulatory agency and are applied consistently across the different rate risk measures.

While the Corporation currently utilizes certain assumptions provided by a federal regulatory agency for gap analysis, earnings simulation modeling and net portfolio equity valuation analysis, beginning in 2012, assumptions will be based on the Corporation’s historical experience.

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

Net interest income simulation.  Given a 200 basis point immediate increase or decrease in market interest rates, net interest income may not change by more than 15% 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 20% 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, 2011 and 2010, respectively. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2011 remained constant. The impact of the market rate movements on net interest income was developed by simulating the effects of rates changing immediately for a one-year period from the December 31, 2011 levels for net interest income.

		Increase								Decrease
		+100 BP				+200 BP				-100 BP				-200 BP
2011 Net interest income – increase (decrease)			2.72	%			4.15	%			(3.17%)				(7.63%)
2010 Net interest income – increase (decrease)			2.77	%			5.02	%			(4.69%)				(8.25%)

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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 (GAAP) 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 $11.6 million or 29.7% to $50.7 million at December 31, 2011 from $39.1 million at December 31, 2010. Net income of $3.8 million in 2011 represented an increase in earnings of $764,000 or 24.9% compared to 2010. Returns on average equity and assets were 8.44% and 0.78%, respectively, for 2011.

The Corporation enhanced its already strong capital position as its capital to assets ratio increased to 10.3% at December 31, 2011 from 8.1% at December 31, 2010. During the first quarter of 2011, the Corporation raised $4.6 million in capital, net of expenses through the issuance of 290,004 shares of common stock in a private placement to accredited investors. During the third quarter of 2011, the Corporation received a $10.0 million investment from the U.S. Treasury Department under the SBLF, a portion of which was used to fully redeem the $7.5 million of preferred stock issued to the U.S. Treasury under the CPP. In addition, stockholders have taken part in the Corporation’s dividend reinvestment plan introduced during 2003 with 46% of registered shareholder accounts active in the plan at December 31, 2011.

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, 2011, 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 2011, the Corporation used its sources of funds primarily to fund loan commitments. As of December 31, 2011, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $43.8 million, and standby letters of credit totaling $245,000. 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, 2011, time deposits amounted to $145.5 million or 34.9% of the Corporation’s total consolidated deposits, including approximately $40.4 million scheduled to mature within the next year. Management of the Corporation believes that the Corporation has adequate resources to fund all of its commitments, that all of its commitments will be funded as required by related maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities.

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Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation has alternative sources of funds. These sources include a $5.5 million line of credit with a correspondent bank of which $0 is outstanding, a line of credit and term borrowing capacity from the FHLB and, to a more limited extent, through the sale of loans. At December 31, 2011, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed, was $139.3 million.

The Corporation paid quarterly cash dividends over the past two years. The Corporation paid dividends of $0.16 and $0.14 per common share for the four quarters of 2011 and 2010, respectively. On February 15, 2012, the Corporation declared a quarterly dividend of $0.18 per common share payable on March 23, 2012 to shareholders of record on March 1, 2012. The determination of future dividends on the Corporation’s common stock will depend on conditions existing at that time with consideration given to the Corporation’s earnings, capital and liquidity needs, among other factors.

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

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in accordance with GAAP 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.

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

Goodwill and intangible assets.  Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. As of November 30, 2011, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. If for any future period we determine that there has been impairment in the carrying value of our goodwill balances, we will record a charge to our earnings, which could have a material adverse effect on net income, but not risk based capital ratios.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

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

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

Not applicable.

Item 9A. Controls and Procedures

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

As of December 31, 2011, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective.

During the fourth quarter of fiscal year 2011, there has been no change made in the Corporation’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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

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

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Management’s Report on Internal Control Over Financial Reporting

Management completed an assessment of the Corporation’s internal control over financial reporting as of December 31, 2011. This assessment was based on criteria for evaluating internal control over financial reporting established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2011.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated herein by reference to the sections captioned “Principal Beneficial Owners of the Corporation’s Common Stock”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Information With Respect to Nominees For Director, Continuing Director and Executive Officers” in the Corporation’s definitive proxy statement for the Corporation’s Annual Meeting of Stockholders to be held on April 25, 2012 (the Proxy Statement) which will be filed no later than 120 days following the Corporation’s fiscal year end.

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

Item 11. Executive Compensation

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

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

The information required by this item is incorporated herein by reference to the section captioned “Principal Beneficial Owners of the Corporation’s Common Stock” in the Proxy Statement.

Equity Compensation Plan Information.  The following table provides certain information as of December 31, 2011 with respect to shares of common stock that may be issued under our equity compensation plans, which consists of the 2007 Stock Incentive Plan and Trust, which was approved by shareholders in April 2007.

Plan Category		Number of securities to be issued upon exercise of outstanding options				Weighted-average exercise price of outstanding options(1)				Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders			94,000			$	24.51				32,783
Equity compensation plans not approved by security holders			0				—				0
Total			94,000			$	24.51				32,783

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

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

Item 14. Principal Accountant Fees and Services

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

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PART IV

Item 15. Exhibits and Financial Statement Schedules

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

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

    (3)  Management Contracts or Compensatory Plans:

    (i)  Exhibits 10.1-10.7 listed below in (b) identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference.

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

3.1		Articles of Incorporation of Emclaire Financial Corp.(1)
3.2		Bylaws of Emclaire Financial Corp.(1)
3.3		Statement with respect to shares for Series B Preferred Stock.(2)
4.0		Specimen Common Stock Certificate of Emclaire Financial Corp.(3)
4.1		Form of certificate for Series B Preferred Stock.(2)
10.1		Amended and Restated Employment Agreement between Emclaire Financial Corp., the Farmers National Bank of Emlenton and William C. Marsh, dated as of November 16, 2011.(4)*
10.2		Change in Control Agreement between Emclaire Financial Corp., the Farmers National Bank of Emlenton and certain executive officers, dated as of July 1, 2007.(4)*
10.3		Change in Control Agreement between Emclaire Financial Corp., the Farmers National Bank of Emlenton and certain executive officer, dated as of May 12, 2008.(5)*
10.4		Change in Control Agreement between Emclaire Financial Corp., the Farmers National Bank of Emlenton and certain executive officer, dated as of August 2, 2010.(6)*
10.5		Group Term Carve-Out Plan between the Farmers National Bank of Emlenton and 20 Officers and Employees.(7)*
10.6		Supplemental Executive Retirement Plan Agreement between the Farmers National Bank of Emlenton and Six Officers.(7)*
10.7		Farmers National Bank of Emlenton Deferred Compensation Plan.(8)*
10.8		Farmers National Bank of Emlenton 2007 Stock Incentive Plan and Trust.(9)*
10.9		Securities Purchase Agreement, dated August 18, 2011 between the Corporation and the U.S. Department of the Treasury with respect to the Series B Preferred Stock.(2)
11.0		Statement regarding computation of earnings per share (see Note 1 of the Notes to Consolidated Financial Statements in the Annual Report).
14.0		Code of Personal and Business Conduct and Ethics.(10)
20.0		Emclaire Financial Corp. Dividend Reinvestment and Stock Purchase Plan.(11)
21.0		Subsidiaries of the Registrant (see information contained herein under “Item 1. Description of Business — Subsidiary Activity”).
31.1		Principal Executive Officer Section 302 Certification.
31.2		Principal Financial Officer Section 302 Certification.
32.1		Principal Executive Officer Section 906 Certification.
32.2		Principal Financial Officer Section 906 Certification.
99.1		Principal Executive Officer Section 111 Certification.
99.2		Principal Financial Officer Section 111 Certification.
101.INS		XBRL Instance Document**

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101.SCH		XBRL Taxonomy Extension Schema Document**
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document**
101.LAB		XBRL Taxonomy Extension Label Linkbase Document**
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

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SIGNATURES

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

		EMCLAIRE FINANCIAL CORP.
Dated: March 23, 2012		By: /s/ William C. Marsh William C. Marsh Chairman, Chief Executive Officer, President and Director (Duly Authorized Representative)

Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By: /s/ William C. Marsh William C. Marsh Chairman of the Board Chief Executive Officer President Director (Principal Executive Officer)		By: /s/ Matthew J. Lucco Matthew J. Lucco Treasurer and Chief Financial Officer (Principal Financial Officer)    Date: March 23, 2012
Date: March 23, 2012		By: /s/ Amanda L. Engles Amanda L. Engles Secretary (Principal Accounting Officer)
		Date: March 23, 2012
By: /s/ Ronald L. Ashbaugh Ronald L. Ashbaugh Director		By: /s/ David L. Cox David L. Cox Director
Date: March 23, 2012		Date: March 23, 2012
By: /s/ James M. Crooks James M. Crooks Director		By: /s/ George W. Freeman George W. Freeman Director
Date: March 23, 2012		Date: March 23, 2012
By: /s/ Mark A. Freemer Mark A. Freemer Director		By: /s/ Robert L. Hunter Robert L. Hunter Director
Date: March 23, 2012		Date: March 23, 2012
By: /s/ John B. Mason John B. Mason Director		By: /s/ Brian C. McCarrier Brian C. McCarrier Director
Date: March 23, 2012		Date: March 23, 2012

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Financial Statements
  
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Reports of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Income			F-4
Consolidated Statements of Changes in Stockholders’ Equity			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Emclaire Financial Corp.
Emlenton, Pennsylvania

We have audited the accompanying consolidated balance sheets of Emclaire Financial Corp. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emclaire Financial Corp. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Horwath LLP

Cleveland, Ohio
March 23, 2012

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Consolidated Balance Sheets
(Dollar amounts in thousands, except share and per share data)

		December 31,
		2011				2010
Assets
Cash and due from banks		$	2,516			$	2,507
Interest earning deposits with banks			25,677				16,520
Total cash and cash equivalents			28,193				19,027
Securities available for sale, at fair value			123,154				125,820
Loans receivable, net of allowance for loan losses of $3,536 and $4,132			312,545				306,152
Federal bank stocks, at cost			3,664				4,129
Bank-owned life insurance			5,809				5,596
Accrued interest receivable			1,630				1,763
Premises and equipment, net			9,026				9,241
Goodwill			3,664				3,664
Core deposit intangible, net			1,580				2,021
Prepaid expenses and other assets			2,617				4,472
Total Assets		$	491,882			$	481,885
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	84,871			$	75,941
Interest bearing			331,597				333,717
Total deposits			416,468				409,658
Borrowed funds:
Short-term			—				5,000
Long-term			20,000				25,000
Total borrowed funds			20,000				30,000
Accrued interest payable			541				649
Accrued expenses and other liabilities			4,143				2,460
Total Liabilities			441,152				442,767
Commitments and Contingent Liabilities			—				—
Stockholders’ Equity
Preferred stock, $1.00 par value, 3,000,000 shares authorized;
Series A, cumulative preferred stock, $7,500 liquidation value, 0 and 7,500 shares issued and outstanding, respectively			—				7,447
Series B, non-cumulative preferred stock, $10,000 liquidation value, 10,000 and 0 shares issued and outstanding, respectively			10,000
Warrants			—				88
Common stock, $1.25 par value, 12,000,000 shares authorized; 1,853,925 and 1,559,421 shares issued; 1,751,908 and 1,457,404 shares outstanding			2,317				1,949
Additional paid-in capital			19,155				14,812
Treasury stock, at cost; 102,017 shares			(2,114	)			(2,114	)
Retained earnings			19,948				17,705
Accumulated other comprehensive income (loss)			1,424				(769	)
Total Stockholders’ Equity			50,730				39,118
Total Liabilities and Stockholders’ Equity		$	491,882			$	481,885

 
 
See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income
(Dollar amounts in thousands, except share and per share data)

		Year ended December 31,
		2011				2010
Interest and dividend income
Loans receivable, including fees		$	17,389			$	17,845
Securities:
Taxable			2,370				2,528
Exempt from federal income tax			1,292				1,156
Federal bank stocks			55				46
Deposits with banks			173				277
Total interest and dividend income			21,279				21,852
Interest expense
Deposits			4,688				5,406
Short-term borrowed funds			159				241
Long-term borrowed funds			1,025				1,422
Total interest expense			5,872				7,069
Net interest income			15,407				14,783
Provision for loan losses			420				1,306
Net interest income after provision for loan losses			14,987				13,477
Noninterest income
Fees and service charges			1,490				1,419
Commissions on financial services			520				700
Title premiums			88				106
Other-than-temporary impairment losses on equity securities			—				(55	)
Net gain on sales of available for sale securities			482				1,030
Earnings on bank-owned life insurance			246				239
Other			1,015				767
Total noninterest income			3,841				4,206
Noninterest expense
Compensation and employee benefits			7,118				6,870
Premises and equipment			2,194				2,139
Intangible asset amortization			441				564
Professional fees			706				548
Federal deposit insurance			410				570
Other			3,176				3,122
Total noninterest expense			14,045				13,813
Income before provision for income taxes			4,783				3,870
Provision for income taxes			950				801
Net income			3,833				3,069
Preferred stock dividends and discount accretion			517				393
Net income available to common stockholders		$	3,316			$	2,676
Earnings per common share
Basic		$	1.98			$	1.85
Diluted		$	1.98			$	1.85

 
 
See accompanying notes to consolidated financial statements.

TABLE OF CONTENTS

Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in thousands, except share and per share data)

		Preferred Stock				Warrants				Common Stock				Additional Paid-in Capital				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance at January 1, 2010		$	7,430			$	88			$	1,949			$	14,685			$	(2,653)			$	15,967			$	(432)			$	37,034
Comprehensive income:
Net income																							3,069								3,069
Change in net unrealized losses on securities available for sale, for which a portion of an other than temporary impairment has been recognized in earnings, net of taxes of ($1)																											(3	)			(3	)
Change in net unrealized losses on securities available for sale, net of taxes of ($64)																											(123	)			(123	)
Change in funded status of defined benefit plan, net of taxes of ($109)																											(211	)			(211	)
Comprehensive income																															2,732
Stock compensation expense															127																127
Reissuance of treasury stock (26,000 shares)																			539				(129	)							410
Preferred dividends and accretion of discount			17																				(393	)							(376	)
Cash dividends declared on common stock ($0.56 per share)																							(809	)							(809	)
Balance at December 31, 2010			7,447				88				1,949				14,812				(2,114)				17,705				(769)				39,118
Comprehensive income:
Net income																							3,833								3,833
Change in net unrealized gains on securities available for sale, net of taxes of $1,430																											2,776				2,776
Change in funded status of defined benefit plan, net of taxes of ($300)																											(583	)			(583	)
Comprehensive income																															6,026
Stock compensation expense															98																98
Issuance of common stock (290,004 shares)											362				4,214																4,576
Issuance of common stock for restricted stock awards (4,500 shares)											6				(6	)															—
Redemption of preferred stock, Series A			(7,500	)																											(7,500	)
Issuance of preferred stock, Series B			10,000																												10,000
Warrant repurchase							(88	)							37																(51	)
Preferred dividends and accretion of discount			53																				(517	)							(464	)
Cash dividends declared on common stock ($0.64 per share)																							(1,073	)							(1,073	)
Balance at December 31, 2011		$	10,000			$	—			$	2,317			$	19,155			$	(2,114)			$	19,948			$	1,424			$	50,730