EMCLAIRE FINANCIAL CORP - Quarter Report: 2013 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from _____________ to _____________

Commission File Number: 001-34527

EMCLAIRE FINANCIAL CORP

(Exact name of registrant as specified in its charter)

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

612 Main Street, Emlenton, Pennsylvania	16373
(Address of principal executive offices)	(Zip Code)

(724) 867-2311

(Registrant’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

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

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

The number of shares outstanding of the Registrant’s common stock was 1,762,158 at May 10, 2013.

EMCLAIRE FINANCIAL CORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1.	Interim Financial Statements (Unaudited)

	Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	1

	Consolidated Statements of Net Income for the three months ended March 31, 2013 and 2012	2

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012	3

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012	4

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	30

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

Signatures		32

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Emclaire Financial Corp

Consolidated Balance Sheets

As of March 31, 2013 (Unaudited) and December 31, 2012

(Dollar amounts in thousands, except per share data)

	March 31,			December 31,
	2013			2012

Assets

Cash and due from banks	$	1,673		$	2,468
Interest earning deposits with banks		21,772			17,956
Cash and cash equivalents		23,445			20,424
Securities available for sale		116,435			120,206
Loans receivable, net of allowance for loan losses of $5,488 and $5,350		339,192			333,801
Federal bank stocks, at cost		2,817			2,885
Bank-owned life insurance		10,154			10,072
Accrued interest receivable		1,704			1,533
Premises and equipment, net		9,305			9,180
Goodwill		3,664			3,664
Core deposit intangible, net		1,162			1,235
Prepaid expenses and other assets		6,105			6,014
Total Assets	$	513,983		$	509,014

Liabilities and Stockholders' Equity

Liabilities:
Deposits:
Non-interest bearing	$	106,761		$	98,559
Interest bearing		330,477			333,900
Total deposits		437,238			432,459
Long-term borrowed funds		20,000			20,000
Accrued interest payable		388			442
Accrued expenses and other liabilities		4,491			4,388
Total Liabilities		462,117			457,289

Commitments and Contingent Liabilities		-			-

Stockholders' Equity:
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series B, non-cumulative preferred stock, $10,000 liquidation value, 10,000 shares issued and outstanding, respectively		10,000			10,000
Common stock, $1.25 par value, 12,000,000 shares authorized; 1,864,175 and 1,861,425 shares issued; 1,762,158 and 1,759,408 shares outstanding		2,330			2,327
Additional paid-in capital		19,322			19,270
Treasury stock, at cost; 102,017 shares		(2,114	)		(2,114	)
Retained earnings		22,052			21,672
Accumulated other comprehensive income		276			570
Total Stockholders' Equity		51,866			51,725
Total Liabilities and Stockholders' Equity	$	513,983		$	509,014

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp

Consolidated Statements of Net Income (Unaudited)

For the three months ended March 31, 2013 and 2012

(Dollar amounts in thousands, except per share data)

	For the three months ended
	March 31,
	2013		2012
Interest and dividend income:
Loans receivable, including fees	$	4,200	$	4,312
Securities:
Taxable		417		568
Exempt from federal income tax		266		298
Federal bank stocks		17		15
Interest earning deposits with banks		14		22
Total interest and dividend income		4,914		5,215
Interest expense:
Deposits		838		1,069
Borrowed funds		198		234
Total interest expense		1,036		1,303
Net interest income		3,878		3,912
Provision for loan losses		143		113
Net interest income after provision for loan losses		3,735		3,799
Noninterest income:
Fees and service charges		398		356
Commissions on financial services		64		86
Title premiums		22		17
Net gain on sales of available for sale securities		85		424
Earnings on bank-owned life insurance		96		61
Other		266		275
Total noninterest income		931		1,219
Noninterest expense:
Compensation and employee benefits		1,905		1,943
Premises and equipment		542		518
Intangible asset amortization		73		93
Professional fees		177		200
Federal deposit insurance		105		96
Other		773		783
Total noninterest expense		3,575		3,633
Income before provision for income taxes		1,091		1,385
Provision for income taxes		233		346
Net income		858		1,039
Preferred stock dividends and discount accretion		125		125
Net income available to common stockholders	$	733	$	914
Basic and diluted earnings per common share	$	0.42	$	0.52
Average common shares outstanding		1,760,927		1,751,908

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

For the three months ended March 31, 2013 and 2012

(Dollar amounts in thousands)

	For the three months ended
	March 31,
	2013			2012
Net income	$	858		$	1,039

Other comprehensive loss
Unrealized losses on securities:
Unrealized holding loss arising during the period		(361	)		(201	)
Reclassification adjustment for gains included in net income		(85	)		(424	)
		(446	)		(625	)
Tax effect		152			212
Net of tax		(294	)		(413	)
Comprehensive income	$	564		$	626

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2013 and 2012

(Dollar amounts in thousands)

	For the three months ended
	March 31,
	2013			2012

Cash flows from operating activities
Net income	$	858		$	1,039
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		171			180
Provision for loan losses		143			113
Amortization of premiums, net		36			42
Amortization of intangible assets and mortgage servicing rights		73			95
Realized gains on sales of available for sale securities, net		(85	)		(424	)
Net (gains)/losses on foreclosed real estate		(10	)		6
Restricted stock and stock option compensation		35			29
Increase in bank-owned life insurance, net		(82	)		(53	)
Increase in accrued interest receivable		(171	)		(50	)
(Increase) decrease in prepaid expenses and other assets		84			(44	)
Decrease in accrued interest payable		(54	)		(4	)
Increase (decrease) in accrued expenses and other liabilities		103			(111	)
Net cash provided by operating activities		1,101			818

Cash flows from investing activities
Loan originations and principal collections, net		(5,697	)		(7,769	)
Available for sale securities:
Sales		1,775			1,112
Maturities, repayments and calls		14,615			25,460
Purchases		(12,944	)		(38,570	)
Redemption of federal bank stocks		68			134
Proceeds from the sale of foreclosed real estate		59			75
Write-down of foreclosed real estate		19			-
Purchases of premises and equipment		(296	)		(44	)
Net cash used in investing activities		(2,401	)		(19,602	)

Cash flows from financing activities
Net increase in deposits		4,779			20,991
Proceeds from exercise of stock options, inlcuding tax benefit		20			-
Dividends paid		(478	)		(440	)
Net cash provided by financing activities		4,321			20,551

Increase in cash and cash equivalents		3,021			1,767
Cash and cash equivalents at beginning of period		20,424			28,193
Cash and cash equivalents at end of period	$	23,445		$	29,960

Supplemental information:
Interest paid	$	1,090		$	1,307
Income taxes paid		-			500

Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		92			30

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the three months ended March 31, 2013 and 2012

(Dollar amounts in thousands, except per share data)

	For the three months ended
	March 31,
	2013			2012

Balance at beginning of period	$	51,725		$	50,730

Net income		858			1,039

Other comprehensive loss		(294	)		(413	)

Stock compensation expense		35			29

Dividends declared on preferred stock		(125	)		(125	)

Dividends declared on common stock		(353	)		(315	)

Exercise of stock options, including tax benefit		20			-

Balance at end of period	$	51,866		$	50,945

Common cash dividend per share	$	0.20		$	0.18

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

Nature of Operations and Basis of Presentation

Emclaire Financial Corp (the Corporation) is a Pennsylvania company and the holding company of The Farmers National Bank of Emlenton (the Bank) and Emclaire Settlement Services, LLC (the Title Company). The Corporation provides a variety of financial services to individuals and businesses through its offices in Western Pennsylvania. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, the Bank and the Title Company. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2012, as contained in the Corporation’s 2012 Annual Report on Form 10-K filed with the SEC.

The balance sheet at December 31, 2012 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts in the consolidated 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, fair value of financial instruments, goodwill, real estate owned, the valuation of deferred tax assets and other-than-temporary impairment charges on securities. The results of operations for interim quarterly or year-to-date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year’s financial statement presentation.

Participation in the Small Business Lending Fund (SBLF) of the U.S. Treasury Department (U.S. Treasury)

On August 18, 2011, the Corporation entered into a Securities Purchase Agreement (the Agreement) with the U.S. Treasury Department, pursuant to which the Corporation issued and sold to the U.S. Treasury 10,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (Series B Preferred Stock), having a liquidation preference of $1,000 per share, for aggregate proceeds of $10.0 million. The issuance was pursuant to the U.S. Treasury’s SBLF program, a $30.0 billion fund established under the Small Business Jobs Act of 2010, which encouraged lending to small businesses by providing capital to qualified community banks with assets less than $10.0 billion. The Series B Preferred Stock is entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, which is calculated on the aggregate liquidation amount, was initially set at 5% per annum based upon the current level of Qualified Small Business Lending (QSBL) by the Bank. The dividend rate for future periods is set based upon the percentage change in qualified lending between each dividend period and the baseline QSBL level established at the time the Agreement was entered into. Such dividend rate may vary from 1% per annum to 5% per annum for the second through tenth dividend periods, and will be fixed at a rate of 1% per annum to 7% per annum for the eleventh through the eighteenth dividend periods. If the Series B Preferred Stock remains outstanding for more than four-and-one-half years, the dividend rate will be fixed at 9%. Prior to that time, in general, the dividend rate decreases as the level of the Bank’s QSBL increases. The dividend rate was 5.0% for the quarters ended March 31, 2013 and 2012. Such dividends are not cumulative, but the Corporation may only declare and pay dividends on its common stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series B Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities.

As more completely described in the Certificate of Designation, holders of the Series B Preferred Stock have the right to vote as a separate class on certain matters relating to the rights of holders of Series B Preferred Stock and on certain corporate transactions. Except with respect to such matters, the Series B Preferred Stock does not have voting rights.

The Corporation may redeem the shares of Series B Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the liquidation amount and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by the Corporation’s primary federal banking regulator. If paid in part, payments are required to be at least 25% of the original proceeds.

Earnings per Common Share

Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares for assumed issuance of restricted stock and shares issued under stock options.

Earnings per Common Share (continued)

The factors used in the Corporation’s earnings per common share computation follow:

(Dollar amounts in thousands, except for per share amounts)	For the three months ended
	March 31,
	2013		2012
Earnings per common share - basic
Net income	$	858	$	1,039
Less: Preferred stock dividends and discount accretion		125		125
Net income available to common stockholders	$	733	$	914
Average common shares outstanding		1,760,927		1,751,908
Basic earnings per common share	$	0.42	$	0.52

Earnings per common share – diluted
Net income available to common stockholders	$	733	$	914
Average common shares outstanding		1,760,927		1,751,908
Add: Dilutive effects of assumed exercises of restricted stock and stock options		3,679		-
Average shares and dilutive potential common shares		1,764,606		1,751,908
Diluted earnings per common share	$	0.42	$	0.52
Stock options and restricted stock awards not considered in computing diluted earnings per share because they were antidilutive		68,061		92,500

Securities

The following table summarizes the Corporation’s securities as of March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Available for sale:
March 31, 2013:
U.S. Treasury and federal agency	$	4,953	$	13	$	(19	)	$	4,947
U.S. government sponsored entities and agencies		26,539		71		(2	)		26,608
Mortgage-backed securities: residential		17,691		1,260		-			18,951
Collateralized mortgage obligations: residential		23,715		31		(97	)		23,649
State and political subdivisions		34,567		1,774		-			36,341
Corporate debt securities		3,475		41		-			3,516
Equity securities		2,357		78		(12	)		2,423
	$	113,297	$	3,268	$	(130	)	$	116,435
December 31, 2012:
U.S. Treasury and federal agency	$	3,959	$	8	$	-		$	3,967
U.S. government sponsored entities and agencies		28,030		132		-			28,162
Mortgage-backed securities: residential		21,137		1,587		-			22,724
Collateralized mortgage obligations: residential		22,508		47		(80	)		22,475
State and political subdivisions		34,904		1,862		(1	)		36,765
Corporate debt securities		3,728		34		(1	)		3,761
Equity securities		2,356		4		(8	)		2,352
	$	116,622	$	3,674	$	(90	)	$	120,206

Securities (continued)

The following table summarizes scheduled maturities of the Corporation’s debt securities as of March 31, 2013. 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. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

(Dollar amounts in thousands)	Available for sale
	Amortized		Fair
	Cost		Value

Due in one year or less	$	1,493	$	1,507
Due after one year through five years		25,962		26,386
Due after five through ten years		32,637		33,963
Due after ten years		9,443		9,556
Mortgage-backed securities: residential		17,691		18,951
Collateralized mortgage obligations: residential		23,715		23,649
	$	110,941	$	114,012

Information pertaining to securities with gross unrealized losses at March 31, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:

(Dollar amounts in thousands)	Less than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss		Value		Loss

March 31, 2013:
U.S. Treasury and federal agency	$	483	$	(19	)	$	-	$	-	$	483	$	(19	)
U.S. government sponsored entities and agencies		3,205		(2	)		-		-		3,205	$	(2	)
Collateralized mortgage obligations: residential		17,383		(97	)		-		-		17,383	$	(97	)
Equity securities		1,200		(12	)		-		-		1,200		(12	)
	$	22,271	$	(130	)	$	-	$	-	$	22,271	$	(130	)

December 31, 2012:
Collateralized mortgage obligations: residential	$	10,698	$	(80	)	$	-	$	-	$	10,698	$	(80	)
State and political subdivisions		521		(1	)		-		-		521		(1	)
Corporate debt securities		500		(1	)		-		-		500		(1	)
Equity securities		493		(8	)		-		-		493		(8	)
	$	12,212	$	(90	)	$	-	$	-	$	12,212	$	(90	)

Gains on sales of available for sale securities for the three month period ended March 31 were as follows:

(Dollar amounts in thousands)	For the three months
	ended March 31,
	2013		2012

Proceeds	$	1,775	$	1,112
Gains		85		424
Tax provision related to gains		29		144

Securities (continued)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. For equity securities determined to be other-than-temporarily impaired, the entire amount of impairment is recognized through earnings.

There were two equity securities in an unrealized loss position as of March 31, 2013, both of which were in an unrealized loss position for less than 12 months. Equity securities owned by the Corporation consist of common stock of various financial service providers. These investment securities are in an unrealized loss position as a result of recent market volatility and depressed pricing of the financial services sector. The Corporation does not invest in these securities with the intent to sell them for a profit in the near term. For investments in equity securities, in addition to the general factors mentioned above for determining whether the decline in market value is other-than-temporary, the analysis of whether an equity security is other-than-temporarily impaired includes a review of the profitability and capital adequacy and all other relevant information available to determine the financial position and near term prospects of each issuer. The results of analyzing the aforementioned metrics and financial fundamentals suggest recovery of amortized cost as the sector improves. Based on that evaluation, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of its amortized cost basis, the Corporation does not consider the equity securities with unrealized losses as of March 31, 2013 to be other-than-temporarily impaired.

There were 16 debt securities in an unrealized loss position as of March 31, 2013, all of which were in an unrealized loss position for less than 12 months. Of these securities, 12 were collateralized mortgage obligations, three were U.S. agency securities and one was a U.S. Treasury security. The unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that is likely to result in the failure to collect contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of its amortized cost basis, the Corporation does not consider the debt securities with unrealized losses as of March 31, 2013 to be other-than-temporarily impaired.

Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:

(Dollar amounts in thousands)	March 31,		December 31,
	2013		2012
Mortgage loans on real estate:
Residential first mortgages	$	95,182	$	97,246
Home equity loans and lines of credit		85,546		85,615
Commercial real estate		102,386		98,823
		283,114		281,684
Other loans:
Commercial business		50,519		45,581
Consumer		11,047		11,886
		61,566		57,467
Total loans, gross		344,680		339,151
Less allowance for loan losses		5,488		5,350
Total loans, net	$	339,192	$	333,801

Loans Receivable and Related Allowance for Loan Losses (continued)

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
							For the three months
	As of March 31, 2013						ended March 31, 2013
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period

Residential first mortgages	$	-	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		4,178		4,004		1,370		4,036		4		4
Commercial business		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	4,178	$	4,004	$	1,370	$	4,036	$	4	$	4

	Impaired Loans with No Specific Allowance
					For the three months
	As of March 31, 2013				ended March 31, 2013
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period

Residential first mortgages	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		689		464		485		1		1
Commercial business		389		364		367		-		-
Consumer		1,589		1,589		1,619		-		-
Total	$	2,667	$	2,417	$	2,471	$	1	$	1

	Impaired Loans with Specific Allowance
							For the year ended
	As of December 31, 2012						December 31, 2012
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period

Residential first mortgages	$	-	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		4,242		4,068		1,448		2,075		186		16
Commercial business		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	4,242	$	4,068	$	1,448	$	2,075	$	186	$	16

	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2012				December 31, 2012
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period

Residential first mortgages	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		730		505		690		12		12
Commercial business		394		369		368		5		5
Consumer		1,650		1,650		1,774		-		-
Total	$	2,774	$	2,524	$	2,832	$	17	$	17

Loans Receivable and Related Allowance for Loan Losses (continued)

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans based on the amounts not being material.

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDRs.

At March 31, 2013 and December 31, 2012, the Corporation had $2.3 million of loans classified as TDRs, which are included in impaired loans above. At March 31, 2013 and December 31, 2012, the Corporation had $35,000 and $36,000, respectively, of the allowance for loan losses allocated to these specific loans. At March 31, 2012, the Corporation had $791,000 of loans classified as TDRs with $35,000 of the allowance for loan losses allocated to these specific loans.

During the three month period ended March 31, 2013, the Corporation modified a residential mortgage loan with a pre- and post-modification recorded investment of $83,000 as a TDR due to financial difficulties experienced by the borrower. The modification included a reduction in the interest rate from 6.75% to 4.00% and a 65 month extension of the original term. During the three month period ended March 31, 2012, the Corporation did not modify any additional loans as TDRs.

During the three month periods ended March 31, 2013 and 2012, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

The reserve allocation for risk rated loan pools is developed by applying the following factors:

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate future losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to anticipate probable incurred losses in the portfolios.

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans 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; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

Loans Receivable and Related Allowance for Loan Losses (continued)

Management uses the following definitions for risk ratings:

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)
					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total
March 31, 2013:
Residential first mortgages	$	94,717	$	-	$	-	$	465	$	-	$	95,182
Home equity and lines of credit		85,404		-		-		142		-		85,546
Commercial real estate		-		92,971		1,164		6,980		1,271		102,386
Commercial business		-		47,303		711		2,505		-		50,519
Consumer		9,441		-		-		1,606		-		11,047
Total	$	189,562	$	140,274	$	1,875	$	11,698	$	1,271	$	344,680

December 31, 2012:
Residential first mortgages	$	96,713	$	-	$	-	$	533	$	-	$	97,246
Home equity and lines of credit		85,443		-		-		172		-		85,615
Commercial real estate		-		88,944		1,658		6,870		1,351		98,823
Commercial business		-		42,417		2,157		1,007		-		45,581
Consumer		10,236		-		-		1,650		-		11,886
Total	$	192,392	$	131,361	$	3,815	$	10,232	$	1,351	$	339,151

Loans Receivable and Related Allowance for Loan Losses (continued)

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing		Accruing		Accruing		Accruing
	Loans Not		30-59 Days		60-89 Days		90 Days +				Total
	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
March 31, 2013:
Residential first mortgages	$	93,213	$	1,403	$	10	$	65	$	491	$	95,182
Home equity and lines of credit		84,747		540		117		-		142		85,546
Commercial real estate		98,205		21		-		-		4,160		102,386
Commercial business		50,121		34		-		-		364		50,519
Consumer		9,423		15		3		-		1,606		11,047
Total loans	$	335,709	$	2,013	$	130	$	65	$	6,763	$	344,680

December 31, 2012:
Residential first mortgages	$	95,001	$	1,272	$	440	$	-	$	533	$	97,246
Home equity and lines of credit		84,592		669		157		-		197		85,615
Commercial real estate		94,485		50		49		21		4,218		98,823
Commercial business		44,915		297		-		-		369		45,581
Consumer		10,172		41		23		-		1,650		11,886
Total loans	$	329,165	$	2,329	$	669	$	21	$	6,967	$	339,151

The following table presents the Corporation’s nonaccrual loans by aging category as of March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)
	Not		30-59 Days		60-89 Days		90 Days +		Total
	Past Due		Past Due		Past Due		Past Due		Loans

March 31, 2013:
Residential first mortgages	$	90	$	-	$	-	$	401	$	491
Home equity and lines of credit		-		-		-		142		142
Commercial real estate		455		3,305		-		400		4,160
Commercial business		73		-		-		291		364
Consumer		1,589		-		-		17		1,606
Total loans	$	2,207	$	3,305	$	-	$	1,251	$	6,763

December 31, 2012:
Residential first mortgages	$	-	$	-	$	-	$	533	$	533
Home equity and lines of credit		-		25		-		172		197
Commercial real estate		469		3,386		10		353		4,218
Commercial business		78		-		-		291		369
Consumer		1,650		-		-		-		1,650
Total loans	$	2,197	$	3,411	$	10	$	1,349	$	6,967

Loans Receivable and Related Allowance for Loan Losses (continued)

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

(Dollar amounts in thousands)
				Home Equity
	Residential			& Lines			Commercial			Commercial
	Mortgages			of Credit			Real Estate			Business			Consumer			Total
Three months ended March 31, 2013:
Allowance for loan losses:
Beginning Balance	$	828		$	730		$	3,090		$	636		$	66		$	5,350
Charge-offs		(5	)		-			-			-			(32	)		(37	)
Recoveries		1			-			2			-			29			32
Provision		(17	)		(3	)		97			66			-			143
Ending Balance	$	807		$	727		$	3,189		$	702		$	63		$	5,488

Ending ALL balance attributable to loans:
Individually evaluated for impairment		-			-			1,370			-			-			1,370
Collectively evaluated for impairment		807			727			1,819			702			63			4,118

Total loans:
Individually evaluated for impairment		-			-			4,468			364			1,589			6,421
Collectively evaluated for impairment		95,182			85,546			97,918			50,155			9,458			338,259

At December 31, 2012:
Ending ALL balance attributable to loans:
Individually evaluated for impairment		-			-			1,448			-			-			1,448
Collectively evaluated for impairment		828			730			1,642			636			66			3,902

Total loans:
Individually evaluated for impairment		-			-			4,573			369			1,650			6,592
Collectively evaluated for impairment		97,246			85,615			94,250			45,212			10,236			332,559

Three months ended March 31, 2012:
Allowance for loan losses:
Beginning Balance	$	832		$	320		$	1,737		$	590		$	57		$	3,536
Charge-offs		(50	)		(26	)		-			-			(36	)		(112	)
Recoveries		76			7			-			17			5			105
Provision		(2	)		112			(14	)		(21	)		38			113
Ending Balance	$	856		$	413		$	1,723		$	586		$	64		$	3,642

The allowance for loan losses is based on estimates and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

Goodwill and Intangible Assets

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)	March 31, 2013				December 31, 2012
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Goodwill	$	3,664	$	-	$	3,664	$	-
Core deposit intangibles		4,027		2,865		4,027		2,792

Total	$	7,691	$	2,865	$	7,691	$	2,792

Goodwill resulted from three previous branch acquisitions. Goodwill represents the excess of the total purchase price paid for the branch acquisitions over the fair value of the assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No goodwill impairment charges were recorded during 2012 or in the first three months of 2013. The core deposit intangible asset is amortized using the double declining balance method over a weighted average estimated life of nine years and is not estimated to have a significant residual value. During the three month periods ending March 31, 2013 and 2012, the Corporation recorded intangible amortization expense totaling $73,000 and $93,000, respectively.

Stock Compensation Plans

The Corporation’s 2007 Stock Incentive Plan and Trust (the Plan), which is shareholder approved, permits the grant of restricted stock awards and options to its directors, officers and employees for up to 177,496 shares of common stock. Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plan. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of ten years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Compensation cost related to share-based payment transactions must be recognized in the financial statements with measurement based upon the fair value of the equity instruments issued.

A summary of option activity under the Plan as of March 31, 2013, and changes during the period then ended is presented below:

						Aggregate		Weighted-Average
				Weighted-Average		Intrinsic Value		Remaining Term
	Options			Exercise Price		(in thousands)		(in years)

Outstanding as of January 1, 2013		86,250		$	24.79	$	-		4.9
Granted		-			-		-		-
Exercised		(1,500	)		13.50		-		-
Forfeited		-			-		-		-
Outstanding as of March 31, 2013		84,750		$	24.99	$	-		4.6
Exercisable as of March 31, 2013		82,000		$	25.27	$	-		4.5

Stock Compensation Plans (continued)

A summary of the status of the Corporation’s nonvested option shares as of March 31, 2013, and changes during the period then ended is presented below:

			Weighted-Average
	Options		Grant-date Fair Value

Nonvested at January 1, 2013		2,750	$	2.43
Granted		-		-
Vested		-		-
Forfeited		-		-
Nonvested as of March 31, 2013		2,750	$	2.43

A summary of the status of the Corporation’s nonvested restricted stock awards as of March 31, 2013, and changes during the period then ended is presented below:

				Weighted-Average
	Shares			Grant-date Fair Value

Nonvested at January 1, 2013		25,650		$	17.30
Granted		-			-
Vested		(1,250	)		13.60
Forfeited		-			-
Nonvested as of March 31, 2013		24,400		$	17.49

For the three month period ended March 31, 2013, the Corporation recognized $35,000 in stock compensation expense, compared to $29,000 for the same period in 2012. As of March 31, 2013, there was $263,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the next 2.7 years. It is the Corporation’s policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation.

Employee Benefit Plans

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-contributory basis, and are fully vested after three years of service. Effective January 1, 2009, the plan was closed to new participants.

The Corporation provided the requisite notice to plan participants on March 12, 2013 of the determination to freeze the plan (curtailment). While the freeze was not effective until April 30, 2013, management determined that participants would not satisfy, within the provisions of the plan, 2013 eligibility requirements based on minimum hours worked for 2013. Therefore, employees ceased to earn benefits as of January 1, 2013. This amendment to the plan will not affect benefits earned by the participant prior to the date of the freeze.

Fair Value

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

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to access at the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Fair Value (continued)

Level 3: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

The Corporation used the following methods and significant assumptions to estimate fair value:

Cash and cash equivalents – The carrying value of cash, due from banks and interest bearing deposits approximates fair value and are classified as Level 1.

Securities available for sale – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain equity securities held by the Corporation. The Level 3 equity security valuations were supported by an analysis prepared by the Corporation which relies on inputs such as the security issuer’s publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors.

Loans – The fair value of loans receivable was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.

Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a

single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of March 31, 2013 the fair value of impaired loans consists of loan balances of $4.0 million, net of a valuation allowance of $1.4 million, compared to loan balances of $4.1 million, net of a valuation allowance of $1.4 million at December 31, 2012. There was $5,000 of additional provision for loan losses recorded for impaired loans during the three month period ended March 31, 2013. There was $64,000 of additional provision recorded for impaired loans for the same period in 2012.

Other Real estate owned (OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of March 31, 2013, OREO measured at fair value less costs to sell had a net carrying amount of $44,000, which was made up of the outstanding balance of $68,000 and write-downs of $24,000, compared to a net carrying amount of $45,000, which was made up of the outstanding balance of $50,000 and a write-down of $5,000 at December 31, 2012 and March 31, 2012.

Fair Value (continued)

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraisal to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied.

Federal bank stock – It is not practical to determine the fair value of federal bank stocks due to restrictions placed on its transferability.

Deposits – The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, checking with interest, savings and money market accounts, is equal to the amount payable on demand resulting in either a Level 1 or Level 2 classification. The fair values of time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities resulting in a Level 2 classification.

Borrowings – The fair value of borrowings with the FHLB is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued interest receivable and payable – The carrying value of accrued interest receivable and payable approximates fair value. The fair value classification is consistent with the related financial instrument.

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

(Dollar amounts in thousands)			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
March 31, 2013:
U.S. Treasury and federal agency	$	4,947	$	4,947	$	-	$	-
U.S. government sponsored entities and agencies		26,608		-		26,608		-
Mortgage-backed securities: residential		18,951		-		18,951		-
Collateralized mortgage obligations: residential		23,649		-		23,649		-
State and political subdivision		36,341		-		36,341		-
Corporate debt securities		3,516		-		3,516		-
Equity securities		2,423		1,770		-		653
	$	116,435	$	6,717	$	109,064	$	653
December 31, 2012:
U.S. Treasury and federal agency	$	3,967	$	3,967	$	-	$	-
U.S. government sponsored entities and agencies		28,162		-		28,162		-
Mortgage-backed securities: residential		22,724		-		22,724		-
Collateralized mortgage obligations: residential		22,475		-		22,475		-
State and political subdivision		36,765		-		36,765		-
Corporate debt securities		3,761		-		3,761		-
Equity securities		2,352		1,699		-		653
	$	120,206	$	5,666	$	113,887	$	653

Fair Value (continued)

The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the three month period ended March 31, 2013, the Corporation had no transfers between levels. The following table presents changes in Level 3 assets measured on a recurring basis for the three month periods ended March 31, 2013 and 2012:

(Dollar amounts in thousands)	Three Months Ended
	March 31,
	2013		2012
Balance at the beginning of the period	$	653	$	-
Total gains or losses (realized/unrealized):		-		-
Included in earnings		-		-
Included in other comprehensive income		-		-
Issuances		-		-
Transfers in and/or out of Level 3		-		-
Balance at the end of the period	$	653	$	-

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

(Dollar amounts in thousands)			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
March 31, 2013:
Impaired commercial real estate loans	$	2,634	$	-	$	-	$	2,634
Other residential real estate owned		44		-		-		44
	$	2,678	$	-	$	-	$	2,678
December 31, 2012:
Impaired commercial real estate loans	$	2,620	$	-	$	-	$	2,620
Other residential real estate owned		45		-		-		45
	$	2,665	$	-	$	-	$	2,665

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis:

(Dollar amounts in thousands)			Valuation	Unobservable
			Techniques(s)	Input (s)	Range
March 31, 2013:
Impaired commercial real estate loans	$	2,634	Sales comparison approach/ Contractual provision of USDA loan	Adjustment for differences between comparable sales	10% - 25%
Other residential real estate owned		44	Sales comparison approach	Adjustment for differences between comparable sales	10%
December 31, 2012:
Impaired commercial real estate loans		2,620	Sales comparison approach/ Contractual provision of USDA loan	Adjustment for differences between comparable sales	10% - 25%
Other residential real estate owned		45	Sales comparison approach	Adjustment for differences between comparable sales	10%

Included in impaired commercial real estate loans is a loan guaranteed by the United States Department of Agriculture (USDA) with balances of $353,000 and $354,000,.respectively, as of March 31, 2013 and December 31, 2012. The guarantee covers 90% of the principal balance outstanding. In determining the fair value of this loan, the Corporation considered the contractual provisions of the loan and did not rely on the fair value of the underlying collateral. As such, the Corporation applied a 10% discount to the loan which represents the portion of the loan at risk. The weighted average discount on impaired commercial real estate loans as of March 31, 2013 and December 31, 2012 was 11%.

Fair Value (continued)

The following table sets forth the carrying amount and estimated fair values of the Corporation’s financial instruments included in the consolidated balance sheet as of March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)

	Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3

Financial Assets:
Cash and cash equivalents	$	23,445	$	23,445	$	23,445	$	-	$	-
Securities available for sale		116,435		116,435		6,717		109,064		653
Loans, net		339,192		347,138		-		-		347,138
Federal bank stock		2,817		N/A		N/A		N/A		N/A
Accrued interest receivable		1,704		1,704		38		459		1,207
		483,593		488,722		30,201		109,523		348,998
Financial Liabilities:
Deposits		437,238		440,669		315,435		125,234		-
FHLB advances		20,000		22,169		-		22,169		-
Accrued interest payable		388		388		5		383		-
		457,626		463,226		315,440		147,786		-

	Carrying		Fair Value Measurements using:
	Amount		Total		Level 1		Level 2		Level 3
December 31, 2012:
Financial Assets:
Cash and cash equivalents	$	20,424	$	20,424	$	20,424	$	-	$	-
Securities available for sale		120,206		120,206		5,666		113,887		653
Loans, net		333,801		340,840		-		-		340,840
Federal bank stock		2,885		N/A		N/A		N/A		N/A
Accrued interest receivable		1,533		1,533		23		383		1,127
		478,849		483,003		26,113		114,270		342,620
Financial Liabilities:
Deposits		432,459		436,279		300,805		135,474		-
FHLB advances		20,000		22,613		-		22,613		-
Accrued interest payable		442		442		55		387		-
		452,901		459,334		300,860		158,474		-

10.

Accumulated Other Comprehensive Income

The following table summarizes the changes within each classification of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

(Dollar amounts in thousands)	Unrealized Gains			Defined
	and Losses on			Benefit
	Available-for-Sale			Pension
	Securities			Items			Totals
Accumulated Other Comprehensive Income at January 1, 2013	$	2,365		$	(1,795	)	$	570

Other comprehensive income before reclassification		(238	)		-			(238	)
Amounts reclassified from accumulated other comprehensive income		(56	)		-			(56	)
Net current period other comprehensive loss		(294	)		-			(294	)

Accumulated Other Comprehensive Income at March 31, 2013	$	2,071		$	(1,795	)	$	276

10.

Accumulated Other Comprehensive Income (continued)

(Dollar amounts in thousands)	Amount Reclassified
	from Accumulated			Affected Line Item in the
Details about Accumulated Other	Other Comprehensive			Statement Where Net
Comprehensive Income Components	Income			Income is Presented

Unrealized gains and losses on available-for-sale securities	$	85		Gain on sale of securities
		(29	)	Tax expense
Total reclassifications for the period	$	56		Net of tax

11.

New Accounting Standards

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments of this guidance do not change the current requirements for reporting new income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the financial statements or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced with other disclosures that provide additional detail. This standard is effective prospectively for annual and interim periods beginning after December 15, 2012. The adoption of this amendment resulted in additional footnote disclosure within the Corporation’s consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries, the Bank and the Title Company, for the three months ended March 31, 2013, compared to the same period in 2012 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC and with the accompanying consolidated financial statements and notes presented on pages 1 through 22 of this Form 10-Q.

This Form 10-Q, including the financial statements and related notes, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or phrases of similar meaning. We caution that the forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performances or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. Therefore, we caution you not to place undue reliance on our forward looking information and statements. Except as required by applicable law or regulation, we will not update the forward looking statements to reflect actual results or changes in factors affecting the forward looking statements.

CHANGES IN FINANCIAL CONDITION

Total assets increased $5.0 million, or 1.0%, to $514.0 million at March 31, 2013 from $509.0 million at December 31, 2012. This increase resulted primarily from an increases in loans receivable of $5.4 million, which was funded by an increase in customer deposits of $4.8 million.

Total liabilities increased $4.8 million, or 1.1%, to $462.1 million at March 31, 2013 from $457.3 million at December 31, 2012, resulting primarily from the aforementioned $4.8 million increase in customer deposits which resulted from an $8.2 million, or 8.3%, increase in noninterest bearing deposits, partially offset by a $3.4 million, or 1.0%, decrease in interest bearing deposits.

Stockholders’ equity increased $141,000 to $51.9 million at March 31, 2013 from $51.7 million at December 31, 2012. Book value and tangible book value per common share was $23.76 and $21.02, respectively, at March 31, 2013, compared to $23.72 and $20.93, respectively, at December 31, 2012.

At March 31, 2013, the Bank was considered well capitalized under regulatory guidelines with a Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 9.21%, 14.85% and 16.11%, respectively, compared to 8.92%, 14.96% and 16.21%, respectively, at December 31, 2012.

RESULTS OF OPERATIONS

Comparison of Results for the Three Month Period Ended March 31, 2013 and 2012

General. Net income before preferred stock dividends and discount accretion decreased $181,000, or 17.4%, to $858,000 for the three months ended March 31, 2013 from $1.0 million for the same period in 2012. This decrease was the result of decreases in net interest income and noninterest income of $34,000 and $288,000, respectively, and an increase in the provision for loan losses of $30,000, partially offset by decreases in noninterest expense and the provision for income taxes of $58,000 and $113,000, respectively.

Net interest income. Net interest income on a tax equivalent basis decreased $50,000, or 1.2%, to $4.1 million for the three months ended March 31, 2013. This decrease can be attributed to a decrease in tax equivalent interest income of $317,000, partially offset by a decrease in interest expense of $267,000.

Interest income. Interest income on a tax equivalent basis decreased $317,000, or 5.9%, to $5.1 million for the three months ended March 31, 2013 as compared to $5.4 million for the three months ended March 31, 2012. This decrease can be attributed to decreases in interest on securities, loans and interest-earning deposits with banks of $199,000, $112,000 and $8,000, respectively, partially offset by an increase in interest earned on federal bank stocks of $2,000.

Tax equivalent interest earned on securities decreased $199,000, or 20.1%, to $793,000 for the three months ended March 31, 2013 as compared to $992,000 for the three months ended March 31, 2012. This decrease resulted from a $14.9 million, or 11.5%, decrease in the average balance of securities, accounting for $109,000 of the decrease in interest income. Additionally, the yield on securities decreased 28 basis points to 2.82% for the three months ended March 31, 2013, versus 3.10% for the same period in 2012, due primarily to calls of higher-yielding securities. This unfavorable yield variance accounted for $90,000 of the decrease in interest income.

Tax equivalent interest earned on loans receivable decreased $112,000, or 2.6%, to $4.3 million for the three months ended March 31, 2013 as compared to $4.4 million for the three months ended March 31, 2012. This decrease resulted from a 43 basis points decline in the average yield on loans to 5.05% for the three months ended March 31, 2013, versus 5.48% for the same period in 2012. This unfavorable yield variance accounted for a $397,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average loans increased $21.8 million, or 6.8%, accounting for an increase of $285,000 in loan interest income. Management’s strategy to increase loan production capacity, which includes the recent expansion of the corporate banking team and the projected entrance into new markets in the coming quarters, is key to overcoming the decrease in loan yields caused by an overall decline in market interest rates.

Interest expense. Interest expense decreased $267,000, or 20.5%, to $1.0 million for the three months ended March 31, 2013 from $1.3 million for the same period in 2012. This decrease in interest expense can be attributed to a decrease in interest incurred on deposits and borrowed funds of $231,000 and $36,000, respectively.

Interest expense incurred on deposits decreased $231,000, or 21.6%, to $838,000 for the three months ended March 31, 2013 compared to $1.1 million for the same period in 2012. The average cost of interest-bearing deposits decreased 23 basis points to 1.05% for the three months ended March 31, 2013, compared to 1.28% for the same period in 2012 resulting in a $199,000 decrease in interest expense. This decrease in the cost of deposits was primarily due to deposits repricing during 2012 and the first three months of 2013 in the overall low interest-rate environment. Additionally, the average balance of interest-bearing deposits decreased $10.3 million, or 3.1%, to $325.2 million for the three months ended March 31, 2013, compared to $335.5 million for the same period in 2012 causing a $32,000 decrease in interest expense. Noninterest bearing deposits increased $11.9 million, or 13.6%, to $99.2 million from $87.3 million, facilitating the overall decline in the Corporation’s cost of funds.

Interest expense incurred on borrowed funds decreased $36,000 or 15.4% to $198,000 for the three months ended March 31, 2013, compared to $234,000 for the same period in the prior year. The average cost of borrowed funds decreased 74 basis points to 3.97% for the three months ended March 31, 2013, compared to 4.71% for the same period in 2012, causing a $38,000 decrease in interest expense. This was the result of the Corporation having exchanged and modified $15.0 million of the $20.0 million in outstanding Federal Home Loan Bank (FHLB) advances during the fourth quarter of 2012. The three $5.0 million advances with original rates of 4.98%, 4.83% and 4.68%, respectively, were exchanged for three $5.0 million advances each with a rate of 0.93% and a term of five years. Prepayment penalties associated with the three modified advances totaled $2.3 million and were cash-settled with the FHLB at the time of the modification. The Corporation is amortizing this prepayment penalty over the life of the new advances.

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

(Dollar amounts in thousands)	Three months ended March 31,

	2013							2012
	Average				Yield /			Average				Yield /
	Balance		Interest		Rate			Balance		Interest		Rate

Interest-earning assets:
Loans, taxable	$	326,023	$	4,050		5.04	%	$	301,191	$	4,157		5.55	%
Loans, tax exempt		16,788		215		5.19	%		19,870		220		4.45	%
Total loans receivable		342,811		4,265		5.05	%		321,061		4,377		5.48	%

Securities, taxable		77,471		417		2.18	%		91,838		568		2.49	%
Securities, tax exempt		36,519		376		4.18	%		37,019		424		4.60	%
Total securities		113,990		793		2.82	%		128,857		992		3.10	%

Interest-earning deposits with banks		13,592		14		0.42	%		22,276		22		0.40	%
Federal bank stocks		2,859		17		2.41	%		3,610		15		1.67	%
Total interest-earning other assets		16,451		31		0.76	%		25,886		37		0.57	%

Total interest-earning assets		473,252		5,089		4.36	%		475,804		5,406		4.57	%
Cash and due from banks		1,927							2,617
Other noninterest-earning assets		26,251							20,728
Total Assets	$	501,430						$	499,149

Interest-bearing liabilities:
Interest-bearing demand deposits	$	198,227	$	70		0.14	%	$	190,805	$	103		0.22	%
Time deposits		126,975		768		2.45	%		144,667		966		2.69	%
Total interest-bearing deposits		325,202		838		1.05	%		335,472		1,069		1.28	%

Borrowed funds, short-term		205		-		0.00	%		-		-		0.00	%
Borrowed funds, long-term		20,000		198		4.02	%		20,000		234		4.71	%
Total borrowed funds		20,205		198		3.97	%		20,000		234		4.71	%

Total interest-bearing liabilities		345,407		1,036		1.22	%		355,472		1,303		1.47	%

Noninterest-bearing demand deposits		99,165		-		-			87,259		-		-

Funding and cost of funds		444,572		1,036		0.95	%		442,731		1,303		1.18	%

Other noninterest-bearing liabilities		5,073							5,251
Total Liabilities		449,645							447,982
Stockholders' Equity		51,785							51,167
Total Liabilities and Stockholders' Equity	$	501,430						$	499,149

Net interest income			$	4,053						$	4,103

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						3.14	%						3.10	%

Net interest margin (net interest income as a percentage of average interest-earning assets)						3.47	%						3.47	%

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 volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.

(Dollar amounts in thousands)	Three months ended March 31,
	2013 versus 2012
	Increase (Decrease) due to
	Volume			Rate			Total
Interest income:
Loans	$	285		$	(397	)	$	(112	)
Securities		(109	)		(90	)		(199	)
Interest-earning deposits with banks		(9	)		1			(8	)
Federal bank stocks		(4	)		6			2

Total interest-earning assets		163			(480	)		(317	)

Interest expense:
Interest-bearing deposits		(32	)		(199	)		(231	)
Borrowed funds		2			(38	)		(36	)

Total interest-bearing liabilities		(30	)		(237	)		(267	)

Net interest income	$	193		$	(243	)	$	(50	)

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

Information pertaining to the allowance for loan losses and nonperforming assets for the quarter ended March 31, 2013 and 2012 is as follows:

(Dollar amounts in thousands)	At or for the three months ended
	March 31,
	2013			2012
Balance at the beginning of the period	$	5,350		$	3,536
Provision for loan losses		143			113
Charge-offs		(37	)		(112	)
Recoveries		32			105
Balance at the end of the period	$	5,488		$	3,642

Nonperforming loans	$	6,828		$	4,594
Nonperforming assets		7,031			4,850
Nonperforming loans to total loans		1.98	%		1.42	%
Nonperforming assets to total assets		1.37	%		0.95	%
Allowance for loan losses to total loans		1.59	%		1.12	%
Allowance for loan losses to non-performing loans		80.37	%		79.27	%

Nonperforming loans decreased $160,000 to $6.8 million at March 31, 2013 from $7.0 million at December 31, 2012. The decrease in nonperforming loans was primarily due to principal reductions resulting from credit workouts and repayments. Of the $6.8 million in nonperforming loans, the Corporation continues to receive payments on $6.0 million.

As of March 31, 2013, the Corporation’s classified and criticized assets amounted to $14.8 million, or 2.9%, of total assets, with $11.7 million classified as substandard, $1.9 million identified as special mention and $1.3 million classified as doubtful. This compares to classified and criticized assets of $15.4 million, or 3.0%, of total assets, with $10.2 million classified as substandard, $3.8 million identified as special mention and $1.4 million classified as doubtful at December 31, 2012. During the quarter ended March 31, 2013, a $2.1 million commercial credit relationship was downgraded from special mention to substandard following the Corporation’s review of updated financial information received from the borrower. The overall decrease in criticized and classified assets was primarily the result of principal reductions resulting from credit workouts and repayments.

The provision for loan losses increased $30,000 to $143,000 for the three months ended March 31, 2013 from $113,000 for the same period in the prior year as average loans receivable increased $21.8 million, or 6.8%, to $342.8 million for the three months ended March 31, 2013 compared to $321.1 for the same period in 2012.

Noninterest income. Noninterest income decreased $288,000, or 23.6%, to $931,000 during the three months ended March 31, 2013, compared to $1.2 million for the same period in the prior year. This decrease was primarily due to decreases in gains on the sale of securities and commissions on financial services of $339,000 and $22,000, respectively. During the first quarter of 2012, the Corporation recognized $424,000 in gains related to the sale of common stock held in a local community bank following its merger with a regional competitor, compared to $85,000 of securities gains realized in the first quarter of 2013 from the sale of fixed income securities. Partially offsetting these decreases, fees and service charges and earnings on bank-owned life insurance increased by $42,000 and $35,000, respectively. During the third quarter of 2012, the Corporation purchased an additional $4.0 million of bank-owned life insurance, thereby increasing its total investment to over $10.0 million.

Noninterest expense. Noninterest expense decreased $58,000, or 1.6%, to $3.6 million for the three months ended March 31, 2013. This decrease in noninterest expense can be attributed to decreases in compensation and employee benefits expense, professional fees, intangible amortization, and other noninterest expense of $38,000, $23,000, $20,000 and $10,000, respectively, partially offset by increases in premise and equipment expense and FDIC expense of $24,000 and $9,000, respectively.

Compensation and employee benefits expense decreased $38,000, or 2.0%, to $1.9 million for the three months ended March 31, 2013. This decrease can be primarily attributed to a $40,000 reduction in employee retirement expense related to the pension plan freeze and a $48,000 decrease in recruitment and hiring expenses, partially offset by normal salary and wage increases and increased employee insurance benefits costs.

Professional fees decreased $23,000, or 11.5%, to $177,000 for the three months ended March 31, 2013 from $200,000 for the same period in the prior year. This decrease can be primarily attributed to a $41,000 decrease in legal fees mainly related to declines in foreclosure and loan workout activity, partially offset by an increase in other professional fees of $14,000 related to information technology consulting.

The Corporation recognized $73,000 of core deposit intangible amortization expense during the first quarter of 2013 compared to $93,000 for the same period in the prior year. This amortization relates to a branch acquisition completed in the third quarter of 2009. Further discussion of goodwill and intangible assets related to the branch office acquisition can be found in the “Notes to Consolidated Financial Statements” beginning on page 6.

Premise and equipment expense increased $24,000, or 4.6%, to $542,000 for the three months ended March 31, 2013 from $518,000 for the same period in the prior year. This increase can be primarily attributed to a $15,000 increase in service contract expense and a $6,000 increase in equipment repairs.

FDIC insurance increased $9,000, or 9.4%, to $105,000 for the three months ended March 31, 2013, compared to $96,000 for the same period in the prior year. This was the result of prior period increases in nonperforming assets, which negatively impacted the FDIC insurance assessment rate.

Provision for income taxes. The provision for income taxes decreased $113,000, or 32.7%, to $233,000 for the three months ended March 31, 2013 compared to $346,000 for the same period in the prior year. The Corporation’s effective tax rate decreased to 21.4% for the first quarter of 2013 from 25.0% for the same quarter in the prior year due to a decrease in taxable income. The difference between the statutory rate of 34% and the Corporation’s effective tax rate of 21.4% for the quarter ended March 31, 2013, was due to tax-exempt income earned on certain tax-free loans and securities and bank-owned life insurance.

LIQUIDITY

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB and Federal Reserve, and amortization and prepayments of outstanding loans and maturing securities. During the three months ended March 31, 2013, the Corporation used its sources of funds primarily to fund loan originations and security purchases. As of March 31, 2013, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $65.1 million, and standby letters of credit totaling $188,000.

At March 31, 2013, time deposits amounted to $122.4 million or 28.0% of the Corporation’s total consolidated deposits, including approximately $47.9 million of which are scheduled to mature within the next year. Management of the Corporation believes (i) it has adequate resources to fund all of its commitments, (ii) all of its commitments will be funded as required by related maturity dates and (iii) based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities if necessary.

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 the Federal Reserve’s discount window. At March 31, 2013, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed, was $154.7 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.

CRITICAL ACCOUNTING POLICIES

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

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012. These policies, along with the disclosures presented in the other financial statement notes provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies.

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

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

Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. The impairment test is a two-step process that begins with an initial impairment evaluation. If the initial evaluation suggests that an impairment of the asset value exists, the second step is to determine the amount of the impairment. If the tests conclude that goodwill is impaired, the carrying value is adjusted and an impairment charge is recorded. As of November 30, 2012, the required annual impairment test of goodwill was performed and management concluded that no impairment existed as of that date.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and interest-bearing 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 and interest-bearing liabilities. 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.

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.

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and 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. As of March 31, 2013, the Corporation’s interest-earning assets maturing or repricing within one year totaled $185.8 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $144.3 million, providing an excess of interest-earning assets over interest-bearing liabilities of $41.5 million. At March 31, 2013, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was 128.8%.

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4. Controls and Procedures

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

As of March 31, 2013, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation.

There has been no change made in the Corporation’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially affect the Corporation’s consolidated financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes from those risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2012, as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a)

Not applicable.

(b)

Not applicable.

Item 6. Exhibits

Exhibit 31.1

Rule 13a-14(a) Certification of Principal Executive Officer

Exhibit 31.2

Rule 13a-14(a) Certification of Principal Financial Officer

Exhibit 32.1

CEO Certification Pursuant to 18 U.S.C. Section 1350

Exhibit 32.2

CFO Certification Pursuant to 18 U.S.C. Section 1350

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema Document*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

* These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

Signatures

Pursuant to the requirements 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 AND SUBSIDIARIES

Date: May 10, 2013	By:	/s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer

Date: May 10, 2013	By:	/s/ Matthew J. Lucco
	Matthew J. Lucco
	Chief Financial Officer
	Treasurer