Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One )

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

For the quarterly period ended June 30, 2011

¨	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 1,747,408 at August 12, 2011.

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 June 30, 2011 and December 31, 2010	1

	Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010	2

	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	3

	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	(Removed and Reserved)	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

Signatures		33

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Emclaire Financial Corp.

Consolidated Balance Sheets

As of June 30, 2011 (Unaudited) and December 31, 2010

(Dollar amounts in thousands, except per share data)

	June 30,			December 31,
	2011			2010

Assets

Cash and due from banks	$	3,040		$	2,507
Interest earning deposits with banks		42,612			16,520
Cash and cash equivalents		45,652			19,027
Securities available for sale, at fair value		134,884			125,820
Loans receivable, net of allowance for loan losses of $3,562 and $4,132		305,346			306,152
Federal bank stocks, at cost		3,886			4,129
Bank-owned life insurance		5,701			5,596
Accrued interest receivable		1,635			1,763
Premises and equipment, net		9,009			9,241
Goodwill		3,664			3,664
Core deposit intangible		1,783			2,021
Prepaid expenses and other assets		3,509			4,472

Total Assets	$	515,069		$	481,885

Liabilities and Stockholders' Equity

Liabilities:
Deposits:
Non-interest bearing	$	86,707		$	75,941
Interest bearing		354,623			333,717
Total deposits		441,330			409,658
Short-term borrowed funds		5,000			5,000
Long-term borrowed funds		20,000			25,000
Accrued interest payable		573			649
Accrued expenses and other liabilities		3,045			2,460

Total Liabilities		469,948			442,767

Commitments and Contingent Liabilities		-			-

Stockholders' Equity:
Cumulative preferred stock, $1.00 par value, $7,500 liquidation value, 3,000,000 shares authorized; 7,500 issued and outstanding		7,456			7,447
Warrants		88			88
Common stock, $1.25 par value, 12,000,000 shares authorized; 1,849,425 and 1,559,421 shares issued; 1,747,408 and 1,457,404 shares outstanding		2,312			1,949
Additional paid-in capital		19,084			14,812
Treasury stock, at cost; 102,017 shares		(2,114	)		(2,114	)
Retained earnings		18,627			17,705
Accumulated other comprehensive loss		(332	)		(769	)

Total Stockholders' Equity		45,121			39,118

Total Liabilities and Stockholders' Equity	$	515,069		$	481,885

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp.

Consolidated Statements of Operations (Unaudited)

For the three and six months ended June 30, 2011 and 2010

(Dollar amounts in thousands, except per share data)

	For the three months ended				For the six months ended
	June 30,				June 30,
	2011		2010		2011		2010

Interest and dividend income:
Loans receivable, including fees	$	4,305	$	4,424	$	8,637	$	8,837
Securities:
Taxable		582		732		1,120		1,340
Exempt from federal income tax		326		282		649		546
Federal bank stocks		14		11		26		22
Interest earning deposits with banks		54		68		101		152
Total interest and dividend income		5,281		5,517		10,533		10,897

Interest expense:
Deposits		1,209		1,407		2,384		2,833
Borrowed funds		332		455		673		901
Total interest expense		1,541		1,862		3,057		3,734

Net interest income		3,740		3,655		7,476		7,163
Provision for loan losses		120		225		240		353

Net interest income after provision for loan losses		3,620		3,430		7,236		6,810

Noninterest income:
Fees and service charges		373		364		713		686
Commissions on financial services		141		150		304		331
Title premiums		25		24		54		42
Net gain on sales of available for sale securities		378		301		482		400
Earnings on bank-owned life insurance		61		59		121		118
Other		244		199		478		364
Total noninterest income		1,222		1,097		2,152		1,941

Noninterest expense:
Compensation and employee benefits		1,742		1,777		3,631		3,607
Premises and equipment		559		529		1,138		1,080
Intangible asset amortization		119		152		238		304
Professional fees		163		165		346		279
Federal deposit insurance		155		148		298		289
Other		1,039		693		1,709		1,297
Total noninterest expense		3,777		3,464		7,360		6,856

Income before provision for income taxes		1,065		1,063		2,028		1,895
Provision for income taxes		215		220		397		370

Net income		850		843		1,631		1,525
Accumulated preferred stock dividends and discount accretion		98		98		196		196

Net income available to common stockholders	$	752	$	745	$	1,435	$	1,329

Basic and diluted earnings per common share	$	0.43	$	0.52	$	0.89	$	0.93

Average common shares outstanding		1,747,408		1,432,261		1,604,809		1,431,835

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2011 and 2010

(Dollar amounts in thousands)

	For the six months ended
	June 30,
	2011			2010

Cash flows from operating activities
Net income	$	1,631		$	1,525
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		409			454
Provision for loan losses		240			353
Net amortization		107			105
Amortization of intangible assets and mortgage servicing rights		246			312
Realized gains on sales of available for sale securities, net		(482	)		(400	)
Net losses on foreclosed real estate		14			25
Restricted stock and stock option compensation		58			81
Increase in bank-owned life insurance, net		(105	)		(103	)
(Increase) decrease in accrued interest receivable		128			(17	)
(Increase) decrease in prepaid expenses and other assets		650			(194	)
Increase (decrease) in accrued interest payable		(76	)		18
Increase (decrease) in accrued expenses and other liabilities		584			(2,065	)
Net cash provided by operating activities		3,404			94

Cash flows from investing activities
Loan originations and principal collections, net		150			(439	)
Available for sale securities:
Sales		27,493			13,796
Maturities, repayments and calls		13,121			54,361
Purchases		(48,503	)		(90,765	)
Redemption (purchase) of federal bank stocks		243			(150	)
Proceeds from the sale of foreclosed real estate		345			64
Purchases of premises and equipment		(177	)		(260	)
Net cash used in investing activities		(7,328	)		(23,393	)

Cash flows from financing activities
Net increase in deposits		31,672			19,222
Repayments on Federal Home Loan Bank advances		(5,000	)		-
Dividends paid		(700	)		(588	)
Proceeds from the issuance of common stock		4,577			-
Proceeds from the reissuance of treasury stock		-			410
Net cash provided by financing activities		30,549			19,044

Increase (decrease) in cash and cash equivalents		26,625			(4,255	)
Cash and cash equivalents at beginning of period		19,027			38,952
Cash and cash equivalents at end of period	$	45,652		$	34,697

Supplemental information:
Interest paid	$	3,133		$	3,742
Income taxes paid		-			385

Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		270			51

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the three and six months ended June 30, 2011 and 2010

(Dollar amounts in thousands, except per share data)

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010

Balance at beginning of period	$	44,117		$	37,730		$	39,118		$	37,034

Net income		850			843			1,631			1,525

Other comprehensive income:
Change in net unrealized gains on available for sale securities, net of taxes		748			953			755			1,285
Less: reclassification adjustment for gains included in net income, net of taxes		249			199			318			264
Other comprehensive income		499			754			437			1,021

Total comprehensive income		1,349			1,597			2,068			2,546

Stock compensation expense		27			40			58			81

Dividends declared on preferred stock		(94	)		(94	)		(188	)		(188	)

Dividends declared on common stock		(278	)		(200	)		(512	)		(400	)

Issuance of common stock (290,004 shares)		-			-			4,577			-

Reissuance of treasury stock (26,000 shares)		-			410			-			410

Balance at end of period	$	45,121		$	39,483		$	45,121		$	39,483

Common cash dividend per share	$	0.16		$	0.14		$	0.32		$	0.28

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp.

Notes to Consolidated Financial Statements (Unaudited)

1.	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, 2010, as contained in the Corporation’s 2010 Annual Report on Form 10-K filed with the SEC.

The balance sheet at December 31, 2010 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.

2.	Issuance of Common Stock

On March 31, 2011, the Corporation sold 290,004 shares of common stock, par value $1.25 per share, in a private offering to accredited individual and institutional investors at $15.95 per share. The Corporation realized $4.6 million in proceeds from the offering net of $48,000 of direct costs relating to the offering.

3.	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 issuable under stock options and warrants.

3.	Earnings per Common Share (continued).

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

(Dollar amounts in thousands, except for per share amounts)	For the three months ended				For the six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Earnings per share - basic

Net income	$	850	$	843	$	1,631	$	1,525
Preferred stock dividends and discount accretion		98		98		196		196

Net income available to common stockholders	$	752	$	745	$	1,435	$	1,329

Average common shares outstanding		1,747,408		1,432,261		1,604,809		1,431,835

Basic earnings per common share	$	0.43	$	0.52	$	0.89	$	0.93

Earnings per share - diluted

Net income available to common stockholders	$	752	$	745	$	1,435	$	1,329

Average common shares outstanding		1,747,408		1,432,261		1,604,809		1,431,835
Add: Dilutive effects of assumed exercises of stock options		2,880		-		3,079		-

Average shares and dilutive potential common shares		1,750,288		1,432,261		1,607,888		1,431,835

Diluted earnings per common share	$	0.43	$	0.52	$	0.89	$	0.93

Stock options, restricted stock awards and warrants not considered in computing diluted earnings per share because they were antidilutive		143,111		158,861		143,111		158,861

4.	Securities.

The following table summarizes the Corporation’s securities as of June 30, 2011 and December 31, 2010:

(Dollar amounts in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value

Available for sale:
June 30, 2011:
U.S. Treasury and federal agency	$	3,940	$	-	$	(50	)	$	3,890
U.S. government sponsored entities and agencies		58,781		49		(219	)		58,611
Mortgage-backed securities: residential		32,777		499		(33	)		33,243
State and political subdivisions		35,922		976		(50	)		36,848
Equity securities		2,542		-		(250	)		2,292
	$	133,962	$	1,524	$	(602	)	$	134,884
December 31, 2010:
U.S. Treasury and federal agency	$	6,839	$	6	$	(116	)	$	6,729
U.S. government sponsored entities and agencies		62,770		79		(487	)		62,362
Mortgage-backed securities: residential		19,015		370		(5	)		19,380
Collateralized mortgage obligations: residential		917		5		-			922
State and political subdivisions		33,477		589		(164	)		33,902
Equity securities		2,542		-		(17	)		2,525
	$	125,560	$	1,049	$	(789	)	$	125,820

4.	Securities (continued).

The following table summarizes scheduled maturities of the Corporation’s debt securities as of June 30, 2011. 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 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	$	999	$	981
Due after one year through five years		28,648		28,692
Due after five through ten years		37,481		38,059
Due after ten years		31,515		31,617
Mortgage-backed securities		32,777		33,243
	$	131,420	$	132,592

Information pertaining to securities with gross unrealized losses at June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

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

June 30, 2011:
U.S. Treasury and federal agency	$	3,890	$	(50	)	$	-	$	-		$	3,890	$	(50	)
U.S. government sponsored entities and agencies		31,325		(219	)		-		-			31,325		(219	)
Mortgage-backed securities: residential		8,074		(33	)		-		-			8,074		(33	)
State and political subdivisions		4,032		(50	)		-		-			4,032		(50	)
Equity securities		1,501		(234	)		151		(16	)		1,652		(250	)
	$	48,822	$	(586	)	$	151	$	(16	)	$	48,973	$	(602	)

December 31, 2010:
U.S. Treasury and federal agency	$	4,814	$	(116	)	$	-	$	-		$	4,814	$	(116	)
U.S. government sponsored entities and agencies		43,291		(487	)							43,291		(487	)
Mortgage-backed securities: residential		1,994		(5	)		-		-			1,994		(5	)
State and political subdivisions		8,685		(164	)		-		-			8,685		(164	)
Equity securities		14		(2	)		152		(15	)		166		(17	)
	$	58,798	$	(774	)	$	152	$	(15	)	$	58,950	$	(789	)

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 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.

4.	Securities (continued).

There were four equity securities in an unrealized loss position as of June 30, 2011. 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 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 June 30, 2011 to be other-than-temporarily impaired.

There were 45 debt securities in an unrealized loss position as of June 30, 2011, all of which were in an unrealized loss position for less than 12 months. Of these securities, 21 were U.S. government sponsored entities and agencies, eight were U.S. Treasury securities, 12 were state and political subdivisions and four were residential mortgage-backed securities issued by a government-sponsored entity (GSE). 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 non-collection of 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 June 30, 2011 to be other-than-temporarily impaired.

5.	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)	June 30,		December 31,
	2011		2010

Mortgage loans on real estate:
Residential first mortgages	$	86,482	$	84,575
Home equity loans and lines of credit		72,412		75,458
Commercial real estate		95,127		93,028
		254,021		253,061
Other loans:
Commercial business		41,941		43,780
Consumer		12,946		13,443
		54,887		57,223
Total loans, gross		308,908		310,284
Less allowance for loan losses		3,562		4,132
Total loans, net	$	305,346	$	306,152

Nonaccrual loans	$	6,530	$	6,570
Loans 90 days or more past due and still accruing		199		41
Total nonperforming loans	$	6,729	$	6,611

5.	Loans Receivable and Related Allowance for Loan Losses (continued).

The following table summarizes the Corporation’s impaired loans as of June 30, 2011 and December 31, 2010:

(Dollar amounts in thousands)	June 30,		December 31,
	2011		2010

Loans with no allocated allowance for loan losses	$	3,336	$	2,209
Loans with allocated allowance for loan losses		906		3,215

Total impaired loans	$	4,242	$	5,424

Amount of the allowance for loan losses allocated	$	589	$	1,246

Interest income on impaired loans recognized on a cash basis		81		371

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 as of June 30, 2011 and December 31, 2010:

(Dollar amounts in thousands)

	Impaired Loans with								Impaired Loans with
	Specific Allowance								No Specific Allowance
	Unpaid						Average		Unpaid				Average
	Principal		Recorded		Related		Recorded		Principal		Recorded		Recorded
	Balance		Investment		Allowance		Investment		Balance		Investment		Investment

June 30, 2011:
Residential first mortgages	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-		-		-
Commercial real estate		-		-		-		818		1,610		1,246		724
Commercial business		906		906		589		1,219		88		64		80
Consumer		-		-		-		-		2,026		2,026		2,073
Total impaired loans	$	906	$	906	$	589	$	2,038	$	3,724	$	3,336	$	2,878

December 31, 2010:
Residential first mortgages	$	-	$	-	$	-			$	-	$	-	$	-
Home equity and lines of credit		-		-		-		2		-		-		-
Commercial real estate		1,994		1,769		387		1,043		-		-		233
Commercial business		1,446		1,446		859		350		98		73		46
Consumer		-		-		-		-		2,136		2,136		427
Total impaired loans	$	3,440	$	3,215	$	1,246	$	1,395	$	2,234	$	2,209	$	706

Unpaid principal balance includes any partial charge-offs taken on loans. 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 TDR’s generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDR’s.

5.	Loans Receivable and Related Allowance for Loan Losses (continued).

At June 30, 2011 and December 31, 2010, the Corporation had $447,000 and $774,000, respectively, of loans classified as TDR’s, which are included in impaired loans above. At June 30, 2011 the Corporation did not have any of the allowance for loan losses allocated to these specific loans.

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 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. Normally, a twelve-quarter rolling weighted-average is utilized to anticipate probable incurred losses in the loan portfolio.

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; concentrations of credit and other external factors.

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.

5.	Loans Receivable and Related Allowance for Loan Losses (continued).

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 June 30, 2011 and December 31, 2010:

(Dollar amounts in thousands)

					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total

June 30, 2011:
Residential first mortgages	$	85,100	$	-	$	-	$	1,382	$	-	$	86,482
Home equity and lines of credit		72,129		-		-		283		-		72,412
Commercial real estate		-		87,952		3,112		4,063		-		95,127
Commercial business		-		38,836		418		2,687		-		41,941
Consumer		10,920		-		-		2,026		-		12,946
Total	$	168,149	$	126,788	$	3,530	$	10,441	$	-	$	308,908

December 31, 2010:
Residential first mortgages	$	84,045	$	-	$	-	$	530	$	-	$	84,575
Home equity and lines of credit		75,458		-		-		-		-		75,458
Commercial real estate		-		86,790		3,021		3,217		-		93,028
Commercial business		-		40,625		1,081		2,030		44		43,780
Consumer		10,953		-		-		2,490		-		13,443
Total	$	170,456	$	127,415	$	4,102	$	8,267	$	44	$	310,284

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 non-performing loans as of June 30, 2011 and December 31, 2010:

(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

June 30, 2011:
Residential first mortgages	$	83,525	$	1,323	$	252	$	199	$	1,183	$	86,482
Home equity and lines of credit		71,553		545		31		-		283		72,412
Commercial real estate		93,081		90		-		-		1,956		95,127
Commercial business		40,920		15		12		-		994		41,941
Consumer		10,797		34		1		-		2,114		12,946
Total loans	$	299,876	$	2,007	$	296	$	199	$	6,530	$	308,908

December 31, 2010:
Residential first mortgages	$	81,888	$	1,875	$	281	$	41	$	490	$	84,575
Home equity and lines of credit		74,559		541		21		-		337		75,458
Commercial real estate		90,809		113		26		-		2,080		93,028
Commercial business		42,168		102		-		-		1,510		43,780
Consumer		11,252		36		2		-		2,153		13,443
Total loans	$	300,676	$	2,667	$	330	$	41	$	6,570	$	310,284

5.	Loans Receivable and Related Allowance for Loan Losses (continued).

The following table presents the Corporation’s nonaccrual loans by aging category as of June 30, 2011 and December 31, 2010:

(Dollar amounts in thousands)

	Not		30-59 Days		60-89 Days		90 Days +		Total
	Past Due		Past Due		Past Due		Past Due		Loans

June 30, 2011:
Residential first mortgages	$	-	$	-	$	-	$	1,183	$	1,183
Home equity and lines of credit		-		-		-		283		283
Commercial real estate		1,140		-		-		816		1,956
Commercial business		103		-		-		891		994
Consumer		2,114		-		-		-		2,114