EMCLAIRE FINANCIAL CORP
FORWARD LOOKING STATEMENTS  Discussions  of  certain  matters in this Form 10-K and other  related  year end documents  may  constitute  forward-looking  statements  within  the  meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and as such, may involve risks and uncertainties.  Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words or phrases such as "believe", "plan", "expect",  "intend",  "anticipate",   "estimate",  "project",  "forecast",  "may increase",  "may fluctuate",  "may improve" and similar expressions of future or conditional  verbs  such  as  "will",  "should",  "would",  and  "could".  These forward-looking  statements  relate to, among other things,  expectations of the business  environment in which the Corporation  operates,  projections of future performance,  potential future credit experience, perceived opportunities in the market and  statements  regarding  the  Corporation's  mission and  vision.  The Corporation's actual results, performance and achievements may differ materially from the results,  performance,  and  achievements  expressed or implied in such forward-looking  statements  due to a  wide  range  of  factors.  These  factors include,  but are not limited to, changes in interest  rates,  general  economic conditions,  the local economy,  the demand for the  Corporation's  products and services,  accounting  principles  or  guidelines,  legislative  and  regulatory changes, monetary and fiscal policies of the U.S. Government, U.S. Treasury, and Federal  Reserve,  real estate  markets,  competition in the financial  services industry, attracting and retaining key personnel,  performance of new employees, regulatory  actions,  changes in and utilization of new  technologies  and other risks  detailed  in the  Corporation's  reports  filed with the  Securities  and Exchange  Commission  (SEC) from time to time. These factors and those discussed under "Risk  Factors"  should be considered in  evaluating  the  forward-looking statements,  and undue  reliance  should not be placed on such  statements.  The Corporation does not undertake,  and specifically  disclaims any obligation,  to update any  forward-looking  statements to reflect  occurrences or unanticipated events or circumstances after the date of such statements.  GENERAL  Emclaire  Financial  Corp. (the  Corporation) is a Pennsylvania  corporation and bank  holding  company  that  provides  a full  range of retail  and  commercial financial products and services to customers in western Pennsylvania through its wholly owned  subsidiary bank, the Farmers National Bank of Emlenton (the Bank). The Bank  also  provides  investment  advisory  services  to our  customers  and operates as Farmers Financial Services.  During 2004,  the Bank entered an agreement  with Blue Vase  Securities,  LLC to provide  investment  advisory  services to our customers and operates as Farmers Financial Services.  Blue Vase Securities,  LLC is a nation-wide,  full-service, independent  broker/dealer  that offers  various  services such as  investments, insurances, wealth management, advisory services, estate and retirement planning and account consolidation.  This partnership has enabled the Bank to provide our customers  with  financial  solutions  that extend  outside the Bank's  ordinary deposit products and services.  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 ten retail  branch  offices in  Venango,  Butler, Clarion, Clearfield, Elk and Jefferson counties,  Pennsylvania.  The Corporation and the Bank are headquartered in Emlenton, Pennsylvania.                                         1   The  Corporation  and the Bank are  subject  to  examination  and  comprehensive regulation by the Office of the Comptroller of the Currency (OCC),  which is the Bank's  chartering  authority,  and the Federal  Deposit  Insurance  Corporation (FDIC),  which  insures  customer  deposits  held by the Bank to the full extent provided by law.  The Bank is a member of the Federal  Reserve Bank of Cleveland (FRB) and the Federal Home Loan Bank of Pittsburgh  (FHLB). The Corporation is a registered bank holding company pursuant to the Bank Holding Company Act of 1956 (BHCA), as amended.  During  January 2006,  the Bank  submitted an  application  to the OCC for a new branch location in Cranberry, Pennsylvania. The Bank posted a legal notification in a local newspaper and it provides 30 days for public comments.  At December 31, 2005, the Corporation had $275.6 million in total assets,  $23.6 million in stockholders'  equity,  $192.5 million in loans and $230.5 million in deposits.  LENDING ACTIVITIES  GENERAL.  The principal  lending  activities of the Bank are the  origination of residential  mortgage,  commercial  mortgage,  commercial  business and consumer loans.  Significantly  all of the Bank's  loans are  secured by  property in the Bank's primary market area.  ONE-TO-FOUR  FAMILY MORTGAGE LOANS. The Bank offers first mortgage loans secured by one-to-four  family  residences  located in the Bank's primary  lending area. Typically such residences are single-family owner occupied units. The Bank is an approved,  qualified  lender  for the  Federal  Home Loan  Mortgage  Corporation (FHLMC). As a result, the Bank may sell loans to and service loans for the FHLMC in market  conditions and  circumstances  where this is advantageous in managing interest rate risk.  HOME  EQUITY  LOANS.   The  Bank   originates   home  equity  loans  secured  by single-family residences.  These loans may be either a single advance fixed-rate loan with a term of up to 20 years, or a variable rate revolving line of credit. These loans are made only on owner-occupied single-family residences.  COMMERCIAL 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 41.5% of the total loan  portfolio at December  31, 2005.  Commercial  real estate  loans  generally  consist of loans granted for commercial  purposes  secured by commercial or other  nonresidential real estate.  Commercial  loans consist of secured and unsecured  loans for such items as capital assets, inventory, operations and other commercial purposes.  CONSUMER LOANS.  Consumer loans  generally  consist of fixed-rate term loans for automobile purchases,  home improvements not secured by real estate, capital and other personal  expenditures.  The Bank also offers unsecured revolving personal lines of credit and overdraft protection.  LOANS TO ONE  BORROWER.  National  banks are  subject to limits on the amount of credit that they can extend to one  borrower.  Under  current law,  loans to one borrower are limited to an amount equal to 15% of unimpaired capital and surplus on an unsecured  basis,  and an  additional  amount  equal to 10% of  unimpaired capital and surplus if the loan is secured by readily marketable collateral.  At December  31, 2005,  the Bank's  loans to one  borrower  limit based upon 15% of unimpaired  capital was $3.3 million.  At December 31, 2005,  the Bank's largest single lending  relationship had an outstanding  balance of $4.7 million,  which consisted of a loan to a  municipality  and was not subject to the legal lending limit.  The next  largest  borrower  had loans which  totaled  $3.2  million and consisted of loans  secured by commercial  real estate and business  property in the Bank's lending area. At December 31, 2005, all of such loans were performing in accordance with their terms.                                          2     3   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:                                  -------------------  -----------------   -----------------   ------------------   ------------------                                       2005                2004                2003               2002                  2001                               -------------------  -----------------   -----------------   ------------------   ------------------                                Dollar               Dollar              Dollar              Dollar               Dollar (Dollar amounts in thousands)  Amount         %     Amount       %      Amount      %       Amount       %       Amount       % - ----------------------------------------------------------------------------------------------------------------------------------            Mortgage loans on real estate:       Residential         first mortgages       $ 66,011      34.0%  $ 69,310    38.2%   $ 76,396    39.7%   $ 82,449     48.2%   $ 84,974     52.5%       Home equity loans         and lines          of credit              39,933      20.5%    31,548    17.4%     30,316    15.8%     19,136     11.2%     15,446      9.5%       Commercial                52,990      27.3%    48,539    26.8%     44,935    23.4%     34,986     20.4%     26,470     16.3%                               --------    -------  --------   ------   --------   ------   --------    ------   --------    ------            Total real             estate loans       158,934      81.8%   149,397    82.4%    151,647    78.9%    136,571     79.8%    126,890     78.3%  Other loans:       Commercial business       27,732      14.2%    23,898    13.2%     26,470    13.8%     21,913     12.8%     20,806     12.9%       Consumer                   7,729       4.0%     8,090     4.4%     14,142     7.3%     12,660      7.4%     14,308      8.8%                               --------    -------  --------   ------   --------   ------   --------    ------   --------    ------            Total other loans     35,461      18.2%    31,988    17.6%     40,612    21.1%     34,573     20.2%     35,114     21.7%                               --------    -------  --------   ------   --------   ------   --------    ------   --------    ------  Total loans receivable         194,395     100.0%   181,385   100.0%    192,259   100.0%    171,144    100.0%    162,004    100.0%                                           =======             ======              ======               ======               ====== Less:       Allowance         for loan           losses                 1,869                1,810               1,777               1,587               1,464                               --------             --------            --------            --------             -------- Net loans receivable          $192,526             $179,575            $190,482            $169,557             $160,540                               ========             ========            ========            ========             ========  The following table sets forth the scheduled contractual principal repayments or interest  repricing of loans in the  Corporation's  portfolio as of December 31, 2005. Demand loans having no stated schedule of repayment and no stated maturity are reported as due within one year.     - ------------------------------------------------------------------------------------------------------------                                      Due in one       Due from one    Due from five  Due after (Dollar amounts in thousands)        year or less     to five years   to ten years   ten years        Total - ------------------------------------------------------------------------------------------------------------       Residential mortgages                   $    847       $  4,108       $ 12,915       $ 48,141       $ 66,011 Home equity loans and lines of credit        148          7,334         13,047         19,404         39,933 Commercial mortgages                       1,466          2,850         15,869         32,805         52,990 Commercial business                        2,276          7,051          3,934         14,471         27,733 Consumer                                     443          6,023            848            415          7,729                                         --------       --------       --------       --------       --------                                         $  5,180       $ 27,366       $ 46,613       $115,236       $194,395                                         ========       ========       ========       ========       ========   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, 2005:    - -----------------------------------------------------------------------                                                     Fixed    Adjustable (Dollar amounts in thousands)                       rates      rates - -----------------------------------------------------------------------    Residential mortgage                               $ 58,463   $  6,701 Home equity loans and lines of credit                35,192      4,594 Commercial mortgage                                  18,831     32,693 Commercial business                                  20,154      5,303 Consumer                                              7,285       --                                                    --------   --------                                                    $139,925   $ 49,291                                                    ========   ========    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.                                          3   DELINQUENCIES AND CLASSIFIED ASSETS  DELINQUENT LOANS AND REAL ESTATE ACQUIRED THROUGH FORECLOSURE (REO).  Typically, a loan is  considered  past due and a late charge is assessed  when the borrower has not made a payment  within  fifteen  days from the payment due date.  When a borrower fails to make a required payment on a loan, the Corporation attempts to cure the  deficiency by contacting  the borrower.  The initial  contact with the borrower is made shortly  after the  seventeenth  day following the due date for which a  payment  was not  received.  In most  cases,  delinquencies  are  cured promptly.  If the delinquency  exceeds 60 days, the Corporation  works with the borrower to set  up a  satisfactory  repayment  schedule.  Typically  loans  are  considered non-accruing upon reaching 90 days delinquency,  although the Corporation may be receiving  partial  payments of interest and partial  repayments of principal on such loans. When a loan is placed in non-accrual status,  previously accrued but unpaid interest is deducted from interest  income.  The  Corporation  institutes foreclosure  action  on  secured  loans  only if all  other  remedies  have been exhausted.  If an  action  to  foreclose  is  instituted  and  the  loan  is not reinstated or paid in full, the property is sold at a judicial or trustee's sale at which the Corporation may be the buyer.  Real estate properties  acquired through, or in lieu of, loan foreclosure are to be sold and are  initially  recorded  at fair  value at the date of  foreclosure establishing  a new  cost  basis.  After  foreclosure,  management  periodically performs  valuations  and the real  estate is carried  at the lower of  carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the  valuation  allowance  are  included in loss on  foreclosed  real estate. The Corporation generally attempts to sell its REO properties as soon as practical upon receipt of clear title.  The original  lender  typically  handles disposition  of those REO  properties  resulting  from  loans  purchased  in the secondary market.  As of December 31, 2005, the Corporation's  non-performing assets, which include non-accrual   loans,   loans   delinquent   due  to  maturity,   troubled   debt restructuring,  repossessions  and REO, amounted to $1.6 million or 0.58% of the Corporation's total assets.  CLASSIFIED ASSETS.  Regulations  applicable to insured  institutions require the classification  of  problem  assets  as  "substandard,"  "doubtful,"  or  "loss" depending upon the existence of certain  characteristics  as discussed  below. A category  designated  "special  mention"  must  also be  maintained  for  assets currently not requiring the above  classifications but having potential weakness or risk  characteristics  that  could  result  in future  problems.  An asset is classified as substandard  if not adequately  protected by the current net worth and paying  capacity  of the  obligor or of the  collateral  pledged,  if any. A substandard  asset  is  characterized  by  the  distinct  possibility  that  the Corporation will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses  inherent in those  classified as substandard.  In addition,  these  weaknesses  make collection or liquidation in full, on the basis of currently  existing facts,  conditions and values,  highly questionable   and  improbable.   Assets   classified  as  loss  are  considered uncollectible  and of such little value that their  continuance as assets is not warranted.  The Corporation's  classification of assets policy requires the establishment of valuation  allowances for loan losses in an amount deemed prudent by management. Valuation  allowances  represent loss allowances  that have been  established to recognize  the  inherent  risk  associated  with  lending  activities.  When the Corporation  classifies  a problem  asset as a loss,  the  asset 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, 2005, the Corporation's  classified  and criticized  assets  amounted to $6.4 million with $4.6 million  classified as substandard  and $1.8 million  identified as special mention.                                          4     The  following  table  sets  forth   information   regarding  the  Corporation's non-performing assets as of December 31:     - ----------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands)                    2005            2004         2003             2002            2001 - -----------------------------------------------------------------------------------------------------------------------       Non-performing loans                          $   1,452       $     840     $   1,329       $   1,160       $   1,245       Total as a percentage of gross loans         0.75%           0.46%         0.69%           0.69%           0.78%                                               ---------       ---------     ---------       ---------       --------- Repossessions                                        --               2            45              --              -- Real estate acquired through foreclosure            106              69            --               3              20                                               ---------       ---------     ---------       ---------       ---------       Total as a percentage of total assets        0.04%           0.03%         0.00%           0.00%           0.01%                                               ---------       ---------     ---------       ---------       --------- Total non-performing assets                   $   1,558       $     911     $   1,374       $   1,163       $   1,265                                               =========       =========     =========       =========       ========= Total non-performing assets       as a percentage of total assets              0.57%           0.33%         0.52%           0.49%           0.58%                                               =========       =========     =========       =========       ========= Allowance for loan losses as a       percentage of non-performing loans         128.72%         215.48%       133.71%         136.81%         117.59%                                               =========       =========     =========       =========       =========   ALLOWANCE  FOR LOAN LOSSES.  Management  establishes  allowances  for  estimated losses on loans based upon its  evaluation of the pertinent  factors  underlying the types and quality of loans;  historical loss experience  based on volume and types of loans;  trend in portfolio volume and  composition;  level and trend on non-performing  assets;  detailed  analysis of  individual  loans for which full collectibility may not be assured; determination of the existence and realizable value of the  collateral  and  guarantees  securing  such loans and the  current economic conditions affecting the collectibility of loans in the portfolio.  The Corporation analyzes its loan portfolio each month for valuation purposes and to determine  the  adequacy of its  allowance  for  losses.  Based upon the factors discussed above, management believes that the Corporation's allowance for losses as of December  31, 2005 of $1.9  million is adequate to cover  probable  losses inherent in the portfolio.  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)                 2005            2004             2003              2002            2001 - ----------------------------------------------------------------------------------------------------------------------------        Balance at beginning of period              $ 1,810          $ 1,777          $ 1,587          $ 1,464          $ 1,460       Provision for loan losses                 205              290              330              381              154        Charge-offs:            Mortgage loans                       (46)            (165)             (25)             (36)             (27)            Commercial business loans            (60)             (36)             (26)            (186)             (62)            Consumer loans                       (91)            (117)            (154)            (109)            (108)                                             -------          -------          -------          -------          -------                                                (197)            (318)            (205)            (331)            (197)       Recoveries:            Mortgage loans                      --                 17             --                 26             --            Commercial business loans             18               19               22               20             --            Consumer loans                        33               25               43               27               47                                             -------          -------          -------          -------          -------                                                  51               61               65               73               47 Balance at end of period                    $ 1,869          $ 1,810          $ 1,777          $ 1,587          $ 1,464                                             =======          =======          =======          =======          ======= Ratio of net charge-offs to    average loans outstanding                   0.08%            0.14%            0.08%            0.15%            0.10%                                             =======          =======          =======          =======          ======= Ratio of allowance to    total loans at end of period                0.96%            1.00%            0.92%            0.93%            0.90%                                             =======          =======          =======          =======          =======                                          5     The  following  table  provides a breakdown of the  allowance for loan losses by major loan category for the years ended December 31:                                            2005              2004               2003               2002              2001                                 -----------------  -----------------  -----------------  ---------------- ------------------      Loan Categories:           Amount        %    Amount       %     Amount       %     Amount       %    Amount       % - ----------------------------------------------------------------------------------------------------------------------------            Commercial, financial    and agricultural             $  554      29.6%  $  503      27.8%  $  623      35.1%  $  479     30.2% $  649       44.3% Commercial mortgages               841      45.0%   1,137      62.8%     798      44.9%     625     39.4%    515       35.2% Residential mortgages              211      11.3%      10       0.6%      20       1.1%      21      1.3%     23        1.6% Home equity loans                  150       8.0%      39       2.2%      68       3.8%      63      4.0%      7        0.5% Consumer loans                     106       5.7%     121       6.7%     190      10.7%     119      7.5%    107        7.3% Unallocated                          7       0.4%    --         0.0%      78       4.4%     280     17.6%    163       11.1%                                 ------    ------   ------    ------   ------    ------   ------  -----    ------    -----                                 $1,869       100%  $1,810       100%  $1,777       100%  $1,587    100%   $1,464      100%                                 ======             ======             ======             ======           ======   INVESTMENT PORTFOLIO  GENERAL. The Corporation maintains an investment portfolio of securities such as U.S.  government and agency  securities,  state and municipal debt  obligations, corporate notes and bonds,  and to a lesser extent,  mortgage-backed  and equity securities.   Management   generally  maintains  an  investment  portfolio  with relatively short maturities to minimize overall interest rate risk.  However, at December  31,  2005  approximately  $14.7  million was  invested in  longer-term callable  municipal  securities,  as part of strategy to moderate federal income taxes.  The Bank has no investment with any one issuer in an amount greater than 10% of stockholders' equity.  Investment decisions are made within policy guidelines  established by the Board of  Directors.  This policy is aimed at  maintaining  a  diversified  investment portfolio,   which  complements  the  overall   asset/liability   and  liquidity objectives of the Bank,  while limiting the related credit risk to an acceptable level.  The following table sets forth certain information regarding the amortized cost, fair  value,   weighted  average  yields  and  contractual   maturities  of  the Corporation's securities as of December 31, 2005:     - ---------------------------------------------------------------------------------------------------------------------------                                 Due in 1    Due from 1    Due from 3   Due from 5    Due after   No scheduled (Dollar amounts in thousands) year or less  to 3 years    to 5 years   to 10 years   10 years    maturity          Total - ---------------------------------------------------------------------------------------------------------------------------          U.S. Government securities      $2,972       $14,682       $12,947       $2,934       $  --         $ --         $33,535 Mortgage-backed securities        --            --             839        2,083            15         --           2,937 Municipal securities              --            --            --           --          15,349         --          15,349 Corporate securities             2,249          --            --           --            --           --           2,249 Equity securities                 --            --            --           --            --          2,234         2,234                                 ------       -------       -------       ------       -------       ------       -------  Estimated Fair Value            $5,221       $14,682       $13,786       $5,017       $15,364       $2,234       $56,304                                 ======       =======       =======       ======       =======       ======       =======  Weighted average yield (1)        3.84%         3.14%         5.89%        4.31%         4.80%        2.50%         4.41%                                 ======       =======       =======       ======       =======       ======       =======    (1) Weighted average yield is calculated based upon amortized cost.   For additional information regarding the Corporation's  investment portfolio see "Management's  Discussion  and  Analysis of Financial  Condition  and Results of Operations"  and  "Notes to  Consolidated  Financial  Statements"  in the Annual Report incorporated herein by reference.                                          6   SOURCES OF FUNDS  GENERAL.  Deposits  are the primary  source of the Bank's  funds for lending and investing  activities.   Secondary  sources  of  funds  are  derived  from  loan repayments  and  investment  maturities.  Loan  repayments  can be  considered a relatively stable funding source,  while deposit activity is greatly  influenced by interest  rates and general  market  conditions.  The Bank also has access to funds through credit facilities  available from the FHLB. In addition,  the Bank can obtain  advances  from the FRB discount  window.  For a  description  of the Bank's sources of funds, see "Management's  Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report incorporated herein by reference.  DEPOSITS.  The Bank offers a wide variety of retail deposit account  products to both  consumer  and  commercial  deposit  customers,  including  time  deposits, non-interest  bearing and interest  bearing  demand  deposit  accounts,  savings deposits and money market accounts.  Deposit  products are promoted in periodic  newspaper and radio  advertisements, along with notices  provided in customer account  statements.  The Bank's market strategy is based on its  reputation as a community  bank that provides  quality products and personal customer service.  The Bank pays interest rates on its interest  bearing deposit  products that are competitive  with rates offered by other  financial  institutions  in its market area.  Management  reviews  interest  rates on deposits  weekly and  considers a number of factors,  including (1) the Bank's  internal cost of funds;  (2) rates offered  by  competing  financial   institutions;   (3)  investing  and  lending opportunities; and (4) the Bank's liquidity position.  For additional information regarding the Corporation's deposit base and borrowed funds,  see  "Management's  Discussion  and Analysis of Financial  Condition and Results of Operations" and "Notes to Consolidated  Financial  Statements" in the Annual Report incorporated herein by reference.  SUBSIDIARY ACTIVITY  The  Corporation  has  one  wholly  owned  subsidiary,   the  Bank,  a  national association. As of December 31, 2005, the Bank had no subsidiaries.  PERSONNEL  At December 31, 2005, the Bank had 111 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.                                          7     THE  CORPORATION.  The  Corporation is a registered  bank holding  company,  and subject to regulation and  examination by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA").  The  Corporation is required to file with the FRB periodic reports and such additional information as the FRB may require. Recent  changes  to the Bank  Holding  Company  rating  system  emphasizes  risk management and evaluation of the potential impact of non-depository  entities on safety and soundness.  The FRB may require  the  Corporation  to  terminate  an  activity or  terminate control  of  or  liquidate  or  divest  certain   subsidiaries,   affiliates  or investments  when the FRB believes the activity or the control of the subsidiary or affiliate  constitutes a significant risk to the financial safety,  soundness or stability of any of its banking subsidiaries.  The FRB also has the authority to regulate  provisions  of certain bank holding  company  debt,  including  the authority to impose  interest  ceilings and reserve  requirements  on such debt. Under certain circumstances, the Corporation must file written notice and obtain FRB approval prior to purchasing or redeeming its equity securities.  Further,  the  Corporation is required by the FRB to maintain  certain levels of capital. See "Capital Standards."  The  Corporation is required to obtain prior FRB approval for the acquisition of more than 5% of the  outstanding  shares of any  class of voting  securities  or substantially  all of the assets of any bank or bank holding company.  Prior FRB approval is also required for the merger or consolidation of the Corporation and another bank holding company.  The  Corporation  is  prohibited  by the  BHCA,  except in  certain  statutorily prescribed instances,  from acquiring direct or indirect ownership or control of more than 5% of the outstanding  voting shares of any company that is not a bank or bank holding  company and from engaging  directly or indirectly in activities other than those of  banking,  managing  or  controlling  banks,  or  furnishing services to its subsidiaries.  However,  subject to the prior FRB approval,  The Corporation  may  engage in any,  or acquire  shares of  companies  engaged  in, activities that the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  Under FRB  regulations,  the  Corporation  is  required  to serve as a source of financial and managerial  strength to the Corporation's  subsidiary bank and may not conduct  operations in an unsafe or unsound manner.  In addition,  it is the FRB's policy that a bank  holding  company  should stand ready to use  available resources  to provide  adequate  capital  funds to its  subsidiary  banks during periods of financial  stress or  adversity  and should  maintain  the  financial flexibility  and  capital-raising  capacity to obtain  additional  resources for assisting its  subsidiary  banks. A bank holding  company's  failure to meet its obligations  to serve as a source  of  strength  to its  subsidiary  banks  will generally be considered by the FRB to be an unsafe and unsound banking  practice or a violation of FRB regulations or both.  The  Corporation  is also a bank  holding  company  within  the  meaning  of the Pennsylvania  Banking Code. As such, the  Corporation and its  subsidiaries  are subject to  examination  by,  and may be  required  to file  reports  with,  the Pennsylvania Department of Banking.  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.                                           8    THE BANK.  As a  national  banking  association,  the Bank is subject to primary supervision,  examination  and  regulation by the OCC. The  Corporation  is also subject to regulations of the FDIC as  administrator  of the Bank Insurance Fund ("BIF")  and the FRB.  If, as a result of an  examination  of the Bank,  the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects,  management, liquidity or other aspects of the Corporation's operations are  unsatisfactory or that the Bank is violating or has violated any law or  regulation,  various  remedies are  available to the OCC.  Such remedies include  the  power  to  enjoin  "unsafe  or  unsound   practices,"  to  require affirmative  action to correct any  conditions  resulting  from any violation or practice,  to issue an administrative order that can be judicially enforced,  to direct an increase in capital,  to restrict the Bank's  growth,  to assess civil monetary penalties,  and to remove officers and directors.  The FDIC has similar enforcement  authority,  in addition to its  authority to  terminate  the Bank's deposit  insurance  in the absence of action by the OCC and upon a finding  that the Bank is operating in an unsafe or unsound  condition,  is engaging in unsafe or unsound  activities,  or that the  Corporation's  conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors.  A  national  bank  may  have a  financial  subsidiary  engaged  in any  activity authorized  for  national  banks  directly  or certain  permissible  activities. Generally,  a financial subsidiary is permitted to engage in activities that are "financial  in  nature"  or  incidental  thereto,   even  though  they  are  not permissible  for the national  bank itself.  The  definition  of  "financial  in nature" includes, among other items, underwriting, dealing in or making a market in securities,  including, for example, distributing shares of mutual funds. The subsidiary  may not,  however,  engage as principal in  underwriting  insurance, issue  annuities or engage in real estate  development or investment or merchant banking.  THE  SARBANES-OXLEY  ACT OF  2002.  The  Sarbanes-Oxley  Act of  2002  addresses accounting oversight and corporate governance matters, including:            o    the prohibition of accounting firms from providing  various types                of consulting services to public clients and requiring accounting                firms to rotate  partners among public client  assignments  every                five years;           o    increased  penalties  for  financial  crimes  and  forfeiture  of                executive bonuses in certain circumstances;           o    required executive certification of financial presentations;           o    increased  requirements  for  board  audit  committees  and their                members;           o    enhanced  disclosure  of controls  and  procedures  and  internal                control over financial reporting;           o    enhanced  controls on, and reporting of, insider  trading;  and o                statutory separations between investment bankers and analysts.  The new legislation and its implementing  regulations have resulted in increased costs of compliance, including certain outside professional costs. To date these costs have not had a material impact on the Corporation's operations.  USA  PATRIOT  ACT OF 2001.  The USA  PATRIOT  Act of 2001  and its  implementing regulations  significantly  expanded the  anti-money  laundering  and  financial transparency laws. Under the USA PATRIOT Act, financial institutions are subject to  prohibitions   regarding  specified   financial   transactions  and  account relationships  as well as  enhanced  due  diligence  and  "know  your  customer" standards in their  dealings  with foreign  financial  institutions  and foreign customers.  For example,  the enhanced due diligence policies,  procedures,  and controls generally require financial institutions to take reasonable steps:            o    To conduct  enhanced  scrutiny of account  relationships to guard                against money laundering and report any suspicious transaction,           o    To ascertain  the identity of the nominal and  beneficial  owners                of,  and the  source of funds  deposited  into,  each  account as                needed  to  guard  against  money   laundering   and  report  any                suspicious transactions,                                          9              o    To ascertain  for any foreign  bank,  the shares of which are not                publicly traded,  the identity of the owners of the foreign bank,                and the nature and extent of the ownership  interest of each such                owner, and           o    To  ascertain  whether any foreign  bank  provides  correspondent                accounts to other foreign banks and, if so, the identity of those                foreign banks and related due diligence information.  Under the USA PATRIOT Act, financial  institutions are required to establish and maintain anti-money laundering programs which included            o    The establishment of a customer identification program,           o    The development of internal policies, procedures, and controls,           o    The designation of a compliance  officer,  o An ongoing  employee                training program, and           o    An independent audit function to test the programs.  The Bank has  implemented  comprehensive  policies and procedures to address the requirements of the USA PATRIOT Act.  PRIVACY.  Federal  banking rules limit the ability of banks and other  financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide:            o    initial  notices  to  customers  about  their  privacy  policies,                describing the conditions under which they may disclose nonpublic                personal   information   to   nonaffiliated   third  parties  and                affiliates;           o    annual  notices of their privacy  policies to current  customers;                and           o    a reasonable  method for customers to "opt out" of disclosures to                nonaffiliated third parties.  These privacy provisions affect how consumer  information is transmitted through diversified   financial   companies  and  conveyed  to  outside   vendors.   The Corporation's privacy policies have been implemented in accordance with the law.  DIVIDENDS AND OTHER  TRANSFERS OF FUNDS.  Dividends from the Bank constitute the principal source of income to the Corporation. The Corporation is a legal entity separate and distinct  from the Bank.  The Bank is subject to various  statutory and regulatory  restrictions on its ability to pay dividends to the Corporation. In addition,  the Bank's regulators have the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if such payment is deemed to constitute an unsafe or unsound practice.  TRANSACTIONS  WITH  AFFILIATES.  The Bank is  subject  to  certain  restrictions imposed by federal  law on any  extensions  of credit to, or the  issuance  of a guarantee or letter of credit on behalf of, any affiliates,  the purchase of, or investments in, stock or other securities thereof, the taking of such securities as  collateral  for loans,  and the purchase of assets of any  affiliates.  Such restrictions  prevent any  affiliates  from  borrowing  from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured  loans and  investments  by the Bank to or in any affiliate are limited, individually,  to 10.0% of the Bank's capital and surplus (as defined by federal regulations),  and such  secured  loans  and  investments  are  limited,  in the aggregate,  to 20.0% of the Bank's  capital and  surplus.  Some of the  entities included in the definition of an affiliate are parent  companies,  sister banks, sponsored and advised  companies,  investment  companies whereby the Bank or its affiliate serves as investment advisor, and financial  subsidiaries of the bank. Additional  restrictions on  transactions  with affiliates may be imposed on the Bank under the prompt  corrective  action provisions of federal law. See "Prompt Corrective Action and Other Enforcement Mechanisms."                                           10    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, 2005, the Bank's loans-to-one-borrower limit was $3.3 million based upon the 15% of  unimpaired  capital and surplus  measurement.  At December  31, 2005, the Bank's largest single lending  relationship had an outstanding balance of $4.7 million, which consisted of a loan to a municipality and was not subject to the legal lending  limit.  The next largest  borrower had loans which totaled $3.2  million  and  consisted  of loans  secured by  commercial  real estate and business  property in the Bank's lending area. At December 31, 2005, all of such loans were performing in accordance with their terms.  CAPITAL STANDARDS.  The federal banking agencies have adopted risk-based minimum capital  guidelines  intended to provide a measure of capital that  reflects the degree of risk  associated  with a banking  organization's  operations  for both transactions  reported on the balance sheet as assets and transactions which are recorded as  off-balance  sheet items.  Under these  guidelines,  nominal dollar amounts of assets and credit  equivalent  amounts of off-balance sheet items are multiplied by one of several risk  adjustment  percentages,  which range from 0% for assets with low credit risk, such as federal banking  agencies,  to 100% for assets with relatively high credit risk.  The  risk-based  capital ratio is determined by  classifying  assets and certain off-balance sheet financial  instruments into weighted  categories,  with higher levels of capital being required for those categories  perceived as representing greater  risk.  Under the capital  guidelines,  a banking  organization's  total capital is divided into tiers.  "Tier I capital"  consists of (1) common equity, (2) qualifying  noncumulative perpetual preferred stock, (3) a limited amount of qualifying  cumulative  perpetual  preferred stock and (4) minority interests in the equity  accounts of  consolidated  subsidiaries  (including  trust-preferred securities),  less goodwill and certain other intangible  assets.  Not more than 25% of  qualifying  Tier I capital  may consist of  trust-preferred  securities. "Tier II  capital"  consists  of hybrid  capital  instruments,  perpetual  debt, mandatory  convertible debt securities,  a limited amount of subordinated  debt, preferred stock that does not qualify as Tier I capital, a limited amount of the allowance for loan and lease losses and a limited  amount of unrealized  holding gains on equity securities.  "Tier III capital" consists of qualifying unsecured subordinated  debt.  The sum of Tier II and Tier III  capital may not exceed the amount of Tier I capital.  The  guidelines   require  a  minimum  ratio  of  qualifying  total  capital  to risk-adjusted   assets  of  8%  and  a  minimum  ratio  of  Tier  1  capital  to risk-adjusted  assets of 4%. In addition to the risk-based  guidelines,  federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization  rated in the highest of the five  categories used by regulators to rate  banking  organizations,  the minimum  leverage  ratio of Tier 1 capital to total  assets  must be 3%.  In  addition  to these  uniform  risk-based  capital guidelines  and leverage  ratios that apply across the industry,  the regulators have the discretion to set individual minimum capital  requirements for specific institutions at rates significantly above the minimum guidelines and ratios.  In addition, federal banking regulators may set capital requirements higher than the minimums  described  above for financial  institutions  whose  circumstances warrant it. For example,  a financial  institution  experiencing or anticipating significant  growth may be expected to maintain capital positions  substantially above the minimum supervisory levels without significant  reliance on intangible assets.  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, 2005,  the Bank exceeded the required  ratios for classification as "well/adequately capitalized."                                           11    An  institution  that,  based upon its capital  levels,  is  classified  as well capitalized,  adequately  capitalized,  or  undercapitalized  may be  treated as though it were in the next lower  capital  category if the  appropriate  federal banking agency,  after notice and  opportunity  for hearing,  determines that an unsafe or unsound  condition  or an unsafe or  unsound  practice  warrants  such treatment.  At each successive  lower capital  category,  an insured  depository institution  is subject to more  restrictions.  The  federal  banking  agencies, however,  may  not  treat  a  significantly   undercapitalized   institution  as critically  undercapitalized  unless its capital  ratio  actually  warrants such treatment.  In addition to measures  taken under the prompt  corrective  action  provisions, commercial banking organizations may be subject to potential enforcement actions by the federal  regulators for unsafe or unsound  practices in conducting  their businesses or for  violations  of any law,  rule,  regulation,  or any condition imposed  in  writing by the agency or any  written  agreement  with the  agency. Finally,  pursuant  to an  interagency  agreement,  the  FDIC  can  examine  any institution that has a substandard regulatory examination score or is considered undercapitalized - without the express  permission of the institution's  primary regulator.  SAFETY AND  SOUNDNESS  STANDARDS.  The federal  banking  agencies  have  adopted guidelines  designed to assist the federal  banking  agencies in identifying and addressing  potential  safety and  soundness  concerns  before  capital  becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls,  information systems and internal audit systems, (ii) loan documentation,  (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi)  compensation,  fees and  benefits.  In addition,  the federal  banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings  standards.  These  guidelines  provide six  standards  for establishing  and  maintaining a system to identify  problem  assets and prevent those assets from  deteriorating.  Under these standards,  an insured depository institution  should:  (i) conduct  periodic  asset  quality  reviews to identify problem  assets,  (ii)  estimate  the  inherent  losses in  problem  assets  and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem  asset totals to capital,  (iv) take  appropriate  corrective  action to resolve  problem  assets,  (v) consider the size and potential risks of material asset  concentrations,  and (vi) provide  periodic  asset  quality  reports with adequate  information  for  management  and the board of directors to assess the level of asset risk.  These  guidelines  also set forth standards for evaluating and  monitoring  earnings and for ensuring that earnings are  sufficient for the maintenance of adequate capital and reserves.  PREMIUMS  FOR DEPOSIT  INSURANCE.  Through the BIF,  the FDIC insures the Bank's customer deposits up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default  as  measured  by   regulatory   capital   ratios  and  other   factors. Specifically,  the assessment rate is based on the institution's  capitalization risk category and supervisory subgroup category. An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup category is based on the FDIC's assessment of the  financial  condition  of the  institution  and the  probability  that  FDIC intervention or other corrective action will be required.  FDIC-insured  depository  institutions  pay an assessment rate equal to the rate assessed on deposits insured by the Savings Association Insurance Fund ("SAIF").  The assessment rate currently  ranges from zero to 27 cents per $100 of domestic deposits.  The FDIC may increase or decrease the  assessment  rate schedule on a semi-annual  basis.  Due to  continued  growth in deposits  and some recent bank failures,  the BIF is nearing its minimum ratio of 1.25% of insured  deposits as mandated by law. If the ratio drops below  1.25%,  it is likely the FDIC will be required to assess  premiums on all banks.  Any increase in  assessments  or the assessment  rate  could  have a  material  adverse  effect on the  Corporation's earnings,  depending  on the amount of the  increase.  Furthermore,  the FDIC is authorized to raise insurance premiums under certain circumstances.                                            12  The FDIC is authorized to terminate a depository institution's deposit insurance upon a finding by the FDIC that the institution's  financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any  applicable  rule,  regulation,  order or condition  enacted or imposed by the  institution's  regulatory  agency.  The  termination  of deposit insurance for the Bank could have a material adverse effect on the Corporation's earnings,  depending  on the  collective  size  of the  particular  institutions involved.  All  FDIC-insured  depository  institutions  must pay an  annual  assessment  to provide  funds for the  payment of  interest  on bonds  issued by the  Financing Corporation,  a federal corporation chartered under the authority of the Federal Housing  Finance  Board.  The bonds,  commonly  referred to as FICO bonds,  were issued to capitalize  the Federal  Savings and Loan Insurance  Corporation.  The FICO assessment rates for fourth quarter of fiscal 2005 were 1.46 cents for each $100 of assessable  deposits.  The FICO  assessments  are adjusted  quarterly to reflect changes in the assessment bases of the FDIC's insurance funds and do not vary  depending  on a depository  institution's  capitalization  or  supervisory evaluations.  DEPOSIT INSURANCE  REFORM.  On February 8, 2006,  President Bush signed into law legislation that merges the BIF and the SAIF, eliminates any disparities in bank and thrift risk-based premium assessments,  reduces the administrative burden of maintaining  and  operating  two  separate  funds and  establishes  certain  new insurance coverage limits and a mechanism for possible periodic  increases.  The legislation  also gives the FDIC  greater  discretion  to identify  the relative risks all institutions  present to the deposit insurance fund and set risk-based premiums.  Major  provisions  in the  legislation  include:  maintaining  basic deposit and municipal account  insurance  coverage at $100,000 but providing for a new basic insurance coverage for retirement  accounts of $250,000.  Insurance coverage for basic deposit and  retirement  accounts  could be increased for inflation  every five years in $10,000 increments  beginning in 2011; providing the FDIC with the ability to set the  designated  reserve  ratio  within a range of  between  1.15 percent and 1.50  percent,  rather than  maintaining  1.25  percent at all times regardless of prevailing  economic  conditions;  providing a one-time assessment credit of $4.7  billion  to banks  and  savings  associations  in  existence  on December  31, 1996.  The  institutions  qualifying  for the credit may use it to offset  future  premiums  with  certain  limitations;  requiring  the payment of dividends  of 100% of the amount that the  insurance  fund  exceeds  1.5% of the estimated  insured  deposits  and the  payment  of 50% of the  amount  that  the insurance  fund  exceeds  1.35% of the  estimated  insured  deposits.  (when the reserve is greater than 1.35% but no more than 1.5%); the merger of the SAIF and BIF must  occur  no later  than  July 1,  2006.  Other  provisions  will  become effective  within 90 days of the publication  date of the final FDIC regulations implementing the legislation.  INTERSTATE  BANKING AND  BRANCHING.  Banks have the ability,  subject to certain State restrictions,  to acquire, by acquisition or merger,  branches outside its home state.  The  establishment  of new interstate  branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to  certain  laws of the  states  in which  they are  located.  Competition  may increase further as banks branch across state lines and enter new markets.  CONSUMER  PROTECTION  LAWS AND  REGULATIONS.  The bank  regulatory  agencies are focusing greater attention on compliance with consumer protection laws and their implementing  regulations.  Examination and enforcement have become more intense in nature,  and  insured  institutions  have been  advised to monitor  carefully compliance with such laws and  regulations.  The bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.  The  Community  Reinvestment  Act,  or CRA, is  intended  to  encourage  insured depository  institutions,  while operating safely and soundly,  to help meet the credit  needs of their  communities.  The CRA  specifically  directs the federal regulatory agencies, in examining insured depository  institutions,  to assess a bank's  record  of  helping  meet  the  credit  needs of its  entire  community, including low- and moderate-income neighborhoods, consistent with safe and sound banking  practices.  The CRA further  requires  the agencies to take a financial institution's  record of meeting its  community  credit  needs into account when evaluating applications for, among other things,  domestic branches,  mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial  institution.  The ratings range from a high of "outstanding" to a low of "substantial  noncompliance."  In its last  examination  for CRA  compliance,  as of March 22, 1999,  the Bank was rated "satisfactory."  On February 22, 2005, the federal banking agencies re-proposed amendments to the CRA regulations that would:            o    increase the definition of "small  institution" from total assets                of $250  million to $1  billion,  without  regard to any  holding                company; and           o    take into  account  abusive  lending  practices  by a bank or its                affiliates in determining a bank's CRA rating.  There can be no assurances such proposal will be adopted or, if adopted, in what form.  The Fair  Credit  Reporting  Act,  as  amended by the Fair and  Accurate  Credit Transactions  Act,  or FACT,  requires  financial  firms to help deter  identity theft,  including  developing  appropriate  fraud  response  programs,  and give consumers more control of their credit data. It also  reauthorizes a federal ban on state laws that  interfere  with  corporate  credit  granting  and  marketing practices.  In connection with FACT, financial  institution  regulatory agencies proposed rules that would prohibit an institution from using certain information about a consumer it received  from an  affiliate to make a  solicitation  to the consumer, unless the consumer has been notified and given a chance to opt out of such solicitations.  A consumer's election to opt out would be applicable for at least five years.                                        13   The Check  Clearing  for the 21st Century  Act, or 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, or 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, or 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, or FH Act,  regulates many practices,  including making it unlawful  for  any  lender  to  discriminate  in  its  housing-related   lending activities against any person because of race, color, religion, national origin, sex,  handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered,  illegal under the FH Act,  including some that are not specifically mentioned in the FH Act itself.  The Home  Mortgage  Disclosure  Act, or 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:            o    making  unaffordable  loans  based on the assets of the  borrower                rather  than on the  borrower's  ability  to repay an  obligation                ("asset-based lending")            o    inducing a borrower to  refinance a loan  repeatedly  in order to                charge  high  points  and fees each  time the loan is  refinanced                ("loan flipping")            o    engaging in fraud or  deception to conceal the true nature of the                loan obligation from an unsuspecting or unsophisticated borrower.  FRB regulations  aimed at curbing such lending  significantly  widen the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994,  a  federal  law  that  requires  extra  disclosures  and  consumer protections to borrowers.  Lenders that violate the rules face  cancellation  of loans and penalties equal to the finance charges paid.  Effective  April 8,  2005,  OCC  guidelines  require  national  banks  and their operating   subsidiaries  to  comply  with  certain  standards  when  making  or purchasing  loans to avoid  predatory or abusive  residential  mortgage  lending practices.  Failure to comply with the guidelines  could be deemed an unsafe and unsound or unfair or  deceptive  practice,  subjecting  the bank to  supervisory enforcement actions.                                          14   Finally, the Real Estate Settlement  Procedures Act, or RESPA,  requires lenders to provide  borrowers  with  disclosures  regarding  the nature and cost of real estate  settlements.  Also, RESPA prohibits certain abusive  practices,  such as kickbacks,  and places  limitations on the amount of escrow accounts.  Penalties under the above laws may include fines,  reimbursements and other penalties. Due to heightened  regulatory  concern  related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally,  the Bank may incur  additional  compliance costs or be required to expend  additional  funds for  investments  in its local community.  FEDERAL  HOME LOAN BANK  SYSTEM.  The Bank is a member of the Federal  Home Loan Bank of  Pittsburgh.  Among  other  benefits,  each FHLB  serves as a reserve or central bank for its members within its assigned  region.  Each FHLB is financed primarily from the sale of  consolidated  obligations  of the FHLB system.  Each FHLB makes  available  loans or advances to its members in  compliance  with the policies and procedures  established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB.  At December 31, 2005,  the Bank was in  compliance  with the stock requirements.  FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to maintain non-interest  bearing  reserves at specified  levels  against their  transaction accounts  (primarily  checking,  NOW,  and  Super  NOW  checking  accounts)  and non-personal  time  deposits.  At December 31, 2005,  the Bank was in compliance with these requirements.
The  following  discusses  certain  factors  that may affect  the  Corporation's financial  condition  and  results of  operations  and should be  considered  in analyzing whether to make or continue an investment in our common stock.  ABILITY OF THE  CORPORATION  TO EXECUTE ITS  BUSINESS  STRATEGY.  The  financial performance and  profitability of the Corporation will depend, in large part, on its ability to favorably execute its business  strategy.  This execution entails risks in, among other areas,  technology  implementation,  market  segmentation, brand  identification,  banking  operations,  and  capital  and  human  resource investments. Accordingly, there can be no assurance that the Corporation will be successful in its business strategy.  ECONOMIC CONDITIONS AND GEOGRAPHIC  CONCENTRATION.  The Corporation's operations are located in western Pennsylvania and are concentrated in Venango, Clarion and Butler  Counties,   Pennsylvania.   Although   management  has  diversified  the Corporation's  loan portfolio into other  Pennsylvania  counties,  and to a very limited extent into other states, the vast majority of the Corporation's credits remain  concentrated  in  the  three  primary  counties.  As a  result  of  this geographic concentration, the Corporation's results depend largely upon economic and real estate market  conditions in these areas.  Deterioration in economic or real estate market  conditions in the  Corporation's  primary market areas could have a  material  adverse  impact  on the  quality  of  the  Corporation's  loan portfolio, the demand for its products and services, and its financial condition and results of operations.  INTEREST RATES. By nature,  all financial  institutions are impacted by changing interest rates, due to the impact of such upon:            o    the demand for new loans           o    prepayment speeds experienced on various asset classes,                particularly residential mortgage loans           o    credit profiles of existing borrowers           o    rates received on loans and securities           o    rates paid on deposits and borrowings.  As presented  previously,  the  Corporation is  financially  exposed to parallel shifts in general market interest rates,  changes in the relative pricing of the term structure of general market  interest  rates,  and relative credit spreads. Therefore,  significant  fluctuations  in interest  rates may present an adverse effect upon the Corporation's financial condition and results of operations.                                           15   GOVERNMENT  REGULATION AND MONETARY POLICY.  The financial  services industry is subject to extensive federal and state  supervision and regulation.  Significant new laws,  changes in existing  laws, or repeals of present laws could cause the Corporation's financial results to materially differ from past results. Further, federal monetary policy, particularly as implemented through the Federal Reserve System,  significantly  affects  credit  conditions for the  Corporation,  and a material  change in these  conditions  could  present an  adverse  impact on the Corporation's financial condition and results of operations.  COMPETITION.  The financial services business in the Corporation's  market areas is highly  competitive,  and is becoming more so due to  technological  advances (particularly  Internet  based  financial  services  delivery),  changes  in the regulatory  environment,  and the enormous consolidation that has occurred among financial  services  providers.  Many of the Corporation's  competitors are much larger  in  terms of total  assets  and  market  capitalization,  enjoy  greater liquidity  in their  equity  securities,  have  greater  access to  capital  and funding, and offer a broader array of financial products and services.  In light of this environment, there can be no assurance that the Corporation will be able to compete effectively.  The results of the Corporation may materially differ in future periods depending upon the nature or level of competition.  CREDIT QUALITY.  A significant  source of risk arises from the possibility  that losses will be sustained because borrowers,  guarantors, and related parties may fail to perform in accordance with the terms of their loans. The Corporation has adopted  underwriting  and credit  monitoring  procedures  and credit  policies, including the  establishment  and review of the allowance for loan losses,  that management  believes  are  appropriate  to control  this risk by  assessing  the likelihood of non-performance,  tracking loan performance,  and diversifying the credit  portfolio.  Such  policies  and  procedures  may not,  however,  prevent unexpected losses that could have a material adverse effect on the Corporation's financial condition or results of operations. Unexpected losses may arise from a wide  variety of  specific  or  systemic  factors,  many of which are beyond the Corporation's ability to predict, influence, or control.  THERE ARE INCREASED RISKS INVOLVED WITH  COMMERCIAL  REAL ESTATE,  CONSTRUCTION, COMMERCIAL BUSINESS AND CONSUMER LENDING ACTIVITIES.           Our lending  activities  include loans  secured by existing  commercial real estate. Commercial real estate lending generally is considered to involve a higher degree of risk than single-family residential lending due to a variety of factors,  including  generally  larger  loan  balances  and  the  dependency  on successful  operation of the project for repayment.  Our lending activities also include commercial  business loans to small to medium business,  which generally are secured by various  equipment,  machinery and other corporate assets,  and a wide variety of consumer loans, including home equity and second mortgage loans, automobile loans and unsecured  loans.  Although  commercial  business loans and consumer  loans  generally  have shorter  terms and higher  interest  rates than mortgage loans,  they generally involve more risk than mortgage loans because of the nature of, or in certain cases the absence of, the collateral  which secures such loans.  OUR  ALLOWANCE  FOR LOAN LOSSES ON LOANS MAY NOT BE  ADEQUATE TO COVER  PROBABLE LOSSES.           We have  established  an allowance  for loan losses which we believe is adequate  to offset  probable  losses  on our  existing  loans.  There can be no assurance  that any future  declines in real estate market  conditions,  general economic  conditions  or changes in  regulatory  policies will not require us to increase our allowance for loan losses, which could adversely affect our results of operations.  OTHER RISKS. From time to time, the Corporation details other risks with respect to its business and financial results in its filings with the SEC.
Not applicable.                                           16
The Corporation  owns no real property but utilizes the main office of the Bank. The  Corporation's  and the Bank's  executive  offices  are  located at 612 Main Street,  Emlenton,  Pennsylvania.  The Corporation pays no rent or other form of consideration  for the use of this  facility.  The  following  table  sets forth information with respect to the Bank's offices at December 31, 2005:    - -------------------------------------------------------------------------------------------------------------------------  (Dollar amounts in thousands)                                            Owned     Lease        Net Book       Deposits                                                                             or    Expiration     Value or          at Location                                                        County    Leased   Date (1)      Annual Rent  12/31/2005 - ------------------------------------------------------------------------------------------------------------------------- Corporate and Bank Main Offices: - --------------------------------               Headquarters and Main Office                           Venango     Owned      --           $1,793       $ 45,895         612 Main Street, Emlenton, Pennsylvania 16373          Data Center                                            Venango     Owned      --              984             --         708 Main Street, Emlenton, Pennsylvania 16373  Bank Branch Offices - -------------------         Bon Aire Office                                         Butler    Leased   May 2011            36         35,479         1101 North Main Street, Butler, Pennsylvania 16003          Brookville Office                                     Jefferson    Owned      --              211         21,419         263 Main Street, Brookville, Pennsylvania 15825          Clarion Office                                         Clarion     Owned      --              330         35,260         Sixth & Wood Street, Clarion, Pennsylvania 16214          DuBois Office                                         Clearfield  Leased  June 2010            20         13,678         861 Beaver Drive, Dubois, Pennsylvania 15801          East Brady Office                                      Clarion     Owned      --               53         18,555         323 Kelly's Way, East Brady, Pennsylvania 16028          Eau Claire Office                                       Butler     Owned      --              161         14,280         207 Washington Street, Eau Claire, Pennsylvania 16030          Knox Office                                            Clarion    Leased  December 2011        27         27,109         Route 338 South, Knox, Pennsylvania 16232          Meridian Office                                         Butler    Leased  December 2012        26          8,494         101 Meridian Road, Butler, Pennsylvania 16003          Ridgway Office                                           Elk       Owned      --              166         10,334         173 Main Street, Ridgway, Pennsylvania 15853                                                                                                               -----------                                                                                                                 $230,503                                                                                                               ===========    ITEM  3.  LEGAL PROCEEDINGS  Neither  the  Bank  nor  the  Corporation  is  involved  in any  material  legal proceedings.  The Bank, from time to time, is party to litigation that arises in the  ordinary  course  of  business,  such as claims to  enforce  liens,  claims involving the  origination  and servicing of loans,  and other issues related to the business of the Bank. In the opinion of  management,  the  resolution of any such issues would not have a material adverse impact on the financial  position, results of operation, or liquidity of the Bank or the Corporation.  ITEM  4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  No matters were  submitted to  stockholders  for a vote during the quarter ended December 31, 2005.                                         17      18  PART II  ITEM  5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER           MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.  (a)  The  information  is contained  under the section  captioned  "Common Stock      Information" in the  Corporation's  Annual Report for the fiscal year ended      December 31, 2005, and is incorporated herein by reference. For information      with  respect  to  equity  compensation  plans,  see  "Item  12 -  Security      Ownership  of  Certain   Beneficial   Owners  and  Management  and  Related      Stockholder Matters." There were no sales of the Corporation's unregistered      securities during the period covered by this report.  (b)  Not applicable.  (c)  Issuer Purchases of Equity  Securities.  The Corporation did not repurchase      any of its equity securities in the year ended December 31, 2005.
PART II
Item 6.       Selected Financial Data..................................................................................18
The  required  information  is  contained  in the  section  captioned  "Selected Consolidated  Financial  Data" in the  Corporation's  Annual Report for the year ended December 31, 2005 and incorporated herein by reference.
The required  information  is contained in the section  captioned  "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation's  Annual  Report  for the  year  ended  December  31,  2005  and is incorporated herein by reference.
Market risk for the  Corporation is comprised  primarily from interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning  assets and paying liabilities are at the Bank,  virtually all of the interest rate risk and liquidity  risk lies at the Bank level.  The Bank is not subject to currency exchange  risk or  commodity  price  risk,  and has no  trading  portfolio,  and therefore,  is not subject to any trading risk.  In addition,  the Bank does not participate  in  hedging  transactions  such as  interest  rate  swaps and caps. Changes in interest rates will impact both income and expense  recorded and also the market value of long-term  interest-earning  assets.  Interest rate risk and liquidity risk management is performed at the Bank level.  Although the Bank has a diversified  loan portfolio,  loans  outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area.  One of the primary  functions of the  Corporation's  asset/liability  management committee  is to  monitor  the level to which the  balance  sheet is  subject to interest rate risk. The goal of the  asset/liability  committee is to manage the relationship  between interest rate sensitive  assets and  liabilities,  thereby minimizing  the  fluctuations  in  the  net  interest  margin,   which  achieves consistent  growth of net interest  income during  periods of changing  interest rates.                                          18     Interest  rate  sensitivity  is the result of  differences  in the  amounts  and repricing  dates  of  the  bank's  rate  sensitive  assets  and  rate  sensitive liabilities.  These  differences,  or interest rate repricing "gap",  provide an indication of the extent that the  Corporation's net interest income is affected by future  changes in interest  rates.  A gap is  considered  positive  when the amount  of  interest-rate  sensitive  assets  exceeds  the  amount  of  interest rate-sensitive  liabilities  and is  considered  negative  when  the  amount  of interest   rate-sensitive   liabilities   exceeds   the   amount   of   interest rate-sensitive  assets.  Generally,  during a period of rising interest rates, a negative gap would  adversely  affect net  interest  income while a positive gap would result in an increase in net interest income. Conversely,  during a period of falling  interest  rates,  a negative  gap would result in an increase in net interest income and a positive gap would adversely  affect net interest  income. The closer to zero that gap is maintained,  generally,  the lesser the impact of market interest rate changes on net interest income.  Based on certain  assumptions by a federal regulatory  agency,  which management believes most accurately  represents the sensitivity of the Corporation's assets and   liabilities   to  interest  rate  changes,   at  December  31,  2005,  the Corporation's  interest-earning  assets  maturing or  repricing  within one year totaled  $67.2  million  while the  Corporation's  interest-bearing  liabilities maturing or repricing within one-year totaled $83.1 million, providing an excess of interest-bearing liabilities over interest-earning assets of $15.9 million or a negative  15.5% of total assets.  At December 31, 2005,  the percentage of the Corporation's  assets to liabilities  maturing or repricing  within one year was 80.9%.  For  more  information,  see  "Market  Risk  Management"  in  Exhibit  13 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2005.  ITEM  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  The  Corporation's   consolidated   financial  statements  required  herein  are contained in the  Corporation's  Annual  Report for the year ended  December 31, 2005 and are incorporated herein by reference.  ITEM  9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON           ACCOUNTING AND FINANCIAL DISCLOSURE  On  January  19,  2005,  the  Corporation's  Board of  Directors  dismissed  its independent  auditors,  Crowe  Chizek  and  Company  LLC  (Crowe  Chizek)  to be effective  upon  filing  of the 2004  Form  10-K.  Crowe  Chizek  completed  its engagement  as  independent  auditor  for the  Corporation's  fiscal  year ended December  31, 2004 upon the filing of the  Corporation's  Form 10-K for the year ended December 31, 2004. Crowe Chizek's report on the Corporation's consolidated financial  statements  during the fiscal years ended  December 31, 2004 and 2003 contained no adverse  opinion or a disclaimer of opinion,  and was not qualified or  modified  as to  uncertainty,  audit  scope or  accounting  principles.  The decision  to  change  accountants  was  approved  by  the  Corporation's   Audit Committee.  During the two fiscal years ended December 31, 2004 and 2003 and the subsequent  interim  period  to the  date  of  their  dismissal,  there  were no disagreements  between  the  Corporation  and  Crowe  Chizek on any  matters  of accounting principles or practices,  financial statement disclosure, or auditing scope or principles, which disagreement(s),  if not resolved to the satisfaction of Crowe Chizek,  would have caused it to make a reference to the subject matter of the  disagreement(s) in connection with its reports.  None of the "REPORTABLE EVENTS"  described in Item  304(a)(1)(v) of Regulation S-K occurred with respect to the Corporation  within the two fiscal years ended December 31, 2004 and 2003 and the subsequent interim period to the date of their dismissal.  Effective  January 19, 2005,  the  Corporation  engaged BEARD MILLER COMPANY LLP (Beard Miller) as its  independent  auditors for the fiscal year ending December 31, 2005.  During the two fiscal years ended  December 31, 2004 and 2003 and the subsequent  interim period to the date of their engagement,  the Corporation did not consult  Beard  Miller  regarding  any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.                                           19
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................19
The Corporation  maintains  disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation's reports in compliance  with the Exchange Act, is recorded,  processed,  summarized,  and reported  within the time periods  specified  in the SEC's rules and forms,  and that such  information  is accumulated  and  communicated  to the  Corporation's Management,  including its Chief Executive  Officer and Principal  Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure  based  closely  on  the  definition  of  "disclosure   controls  and procedures" in Rule 13a-14(c) promulgated under the Exchange Act. As of December 31, 2005, the Corporation  carried out an evaluation,  under the supervision and with  the   participation  of  the  Corporation's   Management,   including  the Corporation's Chief Executive Officer and the Corporation's  Principal Financial and Accounting  Officer, of the effectiveness of the design and operation of the Corporation's  disclosure controls and procedures.  Based on the foregoing,  the Corporation's  Chief  Executive  Officer and Principal  Financial and Accounting Officer concluded that the Corporation's disclosure controls and procedures were effective.  During the fourth quarter of fiscal year 2005, there were no significant changes in the  Corporation's  internal  control  over  financial  reporting or in other factors that could significantly  affect the internal controls subsequent to the date of the evaluation referenced above.
None.  PART III
The information  contained under the sections  captioned  "Principal  Beneficial Owners of the  Corporation's  Common  Stock" and  "Information  as to  Nominees, Directors  and  Executive   Officers"  is   incorporated  by  reference  to  the Corporation's definitive proxy statement for the Corporation's Annual Meeting of Stockholders  to be held on May 17,  2006 (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 principal financial and accounting  officer.  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  principal  financial  and  accounting officer will be publicly disclosed in accordance with applicable regulations.
The  information  contained  under  the  section  captioned  "Information  as to Nominees,   Directors  and  Executive   Officers"  in  the  Proxy  Statement  is incorporated herein by reference.
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.                                          20
The information required by this item is incorporated herein by reference to the section captioned "Information as to Nominees, Directors and Executive Officers" in the Proxy Statement.
The information required by this item is incorporated herein by reference to the section captioned  "Ratification of Independent Public Accountants" in the Proxy Statement.  PART IV
(a)  (1)-(2) Financial Statements and Schedules:                 (i) Financial  statements and schedules included in Exhibit 13 to           this Form 10-K are filed as part of this report.                 (ii) All other financial  statement schedules are omitted because           the required information is not applicable, or because the information           required is  included in the  consolidated  financial  statements  and           notes thereto.      (3) Management Contracts or Compensatory Plans:                 (i)  Exhibits  10.1-10.3  listed  below  in  (b)  below  identify           management contracts or compensatory plans or arrangements required to           be filed as exhibits to this report,  and such listing is incorporated           herein by reference.  (b)  Exhibits are either attached as part of this Report or incorporated  herein      by reference.  3.1  Articles of Incorporation of Emclaire Financial Corp. (1)  3.2  Bylaws of Emclaire Financial Corp. (1)  4    Specimen Stock Certificate of Emclaire Financial Corp. (2)  10.1 Form of Change in Control  Agreement  between  Registrant and two executive      officers. (3)  10.2 Form of Group Term  Carve-Out  Plan  between the Farmers  National  Bank of      Emlenton and 20 Officers and Employees. (5)  10.3 Form of  Supplemental  Executive  Retirement  Plan  Agreement  between  the      Farmers National Bank of Emlenton and Six Officers. (5)  11   Statement  regarding  computation  of earnings per share (see Note 1 of the      Notes to Consolidated Financial Statements in the Annual Report).  13   Annual Report to Stockholders for the fiscal year ended December 31, 2005.  14   Code of Personal and Business Conduct and Ethics. (6)                                           21   16   Letter regarding change in certifying accountant  20   Emclaire Financial Corp. Dividend Reinvestment and Stock Purchase Plan.(4)  21   Subsidiaries  of the Registrant  (see  information  contained  herein under      "Item 1. Description of Business - Subsidiary Activity").  31.1 CEO 302 Certification.  31.2 Principal Financial and Accounting Officer 302 Certification.  32.1 Chief Executive Officer 906 Certification.  32.2 Principal Financial and Accounting Officer 906 Certification.  - -------------------------------------------------------------------------------  (1)  Incorporated  by reference to the  Registrant's  Registration  Statement on      Form SB-2, as amended,  (File No. 333-11773)  declared effective by the SEC      on October 25, 1996. (2)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K      for the year ended December 31, 1997. (3)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K      for the year ended December 31, 1996. (4)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K      for the year ended December 31, 2001. (5)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K      for the year ended December 31, 2002. (6)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K      for the year ended December 31, 2004.                                          22    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 27, 2006      By: /S/ DAVID L. COX                                ------------------------------------------------                                David L. Cox                                President, Chief Executive Officer, and Director                                (Duly Authorized Representative)  Pursuant to the requirement of the Securities  Exchange Act of 1934, this Report has been signed below by the following  persons on behalf of the  Registrant and in the capacities and on the dates indicated.     By:   /S/ DAVID L. COX                                       By:/S/ SHELLY L. RHOADES       -----------------------------------------------           --------------------------------------------       David L. Cox                                              Shelly L. Rhoades       President, Chief Executive Officer, and Director          Treasurer       (Principal Executive Officer)                             (Principal Financial and Accounting Officer)  Date: March 27, 2006                                          Date:March 27, 2006  By:   /S/ RONALD L. ASHBAUGH                                 By:/S/ BRIAN C. MCCARRIER       -----------------------------------------------           --------------------------------------------       Ronald L. Ashbaugh                                        Brian C. McCarrier       Director                                                  Director  Date: March 27, 2006                                          Date:March 27, 2006   By:   /S/ JAMES M. CROOKS                                    By:/S/ GEORGE W. FREEMAN       -----------------------------------------------           --------------------------------------------       James M. Crooks                                           George W. Freeman       Director                                                  Director  Date: March 27, 2006                                          Date:March 27, 2006   By:   /S/ MARK A. FREEMER                                    By:/S/ ROBERT L. HUNTER       -----------------------------------------------           --------------------------------------------       Mark A. Freemer                                           Robert L. Hunter       Director                                                  Director  Date: March 27, 2006                                          Date:March 27, 2006   By:   /S/ J. MICHAEL KING                                    By:/S/ JOHN B. MASON       -----------------------------------------------           --------------------------------------------       J. Michael King                                           John B. Mason       Director                                                  Director  Date: March 27, 2006                                          Date:March 27, 2006                                          23     EX-13 2 a5108284ex13.txt EXHIBIT 13                                      EXHIBIT 13      ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005                                                     SELECTED CONSOLIDATED FINANCIAL DATA   (Dollar amounts in thousands, excpet share data)                                                      ----------------------------------------------------------------------------                                                                              AS OF DECEMBER 31, FINANCIAL CONDITION DATA                              2005           2004             2003           2002             2001 - -----------------------------                     ----------------------------------------------------------------------------       Total assets                                      $   275,517    $  273,380    $     262,512    $     238,577    $     216,717 Securities                                             56,304        63,362           49,162           48,748           38,755 Loans receivable, net                                 192,526       179,575          190,482          169,557          160,540 Deposits                                              230,503       232,874          217,110          204,425          189,470 Borrowed funds                                         19,500        15,000           20,700           10,000            5,000 Stockholders' equity                                   23,615        23,616           22,655           22,680           21,111 Stockholders' equity per common share             $     18.63    $    18.63    $       17.87    $       17.02    $       15.84 Tangible stockholders' equity    per common share                               $     17.50    $    17.48    $       16.70    $       15.82    $       14.54                                                    ----------------------------------------------------------------------------                                                                        FOR THE YEAR ENDED DECEMBER 31, OPERATIONS DATA                                      2005           2004             2003           2002             2001 - -----------------------------                     ---------------------------------------------------------------------------- Interest income                                   $    14,877    $   13,953    $      14,209    $      14,653    $      14,589 Interest expense                                        5,573         5,219            4,901            5,161            6,097                                                   -----------    ----------    -------------    -------------    ------------- Net interest income                                     9,304         8,734            9,308            9,492            8,492 Provision for loan losses                                 205           290              330              381              154                                                   -----------    ----------    -------------    -------------    ------------- Net interest income after    provision for loan losses                            9,099         8,444            8,978            9,111            8,338 Noninterest income                                      3,317         2,535            1,785            1,400            1,339 Noninterest expense                                     9,146         7,909            7,522            7,420            7,254                                                   -----------    ----------    -------------    -------------    ------------- Income before income taxes                              3,270         3,070            3,241            3,091            2,423 Provision for income taxes                                697           513              749              834              718                                                   -----------    ----------    -------------    -------------    -------------  Net income                                        $     2,573    $    2,557    $       2,492    $       2,257    $       1,705                                                   ===========    ==========    =============    =============    =============         Average common shares outstanding            1,267,835     1,267,835        1,301,714        1,332,835        1,332,835        Basic earnings per share                   $      2.03    $     2.02    $        1.91    $        1.69    $        1.28        Dividends per share (2)                    $      1.02    $     0.94    $        1.11    $        1.03    $        0.70                                                    ----------------------------------------------------------------------------                                                                     AS OF OR FOR THE YEAR ENDED DECEMBER 31, OTHER DATA                                            2005           2004             2003           2002             2001 - -----------------------------                     ---------------------------------------------------------------------------- PERFORMANCE RATIOS        Return on average assets                          0.94%         0.96%            0.99%            0.99%            0.84%        Return on average equity                         10.69%        11.08%           10.96%           10.21%            8.35%        Yield on interest-earning assets (1)              6.00%         5.81%            6.28%            6.93%            7.69%        Cost of interest-bearing liabilities              2.70%         2.57%            2.56%            2.99%            3.99%        Cost of funds                                     2.24%         2.15%            2.16%            2.53%            3.35%        Interest rate spread (1)                          3.30%         3.24%            3.72%            3.94%            3.70%        Net interest margin (1)                           3.82%         3.71%            4.18%            4.54%            4.52%        Efficiency ratio (1) (3)                         69.72%        67.11%           64.16%           64.98%           69.58%        Noninterest expense to average assets             3.33%         2.96%            2.99%            3.25%            3.56%        Interest-earning assets to average assets        92.82%        92.86%           92.69%           94.65%           94.42%        Loans to deposits                                83.52%        77.11%           87.74%           82.94%           84.73%        Dividend payout ratio (2)                        50.25%        46.61%           57.98%           60.95%           54.72% ASSET QUALITY RATIOS        Non-performing loans to total loans               0.75%         0.46%            0.69%            0.68%            0.78%        Non-performing assets to total assets             0.57%         0.33%            0.52%            0.49%            0.58%        Allowance for loan losses to total loans          0.96%         1.00%            0.92%            0.93%            0.90%        Allowance for loan losses to            non-performing loans                        128.72%       215.48%          133.71%          136.81%          117.59% CAPITAL RATIOS        Stockholders' equity to assets                    8.57%         8.64%            8.63%            9.51%            9.74%        Tangible stockholders' equity to            tangible assets                               8.09%         8.15%            8.11%            8.90%            9.01%        Average equity to average assets                  8.75%         8.63%            9.02%            9.69%           10.02%  - -----------------------------------------------------------------------------------------------------------------------------------   (1)  Interest income utilized in calculation is on a fully tax equivalent basis. (2)  Includes  $.25 per share special cash  dividends  paid in December 2003 and      December 2002. (3)  The  efficiency  ratio is calculated by dividing  operating  expenses (less      intangible  amortization) by net income (TE basis) and noninterest  income.      The  efficiency  ratio  gives  a  measure  of how  effectively  a  bank  is      operating.                                        -1-     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   OVERVIEW - --------  Emclaire  Financial  Corp. (the  Corporation) is a Pennsylvania  corporation and bank  holding  company  that  provides  a full  range of retail  and  commercial financial products and services to customers in western Pennsylvania through its wholly owned subsidiary bank, the Farmers National Bank of Emlenton (the Bank).  The  Bank was  organized  in 1900 as a  national  banking  association  and is a financial  intermediary whose principal business consists of attracting deposits from the general public and investing such funds in real estate loans secured by liens  on  residential  and  commercial  property,  consumer  loans,  commercial business loans,  marketable securities and interest-earning  deposits.  The Bank operates  through  a  network  of  10  offices  in  Venango,   Butler,  Clarion, Clearfield,  Elk and Jefferson 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,  as a  registered  bank  holding company, is subject to regulation by the Federal Reserve Board.  FORWARD LOOKING STATEMENTS  Discussions of certain  matters in this Annual Report and other related year end documents  may  constitute  forward-looking  statements  within  the  meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the Securities  Exchange Act of 1934, as amended (the "Exchange  Act"), and as such, may involve risks and uncertainties. These forward-looking statements relate to, among  other  things,  expectations  of the  business  environment  in which the Corporation  operates,  projections of future  performance and potential  future credit   experience.   The   Corporation's   actual  results,   performance  and achievements   may  differ   materially   from  the  results,   performance  and achievements  expressed or implied in such  forward-looking  statements due to a wide range of factors. These factors include, but are not limited to, changes in interest  rates,  general  economic  conditions,  the local economy,  accounting principles  or  guidelines,   legislative  and  regulatory  changes,  government monetary and fiscal policies,  real estate markets,  financial services industry competition,  attracting  and retaining key  personnel,  regulatory  actions and other risks detailed in the Corporation's  reports filed with the 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.                                         -2-                                              MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)  CHANGES IN FINANCIAL CONDITION - ------------------------------  Total assets  increased  $2.2 million or 1.0% to $275.6  million at December 31, 2005 from $273.4  million at December 31, 2004.  This increase was primarily due to an increase in loans receivable of $13.0 million. Offsetting the net increase in loans were  decreases in cash and cash  equivalents  and  securities  of $4.3 million and $7.1 million, respectively. Total liabilities increased $2.2 million or 1.0% due  primarily  to an  increase  in  short-term  borrowed  funds of $4.5 million,  offset by a decrease in deposits of $2.4 million or 1.0%. As discussed in further  detail  below,  the  increase in loans was  primarily  funded by the decreases in cash and securities and the increase in short-term borrowings.  CASH AND CASH EQUIVALENTS.  Cash on hand and interest-earning deposits decreased a combined  $4.2  million or 29.1% to $10.4  million at  December  31, 2005 from $14.6 million at December 31, 2004. These accounts fluctuate depending on, among other factors,  net operating  results,  deposits and  withdrawals by customers, loan  repayments  and  originations,  maturities  of  securities,  proceeds from borrowed funds and cash dividends to stockholders. The decrease in cash and cash equivalents was primarily used to fund loan originations.  SECURITIES.  Securities  decreased  $7.1  million  or 11.1% to $56.3  million at December  31,  2005 from  $63.4  million  at  December  31,  2004 as a result of increased loan demand.  This decrease resulted from security  maturities,  calls and sales totaling $10.0 million. Offsetting the net decrease in securities were security  purchases  totaling $4.9 million.  Also  contributing to the change in securities for the year was a decrease in the  unrealized  gain on available for sale  securities.  The funds  available  from the  decrease in  securities  were primarily used to fund loan originations.  LOANS RECEIVABLE. Net loans receivable increased $13.0 million or 7.2% to $192.5 million at December  31, 2005 from $179.6  million at December  31,  2004.  This increase can be attributed to increases in the  Corporation's  home equity loans and lines of credit,  commercial mortgages and commercial business loans of $8.4 million,  $4.4  million  and $3.8  million,  respectively.  Offsetting  this net increase  in loans  receivable  were  decreases  in  residential  mortgages  and consumer  loans of $3.3  million and  $361,000,  respectively.  The  increase in commercial  real estate loans and  business  loans was a result of the growth in the commercial real estate market,  the lower interest rate  environment and the continued focus by management on commercial lending. The increase in home equity loans was due primarily to loan campaigns put forth during the year and also the shift from  residential  first  mortgage loans to home equity loans and lines of credit.  NON-PERFORMING  ASSETS.  Non-performing  assets include  non-accrual loans, real estate acquired  through  foreclosure  (REO) and  repossessions.  Non-performing assets  increased  $647,000 or 71.0% to $1.6 million or 0.57% of total assets at December  31, 2005 from  $911,000 or 0.33% of total assets at December 31, 2004. Non-performing  assets consisted of non-performing  loans, REO and repossessions of $1.5  million,  $106,000,  and $0,  respectively,  at  December  31, 2005 and $840,000, $69,000 and $2,000,  respectively,  at December 31, 2004. The increase in  non-performing  assets was  primarily  contributed  to one  commercial  loan customer who totaled $1.0 million or 64.0% of total non-performing assets.                                         -3-   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)   FEDERAL  BANK STOCKS.  Federal  bank stocks were  comprised of Federal Home Loan Bank  stock  and  Federal  Reserve  Bank  stock of $1.4  million  and  $333,000, respectively,  at December 31, 2005.  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.  BANK-OWNED  LIFE  INSURANCE  (BOLI).  BOLI is comprised  of single  premium life insurance  policies of $4.0  million on 20 officers  and  employees of the Bank. During 2005, the value of the BOLI increased $175,000 or 3.9% to $4.6 million at December 31, 2005 from $4.4 million at December 31, 2004.  This net increase was comprised of the  appreciation of the cash surrender value of $191,000 offset by executive life insurance expense of $16,000.  PREMISES AND  EQUIPMENT.  Premises and equipment  increased  $445,000 or 7.8% to $6.1 million at December  31, 2005 from $5.7  million at December 31, 2004.  The net increase  resulted  from capital  expenditures  of $1.3  million,  offset by normal depreciation of fixed assets of $855,000. Contributing to the increase in capital  expenditures  was the purchase of property for a new branch location of $423,000 and the  construction of a new drive-thru for the Brookville  office of $330,000.  GOODWILL. Goodwill remained constant at $1.4 million at each year ended December 31, 2005 and 2004.  OTHER INTANGIBLES. Core deposit intangibles decreased $21,000 or 100.0% to $0 at December  31,  2005 from  $21,000  at  December  31,  2004 as a result of normal amortization during the year. Also during the year the customer intangible asset decreased  $10,000  or 60.0% to $7,000 at  December  31,  2005 from  $17,000  at December 31, 2004 as a result of normal amortization.  DEPOSITS.  Total  deposits  decreased  $2.4 million or 1.0% to $230.5 million at December  31, 2005 from $232.9  million at December  31,  2004.  The decrease in customer deposits can be attributed to the decrease in  interest-bearing  demand deposits  of $6.9  million or 8.6%.  This  decrease in  interest-bearing  demand deposits can primarily be attributed to the decrease in money market accounts of $5.4 million as a result of customers  shifting  their monies from  FDIC-insured bank  deposit  products to mutual funds and other  equity  investments.  For the year,  noninterest-bearing  demand and time deposits  increased  $3.5 million or 8.7% and $1.0 million or 1.0%, respectively.  BORROWED  FUNDS.  Borrowed  funds,  or advances  from the FHLB,  increased  $4.5 million or 30.0% to $19.5  million at December  31,  2005 from $15.0  million at December  31,  2004.  The increase in advances was the result of the increase in FHLB overnight borrowings of $4.5 million to fund loan originations.  ACCRUED INTEREST PAYABLE.  Accrued interest payable increased $30,000 or 5.2% to $607,000 at December 31, 2005 from  $577,000 at December 31, 2004 as a result of the increase in the cost of interest-bearing deposits.                                           -4-                                            MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)  CAPITAL RESOURCES - -----------------  Total stockholders'  equity remained level at $23.6 million at December 31, 2005 and 2004.  Contributing to  stockholders'  equity was net income of $2.6 million offset by dividends declared of $1.3 million and a decrease in accumulated other comprehensive income of $1.3 million.  Returns on average equity and assets were 10.69% and 0.94%, respectively, for 2005.  The  Corporation  has  maintained a strong  capital  position  with an equity to assets  ratio of 8.6% for both years ended  December  31,  2005 and 2004.  While continuing  to sustain  this  strong  capital  position,  stockholders  received dividends  of $1.3  million  in  2005.  Regular  quarterly  dividends  increased $101,000 or 8.5% to $1.3 million in 2005 from $1.2 million in 2004. Stockholders have taken  part in the  Corporation's  dividend  reinvestment  plan  introduced during 2003 with 38% of registered  stockholder  accounts  active in the plan at December 31, 2005 and 2004.  The  Corporation's  strong capital  position  supports its growth strategy while both  protecting the interest of  stockholders  and depositors and ensuring 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,  2005,  the  Corporation  and the Bank  were in compliance with all regulatory capital requirements.  LIQUIDITY  The Corporation's primary sources of funds generally have been deposits obtained through the Bank's office network,  borrowings  from the FHLB, and  amortization and prepayments of outstanding loans and maturing  securities.  During 2005, the Corporation used its sources of funds primarily to fund loan commitments.  As of December 31, 2005, the Corporation had outstanding loan  commitments,  including undisbursed  loans and amounts  available  under credit  lines,  totaling  $17.1 million.  The Bank is required by the OCC to  establish  policies to monitor and manage  liquidity  levels to ensure  the  Bank's  ability  to meet  demands  for customer  withdrawals  and the repayment of short-term  borrowings.  The Bank is currently in compliance with all liquidity policy limits.  At December 31, 2005,  time deposits  amounted to $112.4 million or 48.8% of the Corporation's total consolidated deposits, including approximately $45.7 million which are scheduled to mature within the next year. Management believes that the Corporation has adequate  resources to fund all of its commitments,  that all of its commitments  will be funded as required by related  maturity dates and that, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities.  Aside from  liquidity  available  from  customer  deposits or through  sales and maturities of securities,  the Corporation has alternative sources of funds such as a term borrowing capacity from the FHLB and, to a limited extent, through the sale of loans. At December 31, 2005, the Corporation's  borrowing  capacity with the FHLB, net of funds borrowed, was $107.2 million.  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.                                         -5-   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)  CRITICAL ACCOUNTING POLICIES - ----------------------------  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 and in this financial  review,  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 currently views the determination of the allowance for loan losses as a critical accounting policy.  The allowance for loan losses provides for an estimate of probable losses in the loan portfolio.  In determining the appropriate  level of the allowance for loan loss,  the loan portfolio is separated into  risk-rated and  homogeneous  pools. Migration  analysis/historical  loss rates,  adjusted for relevant trends,  have been applied to these  pools.  Qualitative  adjustments  are then applied to the portfolio to allow for quality of lending policies and procedures,  national and local economic and business conditions,  changes in the nature and volume of the portfolio,  experience,  ability and depth of lending management, changes in the trends,  volumes and severity of past due,  non-accrual and classified loans and loss and  recovery  trends,  quality of the  Corporation's  loan review  system, concentrations  of  credit,  and  external  factors.  The  methodology  used  to determine  the  adequacy  of the  Corporation's  allowance  for loan  losses  is comprehensive  and  meets  regulatory  and  accounting  industry  standards  for assessing  the  allowance,  however  it is still an  estimate.  Loan  losses are charged against the allowance while recoveries of amounts previously charged-off are credited to the allowance.  Loan loss provisions are charged against current earnings  based on  management's  periodic  evaluation and review of the factors indicated above.                                         -6-                                            MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)  CHANGES IN RESULTS OF OPERATIONS - -------------------------------- The  Corporation  reported  net income of $2.6  million,  $2.6  million and $2.5 million in 2005, 2004 and 2003,  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 net interest income.  AVERAGE BALANCE SHEET AND YIELD/RATE  ANALYSIS.  The following table sets forth, for the periods  indicated,  information  concerning the total dollar amounts of interest income from  interest-earning  assets and the resultant 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.    - ---------------------------------------------------------------------------------------------------------------------------------                                                                           Year ended December 31,                                                          2005                         2004                         2003                                             ----------------------------- ---------------------------  --------------------------                                             Average                Yield/ Average              Yield/  Average              Yield/ (Dollar amounts in thousands)               Balance    Interest    Rate   Balance    Interest  Rate    Balance    Interest  Rate - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS:               Loans, taxable                          $181,109   $12,011     6.63%  $178,998   $11,414   6.38%   $171,953   $11,859   6.90%     Loans, tax-exempt                          7,052       454     6.44%     7,376       478   6.48%      6,077       271   4.46%                                             --------   -------            --------   -------           --------   -------           Total loans receivable             188,161    12,465     6.62%   186,374    11,892   6.38%    178,030    12,130   6.81%                                             --------   -------            --------   -------           --------   -------     Securities, taxable                       47,075     1,714     3.64%    40,245     1,396   3.47%     35,635     1,391   3.90%     Securities, tax-exempt                    15,468     1,012     6.54%    15,398     1,014   6.58%     16,070     1,066   6.63%                                             --------   -------            --------   -------           --------   -------           Total securities                    62,543     2,726     4.36%    55,643     2,410   4.33%     51,705     2,457   4.75%                                             --------   -------            --------   -------           --------   -------     Interest-earning deposits           with banks                           2,978        81     2.72%     4,405        71   1.61%      1,996        25   1.25%     Federal bank stocks                        1,633        58     3.55%     1,753        42   2.40%      1,749        48   2.74%                                             --------   -------            --------   -------           --------   -------           Total interest-earning                 cash equivalents               4,611       139     3.01%     6,158       113   1.84%      3,745        73   1.95%                                             --------   -------            --------   -------           --------   -------     TOTAL INTEREST-EARNING ASSETS            255,315    15,330     6.00%   248,175    14,415   5.81%    233,480    14,660   6.28%            Cash and due from banks              7,399                         7,175                        6,066           Other noninterest-earning                 assets                        12,340                        11,913                       12,355                                             --------                      --------                     --------           Total Assets                      $275,054                      $267,263                     $251,901                                             ========                      ========                     ======== INTEREST-BEARING LIABILITIES:     Interest-bearing demand deposits        $ 79,063   $   570     0.72%  $ 77,421   $   457   0.59%   $ 77,058     $ 596   0.77%     Time deposits                            110,829     4,324     3.90%   110,456     4,129   3.74%     99,562     3,775   3.79%                                             --------   -------            --------   -------           --------   -------           Total interest-bearing deposits    189,892     4,894     2.58%   187,877     4,586   2.44%    176,620     4,371   2.47%                                             --------   -------            --------   -------           --------   -------     Borrowed funds, short-term                 1,199        50     4.17%       504         3   0.60%      2,032        23   0.00%     Borrowed funds, long-term                 15,000       629     4.19%    15,000       630   4.20%     12,692       507   3.99%                                             --------   -------            --------   -------           --------   -------           Total borrowed funds                16,199       679     4.19%    15,504       633   4.08%     14,724       530   3.60%                                             --------   -------            --------   -------           --------   -------     TOTAL INTEREST-BEARING LIABILITIES       206,091     5,573     2.70%   203,381     5,219   2.57%    191,344     4,901   2.56%            Noninterest-bearing                 demand deposits               42,450         -         -    38,800         -       -     35,970         -       -                                             --------   -------            --------   -------           --------   -------           FUNDING AND COST OF FUNDS          248,541     5,573     2.24%   242,181     5,219   2.15%    227,314     4,901   2.16%            Other noninterest-bearing                 liabilities                    2,452                         2,005                        1,856                                             --------                      --------                     --------           Total Liabilities                  250,993                       244,186                      229,170            Stockholders' Equity                24,061                        23,077                       22,731                                             --------                      --------                     --------           Total Liabilities and                 Stockholders' Equity        $275,054                      $267,263                     $251,901                                             ========   -------            ========   -------           ========   ------- NET INTEREST INCOME                                    $ 9,757                       $ 9,196                      $ 9,759                                                        =======                       =======                      ======= INTEREST RATE SPREAD (difference between     weighted average rate on     interest-earning     assets and interest-bearing     liabilities)                                                   3.30%                       3.24%                        3.72%  NET INTEREST MARGIN (net interest     income as a percentage of average     interest-earning assets)                                       3.82%                       3.71%                        4.18%  - ----------------------------------------------------------------------------------------------------------------------------------                                            -7-    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)   ANALYSIS OF CHANGES IN NET INTEREST  INCOME.  The following  table  analyzes the changes in  interest  income and  interest  expense in terms of: (1)  changes in volume of  interest-earning  assets  and  interest-bearing  liabilities  and (2) changes in yields and rates.  The table  reflects the extent to which changes in the  Corporation's  interest  income and interest  expense are  attributable  to changes in rate (change in rate  multiplied  by prior year  volume),  changes in volume   (changes  in  volume   multiplied  by  prior  year  rate)  and  changes attributable to the combined impact of volume/rate (change in rate multiplied by change  in  volume).   The  changes  attributable  to  the  combined  impact  of volume/rate  are  allocated  on a consistent  basis  between the volume and rate variances.  Changes  in  interest  income on loans and  securities  reflect  the changes in interest income on a fully tax equivalent basis.     - -----------------------------------------------------------------------------------------------------------                                                   2005 versus 2004                 2004 versue 2003                                               Increase (decrease) due to       Increase (decrease) due to                                             ----------------------------    ------------------------------- (Dollar amounts in thousands)               Volume     Rate       Total     Volume     Rate          Total - ----------------------------------------------------------------------------------------------------------- Interest income:           Loans                                     $ 115       $458      $573      $553      $  (791)      $(238)    Securities                                  300         16       316       179         (226)        (47)    Interest-earning deposits with banks        (28)        38        10        37            9          46    Federal bank stocks                          (3)        19        16       --            (6)         (6)                                              -----       ----      ----      ----      -------       -----     Total interest-earning assets               384        531       915       769       (1,014)       (245)                                              -----       ----      ----      ----      -------       ----- Interest expense:    Deposits                                     50        258       308       275          (60)        215    Borrowed funds                               29         17        46        29           74         103                                              -----       ----      ----      ----      -------       -----    Total interest-bearing liabilities           79        275       354       304           14         318                                              -----       ----      ----      ----      -------       ----- Net interest income                          $ 305       $256      $561      $465      $(1,028)      $(563)                                              =====       ====      ====      ====      =======       =====   2005 RESULTS COMPARED TO 2004 RESULTS  The Corporation  reported net income of $2.57 million and $2.56 million for 2005 and 2004,  respectively.  The  $16,000  or 1.0%  increase  in net  income can be attributed  to  increases  in net  interest  income  and  noninterest  income of $570,000 and  $782,000,  respectively,  and a decrease in the provision for loan losses of $85,000, offset by increases in noninterest expenses and the provision for income taxes of $1.2 million and $184,000, respectively.  NET INTEREST  INCOME.  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  $561,000 or 6.1% to $9.8  million  for 2005,  compared  to $9.2  million  for 2004.  This increase  in  net  interest  income  can be  attributed  to an  increase  in tax equivalent interest income of $915,000 offset by an increase in interest expense of $354,000.  INTEREST INCOME.  Tax equivalent  interest income increased  $915,000 or 6.4% to $15.3 million for 2005, compared to $14.4 million for 2004. This increase can be attributed  primarily to increases in interest earned on loans and securities of $573,000 and $316,000, respectively.                                        -8-                                             MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)   Tax equivalent interest earned on loans receivable increased $573,000 or 4.8% to $12.5 million for 2005,  compared to $11.9  million for 2004.  During that time, average loans receivable increased $1.8 million or 1.0%, accounting for $115,000 in additional loan interest  income.  This volume increase was accompanied by an increase  of  $458,000  related to the 24 basis  point  increase  in the average interest rate earned on the loan portfolio.  The increase in the average balance of loans was  primarily due to increased  originations  of home equity loans and lines of credit,  commercial  mortgages and commercial  business loans while the increases in the average yield primarily  reflects the recent upward movement in short-term market interest rates.  Tax equivalent interest earned on securities increased $316,000 or 13.1% to $2.7 million for 2005, compared to $2.4 million for 2004 primarily due to an increase in the average volume. The average volume of these assets increased $6.9 million or 12.4% as a result of the deployment of funds from deposit  growth,  in excess of loan demand,  into short-term  commercial paper,  U.S.  Government agency and related entities, mortgage-backed and equity securities.  Interest earned on interest-earning deposits with banks, including federal funds sold,  increased  $10,000 or 14.1% to $81,000 for 2005,  compared to $71,000 for 2004. The average rate of  interest-earning  deposits increased 111 basis points during 2005  resulting  in an increase in interest  income of $38,000.  Interest rates earned on interest-earning  deposit accounts are influenced by the Federal Reserve Board (FRB) and generally  fluctuate  with changes in the discount rate. During  2005,  the FRB raised  the  discount  rate 200 basis  points to 4.25% at December 31, 2005 from 2.25% at December 31, 2004.  The average  volume of these assets  decreased  $1.4 million or 32.4% as a result of  investing  excess funds into increased loan production and a decline in deposits.  Interest earned on federal bank stocks increased $16,000 or 38.1% to $58,000 for 2005,  compared to $42,000 for 2004.  The  average  rate of federal  bank stocks increased  115 basis  points  during 2005  resulting  in an increase in interest income of $19,000. The average volume of these assets decreased $120,000 or 6.8% during 2005 resulting in a decrease of interest income of $3,000.  INTEREST EXPENSE.  Interest expense  increased  $354,000 or 6.8% to $5.6 million for 2005,  compared to $5.2 million for 2004. This increase in interest  expense can be  attributed  to increases  in interest  incurred on deposits and borrowed funds of $308,000 and $46,000, respectively.  Deposit  interest expense  increased  $308,000 or 6.7% to $4.9 million for 2005, compared to $4.6  million  for 2004.  This  increase in interest  expense can be attributed to the increase in average interest-bearing  deposits of $2.0 million or 1.1%  between  2005 and 2004  resulting  in  additional  interest  expense of $50,000.  Contributing  to the volume  variance was a 14 basis point increase in the average cost of interest-bearing deposits to 2.58% for 2005 versus 2.44% for 2004  resulting in an increase in expense due to rate of $258,000.  The increase in the average balance of deposits was primarily due to the general  fluctuation in transactional  demand deposit accounts while the increase in the average cost was due to the recent upward movement in short-term market interest rates.  Interest  expense on borrowed  funds  increased  $46,000 or 7.3% to $679,000 for 2005,  compared to $633,000 for 2004. This increase was a result of the increase in the average balance of borrowed funds of $695,000 or 4.5% to $16.2 million in 2005 from $15.5  million in 2004  resulting in  additional  interest  expense of $29,000. In addition to the volume increase,  the average rate on borrowed funds increased 11 basis  points to 4.19% for 2005 versus 4.08% for 2004  resulting in an  increase in interest  expense  due to rate of $17,000.  The  increase in the average balance and rate of borrowed funds was primarily a result of the Federal Home Loan Bank short-term  borrowings incurred throughout 2005 primarily to fund loan demand and the outflow in deposits.                                         -9-      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)   PROVISION FOR LOAN LOSSES. The Corporation records provisions for loan losses to bring the total  allowance  for loan losses to a level deemed  adequate to cover probable losses  incurred in the loan portfolio.  In determining the appropriate level of  allowance  for  loan  losses,  management  considers  historical  loss experience,  the present  and  prospective  financial  condition  of  borrowers, current and  prospective  economic  conditions  (particularly  as they relate to markets where the Corporation  originates  loans),  the status of non-performing assets,  the  estimated  underlying  value of the  collateral  and other factors related to the collectibility of the loan portfolio.  The provision for loan losses  decreased  $85,000 or 29.3% to $205,000 for 2005, compared to  $290,000  for 2004.  The  Corporation's  allowance  for loan losses amounted to $1.9 million or 0.96% of the  Corporation's  total loan portfolio at December 31, 2005,  compared to $1.8 million or 1.00% at December 31, 2004.  The allowance  for loan losses as a percentage of  non-performing  loans at December 31, 2005 and 2004 was 128.72% and  215.48%,  respectively.  The  decrease in the provision for loan losses from 2004 to 2005 was primarily due to the decrease of charge-offs and also qualitative factors such as local economics,  portfolio mix and trends.  NONINTEREST  INCOME.  Noninterest  income includes items that are not related to interest rates, but rather to services rendered and activities  conducted in the financial  services  industry,  such  as fees on  depository  accounts,  general transaction and service fees, security and loan gains and losses and earnings on BOLI.  Noninterest  income increased $782,000 or 30.8% to $3.3 million for 2005, compared to $2.5 million for 2004.  This can be  attributed to increases in fees and service charges,  commissions on financial services, gains on securities and other  noninterest   income  of  $298,000,   $342,000,   $156,000  and  $19,000, respectively.  Offsetting  this increase were  decreases in gains on the sale of loans and earnings on BOLI of $32,000 and $1,000, respectively.  Earnings on fees and service charges increased $298,000 or 26.6% to $1.4 million for 2005,  compared to $1.1 million for 2004.  This  increase was  primarily the result of the  addition  of the  Overdraft  Privilege  Program  to our  existing product and service line during  April 2005.  During the year,  the  Corporation realized an increase in  overdraft  charges of $307,000 to $1.2  million for the year ended  December 31, 2005  compared to $889,000 for the year ended  December 31, 2004.  During July 2004,  the  Corporation  entered  into an  agreement  with Blue Vase Securities,  LLC to provide investment  advisory services to our customers,  and operates  as  Farmers  Financial  Services.  Blue  Vase  Securities,  LLC  is  a nation-wide,   full-service,   independent  broker/dealer  that  offers  various services such as investments,  insurances, wealth management, advisory services, estate and retirement planning and account  consolidation.  This partnership has enabled us to provide our customers with financial solutions that extend outside the Bank's  ordinary  deposit  products  and  services.  The  Corporation  earns commissions  from  providing this service and recognized an increase of $342,000 in  commissions  to $437,000 for the year ended  December  31, 2005  compared to $95,000 in 2004.  In 2004,  management elected to sell its student loan portfolio based on the low interest rate  environment and the higher expense  associated with the servicing of these loans. The final sale of this portfolio  occurred in 2005. Gains on the sale of loans  decreased  $32,000 or 86.5% to $5,000 for the year ended December 31, 2005 compared to $37,000 for the year ended December 31, 2004.                                        -10-                                              MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)  In 2003,  management began to diversify its security  portfolio with an emphasis on  marketable  equity  securities  of  community  banks with growth  potential, increasing  dividend  yields and the  potential to diversify  the  Corporation's business.  In 2005, management continued to realize gains on the diversification of the security portfolio. The first investment contributed $628,000 to gains on securities as management  elected to divest this investment into other community bank  stocks  and other  funding  needs.  The  second  investment,  which was an involuntary  transaction  that  resulted  from the sale of the  community  bank, contributed  $198,000 to gains on  securities.  The Bank also realized  gains on securities  from  the sale of  investments  of  Fannie  Mae and  Freddie  MAC of $31,000.  Other  noninterest  income  increased  $19,000  or 4.9% to  $407,000  for  2005, compared to $388,000 for 2004. Other  noninterest  income consists  primarily of miscellaneous  customer  fees for ATM and debit card  privileges,  wire transfer fees, commissions on insurance and gains on the sale of foreclosed assets.  NONINTEREST EXPENSE. Noninterest expense increased $1.2 million or 15.6% to $9.1 million  for  2005,  compared  to  $7.9  million  for  2004.  This  increase  in noninterest  expense is  comprised of  increases  in  compensation  and employee benefits,  premises and  equipment  expenses and other  noninterest  expenses of $712,000,  $225,000  and  $305,000,  respectively,  offset by the  reduction  in intangible amortization expense of $5,000.  The largest  component  of  noninterest  expense is  compensation  and  employee benefits.  This expense  increased  $712,000 or 16.2%.  Normal annual salary and wage  adjustments,   increased  health  insurance  and  pension  costs,   higher director's fees, and commissions paid to the financial  services  representative were the major  components of this increase.  Also  contributing to the increase was the  addition of a new  commercial  lender,  compliance  officer,  financial services  assistant,  trainer  and credit  analyst.  Partially  offsetting  this increase  was an  increase  in  standard  loan costs  deferred  associated  with personnel as a result of increased loan production.  Premises and equipment expense increased $225,000 or 16.2% primarily as a result of a change in the estimated  useful life of an asset which was replaced  during the fourth  quarter of 2005 and resulted in additional  depreciation  expense of $108,000.  Also contributing to the increase in premises and equipment  expenses were  increases  in repairs and  maintenance,  utilities  resulting  from higher energy  costs  experienced  during the year and  maintenance  service  contracts incurred as a result of new technology.  Other noninterest  expense increased  $305,000 or 14.6% primarily as a result of increased professional fees, travel and entertainment, loan expenses, collection costs,  bad checks and other  losses,  expenses  associated  with the  overdraft privilege  program and losses  associated  with  reconciling  items related to a correspondent bank relationship.  During 2005, the introduction of the overdraft privilege  program to our product and service line  accounted for $47,000 of the increase in other noninterest  expenses.  Also contributing to this increase was the  write-off of amounts  related to a  correspondent  bank  reconciliation  of $203,000  resulting from the  inefficiencies  related to  consolidation of their offices as well as variances  resulting from the Bank's  technology  conversions late in 2004.  Provision  for income  taxes  increased  $184,000 or 35.9% to $697,000 for 2005, compared to $513,000 for 2004.  Contributing  to this change was the increase in the  effective  tax rate to 21.3% for 2005 from 16.7% for 2004.  During 2004 the Corporation  generated  tax  credits  and  reduced  federal  income tax  expense primarily as a result of the historical  renovations to our headquarters located in Emlenton, Pennsylvania.                                         -11-     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)   2004 RESULTS COMPARED TO 2003 RESULTS  The  Corporation  reported  net income of $2.6 million and $2.5 million for 2004 and 2003,  respectively.  The  $65,000  or 2.6%  increase  in net  income can be attributed to increases in  noninterest  income of $750,000 and decreases in the provision  for loan  losses and the  provision  for income  taxes of $40,000 and $236,000, respectively,  offset by a decrease in net interest income of $574,000 and an increase in noninterest expense of $387,000.  NET INTEREST  INCOME.  The primary  source of the  Corporation's  revenue is net interest income.  Net interest income is the difference  between interest income on  earning  assets,  such as loans and  securities,  and  interest  expense  on liabilities,  such as  deposits  and  borrowed  funds,  used to fund the earning assets.  Net  interest  income is  impacted  by the  volume and  composition  of interest-earning  assets and  interest  bearing  liabilities  and changes in the level of interest rates. Tax equivalent net interest income  decreased  $564,000 or 5.8% to $9.2  million  for 2004,  compared  to $9.8  million  for 2003.  This decrease  in  net  interest  income  can  be  attributed  to a  decrease  in tax equivalent  interest  income of $245,000  and a increase in interest  expense of $319,000.  INTEREST INCOME.  Tax equivalent  interest income decreased  $245,000 or 1.7% to $14.4 million for 2004, compared to $14.7 million for 2003. This decrease can be attributed to decreases in interest earned on loans, securities and federal bank stocks of $238,000, $47,000 and $6,000,  respectively,  offset by an increase in interest earned on interest-earning cash equivalents of $46,000.  Tax equivalent interest earned on loans receivable decreased $238,000 or 2.0% to $11.9 million for 2004,  compared to $12.1  million for 2003.  During that time, average  loans  increased  $8.3  million or 4.7%,  accounting  for  $553,000  in additional  loan interest  income.  Due to the  continually  lower interest rate environment  experienced  in both 2004 and 2003,  this volume  increase was more than offset by a decrease of $791,000  relating to the 43 basis point  reduction in the average interest rate earned on the loan portfolio.  Tax equivalent  interest earned on securities  decreased $47,000 or 1.9% to $2.4 million for 2004, compared to $2.5 million for 2003. The average volume of these assets  increased  $3.9 million or 7.6% - as a result of the deployment of funds from deposit growth, in excess of loan demand, into short-term commercial paper, U.S.  Government  agency  and  related  entities,   mortgage-backed  and  equity securities - accounting  for  $179,000 of the increase in interest  income.  The average rate of securities decreased 42 basis points during 2004 resulting in an offsetting reduction in such interest income of $226,000.  Interest earned on  interest-earning  deposit accounts,  including federal funds sold,  increased $40,000 or 54.8% to $113,000 for 2004,  compared to $73,000 for 2003.  The average  volume of these assets  increased $2.4 million or 64.4% as a result of excess  funds  resulting  from  lower  loan  production  and growth in deposits, accounting for $37,000 of the increase in interest income. The average rate  of  interest-earning  deposits  decreased  11  basis  points  during  2004 resulting in a decrease in interest  income of $3,000.  Interest rates earned on interest-earning  deposit  accounts  are  influenced  by the FRB  and  generally fluctuate  with changes in the discount  rate.  During 2004,  the FRB raised the discount  rate 125 basis  points to 3.25% at  December  31,  2004 from  2.00% at December 31, 2003.  INTEREST EXPENSE.  Interest expense  increased  $319,000 or 6.5% to $5.2 million for 2004,  compared to $4.9 million for 2003. This increase in interest  expense can be  attributed  to increases  in interest  incurred on deposits and borrowed funds of $216,000 and $103,000, respectively.                                        -12-     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)  Deposit interest expense increased $216,000 or 4.9% to $4.6 million for 2004, compared to $4.4 million for 2003.  This increase in interest expense can be attributed to the increase in average  interest-bearing  deposits of $11.3 million or 6.4% between 2004 and 2003 resulting in additional  interest expense of $275,000.  Offsetting the volume variance was a 3 basis point decline in the cost of interest-bearing deposits to 2.44% for 2004 versus 2.47% for 2003 resulting in a reduction in expense due to rate of $59,000.  Interest  expense on borrowed funds increased  $103,000 or 19.4% to $633,000 for 2004,  compared to $530,000 for 2003. This increase was a result of the increase in the average balance of borrowed funds of $780,000 or 5.3% to $15.5 million in 2004 from $14.7  million in 2003  resulting in  additional  interest  expense of $29,000. In addition to the volume increase,  the average rate on borrowed funds increased 48 basis  points to 4.08% for 2004 versus 3.60% for 2003  resulting in an  increase in interest  expense  due to rate of $74,000.  The  increase in the average balance and rate of borrowed funds was primarily a result of the Federal Home Loan Bank term borrowing in June 2003. Offsetting the increase was interest capitalization  on  the  renovations  of  the  main  headquarters  in  Emlenton, Pennsylvania.  PROVISION FOR LOAN LOSSES. The Corporation records provisions for loan losses to bring the total  allowance  for loan losses to a level deemed  adequate to cover probable losses  incurred in the loan portfolio.  In determining the appropriate level of  allowance  for  loan  losses,  management  considers  historical  loss experience,  the present  and  prospective  financial  condition  of  borrowers, current and  prospective  economic  conditions  (particularly  as they relate to markets where the Corporation  originates  loans),  the status of non-performing assets,  the  estimated  underlying  value of the  collateral  and other factors related to the collectibility of the loan portfolio.  The provision for loan losses  decreased  $40,000 or 12.1% to $290,000 for 2004, compared to  $330,000  for 2003.  The  Corporation's  allowance  for loan losses amounted to $1.8 million or 1.00% of the  Corporation's  total loan portfolio at December 31, 2004,  compared to $1.8 million or 0.92% at December 31, 2003.  The allowance  for loan losses as a percentage of  non-performing  loans at December 31, 2004 and 2003 was 215.48% and  133.71%,  respectively.  The  decrease in the provision  for loan losses from 2004 to 2003 was  primarily due to the decreases in loans  receivable  and  non-performing  loans of $10.5  million and $489,000, respectively.  NONINTEREST  INCOME.  Noninterest  income includes items that are not related to interest rates, but rather to services rendered and activities  conducted in the financial  services  industry,  such  as fees on  depository  accounts,  general transaction and service fees, security and loan gains and losses and earnings on BOLI.  Noninterest  income increased $750,000 or 42.0% to $2.5 million for 2004, compared to $1.8 million for 2003.  This can be  attributed to increases in fees and service charges,  commissions on financial services, gains on securities and other noninterest income $88,000, $95,000,  $531,000 and $87,000,  respectively. Offsetting  this  increase  were  decreases  in gains  on the sale of loans  and earnings on BOLI of $10,000 and $41,000, respectively.  Earnings on fees and service charges  increased  $88,000 or 8.5% to $1.1 million for 2004,  compared to $1.0 million for 2003.  This  increase was  primarily the result of management electing to increase the non-sufficient  funds fee early in 2004.                                         -13-                                               MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)  During  2004,  the  Corporation   entered  into  an  agreement  with  Blue  Vase Securities,  LLC to provide investment  advisory services to our customers,  and operates  as  Farmers  Financial  Services.  Blue  Vase  Securities,  LLC  is  a nation-wide,   full-service,   independent  broker/dealer  that  offers  various services such as investments,  insurances, wealth management, advisory services, estate and retirement planning and account  consolidation.  This partnership has enabled the  Corporation to provide our customers with financial  solutions that extend  outside  the  Bank's  ordinary  deposit   products  and  services.   The Corporation earns commissions from providing this service and recognized $95,000 in 2004.  In 2004,  management elected to sell its student loan portfolio based on the low interest rate  environment and the higher expense  associated with the servicing of these loans.  This sale resulted in a gain on the sale of loans of $39,000 in 2004.  Offsetting  this gain was an adjustment of $2,000  associated  with loans sold in 2003. The remainder of this portfolio has been  classified as loans held for sale.  In 2003,  management began to diversify its security  portfolio with an emphasis on  marketable  equity  securities  of  community  banks with growth  potential, increasing  dividend  yields and the  potential to diversify  the  Corporation's business.  In 2004,  management began to realize gains on the diversification of the security portfolio. The first investment contributed $296,000 to the gain on the sale of  securities  as management  elected to divest this  investment  into other  community  bank stocks and other funding  needs.  The second  investment, which  was an  involuntary  transaction  that  resulted  from  the  sale  of the community bank, contributed $365,000 to gains on securities.  The earnings on BOLI decreased  $41,000 or 17.6% to $192,000 for 2004,  compared to $233,000 for 2003.  Lower interest rates earned on bank-owned  life insurance contributed to this decrease in earnings between 2004 and 2003.  Other  noninterest  income  increased  $87,000  or 28.9% to  $388,000  for 2004, compared to $301,000 for 2003. Other  noninterest  income consists  primarily of miscellaneous  customer  fees for ATM and debit card  privileges,  wire transfer fees, commissions on insurance and gains on the sale of foreclosed assets.  NONINTEREST  EXPENSE.  Noninterest  expense  increased  $387,000 or 5.1% to $7.9 million  for  2004,  compared  to  $7.5  million  for  2003.  This  increase  in noninterest  expense is  comprised of  increases  in  compensation  and employee benefits,  premises and  equipment  expenses and other  noninterest  expenses of $219,000,  $172,000  and  $75,000,  respectively,  offset  by the  reduction  in intangible amortization expense of $79,000.  The largest  component  of  noninterest  expense is  compensation  and  employee benefits. This expense increased $219,000 or 5.2%. Normal annual salary and wage adjustments,  increased  health  insurance  costs,  higher  director's fees, and commissions  paid  to the  financial  services  representative  were  the  major components of this increase.  Also contributing to the increase was the addition of a new  compliance  officer  and credit  analyst.  Partially  offsetting  this increase was a reduction in pension costs, employee training expenses, incentive accruals  and a  decrease  in  standard  loan  costs  deferred  associated  with personnel as a result of lower loan production.                                        -14-                                            MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)  Premises and equipment expense increased $172,000 or 16.4% primarily as a result of  additional  depreciation  on certain  data  processing  equipment  placed in service  in  the  first  quarter  2004  and  the  depreciation  related  to  the renovations incurred at the headquarter office in Emlenton during 2003.  Intangible  amortization  expense  decreased $79,000 or 68.7% as a result of the cessation  of  intangible  amortization  expense  on three  branches  previously acquired  which have been fully  amortized.  Offsetting  this  decrease  was the increase in intangible  amortization  expense of $3,000  related to the customer relationship  intangible  asset  recognized in 2004.  The customer  relationship intangible asset will be amortized over two years.  Other  noninterest  expense  increased  $75,000 or 3.4% primarily as a result of increased  telephone  costs,  Pennsylvania  shares  and use taxes  and  software amortization.  Other noninterest  expenses consists  primarily of loan servicing costs,  credit  bureau and loan  expenses,  contributions,  bad checks and other losses and other  miscellaneous  operating expenses.  Partially  offsetting this increase in other  noninterest  expenses were  decreases in  professional  fees, postage and freight, advertising and other noninterest expenses.  Provision  for income  taxes  decreased  $236,000 or 31.5% to $513,000 for 2004, compared to $749,000 for 2003. Contributing to this change was the effective tax rate  decreasing  to 16.7%  for 2004 from  23.2% for 2003 as a direct  result of investments in tax-free municipal  securities and loans,  nontaxable BOLI income and a  historical  tax credit  related  to the  renovations  of the main  office building.  MARKET RISK MANAGEMENT  The primary objective of the Corporation's  asset liability  management function is to maximize  the  Corporation's  net  interest  income  while  simultaneously maintaining  an acceptable  level of interest rate risk given the  Corporation's operating   environment,   capital  and  liquidity   requirements,   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 interest-bearing liabilities.  The  Corporation's  Board of  Directors  has  established  a Finance  Committee, consisting of four outside directors,  the President and Chief Executive Officer and the Principal  Financial and  Accounting  Officer,  to monitor  market risk, including  primarily  interest rate risk. This  committee,  which meets at least quarterly, generally establishes and monitors the investment, interest rate risk and asset and liability management policies established by the Corporation.  In order to minimize the potential for adverse affects of material and prolonged changes  in  interest  rates on the  Corporation's  results of  operations,  the Corporation's  management  has  implemented  and  continues to monitor asset and 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.                                         -15-     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)    MARKET RISK MANAGEMENT (CONTINUED). - ----------------------  INTEREST RATE SENSITIVITY GAP ANALYSIS.  The  implementation  of asset  and  liability  initiatives  and  strategies  and compliance with related policies,  combined with other external factors, such as demand  for  the   Corporation's   products  and  economic  and  interest   rate environments in general, has resulted in the Corporation  maintaining a one-year cumulative interest rate sensitivity gap ranging between a positive and negative 20% of total assets. The one-year interest rate sensitivity gap is identified as the  difference  between  the  Corporation's  interest-earning  assets  that are scheduled  to  mature  or  reprice  within  one-year  and  its  interest-bearing liabilities that are scheduled to mature or reprice within one-year.  The  interest  rate  sensitivity  gap is defined as the  difference  between the amount of  interest-earning  assets maturing or repricing within a specific time period and the amount of  interest-bearing  liabilities  maturing  or  repricing within  that  time  period.  A gap is  considered  positive  when the  amount of interest  rate-sensitive  assets  exceeds the amount of interest  rate-sensitive liabilities,   and  is   considered   negative   when  the  amount  of  interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally,  during a period of  rising  interest  rates,  a  negative  gap would adversely  affect net  interest  income  while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates,  a negative gap would result in an increase in net interest  income and a positive gap would adversely affect net interest income.  The closer to zero, or more neutral, that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.  Based on certain  assumptions  provided by a federal  regulatory  agency,  which management   believes  most   accurately   represents  the  sensitivity  of  the Corporation's  assets and liabilities to interest rate changes,  at December 31, 2005, the  Corporation's  interest-earning  assets maturing or repricing  within one-year  totaled  $67.2  million  while  the   Corporation's   interest-bearing liabilities  maturing  or  repricing  within  one-year  totaled  $83.1  million, providing an excess of interest-bearing liabilities over interest-earning assets of $15.9 million or a negative 5.8% of total assets.  At December 31, 2005,  the percentage  of the  Corporation's  assets to  liabilities  maturing or repricing within one-year was 80.9%.  The  following  table  presents  the  amounts  of  interest-earning  assets  and interest-bearing  liabilities  outstanding  as of  December  31,  2005 which are expected  to  mature,  prepay or  reprice  in each of the  future  time  periods presented:    - ------------------------------------------------------------------------------------------------------------------------------                                                   Due in       Due within     Due within    Due within   Due in                                                   six months   six months       one to      three to       over (Dollar amounts in thousands)                     or less      to one year    three years   five years   five years  Total - ------------------------------------------------------------------------------------------------------------------------------        Total interest-earning assets                     $ 45,861      $   21,378     $ 77,516     $ 48,098    $ 56,157    $249,010  Total interest-bearing liabilities                  45,915          37,183       56,277       21,502      89,137     250,014                                                   ---------     ----------     --------     --------    --------    -------- Maturity or repricing gap during the period       $    (54)     $  (15,805)    $ 21,239     $ 26,596    $(32,980)   $ (1,004)                                                   =========     ==========     ========     ========    ========    ======== Cumulative gap                                    $    (54)     $  (15,859)    $  5,380     $ 31,976    $ (1,004)                                                   =========     ==========     ========     ========    ======== Ratio of gap during the period to total assets      (0.02%)         (5.74%)       7.71%        9.65%     (11.97%)                                                   =========     ==========     ========     ========    ======== Ratio of cumulative gap to total assets             (0.02%)         (5.76%)       1.95%       11.61%      (0.36%)                                                   =========     ==========     ========     ========    ======== Total assets                                                                                                        $275,517                                                                                                                     ========                                         -16-                                             MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)    INTEREST RATE SENSITIVITY GAP ANALYSIS (CONTINUED) - --------------------------------------  Although  certain assets and liabilities may have similar  maturities or periods of repricing,  they may react in different degrees to changes in market interest rates.  The  interest  rates on  certain  types of assets  and  liabilities  may fluctuate in advance of changes in market interest  rates,  while interest rates on other  types of assets  and  liabilities  may lag  behind  changes  in market interest rates. In the event of a change in interest rates, prepayment and early withdrawal  levels  would likely  deviate  significantly  from those  assumed in calculating  the table.  The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.  The one-year  interest rate  sensitivity  gap has been the most common  industry standard used to measure an institution's  interest rate risk position regarding maturities, repricing and prepayments. In recent years, in addition to utilizing interest  rate  sensitivity  gap  analysis,  the  Corporation  has increased its emphasis on the utilization of interest rate sensitivity  simulation analysis to evaluate and manage interest rate risk.  INTEREST RATE SENSITIVITY SIMULATION ANALYSIS.  The  Corporation  also  utilizes  income  simulation  modeling in measuring  its interest  rate risk and  managing  its interest  rate  sensitivity.  The Finance Committee of the  Corporation  believes  that  simulation  modeling  enables the Corporation to more accurately  evaluate and manage the possible  effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve and different loan and security  prepayment and deposit decay assumptions under various interest rate scenarios.  As with gap analysis and earnings  simulation  modeling,  assumptions  about the timing  and  variability  of cash flows are  critical  in net  portfolio  equity valuation analysis.  Particularly important are the assumptions driving mortgage prepayments  and the  assumptions  about expected  attrition of the core deposit portfolios.   These  assumptions  are  based  on  the  Corporation's  historical experience  and  industry  standards  and are  applied  consistently  across the different rate risk measures.  The Corporation has established the following  guidelines for assessing interest rate risk:            NET INTEREST INCOME  SIMULATION.  Given a 200 basis point parallel and           gradual  increase or decrease in market interest  rates,  net interest           income may not change by more than 10% 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.                                        -17-     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)  INTEREST RATE SENSITIVITY SIMULATION ANALYSIS (CONTINUED). - ---------------------------------------------  The following  table  presents the simulated  impact of a 100 basis point or 200 basis point  upward or a 100 basis point or 200 basis  point  downward  shift of market  interest  rates on net interest  income for the years ended December 31, 2005  and  2004,  respectively.   This  analysis  was  done  assuming  that  the interest-earning  asset and  interest-bearing  liability  levels at December 31, 2005 remained constant.  The impact of the market rate movements on net interest income was  developed  by  simulating  the effects of rates  changing  gradually during a one-year  period from the  December  31,  2005 levels for net  interest income.    - ----------------------------------------------------------------------------------------------------------------------                                                               Increase                            Decrease                                                   ---------------------------------   --------------------------------                                                         +100                  +200        -100                  -200                                                           BP                    BP          BP                    BP - ----------------------------------------------------------------------------------------------------------------------      2005 Net interest income - increase (decrease)          0.40%                (0.53%)     (1.45%)               (4.75%)  2004 Net interest income - increase (decrease)          0.46%                (1.12%)     (4.95%)              (11.75%) - ----------------------------------------------------------------------------------------------------------------------   IMPACT OF INFLATION AND CHANGING PRICES  The  consolidated  financial  statements  of the  Corporation  and related notes presented  herein have been prepared in accordance  with  accounting  principles generally accepted in the United States of America which require the measurement of financial  condition  and operating  results in terms of historical  dollars, without  considering changes in the relative purchasing power of money over time due to inflation.  Unlike  most  industrial   companies,   substantially  all  of  the  assets  and liabilities  of a financial  institution  are  monetary in nature.  As a result, interest  rates  have a more  significant  impact on a  financial  institution's performance  than the effects of general levels of inflation.  Interest rates do not  necessarily  move in the same  direction  or in the same  magnitude  as the prices of goods and  services  since such prices are  affected by inflation to a larger degree than interest  rates.  In the current  interest rate  environment, liquidity and the maturity structure of the Corporation's assets and liabilities are critical to the maintenance of acceptable performance levels.                                         -18-                                            MANAGEMENT'S DISCUSSION AND ANALYSIS OF                                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      (CONTINUED)   RECENT ACCOUNTING PRONOUNCEMENTS AND STANDARDS - ----------------------------------------------  In March 2004, the FASB's  Emerging Issues Task Force (EITF) reached a consensus on Issue No.  03-1,  "The  Meaning of  Other-Than-Temporary  Impairment  and Its Application   to  Certain   Investments."   EITF  03-1   provides   guidance  on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable  equity securities accounted for under the cost method.  The EITF developed a basic  three-step model to evaluate whether an investment is other-than-temporarily  impaired. In November 2005, the FASB  approved the issuance of FASB Staff  Position  (FSP) FAS No. 115-1 and FAS 124-1,  "The Meaning of  Other-Than-Temporary  Impairment and Its Application to Certain  Investments."  The FSP  addresses  when  an  investment  is  considered impaired,  whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting  considerations  subsequent to the recognition of an  other-than-temporary  impairment and requires  certain disclosures   about   unrealized   losses  that  have  not  been  recognized  as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 with earlier  application  permitted.  For the Corporation the effective date will be the first quarter of fiscal year 2006.  In June 2005, the FASB's  Emerging  Issues Task Force (EITF) reached a consensus on  Issue  No.  05-6,   "Determining  the  Amortization   Period  for  Leasehold Improvements   Purchased  after  Lease  Inception  or  Acquired  in  a  Business Combination" ("EITF 05-6").  This guidance requires that leasehold  improvements acquired in a business combination or purchased subsequent to the inception of a lease be  amortized  over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are reasonably assured at the date of the business  combination  or purchase.  This guidance is applicable only to  leasehold  improvements  that are  purchased  or acquired in  reporting periods beginning after June 29, 2005. The adoption of this accounting principle did not have a  significant  impact on our  financial  position  or  results  of operations.  In May 2005, FASB issued SFAS 154,  "Accounting Changes and Error Corrections.". The  Statement  requires  retroactive  application  of  a  voluntary  change  in accounting   principle  to  prior  period  financial  statements  unless  it  is impracticable.  SFAS 154 also requires that a change in method of  depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in  accounting  estimate  that is affected by a change in accounting principle.  SFAS 154 replaces APB Opinion 20, "Accounting Changes",  and SFAS 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 will be effective for accounting  changes and corrections of errors made in fiscal years beginning after December 15, 2005.  Management  currently believes that adoption of  the  provisions  of  SFAS  154  will  not  have  a  material  impact  on the Corporation's consolidated financial statements.                                         -19-   CONSOLIDATED BALANCE SHEETS     (Dollar amounts in thousands, except share data) - -------------------------------------------------------------------------------------------------------------------                                                                                          December 31, - -------------------------------------------------------------------------------------------------------------------                                                                              2005                            2004 - ------------------------------------------------------------------------------------------------------------------- ASSETS    Cash and due from banks                                                   $   9,399                      $   7,769 Interest-earning deposits with banks                                            968                          6,855 - -------------------------------------------------------------------------------------------------------------------         Total cash and cash equivalents                                      10,367                         14,624 - ------------------------------------------------------------------------------------------------------------------- Securities:         Available for sale, at fair value                                    56,289                         63,346         Held to maturity; fair value of $14 and $16                              15                             16 - -------------------------------------------------------------------------------------------------------------------               Total securities                                               56,304                         63,362 - ------------------------------------------------------------------------------------------------------------------- Loans held for sale                                                               -                            386 Loans receivable, net of allowance for loan losses of $1,869 and $1,810     192,526                        179,575 Federal bank stocks, at cost                                                  1,773                          1,731 Bank-owned life insurance                                                     4,623                          4,448 Accrued interest receivable                                                   1,271                          1,203 Premises and equipment, net                                                   6,123                          5,678 Goodwill                                                                      1,422                          1,422 Other intangibles                                                                 7                             38 Prepaid expenses and other assets                                             1,101                            913 - -------------------------------------------------------------------------------------------------------------------               TOTAL ASSETS                                                $ 275,517                      $ 273,380 - -------------------------------------------------------------------------------------------------------------------  LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits:         Noninterest-bearing                                               $  44,044                       $ 40,511         Interest-bearing                                                    186,459                        192,363 - -------------------------------------------------------------------------------------------------------------------               Total deposits                                                230,503                        232,874 - ------------------------------------------------------------------------------------------------------------------- Borrowed funds         Short-term                                                            4,500                              -         Long-term                                                            15,000                         15,000 - -------------------------------------------------------------------------------------------------------------------               Total borrowed funds                                           19,500                         15,000 - ------------------------------------------------------------------------------------------------------------------- Accrued interest payable                                                        607                            577 Accrued expenses and other liabilities                                        1,292                          1,313 - -------------------------------------------------------------------------------------------------------------------               TOTAL LIABILITIES                                             251,902                        249,764 - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value, 3,000,000 shares authorized; none issued        -                              - Common stock, $1.25 par value, 12,000,000 shares authorized;               1,395,852 shares issued, 1,267,835 shares outstanding           1,745                          1,745 Additional paid-in capital                                                   10,871                         10,871 Treasury stock, at cost; 128,017 shares                                      (2,653)                        (2,653) Retained earnings                                                            13,678                         12,398 Accumulated other comprehensive (loss) income                                   (26)                         1,255 - -------------------------------------------------------------------------------------------------------------------               TOTAL STOCKHOLDERS' EQUITY                                     23,615                         23,616 - -------------------------------------------------------------------------------------------------------------------               TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $ 275,517                      $ 273,380 - -------------------------------------------------------------------------------------------------------------------     See accompanying notes to consolidated financial statements.                                        -20-                                                 CONSOLIDATED STATEMENTS OF INCOME   (Dollar amounts in thousands, except share data)                                                                           Year ended December 31, - ------------------------------------------------------------------------------------------------------                                                                     2005            2004       2003 - ------------------------------------------------------------------------------------------------------ Interest and dividend income             Loans receivable, including fees                  $   12,325      $   11,744      $   12,009         Securities:               Taxable                                          1,714           1,396           1,391               Exempt from federal income tax                     699             700             736         Federal bank stocks                                       58              42              48         Deposits with banks                                       81              71              25 - ------------------------------------------------------------------------------------------------------               Total interest and dividend income              14,877          13,953          14,209 - ------------------------------------------------------------------------------------------------------ Interest expense         Deposits                                               4,894           4,586           4,371         Short-term borrowed funds                                 50               3              23         Long-term borrowed funds                                 629             630             507 - ------------------------------------------------------------------------------------------------------               Total interest expense                           5,573           5,219           4,901 - ------------------------------------------------------------------------------------------------------ Net interest income                                            9,304           8,734           9,308         Provision for loan losses                                205             290             330 - ------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses            9,099           8,444           8,978 - ------------------------------------------------------------------------------------------------------ Noninterest income         Fees and service charges                               1,420           1,122           1,034         Commissions on financial services                        437              95            --         Gain on the sale of loans                                  5              37              47         Gains on securities                                      857             701             170         Earnings on bank-owned life insurance (BOLI)             191             192             233         Other                                                    407             388             301 - ------------------------------------------------------------------------------------------------------               Total noninterest income                         3,317           2,535           1,785 - ------------------------------------------------------------------------------------------------------ Noninterest expense         Compensation and employee benefits                     5,107           4,395           4,176         Premises and equipment                                 1,611           1,386           1,136         Intangible amortization expense                           31              36             115         Other                                                  2,397           2,092           2,095 - ------------------------------------------------------------------------------------------------------               Total noninterest expense                        9,146           7,909           7,522 - ------------------------------------------------------------------------------------------------------ Income before provision for income taxes                       3,270           3,070           3,241         Provision for income taxes                               697             513             749 - ------------------------------------------------------------------------------------------------------ Net income                                                $    2,573      $    2,557      $    2,492 - ------------------------------------------------------------------------------------------------------ Basic earnings per share                                  $     2.03      $     2.02      $     1.91  Average common shares outstanding                          1,267,835       1,267,835       1,301,714      See accompanying notes to consolidated financial statements.                                         -21-       CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY       (Dollar amounts in thousands, except share data)                                                                                                       Accumulated                                                              Additional                                 Other            Total                                                    Common     Paid-in      Treasury    Retained      Comprehensive   Stockholders'                                                    Stock      Capital        Stock     Earnings      Income (Loss)      Equity - -----------------------------------------------------------------------------------------------------------------------------------        Balance at January 1, 2003                          $ 1,745  $ 10,871       $  (971)    $ 9,978            $ 1,057       $ 22,680 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income:       Net income                                                                          2,492                             2,492       Change in net unrealized gain on           securities available for sale, net of           taxes of $310                                                                                        602            602                                                                                                                          -------- Comprehensive income                                                                                                        3,094 Purchase of treasury stock, 65,000 Shares                                    (1,682)                                       (1,682) Dividends declared, $1.11 per share                                                      (1,437)                           (1,437) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003                          1,745    10,871        (2,653)     11,033              1,659         22,655 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income:       Net income                                                                          2,557                             2,557       Change in net unrealized gain on           securities available for sale, net of           taxes of ($207)                                                                                     (404)          (404)                                                                                                                          -------- Comprehensive income                                                                                                        2,153 Dividends declared, $0.94 per share                                                      (1,192)                           (1,192) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2004                          1,745   10,871         (2,653)     12,398              1,255         23,616 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income:       Net income                                                                          2,573                             2,573       Change in net unrealized gain on           securities available for sale, net of           taxes of ($660)                                                                                   (1,281)        (1,281)                                                                                                                          -------- Comprehensive income                                                                                                        1,292 Dividends declared, $1.02 per share                                                      (1,293)                           (1,293) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2005                        $ 1,745  $ 10,871       $(2,653)    $13,678            $   (26)      $ 23,615 - ---------------------------------------------------------------------------------------------------------------------------------    See accompanying notes to consolidated financial statements.                                         -22-                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS   (Dollar amounts in thousands, except share data)                                                                                                 Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------------                                                                                          2005          2004            2003 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities     Net income                                                                             $  2,573       $  2,557       $  2,492 Adjustments to reconcile net income to net cash provided by operating activities:        Depreciation and amortization of premises and equipment                              855            703            490        Provision for loan losses                                                            205            290            330        Amortization of premiums and accretion of discounts, net                              94            223            253        Amortization of intangible assets and mortgage servicing rights                       37             36            115        Gains on securities                                                                 (857)          (701)          (170)        Gain on sale of loans                                                                 (5)           (37)           (47)        Loans originated for sale                                                           (155)          --           (1,989)        Proceeds from sales of loans held for sale                                           546          3,541          2,036        Earnings on bank-owned life insurance, net                                          (175)          (176)          (218)        (Increase) decrease in accrued interest receivable                                   (68)            67             55        (Increase) decrease in prepaid expenses and other assets                             572             (6)          (642)        Increase in accrued interest payable                                                  30            100             10        Increase (decrease) in accrued expenses and other liabilities                        (21)          (421)           479 - --------------------------------------------------------------------------------------------------------------------------------             Net cash provided by operating activities                                     3,631          6,176          3,194 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Loan originations and principal collections, net                                        (13,286)         6,628        (21,344) Available for sale securities:             Sales                                                                         1,646            945            647             Maturities, prepayments and calls                                             8,809         13,299         36,369             Purchases                                                                    (4,552)       (28,549)       (36,524) Held to maturity securities:             Maturities, prepayments and calls                                                 1              1             12 Redemptions of federal bank stocks                                                        1,068            737            658 Purchases of federal bank stocks                                                         (1,110)          (486)        (1,342) Purchase of customer relationship intangible                                               --              (20)          -- Purchases of premises and equipment                                                      (1,300)          (682)        (1,949) - --------------------------------------------------------------------------------------------------------------------------------             Net cash used in investing activities                                        (8,724)        (8,127)       (23,473) - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net (decrease) increase in deposits                                                      (2,371)        15,764         12,685 Borrowings from the FHLB                                                                   --             --           10,700 Increase (decrease) of overnight borrowed funds                                           4,500         (5,700)          -- Dividends paid on common stock                                                           (1,293)        (1,192)        (1,437) Payments to acquire treasury stock                                                         --             --           (1,682) - --------------------------------------------------------------------------------------------------------------------------------             Net cash provided by financing activities                                       836          8,872         20,266 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents                                     (4,257)         6,921            (13) Cash and cash equivalents at beginning of period                                         14,624          7,703          7,716 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period                                             $ 10,367       $ 14,624       $  7,703 - --------------------------------------------------------------------------------------------------------------------------------  Supplemental information:        Interest paid                                                                   $  5,543       $  5,119       $  4,891        Income taxes paid                                                                    442            295            828  Supplemental noncash disclosures:        Transfers from portfolio loans to loans held for sale                           $   --         $  3,890       $   --        Transfers from loans to foreclosed real estate                                       106             69           --      See accompanying notes to consolidated financial statements.                                        -23-      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                NATURE OF OPERATIONS AND BASIS OF PRESENTATION.                Emclaire  Financial  Corp. (the  "Corporation")  is a Pennsylvania               company  organized as the holding company of Farmers National Bank               of Emlenton (the "Bank").  The  Corporation  provides a variety of               financial  services  to  individuals  and  businesses  through its               offices in western Pennsylvania.  Its primary deposit products are               checking,  savings and  certificate  of deposit  accounts  and its               primary lending products are residential and commercial mortgages,               commercial business and consumer loans.                The consolidated  financial statements include the accounts of the               Corporation  and  its  wholly  owned  subsidiary,  the  Bank.  All               intercompany  transactions  and balances  have been  eliminated in               preparing the consolidated financial statements.                USE OF ESTIMATES.                To prepare  financial  statements  in conformity  with  accounting               principles  generally  accepted  in the United  States of America,               management  makes  estimates  and  assumptions  based on available               information.  These estimates and  assumptions  affect the amounts               reported in the financial statements and accompanying notes.                Actual  results  could  differ  from  those  estimates.   Material               estimates that are particularly  susceptible to significant change               in the near term relate to the  determination of the allowance for               loan  losses,  loan  servicing  rights,  fair  value of  financial               instruments and deferred tax assets.                CASH AND CASH EQUIVALENTS.                Cash and  cash  equivalents  include  cash on  hand,  cash  items,               interest-earning   deposits  with  other  financial  institutions,               federal   funds   sold   and   due   from   correspondent   banks.               Interest-earning  deposits  mature within one year and are carried               at cost. Federal funds are generally sold or purchased for one day               periods.  Net  cash  flows  are  reported  for  loan  and  deposit               transactions.                Restricted  cash on hand or on deposit  with the  Federal  Reserve               Bank of  approximately  $2.1 million and $3.0 million was required               to meet regulatory  reserve and clearing  requirements at December               31,  2005  and  2004,  respectively.  Such  balances  do not  earn               interest.                SECURITIES.                Securities are classified as either  available for sale or held to               maturity at the time of purchase based on management's  intent and               ability.  Securities acquired with the positive intent and ability               to hold to maturity are stated at cost  adjusted for  amortization               of premium and accretion of discount  which are computed using the               interest method and recognized as adjustments of interest  income.               Available for sale  securities  consist of securities that are not               classified as held to maturity and are carried at fair value, with               unrealized  holding  gains  and  losses  reported  as  a  separate               component of  stockholders'  equity,  net of tax, until  realized.               Realized   gains  and  losses  are  computed  using  the  specific               identification method and are included in operations in the period               sold.   Interest  and  dividends  on  investment   securities  are               recognized as income when earned.  Securities  are written down to               fair value when a decline in fair value is not temporary.                                        -24-                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                SECURITIES (CONTINUED).                The  Corporation's  policy  requires an annual  review of impaired               securities. This review includes analyzing the length and time and               the extent to which the market value has been less than cost;  the               financial   condition  and  near-term  prospects  of  the  issuer,               including any specific  events which may influence the  operations               of the issuer and the intent  and  ability of the  Corporation  to               hold its investment  for a period of time  sufficient to allow for               any anticipated  recovery in market value.  Declines in fair value               of  impaired  securities  below  their  cost that are deemed to be               other-than-temporary are reflected in earnings as realized losses.                LOANS HELD FOR SALE.                Loans originated and intended for sale in the secondary market are               carried at the lower of aggregate cost or market, as determined by               outstanding commitments from investors.  Net unrealized losses, if               any,  are  recorded  as  a  valuation  allowance  and  charged  to               earnings.  Loans held for sale are generally  sold with  servicing               rights  retained.  The carrying  value of loans sold is reduced by               the cost  allocated to the servicing  rights.  Gains and losses on               sales of mortgage  loans are based on the  difference  between the               selling price and the carrying value of the related loan sold.                LOANS RECEIVABLE.                Loans that  management  has the intent and ability to hold for the               foreseeable  future or until  maturity  or payoff are  reported at               their outstanding principal balances adjusted for charge-offs, the               allowance  for  loan  losses  and any  deferred  fees or  costs on               originated  loans or premiums or  discounts  on  purchased  loans.               Interest income is accrued on the unpaid principal  balance.  Loan               origination  fees, net of certain direct  origination  costs,  and               premiums  and  discounts   are  deferred  and   recognized  as  an               adjustment of the related loan yield using the interest method.                The accrual of interest on loans is typically  discontinued at the               time the loan is 90 days or more  delinquent  unless the credit is               well secured and in the process of collection. Loans are placed on               non-accrual  or  charged-off  at an earlier date if  collection of               principal or interest is considered doubtful. All interest accrued               but not collected for loans that are placed on non-accrual  status               or charged-off is reversed against  interest income.  The interest               on these loans is accounted for on the cash-basis or cost-recovery               method, until qualifying for return to accrual. Loans are returned               to  accrual  status  when  all  principal  and  interest   amounts               contractually  due are  brought  current and future  payments  are               reasonably assured.                ALLOWANCE FOR LOAN LOSSES.                The allowance for loan losses is a valuation allowance established               for probable  incurred  credit losses,  increased by the provision               for loan losses and decreased by charge-offs less recoveries. Loan               losses are charged against the allowance when management  believes               the  uncollectibility  of a loan balance is confirmed.  Subsequent               recoveries, if any, are credited to the allowance.                                        -25-  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                ALLOWANCE FOR LOAN LOSSES (CONTINUED).                The  allowance  for loan losses is evaluated on a regular basis by               management and is based upon  management's  periodic review of the               collectibility  of loans in light of  historical  experience,  the               nature and volume of the loan portfolio,  adverse  situations that               may affect the borrower's ability to repay, estimated value of any               underlying  collateral and prevailing  economic  conditions.  This               evaluation is inherently  subjective as it requires estimates that               are  susceptible  to  significant  revision  as  more  information               becomes available.                A loan is considered  impaired when, based on current  information               and events,  it is probable that the Corporation will be unable to               collect the  scheduled  payments of principal or interest when due               according to the contractual  terms of the loan  agreement.  Loans               that   experience   insignificant   payment   delays  and  payment               shortfalls  generally are not  classified as impaired.  Management               determines  the   significance   of  payment  delays  and  payment               shortfalls on a case-by-case  basis, taking into consideration all               the  circumstances  surrounding  the loan and the borrower.  Large               groups  of  homogeneous  loans  are  evaluated   collectively  for               impairment.   Accordingly,   the  Corporation  does  not  identify               individual consumer and residential  mortgage loans for impairment               disclosures.                BANK-OWNED LIFE INSURANCE (BOLI).                The Corporation  has purchased life insurance  policies on certain               key officers and employees. BOLI is recorded at its cash surrender               value, or the amount that can be realized.                PREMISES AND EQUIPMENT.                Land is carried at cost.  Premises,  furniture and equipment,  and               leasehold  improvements  are  carried  at  cost  less  accumulated               depreciation  or  amortization.  Depreciation  is  calculated on a               straight-line  basis for the estimated useful lives of the related               assets,  which  are 39 to 40 years for  buildings  and three to 10               years for  furniture,  equipment  and  software.  Amortization  of               leasehold  improvements is computed using the straight-line method               for the term of the related  lease.  Premises  and  equipment  are               reviewed for  impairment  when events  indicate their carry amount               may not be recoverable  from future  undiscounted  cash flows.  If               impaired, assets are recorded at fair value.                GOODWILL AND INTANGIBLE ASSETS.                Goodwill  results from business  acquisitions  and  represents the               excess of the  purchase  price  above the fair  value of  acquired               assets and liabilities.  Core deposit intangible assets arise from               whole bank or branch  acquisitions  and are measured at fair value               and  then  are  amortized  on  a  straight-line  basis  for  their               estimated   lives,   generally   less  than  10  years.   Customer               relationship  intangible  assets  arise  from  the  purchase  of a               customer  list from  another  company or  individual  and then are               amortized on a straight-line  basis over 2 years.  Goodwill is not               amortized and is assessed at least annually for impairment and any               such impairment will be recognized in the period identified.                                        -26-                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                SERVICING ASSETS.                Servicing   assets  represent  the  allocated  value  of  retained               servicing  rights on loans sold.  Servicing assets are expensed in               proportion  to,  and for the period of,  estimated  net  servicing               revenues.  Impairment is evaluated  based on the fair value of the               assets,  using  groupings of the  underlying  loans as to interest               rates.  Fair value is determined  using prices for similar  assets               with  similar  characteristics,  when  available,  or  based  upon               discounted  cash  flows  using   market-based   assumptions.   Any               impairment of a grouping is reported as a valuation allowance,  to               the extent that fair value is less than the capitalized amount for               a grouping.                REAL ESTATE ACQUIRED THROUGH FORECLOSURE.                Real estate  properties  acquired  through  foreclosure  (REO) are               initially  recorded at the lower of cost or fair value at the date               of  foreclosure,  establishing  a new cost  basis.  If fair  value               declines  subsequent  to  foreclosure,  a  valuation  is  recorded               through expense. Costs after acquisition are expensed. Real estate               acquired through foreclosure is classified in prepaid expenses and               other assets and totaled $106,000 and $69,000 at December 31, 2005               and 2004, respectively.                INCOME TAXES.                Income tax expense is the total of the current year income tax due               or   refundable   and  the  change  in  deferred  tax  assets  and               liabilities.  Deferred tax assets and liabilities are the expected               future tax amounts for the temporary  differences between carrying               amounts and tax bases of assets and  liabilities,  computed  using               enacted  tax rates.  A  valuation  allowance,  if needed,  reduces               deferred tax assets to the amount expected to be realized.                BASIC EARNINGS PER COMMON SHARE.                The  Corporation  maintains  a simple  capital  structure  with no               common  stock  equivalents.  Basic  earnings  per common  share is               calculated using net income divided by the weighted average number               of common shares  outstanding during the period. The Corporation's               capital structure contains no potentially dilutive securities.                COMPREHENSIVE INCOME.                Comprehensive   income   consists   of  net   income   and   other               comprehensive   income.   Other   comprehensive   income  includes               unrealized gains and losses on securities available for sale which               are also recognized as separate components of equity.                OPERATING SEGMENTS.                Operations are managed and financial performance is evaluated on a               corporate-wide   basis.   Accordingly,   all  financial   services               operations  are  considered  by management to be aggregated in one               reportable operating segment, banking.                                        -27-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                RETIREMENT PLANS.                The Corporation  maintains a noncontributory  defined benefit plan               covering  substantially all employees and officers. The plan calls               for benefits to be paid to eligible  employees at retirement based               primarily  on  years  of  service  and  compensation   rates  near               retirement.  The  Corporation  also  maintains a 401(k) plan which               covers  substantially  all employees and a supplemental  executive               retirement plan for key executive officers.                RECENT ACCOUNTING PRONOUNCEMENTS.                In March  2004,  the FASB's  Emerging  Issues  Task  Force  (EITF)               reached  a  consensus   on  Issue  No.   03-1,   "The  Meaning  of               Other-Than-Temporary  Impairment  and Its  Application  to Certain               Investments." EITF 03-1 provides guidance on  other-than-temporary               impairment  models  for  marketable  debt  and  equity  securities               accounted for under SFAS 115 and non-marketable  equity securities               accounted  for under the cost method.  The EITF  developed a basic               three-step   model  to   evaluate   whether   an   investment   is               other-than-temporarily   impaired.  In  November  2005,  the  FASB               approved the issuance of FASB Staff Position FAS No. 115-1 and FAS               124-1,  "The Meaning of  Other-Than-Temporary  Impairment  and Its               Application  to Certain  Investments."  The FSP addresses  when an               investment  is  considered  impaired,  whether the  impairment  is               other-than-temporary  and the  measurement of an impairment  loss.               The FSP also includes accounting  considerations subsequent to the               recognition  of an  other-than-temporary  impairment  and requires               certain  disclosures  about  unrealized  losses that have not been               recognized  as  other-than-temporary.  The  FSP is  effective  for               reporting  periods  beginning after December 15, 2005 with earlier               application permitted. For the Corporation the effective date will               be the first quarter of fiscal 2006.                In June 2005, the FASB's Emerging Issues Task Force (EITF) reached               a  consensus  on Issue No.  05-6,  "Determining  the  Amortization               Period for Leasehold  Improvements Purchased after Lease Inception               or  Acquired  in  a  Business  Combination"  ("EITF  05-6").  This               guidance  requires  that  leasehold  improvements  acquired  in  a               business combination or purchased subsequent to the inception of a               lease be  amortized  over the  shorter of the  useful  life of the               assets or a term that includes required lease periods and renewals               that  are   reasonably   assured  at  the  date  of  the  business               combination  or  purchase.  This  guidance is  applicable  only to               leasehold improvements that are purchased or acquired in reporting               periods  beginning  after  June 29,  2005.  The  adoption  of this               accounting  principle  did not have a  significant  impact  on our               financial position or results of operations.                In May 2005, FASB issued SFAS 154,  "Accounting  Changes and Error               Corrections." The Statement requires retroactive  application of a               voluntary change in accounting principle to prior period financial               statements unless it is impracticable. SFAS 154 also requires that               a change in method of depreciation, amortization, or depletion for               long-lived,  non-financial  assets be accounted for as a change in               accounting  estimate  that is affected  by a change in  accounting               principle. SFAS 154 replaces APB Opinion 20, "Accounting Changes",               and SFAS 3,  "Reporting  Accounting  Changes in Interim  Financial               Statements." SFAS 154 will be effective for accounting changes and               corrections  of  errors  made  in  fiscal  years  beginning  after               December 15, 2005.  Management currently believes that adoption of               the provisions of SFAS 154 will not have a material  impact on the               Corporation's consolidated financial statements.                                        -28-                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  1.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                TRANSFERS OF FINANCIAL ASSETS.                Transfers of financial  assets are  accounted  for as sales,  when               control  over  the  assets  has  been  surrendered.  Control  over               transferred assets is deemed to be surrendered when (1) the assets               have  been  isolated  from  the  Corporation,  (2) the  transferee               obtains  the right  (free of  conditions  that  constrain  it from               taking  advantage  of  that  right)  to  pledge  or  exchange  the               transferred  assets,  and (3) the  Corporation  does not  maintain               effective control over the transferred assets through an agreement               to repurchase them before their maturity.                ADVERTISING.                The   Corporation   follows  the  policy  of  charging   costs  of               advertising to expense as incurred.                OFF-BALANCE SHEET FINANCIAL INSTRUMENTS.                In the ordinary  course of business,  the  Corporation has entered               into  off-balance  sheet  financial  instruments,   consisting  of               commitments  to extend  credit,  commitments  under line of credit               lending   arrangements  and  letters  of  credit.  Such  financial               instruments are recorded in the financial statements when they are               funded or related fees are received.                FAIR VALUE OF FINANCIAL INSTRUMENTS.                Fair values of financial  instruments are estimated using relevant               market information and other assumptions,  as more fully disclosed               in a separate note. Fair value estimates involve uncertainties and               matters of significant  judgment regarding interest rates,  credit               risk, prepayments and other factors,  especially in the absence of               broad markets for particular  items.  Changes in assumptions or in               market conditions could significantly affect the estimates.                LOSS CONTINGENCIES.                Loss contingencies,  including claims and legal actions arising in               the ordinary course of business,  are recorded as liabilities when               the  likelihood of loss is probable and an amount or range of loss               can be reasonably estimated. Management does not believe there are               now  such  matters  that  will  have  a  material  effect  on  the               consolidated financial statements.                RECLASSIFICATIONS.                Certain items in the prior year consolidated  financial statements               were reclassified to conform to the current presentation.                                        -29-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  2.           SECURITIES                The following table summarizes the Corporation's  securities as of December 31:     - ------------------------------------------------------------------------------------------------------------------                                                                Amortized    Unrealized     Unrealized      Fair (Dollar amounts in thousands)                                   Cost          gains         losses         value - ------------------------------------------------------------------------------------------------------------------ Available for sale:        December 31, 2005:                   U.S. Government agencies and related entities      $34,353      $  --         $   (818)      $33,535              Mortgage-backed securities                           3,046         --             (124)        2,922              Municipal securities                                14,685          664           --          15,349              Corporate securities                                 2,249            4             (4)        2,249              Equity securities                                    1,995          383           (144)        2,234                                                                 -------      -------       --------       -------                                                                 $56,328      $ 1,051       $ (1,090)      $56,289                                                                 =======      =======       ========       =======        December 31, 2004:              U.S. Government agencies and related entities      $34,869      $    61       $   (260)      $34,670              Mortgage-backed securities                           3,911         --              (47)        3,864              Municipal securities                                14,682          901           --          15,583              Corporate securities                                 6,012           69             (9)        6,072              Equity securities                                    1,970        1,200            (13)        3,157                                                                 -------      -------       --------       -------                                                                 $61,444      $ 2,231       $   (329)      $63,346                                                                 =======      =======       ========       ======= Held to maturity:        December 31, 2005:              Mortgage-backed securities                         $    15      $  --         $     (1)      $    14                                                                 -------      -------       --------       -------                                                                 $    15      $  --         $     (1)      $    14                                                                 =======      =======       ========       =======        December 31, 2004:              Mortgage-backed securities                         $    16      $  --         $   --         $    16                                                                 -------      -------       --------       -------                                                                 $    16      $  --         $   --         $    16                                                                 =======      =======       ========       =======                   Sales of available for sale securities were as follows:   - -------------------------------------------------------------------------------------------------               (Dollar amounts in thousands)                       2005           2004       2003 - -------------------------------------------------------------------------------------------------                  Proceeds                                          $ 1,646          $ 945      $ 647              Gross gains                                           857            701        170              Tax provision related to gains                        291            238         58  - -------------------------------------------------------------------------------------------------                 The  following  table  summarizes   scheduled  maturities  of  the Corporation's securities as of December 31, 2005:                                                       Available for sale                 Held to maturity                                             -------------------------------    ---------------------------                                                Amortized          Fair            Amortized      Fair (Dollar amounts in thousands)                    cost             value             cost         value - ----------------------------------------------------------------------------------------------------------      Due in one year or less                           $  5,248        $  5,221              $ -          $  - Due after one year through five years               29,222          28,468                -             - Due after five through ten years                     5,178           5,017                -             - Due after ten years                                 14,685          15,349               15            14 No scheduled maturity                                1,995           2,234                -             -                                             ---------------  --------------    -------------  ------------                                                   $ 56,328        $ 56,289              $15          $ 14                                             ===============  ==============    =============  ============                                         -30-                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   2.            SECURITIES (CONTINUED)                Expected maturities may differ from contractual maturities because               issuers may have the right to call or prepay  obligations  with or               without call or prepayment penalties.                Securities  with carrying values of $11.4 million and $9.7 million               as of December  31, 2005 and 2004,  respectively,  were pledged to               secure  public  deposits  and  for  other  purposes   required  or               permitted by law.                At year end 2005 and 2004, there were no holdings of securities of               any one  issuer,  other than U.S.  Government  agency and  related               entities, in an amount greater than 10% of stockholders' equity.                Securities  with  unrealized  losses at year end 2005 and 2004 not               recognized in income are as follows:                                                                  Less than 12 Months         12 Months or More         Total                                                 -----------------------------------------------------------------------------              Description of Securities           Fair       Unrealized      Fair       Unrealized      Fair      Unrealized (Dollar amounts in thousands)                    Value        Loss          Value        Loss          Value        Loss - ----------------------------------------------------------------------------------------------------------------------------- December 31, 2005:        U.S. Government agencies and related entities     $17,031       $ (318)      $16,504       $ (500)      $33,535      $  (818) Mortgage-backed securities                            702          (34)        2,220          (91)        2,922         (125) Municipal securities                                    -            -             -            -             -            - Corporate securities                                    -            -           745           (4)          745           (4) Equity securities                                   1,126         (139)          215           (5)        1,341         (144)                                                 ---------- ------------  ------------ ------------  ------------ ------------                                                   $18,859       $ (491)      $19,684       $ (600)      $38,543      $(1,091)                                                 ========== ============  ============ ============  ============ ============  December 31, 2004: U.S. Government agencies and related entities     $10,968       $  (48)      $ 9,288       $ (212)      $20,256      $  (260) Mortgage-backed securities                          3,292          (41)          573           (6)        3,865          (47) Municipal securities                                    -            -             -            -             -            - Corporate securities                                1,512           (9)            -            -         1,512           (9) Equity securities                                      39           (1)          268          (12)          307          (13)                                                 ---------- ------------  ------------ ------------  ------------ ------------                                                   $15,811       $  (99)      $10,129       $ (230)      $25,940      $  (329)                                                 ========== ============  ============ ============  ============ ============                 At December  31, 2005 there were 44  securities  in an  unrealized               loss position.                Unrealized  losses on available for sale  securities have not been               recognized  into  income  because the  issuers'  bonds are of high               credit quality (rated AA or higher), management has the intent and               ability to hold for the foreseeable  future and the decline in the               fair value is largely due to an increase in market interest rates.               The fair value is expected to recover as the bonds  approach their               maturity dates and/or market rates decline.                                         -31-    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   3.            LOANS RECEIVABLE                The following table summarizes the Corporation's  loans receivable               as of December 31:    - ------------------------------------------------------------------------------------------------- (Dollar amounts in thousands)                                             2005           2004 - ------------------------------------------------------------------------------------------------- Mortgage loans on real estate:         Residential first mortgages                                     $      66,011   $     69,310      Home equity loans and lines of credit                                  39,933         31,548      Commercial real estate                                                 52,990         48,539                                                                      -------------   ------------                                                                      -------------   ------------                                                                            158,934        149,397 Other loans:      Commercial business                                                    27,732         23,898      Consumer                                                                7,729          8,090                                                                      -------------   ------------                                                                      -------------   ------------                                                                             35,461         31,988                                                                       -------------   ------------                                                                      -------------   ------------ Total loans, gross                                                         194,395        181,385  Less allowance for loan losses                                               1,869          1,810                                                                      -------------   ------------ Total loans, net                                                     $     192,526   $    179,575                                                                      =============   ============                 Following is an analysis of the changes in the  allowance for loan               losses for the years ended December 31:      - --------------------------------------------------------------------------------------------- (Dollar amounts in thousands)                                 2005          2004        2003 - ---------------------------------------------------------------------------------------------     Balance at the beginning of the year                          $ 1,810      $ 1,777   $ 1,587  Provision for loan losses                                         205          290       330 Charge-offs                                                      (197)        (318)     (205) Recoveries                                                         51           61        65                                                             ----------    ---------  -------- Balance at the end of the year                                $ 1,869      $ 1,810   $ 1,777                                                             ==========    =========  ========                  Non-performing  loans, which include primarily  non-accrual loans,               were $1.5  million and  $840,000  at  December  31, 2005 and 2004,               respectively. The Corporation is not committed to lend significant               additional funds to debtors whose loans are on non-accrual status.               At December 31, 2005 and 2004,  the recorded  investment  in loans               considered  to be impaired,  requiring an allowance for loan loss,               was   $999,000   and   $441,000,   respectively,   against   which               approximately   $100,000  and  $104,000,   respectively,   of  the               allowance  for loan losses was  allocated.  There were no impaired               loans that did not  require  an  allowance  for loan loss.  During               2005,  2004  and  2003,  impaired  loans  averaged  $1.2  million,               $635,000 and $728,000,  respectively.  The Corporation  recognized               interest  income  on  impaired  loans  of  approximately  $95,000,               $27,000 and $29,000,  on a cash basis, during 2005, 2004 and 2003,               respectively.  Non-performing loans and impaired loans are defined               differently. Some loans may be included in both categories whereas               other loans may be included in only one category.                                         -32-                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  3.            LOANS RECEIVABLE (CONTINUED)                The  Corporation  conducts  its  business  through  10  offices in               Venango, Butler, Clarion,  Clearfield, Elk and Jefferson counties,               Pennsylvania  and primarily lends in this  geographical  area. The               Corporation does not have any significant concentrations of credit               risk to any one industry or customer.                The Corporation is required to maintain qualifying collateral with               the FHLB to secure all outstanding  loans.  Loans with book values               of $52.1  million and $56.6  million as of  December  31, 2005 and               2004,  respectively,  are pledged as  qualifying  collateral.  The               Corporation  is in  compliance  with all FHLB  credit  policies at               December 31, 2005.                The Corporation was servicing loans with unpaid principal balances               of $2.4  million and $2.5  million at December  31, 2005 and 2004,               respectively,  for a third  party  investor.  Such  loans  are not               reflected  in  the  consolidated   balance  sheets  and  servicing               operations  result  in the  generation  of  annual  fee  income of               approximately  0.25%  of the  unpaid  principal  balances  of such               loans.  4.            FEDERAL BANK STOCKS                The Bank is a member of the Federal  Home Loan Bank of  Pittsburgh               (FHLB) and the  Federal  Reserve  Bank of  Cleveland  (FRB).  As a               member of these federal  banking  systems,  the Bank  maintains an               investment in the capital stock of the respective  regional banks,               at  cost.  These  stocks  are  purchased  and  redeemed  at par as               directed  by the  federal  banks and levels  maintained  are based               primarily on borrowing and other correspondent relationships.  The               Bank's  investment  in FHLB and FRB stocks was $1.440  million and               $333,000,  respectively,  at December 31, 2005, and $1.398 million               and $333,000, respectively, at December 31, 2004.  5.            PREMISES AND EQUIPMENT                Premises  and  equipment  at December 31 are  summarized  by major               classification as follows:   - ------------------------------------------------------------------------------- (Dollar amounts in thousands)                       2005               2004 - ------------------------------------------------------------------------------- Land                                           $     349            $   349 Buildings and improvements                         4,738              4,571 Leasehold improvements                               695                694 Furniture, fixtures and equipment                  4,410              4,245 Software                                           1,389              1,328 Construction in progess                              914                 18                                                ---------            -------                                                   12,495             11,205                                                ---------            ------- Less accumulated depreciation and amortization $   6,123            $ 5,678                                                =========            =======                Depreciation and amortization expense for the years ended December               31, 2005,  2004 and 2003 were  $855,000,  $703,000  and  $490,000,               respectively.  The increase in  depreciation  expense between 2005               and 2004 was primarily the additional expense incurred as a result               of the change in the estimated life of equipment during the fourth               quarter  of 2005  which  resulted  in an  additional  $108,000  of               depreciation.  The increase in  depreciation  expense between 2004               and 2003 was primarily as a result of additional  depreciation  on               certain data processing  equipment  placed in service in the first               quarter  2004  and the  depreciation  related  to the  renovations               incurred at the headquarter office in Emlenton during 2003.                                        -33-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)     5.            PREMISES AND EQUIPMENT (CONTINUED)                Rent expense under  non-cancelable  operating lease agreements for               the years ended  December  31, 2005,  2004 and 2003 was  $109,000,               $108,000  and  $124,000,   respectively.  Rent  commitments  under               non-cancelable  long-term  operating lease  agreements for certain               branch  offices for the years ended  December  31, are as follows,               before considering renewal options that are generally present:                ---------------------------------------------------------------               (Dollar amounts in thousands)                     Amount               ---------------------------------------------------------------                                   2006                                  $ 112                                  2007                                    115                                  2008                                    120                                  2009                                    122                                  2010                                    112                               Thereafter                                 105                                                           -------------------                                                                         $ 686                                                           =================== 6.            GOODWILL AND INTANGIBLE ASSETS                The following table summarizes the Corporation's acquired Goodwill and intangible assets as of December 31:     - -------------------------------------------------------------------------------------------------------                                                           2005                            2004                                                --------------------------     -------------------------                                                 Gross                         Gross                                                 Carrying     Accumulated      Carrying     Accumulated (Dollar amounts in thousands)                   Amount       Amortization     Amount       Amortization - -------------------------------------------------------------------------------------------------------      Goodwill                                        $1,422         $ --           $1,422         $ -- Core deposit intangibles                         1,240          1,240          1,240          1,219 Other customer relationship intangibles             20             13             20              3                                                 ------         ------         ------         ------   Total                                         $2,682         $1,253         $2,682         $1,222                                                 ======         ======         ======         ======                  Goodwill resulted from two previous branch  acquisitions and is no               longer amortized.                Aggregate  amortization  expense  for  2005,  2004  and  2003  was               $31,000, $36,000 and $115,000, respectively.  7.            RELATED PARTY BALANCES AND TRANSACTIONS                In the ordinary  course of business,  the Bank  maintains loan and               deposit  relationships  with  employees,  principal  officers  and               directors.  The Bank has granted  loans to principal  officers and               directors and their affiliates  amounting to $1.4 million and $1.6               million at December 31, 2005 and 2004, respectively.  During 2005,               total   principal   additions  and  total   principal   repayments               associated   with  these   loans  were   $93,000   and   $245,000,               respectively.  Deposits from principal officers and directors held               by the Bank at December 31, 2005 and 2004 totaled $3.3 million and               $4.0 million, respectively.                In addition,  directors and their  affiliates may provide  certain               professional and other services to the Corporation and the Bank in               the  ordinary  course of  business.  During  2005,  2004 and 2003,               amounts paid to  affiliates  for such  services  totaled  $55,000,               $104,000 and $74,000, respectively.                                        -34-                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   8.            DEPOSITS                The following table  summarizes the  Corporation's  deposits as of               December 31:   - ------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands)                    2005                               2004 - -----------------------------    ---------------------------------- -----------------------------------                                   Weighted                               Weighted                                  average                                average        Type of accounts            rate         Amount          %        rate      Amount        % - -------------------------------------------------------------------------------------------------------       Noninterest-bearing deposits         --       $   44,044      19.1%       --     $  40,511      17.4% Interest-bearing demand deposits   0.70%          74,067      32.1%     0.76%       80,998      34.8% Time deposits                      4.13%         112,392      48.8%     3.80%      111,365      47.8%                                               ----------     ------    ------     --------     ------                                    2.24%      $  230,503     100.0%     2.08%     $232,874     100.0%                                               ==========     ======    ======     ========     ======                  The  Corporation had a total of $25.9 million and $24.0 million in               time  deposits of $100,000 or more at December  31, 2005 and 2004,               respectively.                Scheduled maturities of time deposits for the next five years were               as follows:                 ---------------------------------------------------------------                (Dollar amounts in thousands)           Amount             %               ---------------------------------------------------------------                                            2006       $  45,720        40.7%                                            2007          13,499        12.0%                                            2008          25,266        22.5%                                            2009           5,643         5.0%                                            2010           8,197         7.3%                                         Thereafter       14,067        12.5%                                                    -------------    ---------                                                       $ 112,392       100.0%                                                    =============    =========   9.            BORROWED FUNDS                The following table summarizes the Corporation's borrowed funds as               of December 31:    - ----------------------------------------------------------------------------------------------------------------------------------                                                                     2005                                       2004                                                    ----------------------------------------   ------------------------------------                                                                                    Weighted                               Weighted                                                                Average    Average   average             Average  Average  average (Dollar amounts in thousands)                      Balance     Balance     Rate      rate     Balance   Balance   Rate     rate - ---------------------------------------------------------------------------------------------------------------------------------- FHLB advances:                   Due within 12 months                      $ 4,500     $ 1,199     3.75%     4.17%    $      -  $   504     1.26%   0.60%          Due beyond 12 months but within 5 years         -           -         -         -           -        -        -        -          Due beyond 5 years but within 10 years     15,000      15,000     4.13%     4.19%      15,000   15,000     4.13%   4.20%          Due beyond 10 years                             -           -         -         -           -                 -        -                                                    -------     -------                        --------  -------                                                    $19,500     $16,199                        $ 15,000  $15,504                                                    =======     =======                        ========  =======                 The Bank maintains a credit  arrangement with the FHLB as a source               of additional liquidity. The total maximum borrowing capacity with               the FHLB,  excluding loans  outstanding,  at December 31, 2005 was               $107.2 million.                                         -35-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   10.           INSURANCE OF ACCOUNTS AND REGULATORY MATTERS                INSURANCE OF ACCOUNTS.                The Federal Deposit Insurance  Corporation (FDIC) insures deposits               of account  holders  up to  $100,000  per  insured  depositor.  To               provide this insurance,  the Bank must pay an annual  premium.  In               connection with the insurance of deposits, the Bank is required to               maintain certain minimum levels of regulatory  capital as outlined               below.                RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES.                The Bank is  subject to a  regulatory  dividend  restriction  that               generally  limits the amount of dividends  that can be paid by the               Bank to the Corporation.  Prior regulatory approval is required if               the total of all  dividends  declared in any calendar year exceeds               net profits (as defined in the  regulations) for the year combined               with net retained  earnings  (as  defined)  for the two  preceding               calendar  years.  In addition,  dividends  paid by the Bank to the               Corporation  would be prohibited if the effect thereof would cause               the Bank's capital to be reduced below applicable  minimum capital               requirements.   As  of  December   31,   2005,   $3.0  million  of               undistributed  earnings  of  the  Corporation  was  available  for               distribution as dividends, without prior regulatory approval.                Loans or advances from the Bank to the  Corporation are limited to               10 percent of the Bank's  capital  stock and  surplus on a secured               basis.  Funds  available  for loans or advances by the Bank to the               Corporation  amounted to approximately $1.1 million as of December               31, 2005.                MINIMUM REGULATORY CAPITAL REQUIREMENTS.                The Corporation (on a consolidated basis) and the Bank are subject               to various  regulatory  capital  requirements  administered by the               federal  banking   agencies.   Failure  to  meet  minimum  capital               requirements   can  initiate   certain   mandatory   and  possibly               additional   discretionary   actions  by   regulators   that,   if               undertaken,   could   have  a  direct   material   effect  on  the               Corporation's and the Bank's financial  statements.  Under capital               adequacy  guidelines  and  the  regulatory  framework  for  prompt               corrective action, the Corporation and the Bank must meet specific               capital guidelines that involve  quantitative  measures of assets,               liabilities  and certain  off-balance  sheet  items as  calculated               under  regulatory  accounting  practices.  The capital amounts and               classification  are also subject to  qualitative  judgments by the               regulators  about  components,  risk weightings and other factors.               Prompt  corrective  action  provisions  are not applicable to bank               holding companies.                Quantitative  measures established by regulation to ensure capital               adequacy  require the Corporation and the Bank to maintain minimum               amounts and ratios (set forth in the following table) of total and               Tier 1 capital (as defined in the  regulations)  to  risk-weighted               assets (as  defined) and of Tier 1 capital (as defined) to average               assets  (as  defined).  As of  December  31,  2005 and  2004,  the               Corporation and the Bank met all capital adequacy  requirements to               which they are subject.                As of December 31,  2005,  the most recent  notification  from the               FDIC categorized the Bank as well capitalized under the regulatory               framework for prompt corrective  action. To be categorized as well               capitalized,   an   institution   must   maintain   minimum  total               risk-based,  Tier 1 risk-based  and Tier 1 leverage  ratios as set               forth in the  following  table.  There are no conditions or events               since the notification  that management  believes have changed the               Bank's category.                                         -36-                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   10.           INSURANCE OF ACCOUNTS AND REGULATORY MATTERS (CONTINUED)                The  following  table sets forth  certain  information  concerning regulatory capital of the consolidated  Corporation and the Bank as of the dates presented:     - -------------------------------------------------------------------------------------------------------------------------------                                                          December 31, 2005                       December 31, 2004                                           ------------------------------------------   ----------------------------------------                                               Consolidated              Bank              Consolidated                  Bank                                           ----------------------   -----------------   -------------------  ------------------- (Dollar amounts in thousands)               Amount       Ratio     Amount    Ratio      Amount     Ratio     Amount     Ratio - ------------------------------------------------------------------------------------------------------------------------------- Total capital to risk weighted assets:               Actual                                $24,196       12.36%    $22,175   11.44%     $23,245    12.49%    $20,859    11.36%      For capital adequacy purposes          15,662        8.00%     15,501    8.00%      14,889     8.00%     14,686     8.00%      To be well capitalized                    N/A          N/A     19,376   10.00%         N/A       N/A     18,358    10.00% Tier 1 capital to risk-weighted assets:      Actual                                $22,212       11.35%    $20,312   10.48%     $20,901    11.23%    $19,049    10.38%      For capital adequacy purposes           7,831        4.00%      7,751    4.00%       7,445     4.00%      7,343     4.00%      To be well capitalized                    N/A          N/A     11,626    6.00%         N/A       N/A     11,015     6.00% Tier 1 capital to average assets:      Actual                                $22,212        8.13%    $20,312    7.51%     $20,901     7.68%    $19,049     7.08%      For capital adequacy purposes          10,926        4.00%     10,824    4.00%      10,882     4.00%     10,768     4.00%      To be well capitalized                    N/A          N/A     13,530    5.00%         N/A       N/A     13,460     5.00% - -------------------------------------------------------------------------------------------------------------------------------    11.           INCOME TAXES                The  Corporation  and the Bank file a consolidated  federal income               tax return.  The  provision  for income  taxes for the years ended               December 31 is comprised of the following:   - ---------------------------------------------------------------------------- (Dollar amounts in thousands)      2005              2004             2003 - ----------------------------------------------------------------------------         Current                       $ 556             $ 538         $ 618         Deferred                        141               (25)          131                               --------------    --------------    ----------                                       $ 697             $ 513         $ 749                               ==============    ==============    ==========                A  reconciliation  between the  provision for income taxes and the               amount  computed by  multiplying  operating  results before income               taxes  by the  statutory  federal  income  tax rate of 34% for the               years ended December 31 is as follows:    - --------------------------------------------------------------------------------------------------------------                                                       2005                    2004                  2003                                               --------------------    ---------------------  -----------------                                                         % Pre-tax               % Pre-tax            % Pre-tax (Dollar amounts in thousands)                   Amount     Income       Amount     Income    Amount    Income - --------------------------------------------------------------------------------------------------------------        Provision at statutory tax rate               $ 1,112      34.0%      $ 1,044      34.0%   $ 1,102     34.0% Increase (decrease) resulting from:         Tax free interest, net of disallowance   (313)     (9.6%)        (319)    (10.4%)     (312)    (9.6%)         Earnings on BOLI                          (59)     (1.8%)         (53)     (1.7%)      (79)    (2.4%)         Other, net                                (43)     (1.3%)        (159)     (5.2%)       38      1.2%                                               -------------------   --------------------- ------------------- Provision                                     $   697      21.3%      $   513      16.7%   $   749     23.2%                                               ===================   ===================== ===================                                         -37-    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   11.           INCOME TAXES (CONTINUED)                The tax effects of  temporary  differences  between the  financial               reporting  basis and income  tax basis of assets  and  liabilities               that are  included in the net deferred tax asset as of December 31               relate to the following:                -----------------------------------------------------------------               (Dollar amounts in thousands)                  2005       2004               -----------------------------------------------------------------               Deferred tax assets:                        Net unrealized loss on securities     $    13    $  --                       Loss on securities                         40        107                       Provision for loan losses                 582        562                       Deferred loan fees                         10         29                       Intangible assets                         130        145                       Accrued pension cost                       42         28                       Tax credits                               202        314                       Other                                       3          4                                                             -------    -------                        Gross deferred tax assets               1,022      1,189                Deferred tax liabilities:                                                             -------    -------                       Net unrealized gain on securities        --          647                       Depreciation                              318        389                       Stock gain                                184        118                       Prepaid expenses                           68         81                       Loan servicing                              5          7                       Other                                      64         83                                                             -------    -------                       Gross deferred tax liabilities            639      1,325                                                             -------    -------                       Net deferred tax asset/(liability)    $   383    $  (136)                                                             =======    =======                The Corporation determined that it was not required to establish a               valuation  allowance  for deferred tax assets in  accordance  with               SFAS No.  109,  "Accounting  for Income  Taxes,"  since it is more               likely  than not that the  deferred  tax  asset  will be  realized               through  carry-back  to  taxable  income  in prior  years,  future               reversals of existing  taxable  temporary  differences,  and, to a               lesser extent, future taxable income.  12.           COMMITMENTS AND LEGAL CONTINGENCIES                In the ordinary  course of business,  the  Corporation has various               outstanding  commitments and contingent  liabilities  that are not               reflected in the accompanying  consolidated  financial statements.               In addition,  the  Corporation  is involved in certain  claims and               legal  actions  arising in the ordinary  course of  business.  The               outcome  of  these   claims   and   actions   are  not   presently               determinable;   however,  in  the  opinion  of  the  Corporation's               management,   after   consulting   legal  counsel,   the  ultimate               disposition  of these  matters  will not have a  material  adverse               effect on the consolidated financial statements.                                        -38-                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  13.           EMPLOYEE BENEFIT PLANS                DEFINED BENEFIT PLAN.                The Corporation  provides pension benefits for eligible  employees               through  a  defined  benefit  pension  plan.   Substantially   all               employees participate in the retirement plan on a non-contributing               basis and are fully vested after five years of service.                The Corporation uses a December 31 measurement date for its plans.                Information pertaining to changes in obligations and funded status               of the defined benefit pension plan is as follows:    - ---------------------------------------------------------------------------------------- (Dollar amounts in thousands)                          2005         2004      2003 - ---------------------------------------------------------------------------------------- Change in plan assets:          Fair value of plan assets at beginning of year    $ 2,818     $ 2,483     $ 1,983      Actual return on plan assets                          164         204         316      Employer contribution                                 135         209         248      Benefits paid                                         (80)        (78)        (64)                                                        -------     -------     -------      Fair value of plan assets at end of year            3,037       2,818       2,483                                                        -------     -------     ------- Change in benefit obligation:      Benefit obligation at beginning of year             3,276       2,912       2,801      Service cost                                          188         158         147      Interest cost                                         214         187         164      Actuarial loss                                        154          97         235      Effect of plan amendment                             --          --          (580)      Effect of change in assumptions                       174        --           209      Benefits paid                                         (80)        (78)        (64)                                                        -------     -------     -------      Benefit obligation at end of year                   3,926       3,276       2,912                                                        -------     -------     ------- Funded status (plan assets less benefit obligation)       (889)       (458)       (429) Unrecognized prior service cost                           (486)       (517)       (548) Unrecognized net actuarial gain                          1,283         923         843 Unrecognized transition asset                              (48)        (56)        (65)                                                        -------     -------     ------- Accrued pension cost                                   $  (140)    $  (108)    $  (199)                                                        =======     =======     =======                                         -39-    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)   13.           EMPLOYEE BENEFIT PLANS (CONTINUED)                Amounts recognized in the year end balance sheet consist of:    - ---------------------------------------------------------------------------------------                                              Pension Benefits         Other Benefits                                           ----------------------    ------------------- (Dollar amounts in thousands)               2005          2004         2005       2004 - ---------------------------------------------------------------------------------------      Prepaid benefit cost                       $    -        $    -         $ -        $ - Accrued benefit cost                         (140)         (108)          -          - Intangible assets                               -             -           -          - Accumulated other comprehensive income          -             -           -          -                                           --------      --------   -------------------- Net amount recognized                      $ (140)       $ (108)        $ -        $ -                                           ========      ========   =========   ========                  The accumulated benefit obligation for all defined benefit pension               plans was $3.1 million and $2.7 million at year end 2005 and 2004,               respectively.                The components of the periodic pension cost are as follows:  - ------------------------------------------------------------------------------ (Dollar amounts in thousands)        2005             2004           2003 - ------------------------------------------------------------------------------  Service cost                            $ 188          $ 158          $ 147 Interest cost                             214            187            164 Expected return on plan assets           (246)          (209)          (176) Transition asset                           (8)            (8)            (8) Prior service costs                        19            (10)           (31) Recognized net actuarial (gain) loss        -              -             47                                     ---------      ---------     ---------- Net periodic pension cost               $ 167          $ 118          $ 143                                     =========      =========     ==========                Weighted-average actuarial assumptions include the following:    - ----------------------------------------------------------------------------                                                     2005      2004    2003 - ---------------------------------------------------------------------------- Discount rate for benefit obligations and net cost  6.30%     6.30%   6.30% Rate of increase in future compensation levels      4.50%     4.50%   4.50% Expected rate of return on plan assets              8.50%     8.50%   8.50%                                         -40-                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  13.           EMPLOYEE BENEFIT PLANS (CONTINUED)                PLAN ASSETS.                The  Corporation's  pension plan asset allocation at year end 2005               and 2004, target allocation for 2006, and expected  long-term rate               of return by asset category are as follows:  - ----------------------------------------------------------------------------                                                                Weighted-                                                                Average                                                              Expected Long-  Asset Category         Target           Percentage of Plan  Term Rate of                       Allocation         Assets at Year End     Return                          2006            2005          2004      2005 - ------------------------------------------------------------------------ Equity Securities         62%            55%            52%      6.0%  Debt Securities          15%            14%            16%      2.0%       Other               23%            31%            32%      0.5%                                        ----------  ----------- ---------                                          100%          100%      8.5%                                        ==========  =========== =========                The intent of the Plan is to provide a range of investment options               for building a  diversified  asset  allocation  strategy that will               provide the highest likelihood of meeting the aggregate  actuarial               projections.   In  selecting  the  options  and  asset  allocation               strategy,  the  Corporation  has  determined  that the benefits of               reduced  portfolio  risk are best  received  through  asset  style               diversification.   The  following   asset  classes  or  investment               categories  are  utilized  to meet the  Plan's  objectives:  Small               company stock,  International  stock, Mid-cap stock, Large company               stock, Diversified bond, Money Market/Stable Value and Cash.                CONTRIBUTIONS.                The Corporation  expects to contribute  approximately  $135,000 to               its pension plan in 2006.                ESTIMATED FUTURE BENEFIT PAYMENTS.                The following  benefit  payments,  which reflect  expected  future               service, as appropriate, are expected to be paid:                ----------------------------------------------------------               (Dollar amounts in thousands)                      For year ended              Pension Benefits               ----------------------------------------------------------                            2006                       $    81                           2007                            83                           2008                            84                           2009                           103                           2010                           133                         2011-2015                      1,032                        Thereafter                      2,410                                                    ----------                     Benefit Obligation                $ 3,926                                                    ==========                                         -41-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  13.           EMPLOYEE BENEFIT PLANS (CONTINUED)                DEFINED CONTRIBUTION PLAN.                The  Corporation  maintains a defined  contribution  401(k)  Plan.               Employees are eligible to  participate  by providing  tax-deferred               contributions  up  to  20%  of  qualified  compensation.  Employee               contributions  are  vested at all  times.  The  Corporation  makes               matching  contributions  as  approved  by the Board of  Directors.               Matching  contributions  for  2005,  2004 and 2003  were  $75,000,               $67,000 and $68,000, respectively.                SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN.                During 2003, the Corporation  established a Supplemental Executive               Retirement  Plan (SERP) to provide certain  additional  retirement               benefits to participating executive officers. The SERP was adopted               in order to provide benefits to such executives whose benefits are               reduced  under  the  Corporation's   tax-qualified  benefit  plans               pursuant to limitations  under the Internal Revenue Code. The SERP               is subject to certain  vesting  provisions  and provides  that the               executives shall receive a supplemental  retirement benefit if the               executive's  employment  is terminated  after  reaching the normal               retirement age of 62. For the years ended December 31, 2005,  2004               and 2003,  the  Corporation  recognized  SERP  expense of $40,000,               $38,000 and $33,000, respectively.  14.           FINANCIAL INSTRUMENTS                FAIR VALUE OF FINANCIAL INSTRUMENTS.                The following  table sets forth the carrying amount and fair value               of  the  Corporation's   financial  instruments  included  in  the               consolidated balance sheets as of December 31:  - ------------------------------------------------------------------------------                                            2005                  2004                                   ---------------------- ---------------------                                   Carrying       Fair      Carrying     Fair (Dollar amounts in thousands)      amount       value       amount      value - ------------------------------------------------------------------------------ Financial assets:      Cash and cash equivalents   $ 10,367     $ 10,367    $ 14,624   $ 14,624      Securities                    56,304       56,303      63,362     63,362      Loans held for sale                -            -         386        386      Loans receivable             192,526      190,596     179,575    180,832      Federal bank stocks            1,773        1,773       1,731      1,731      Accrued interest receivable    1,271        1,271       1,203      1,203  Financial liabilities:      Deposits                     230,503      228,720     232,874    232,394      Borrowed funds                19,500       19,039      15,000     15,034      Accrued interest payable         607          607         577        577                 The  methods  and  assumptions  used to  estimate  fair  value are               described as follows.                                        -42-                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  14.           FINANCIAL INSTRUMENTS (CONTINUED)                FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED).                Carrying  amount  is the  estimated  fair  value for cash and cash               equivalents,  short-term borrowings,  federal bank stocks, accrued               interest receivable and payable, demand deposits,  short-term debt               and variable  rate loans or deposits that reprice  frequently  and               fully.  Security  fair values are based on market prices or dealer               quotes,  and if no such information is available,  on the rate and               term of the security and information  about the issuer.  For fixed               rate loans or  deposits  and for  variable  rate loans or deposits               with infrequent repricing or repricing limits, fair value is based               on discounted cash flows using current market rates applied to the               estimated life and credit risk. Fair values for impaired loans are               estimated  using  discounted  cash  flow  analysis  or  underlying               collateral  values.  Fair value of loans held for sale is based on               market  quotes.  Fair value of debt is based on current  rates for               similar  financing.  The fair value of off-balance  sheet items is               based on the  current  fees or cost that would be charged to enter               into or terminate such arrangements and is not material.                OFF-BALANCE SHEET FINANCIAL INSTRUMENTS.                The Corporation is party to credit-related  financial  instruments               with  off-balance  sheet risk in the normal  course of business to               meet  the  financing  needs  of  its  customers.  These  financial               instruments  include  commitments  to extend credit and commercial               letters of credit.  Commitments  to extend  credit  involve,  to a               varying  degree,  elements  of credit  and  interest  rate risk in               excess of amounts  recognized  in the  consolidated  statements of               financial condition.  The Corporation's exposure to credit loss in               the event of non-performance by the other party for commitments to               extend credit is  represented by the  contractual  amount of these               commitments,  less any collateral value obtained.  The Corporation               uses  the  same  credit  policies  in  making  commitments  as for               on-balance sheet  instruments.  The Corporation's  distribution of               commitments  to extend credit  approximates  the  distribution  of               loans receivable outstanding.                The  following   table   presents  the  notional   amount  of  the               Corporation's  off-balance sheet commitment financial  instruments               as of December 31:   - --------------------------------------------------------------------------------                                         2005                     2004                               ------------------------- ------------------------                                             Variable                   Variable (Dollar amounts in thousands) Fixed Rate      Rate       Fixed Rate      Rate - -------------------------------------------------------------------------------- Commitments to make loans       $ 280     $       143   $        424  $     648 Unused lines of credit          1,192          15,516            315     12,690 Standby letters of credit           -             682              -        686                               --------   -------------  ------------  ----------                               $ 1,472     $    15,659   $        739   $ 13,338                               ========   =============  ============  ==========                Commitments  to make loans are  generally  made for  periods of 30               days or less. The fixed rate loan  commitments have interest rates               ranging from 4.00% to 11.25% and  maturities  ranging from five to               30 years at both year end  dates.  Commitments  to  extend  credit               include  agreements  to lend to a customer  as long as there is no               violation of any  condition  established  in the  contract.  These               commitments   generally  have  fixed  expiration  dates  or  other               termination clauses and may require payment of a fee.  Commitments               to  extend  credit  also  include   unfunded   commitments   under               commercial  and consumer lines of credit,  revolving  credit lines               and overdraft protection agreements.  These lines of credit may be               collateralized  and usually do not  contain a  specified  maturity               date and may be  drawn  upon to the  total  extent  to  which  the               Corporation is committed.                                        -43-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  14.           FINANCIAL INSTRUMENTS (CONTINUED)                OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED).                Standby  letters of credit are conditional  commitments  issued by               the Corporation usually for commercial  customers to guarantee the               performance  of a  customer  to a third  party.  The  credit  risk               involved in issuing  letters of credit is essentially  the same as               that  involved in extending  loan  facilities  to  customers.  The               Corporation    generally   holds   collateral   supporting   those               commitments if deemed  necessary.  Standby  letters of credit were               $629,000 and $902,000 at December 31, 2005 and 2004, respectively.  15.           EMCLAIRE FINANCIAL CORP. - CONDENSED FINANCIAL STATEMENTS,               PARENT CORPORATION ONLY                Following  are  condensed  financial  statements  for  the  parent               company as of and for the years ended December 31:     - ------------------------------------------------------------------------------------------------------------------ Condensed Statements of Financial Condition                                                  December 31, (Dollar amounts in thousands)                                                       2005                 2004 - ------------------------------------------------------------------------------------------------------------------ Assets:           Cash and cash equivalents                                                            $ 306            $ 109       Securities available for sale                                                        2,088            3,157       Equity in net assets of subsidiary bank                                             21,558           20,981       Other assets                                                                             7               10                                                                                    -------------    --------------           Total Assets                                                                   $23,959          $24,257                                                                                    =============    ============== Liabilities and Stockholders' Equity:       Accrued expenses and other liabilities                                             $   344          $   641       Stockholders' Equity                                                                23,615           23,616                                                                                    -------------    --------------           Total Liabilities and Stockholders' Equity                                     $23,959          $24,257                                                                                    =============    ============== - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Condensed Statements of Operations                                           Year ended December 31, (Dollar amounts in thousands)                                          2005          2004             2003 - ------------------------------------------------------------------------------------------------------------------ Income:       Dividends from subsidiary                                           $  721         $ 1,192           $1,437       Investment income                                                      917             758              202                                                                  ---------------   -------------   --------------           Total income                                                     1,638           1,950            1,639 Expense:       Noninterest expense                                                     83              41               91                                                                  ---------------   -------------   --------------           Total expense                                                       83              41               91                                                                  ---------------   -------------   --------------       Income before income taxes and equity in undistributed           operating results of subsidiary                                  1,555           1,909            1,548        Equity in undistributed net income of subsidiary                     1,241             831              966                                                                  ---------------   -------------   --------------       Income before income taxes                                           2,796           2,740            2,514        Income tax expense                                                     223             183               22                                                                  ---------------   -------------   -------------- Net income                                                                $2,573         $ 2,557           $2,492                                                                  ===============   =============   ==============                                        -44-                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  15.           EMCLAIRE FINANCIAL CORP. - CONDENSED FINANCIAL STATEMENTS,               PARENT CORPORATION ONLY (CONTINUED)    - ---------------------------------------------------------------------------------------------------------- Condensed Statements of Cash Flows                                             Year ended December 31, (Dollar amounts in thousands)                                               2005        2004        2003 - ---------------------------------------------------------------------------------------------------------- Operating activities:           Net income                                                          $2,573       $2,557      $2,492       Adjustments to reconcile net income to net cash provided           by operating activities:                Equity in undistributed operating results of subsidiary    (1,241)        (831)       (966)                Other, net                                                   (803)      (1,332)      2,176                                                                          --------     --------    --------                    Net cash provided by operating activities                 529          394       3,702                                                                          --------     --------    -------- Investing activities:                Purchases of securities                                       (99)        (131)       (748)                Proceeds from the sale of available for sale securities     1,060          945         244                                                                          --------     --------    --------                    Net cash provided by (used) in investing activities       961          814        (504)                                                                          --------     --------    -------- Financing activities:                Dividends paid                                             (1,293)      (1,192)     (1,437)                Payments to acquire treasury stock                              -            -      (1,682)                                                                          --------     --------    --------                    Net cash used in financing activities                  (1,293)      (1,192)     (3,119)                                                                          --------     --------    -------- Increase in cash and cash equivalents                                        197           16          79 Cash and cash equivalents at beginning of period                             109           93          14                                                                          --------     --------    -------- Cash and cash equivalents at end of period                                 $ 306        $ 109        $ 93                                                                          ========     ========    ========    16.           OTHER COMPREHENSIVE INCOME (LOSS)                Other  comprehensive  income (loss)  components  and related taxes               were as follows:    - ---------------------------------------------------------------------------------------------------- (Dollar amounts in thousands)                                           2005       2004       2003 - -------------------------------------------------------------------   --------  ---------   --------     Unrealized holding gains (losses) on available for sale securities    $ (1,084)    $   90   $ 1,082 Reclassification adjustment for gains later recognized in income          (857)      (701)     (170)                                                                       --------  ---------   ------- Net unrealized gains (losses)                                           (1,941)      (611)      912  Tax effect                                                                 660        207      (310)                                                                       --------  ---------   ------- Other comprehensive income (loss)                                     $ (1,281)    $ (404)  $   602                                                                       ========  =========   =======                                          -45-   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)  17.           OTHER NONINTEREST EXPENSES                The  following  summarizes  the  Corporation's  other  noninterest               expenses for the years ended December 31:  - ----------------------------------------------------------------------- (Dollar amounts in thousands)               2005      2004        2003 - ----------------------------------------------------------------------- Telephone and data communications         $  272    $  327      $  228 Professional fees                            231       223         238 Customer bank card processing                241       239         228 Pennsylvania shares and use taxes            142       202         159 Correspondent and courier fees               189       190         177 Postage and freight                          148       157         172 Marketing and advertising                    109       114         143 Printing and supplies                        141       147         154 Travel, entertainment and conferences        140        84          98 Other                                        784       409         498                                          --------  --------   ---------       Total other noninterest expenses    $2,397    $2,092      $2,095                                          ========  ========   =========   18.           QUARTERLY FINANCIAL DATA (UNAUDITED)                The  following  is a summary of  selected  quarterly  data for the               years ended December 31:    - ---------------------------------------------------------------------------------------------------                                                                 First     Second     Third   Fourth (Dollar amounts in thousands, except share data)               Quarter    Quarter   Quarter  Quarter - --------------------------------------------------------------------------------------------------- 2005:            Interest income                                          $3,544     $3,782    $3,733   $3,818       Interest expense                                          1,354      1,342     1,405    1,472                                                                -------   --------  -------  -------       Net interest income                                       2,190      2,440     2,328    2,346       Provision for loan losses                                    60         45        40       60                                                                -------   --------  -------  -------       Net interest income after provision for loan losses       2,130      2,395     2,288    2,286       Noninterest income (1)                                      655        757       920      985       Noninterest expense                                       2,087      2,330     2,386    2,343                                                                -------   --------  -------  -------       Income before income taxes                                  698        822       822      928       Provision for income taxes                                  131        168       159      239                                                                -------   --------  -------  -------       Net income                                                $ 567     $  654    $  663   $  689                                                                =======   ========  =======  =======       Basic earnings per share                                  $0.45     $ 0.52    $ 0.52   $ 0.54                                                                =======   ========  =======  ======= 2004:       Interest income                                          $3,463     $3,418    $3,521   $3,551       Interest expense                                          1,251      1,259     1,287    1,422                                                                -------   --------  -------  -------       Net interest income                                       2,212      2,159     2,234    2,129       Provision for loan losses                                    55         20        95      120                                                                -------   --------  -------  -------       Net interest income after provision for loan losses       2,157      2,139     2,139    2,009       Noninterest income                                          480        521       576      958       Noninterest expense                                       1,950      2,008     1,949    2,002                                                                -------   --------  -------  -------       Income before income taxes                                  687        652       766      965       Provision for income taxes                                  122        129        81      181                                                                -------   --------  -------  -------       Net income                                               $  565     $  523    $  685   $  784                                                                =======   ========  =======  =======       Basic earnings per share                                 $ 0.45     $ 0.41    $ 0.54   $ 0.62                                                                =======   ========  =======  =======   (1)           Noninterest  income  fluctuated  upward during the fourth  quarter               2004 as a result of gains on equity stocks.                                        -46-                                REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   BMC [LOGO]   AUDIT COMMITTEE, BOARD OF DIRECTORS AND STOCKHOLDERS EMCLAIRE FINANCIAL CORP. EMLENTON, PENNSYLVANIA  We  have  audited  the  accompanying  consolidated  balance  sheet  of  Emclaire Financial Corp. as of December 31, 2005, and the related consolidated  statement of  income,  changes  in  stockholders'  equity and cash flows for the year then ended. The financial  statements of Emclaire  Financial Corp., as of and for the two years ended  December 31, 2004 and 2003 were audited by other auditors whose report,  dated  March  10,  2005,  expressed  an  unqualified  opinion  on those statements.   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 company 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 company's  internal control over financial reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes examining,  on a test basis,  evidence supporting the amounts and disclosures in the  financial   statements,   assessing  the  accounting  principles  used  and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audits  provide  a reasonable basis for our opinion.  In our opinion, the consolidated  financial statements referred to above present fairly, in all material  respects,  the financial position of Emclaire Financial Corp. as of December 31, 2005,  and the results of its  operations  and its cash flows  for the  year  then  ended,  in  conformity  with  accounting  principles generally accepted in the United States of America.                                                        /s/ Beard Miller Company LLP                                                     ---------------------------- Beard Miller Company LLP Pittsburgh, Pennsylvania March 10, 2006                                         -47-        STOCK AND DIVIDEND INFORMATION   LISTINGS AND MARKETS  Emclaire Financial Corp. common stock is traded on the Over the Counter Bulletin Board  (OTCBB)  under the symbol  "EMCF.OB."  The listed  market  makers for the Corporation's common stock include:  ARTHURS, LESTRANGE & CO., INC. Two Gateway Center Pittsburgh, PA 15222 Telephone: (877) 282-1941  FERRIS, BAKER, WATTS, INC. 100 Light Street, 8th Floor Baltimore, MD 21202 Telephone: (800) 638-7411  BOENNING AND SCATTERGOOD 4 Tower Bridge, Suite 300 200 Bar Harbor Drive West Conshonhocken, PA 19428 Telephone: (610) 862-5360  PARKER HUNTER, INC. 600 Grant Street-Suite 3100 Pittsburgh, PA 15219 Telephone: (412) 562-8000   STOCK PRICE AND CASH DIVIDEND INFORMATION  The bid and ask price of the  Corporation's  common stock was $26.00 and $26.75, respectively,  as of March 10,  2006.  The  Corporation  traditionally  has paid regular quarterly cash dividends.  The  following  table  sets  forth  the high and low sale  market  prices of the Corporation's  common  stock as well as cash  dividends  paid for the  quarterly periods presented:    - ----------------------------------------------------------------------                                    Market Price                         ---------------------------------    Cash                             High       Low      Close      Dividend - ---------------------------------------------------------------------- 2005:   Fourth quarter      $   30.25   $   26.50   $   26.60   $   0.27   Third quarter           31.00       29.00       30.00       0.25   Second quarter          31.75       28.00       30.25       0.25   First quarter           28.50       26.30       28.50       0.25  2004:   Fourth quarter      $   26.50   $   25.50   $   26.25   $   0.25   Third quarter           26.25       24.75       26.00       0.23   Second quarter          26.25       24.50       26.00       0.23   First quarter           26.50       25.60       26.40       0.23   NUMBER OF STOCKHOLDERS AND SHARES OUTSTANDING  As of December 31, 2005, there were approximately 695 stockholders of record and 1,267,835  shares  of common  stock  entitled  to vote,  receive  dividends  and considered   outstanding  for  financial  reporting  purposes.   The  number  of stockholders  of record does not  include the number of persons or entities  who hold their stock in nominee or "street" name.  DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN  Common  stockholders  may have cash  dividends,  declared  on the  Corporation's common stock,  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.                                         -48-    CORPORATE HEADQUARTERS                Emclaire Financial Corp.               612 Main Street               Emlenton, Pennsylvania 16373               Phone:                (724) 867-2311               Website:              www.farmersnb.com  SUBSIDIARY BANK                The Farmers National Bank of Emlenton.  ANNUAL MEETING                The annual meeting of the Corporation's  stockholders will be held               at 11:00 a.m.,  on  Wednesday,  May 17,  2006,  at the main office               building in Emlenton, Pennsylvania 16373.  STOCKHOLDER AND INVESTOR INFORMATION                Copies  of  annual   reports,   quarterly   reports   and  related               stockholder  literature are available upon written request without               charge to stockholders.  Requests should be addressed to Shelly L.               Rhoades,  Treasurer of Emclaire  Financial Corp., 612 Main Street,               Emlenton, Pennsylvania 16373.                In addition,  other public filings of the  Corporation,  including               the  Annual  Report  on  Form  10-K,  can  be  obtained  from  the               Securities     and     Exchange     Commission's     website    at               http://www.sec.gov.  INDEPENDENT ACCOUNTANTS                Beard Miller Company LLP               P.O. Box 101086               Pittsburgh, PA  15237  SPECIAL COUNSEL                Elias, Matz, Tiernan and Herrick L.L.P.               12th Floor               734 15th Street, N.W.               Washington, DC  20005  REGISTRAR AND TRANSFER AGENT                Illinois Stock Transfer Corporation               209 West Jackson Boulevard, Suite 903               Chicago, IL  60606               www.illinoisstocktransfer.com               (800) 757-5755                                           -49-                                           NOTES                                        -50-    EX-31.1 3 a5108284ex311.txt EXHIBIT 31.1                                                                      EXHIBIT 31.1                                   CERTIFICATIONS                 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER                  (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)  I, David L. Cox, Chief Executive Officer and President, certify that:  1.   I have  reviewed  this  annual  report on Form 10-K of  Emclaire  Financial      Corp.;  2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue      statement of a material fact or omit to state a material fact  necessary to      make the statements  made, in light of the  circumstances  under which such      statements  were made, not misleading with respect to the period covered by      this annual report;  3.   Based on my  knowledge,  the  financial  statements,  and  other  financial      information included in this annual report,  fairly present in all material      respects, the financial condition,  results of operations and cash flows of      the registrant as of, and for, the periods presented in this annual report;  4.   The  registrant's  other  certifying  officers  and I are  responsible  for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:           (a)      Designed such disclosure  controls and  procedures,  or caused                   such  disclosure  controls and procedures to be designed under                   our supervision,  to ensure that material information relating                   to the registrant, including its consolidated subsidiaries, is                   made known to us by others within those entities, particularly                   during the period in which this report is being prepared;           (b)      Evaluated the  effectiveness  of the  registrant's  disclosure                   controls  and  procedures  and  presented  in this  report our                   conclusions about the effectiveness of the disclosure controls                   and  procedures,  as of the end of the period  covered by this                   report based on such evaluation; and           (c)      Disclosed  in  this  report  any  change  in the  registrant's                   internal control over financial reporting that occurred during                   the registrant's  most recent fiscal quarter (the registrant's                   fourth  fiscal  quarter in the case of an annual  report) that                   has materially affected, or is reasonably likely to materially                   affect,  the  registrant's  internal  control  over  financial                   reporting.  5.   The registrant's other certifying officer(s) and I have disclosed, based on      our most recent evaluation of internal control over financial reporting, to      the registrant's auditors and the audit committee of the registrant's board      of directors (or persons performing the equivalent functions):           (a)      All significant  deficiencies  and material  weaknesses in the                   design  or  operation  of  internal   control  over  financial                   reporting which are reasonably  likely to adversely affect the                   registrant's ability to record, process,  summarize and report                   financial information; and           (b)      Any fraud,  whether or not material,  that involves management                   or  other  employees  who  have  a  significant  role  in  the                   registrant's internal control over financial reporting.  Date: March 27, 2006                           By: /S/ DAVID L. COX                          ---------------------------------------------------                              David L. Cox                              Chairman, Chief Executive Officer and President     EX-31.2 4 a5108284ex312.txt EXHIBIT 31.2                                                                      EXHIBIT 31.2           CERTIFICATION OF THE PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER                  (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)  I, Shelly L. Rhoades,  Treasurer and Principal Financial and Accounting Officer, certify that:  1.   I have  reviewed  this  annual  report on Form 10-K of  Emclaire  Financial      Corp.;  2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue      statement of a material fact or omit to state a material fact  necessary to      make the statements  made, in light of the  circumstances  under which such      statements  were made, not misleading with respect to the period covered by      this annual report;  3.   Based  on my  knowledge,  the  financial  statements  and  other  financial      information included in this annual report,  fairly present in all material      respects, the financial condition,  results of operations and cash flows of      the registrant as of, and for, the periods presented in this annual report;  4.   The  registrant's  other  certifying  officers  and I are  responsible  for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the registrant and we      have:           (a)      Designed such disclosure  controls and  procedures,  or caused                   such  disclosure  controls and procedures to be designed under                   our supervision,  to ensure that material information relating                   to the registrant, including its consolidated subsidiaries, is                   made known to us by others within those entities, particularly                   during the period in which this report is being prepared;           (b)      Evaluated the  effectiveness  of the  registrant's  disclosure                   controls  and  procedures  and  presented  in this  report our                   conclusions about the effectiveness of the disclosure controls                   and  procedures,  as of the end of the period  covered by this                   report based on such evaluation; and           (c)      Disclosed  in  this  report  any  change  in the  registrant's                   internal control over financial reporting that occurred during                   the registrant's  most recent fiscal quarter (the registrant's                   fourth  fiscal  quarter in the case of an annual  report) that                   has materially affected, or is reasonably likely to materially                   affect,  the  registrant's  internal  control  over  financial                   reporting.  5.   The registrant's other certifying officer(s) and I have disclosed, based on      our most recent evaluation of internal control over financial reporting, to      the registrant's auditors and the audit committee of the registrant's board      of directors (or persons performing the equivalent functions):           (a)      All significant  deficiencies  and material  weaknesses in the                   design  or  operation  of  internal   control  over  financial                   reporting which are reasonably  likely to adversely affect the                   registrant's ability to record, process,  summarize and report                   financial information; and           (b)      Any fraud,  whether or not material,  that involves management                   or  other  employees  who  have  a  significant  role  in  the                   registrant's internal control over financial reporting.  Date: March 27, 2006                              By: /S/ SHELLY L. RHOADES                             Shelly L. Rhoades                             Principal Financial and Accounting Officer                             Treasurer     EX-32.1 5 a5108284ex321.txt EXHIBIT 32.1                                                                      EXHIBIT 32.1                            CEO CERTIFICATION PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In  connection  with  the  Annual  Report  of  Emclaire   Financial  Corp.  (the "Corporation")  on Form 10-K for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date here (the "Report"), I, David L. Cox, Chief  Executive  Officer of the  Corporation,  certify,  pursuant to 18 U.S.C.  ss. 1350, as adopted  pursuant to ss. 906 of the  Sarbanes-Oxley  Act of 2002, that:       1.   The Report fully  complies with the  requirements  of section 13(a) or           15(d) of the Securities Exchange Act of 1934; and       2.   The  information  contained  in the  Report  fairly  presents,  in all           material respects, the financial condition and result of operations of           the Corporation.  /S/DAVID L. COX - ----------------------- David L. Cox Chief Executive Officer March 27, 2006     EX-32.2 6 a5108284ex322.txt EXHIBIT 32.2                                                                      EXHIBIT 32.2        PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER CERTIFICATION PURSUANT TO                             18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In  connection  with  the  Annual  Report  of  Emclaire   Financial  Corp.  (the "Corporation")  on Form 10-K for the year ending December 31, 2005 as filed with the  Securities  and Exchange  Commission  on the date here (the  "Report"),  I, Shelly L. Rhoades,  Treasurer and Principal  Financial and Accounting Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:       1.   The Report fully  complies with the  requirements  of section 13(a) or           15(d) of the Securities Exchange Act of 1934; and       2.   The  information  contained  in the  Report  fairly  presents,  in all           material respects, the financial condition and result of operations of           the Corporation.  /S/SHELLY L. RHOADES - ------------------------------------------ Shelly L. Rhoades Principal Financial and Accounting Officer Treasurer March 27, 2006         -----END PRIVACY-ENHANCED MESSAGE-----