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, 2012, compared to the same period in 2011 and should be read in conjunction with the Corporation's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC and with the accompanying consolidated financial statements and notes presented on pages 1 through 20 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 $21.0 million or 4.3% to $512.8 million at March 31, 2012 from $491.9 million at December 31, 2011. This increase resulted primarily from increases in cash and cash equivalents, securities and loans receivable of $1.8 million, $11.8 million and $7.6 million, respectively. The increase in the Corporation's assets was primarily funded by an increase in customer deposits of $21.0 million.

Total liabilities increased $20.7 million to $461.9 million at March 31, 2012 from $441.2 million at December 31, 2011, resulting primarily from the aforementioned $21.0 increase in customer deposits which consisted of a $11.0 million or 12.9% increase in noninterest bearing deposits and a $10.0 million or 3.0% increase in interest bearing deposits.

Stockholders' equity increased $215,000 to $50.9 million at March 31, 2012 from $50.7 million at December 31, 2011. Book value and tangible book value per common share was $23.37 and $20.43, respectively, at March 31, 2012, compared to $23.25 and $20.26, respectively, at December 31, 2011.

At March 31, 2012, the Bank was considered well capitalized under the regulatory framework for prompt corrective action with a Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.69%, 14.79% and 16.04%, respectively, compared to 8.69%, 15.00% and 16.25%, respectively, at December 31, 2011.

RESULTS OF OPERATIONS

Comparison of Results for the Three Month Period Ended March 31, 2012 and 2011

General. Net income before preferred stock dividends and discount accretion increased $258,000 or 33.0% to $1.0 million for the three months ended March 31, 2012 from $781,000 for the same period in 2011. This increase was the result of increases in net interest income and noninterest income of $176,000 and $289,000, respectively, and a decrease in the provision for loan losses of $7,000. Partially offsetting these favorable items, noninterest expense and the provision for income taxes increased $50,000 and $164,000, respectively.

Net interest income. Net interest income on a tax equivalent basis increased $179,000 or 4.6% to $4.1 million for the three months ended March 31, 2012 from $3.9 million for the same period in 2011. This increase can be attributed to a decrease in interest expense of $213,000, partially offset by a decrease in tax equivalent interest income of $34,000.

Interest income. Interest income on a tax equivalent basis decreased $34,000 to $5.4 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. This decrease can be attributed to decreases in interest on securities, loans, and interest-earning deposits with banks of $8,000, $3,000, and $25,000, respectively, partially offset by an increase in interest earned on federal bank stocks of $2,000.

Tax equivalent interest earned on loans receivable decreased $3,000 to $4.4 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. This decrease resulted as the average yield on loans receivable decreased 28 basis points to 5.48% for the three months ended March 31, 2012, versus 5.76% for the same period in 2011. This unfavorable yield variance accounted for a $178,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average loans increased $12.6 million or 4.1%, accounting for an increase of $175,000 in loan interest income.

Tax equivalent interest earned on securities decreased $8,000 to $1.0 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. This decrease resulted from a decrease in the yield on securities of 20 basis points to 3.10% for the three months ended March 31, 2012, versus 3.30% for the same period in 2011, due primarily to calls of higher-yielding securities. This unfavorable yield variance accounted for a $56,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average securities increased $5.9 million or 4.8%, accounting for a $48,000 increase in interest income.

Interest earned on interest-earning deposit accounts decreased $25,000 or 53.2% to $22,000 for the three months ended March 31, 2012 from $47,000 for the same period in 2011. This decrease resulted from a decrease in the average yield on interest-earning deposit accounts of 49 basis points to 0.40% for the three months ended March 31, 2012, compared to 0.89% for the same period in the prior year, accounting for a $27,000 decrease in interest income. Partially offsetting this unfavorable yield variance, the average balance of these assets increased $791,000, primarily as excess cash was maintained as a result of increased customer deposits, accounting for a $2,000 increase in interest income.

Interest expense. Interest expense decreased $213,000 or 14.1% to $1.3 million for the three months ended March 31, 2012 from $1.5 million for the same period in 2011. This decrease in interest expense can be attributed to a decrease in interest incurred on deposits and borrowed funds of $106,000 and $107,000, respectively.

Interest expense incurred on deposits decreased $106,000 or 9.0% to $1.1 million for the three months ended March 31, 2012 compared to $1.2 million for the same period in 2011. The average cost of interest-bearing deposits decreased 17 basis points to 1.28% for the three months ended March 31, 2012, compared to 1.45% for the same period in 2011 resulting in a $129,000 decrease in interest expense. This decrease in the cost of deposits was primarily due to deposits repricing during 2011 and the first three months of 2012 in the overall low interest-rate environment. Partially offsetting this favorable rate variance, the average balance of interest-bearing deposits increased $6.5 million to $335.5 million for the three months ended March 31, 2012, compared to $328.9 million for the same period in 2011 causing a $23,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $107,000 or 31.4% to $234,000 for the three months ended March 31, 2012, compared to $341,000 for the same period in the prior year. The average balance of borrowed funds decreased $10.3 million or 33.9%, accounting for a $120,000 decrease in interest expense. Partially offsetting this favorable volume variance, the average cost of borrowed funds increased 14 basis points to 4.71% for the three months ended March 31, 2012, compared to 4.57% for the same period in 2011, causing a $13,000 increase in interest expense. Both the decrease in volume and increase in rate were primarily related to the Corporation's early retirement of $5.0 million in long-term FHLB borrowings during second quarter of 2011, and the repayment of a $5.0 million credit line at a correspondent bank during the second and third quarter of 2011.

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

(Dollar amounts in
thousands)                                         Three months ended March 31,
                                         2012                                        2011
                         Average                      Yield /        Average                      Yield /
                         Balance       Interest         Rate         Balance       Interest         Rate

Interest-earning
assets:
Loans, taxable          $ 301,191     $    4,157           5.55 %   $ 295,929     $    4,222           5.79 %
Loans, tax exempt          19,870            220           4.45 %      12,570            158           5.11 %
Total loans
receivable                321,061          4,377           5.48 %     308,499          4,380           5.76 %

Securities, taxable        91,838            568           2.49 %      88,015            537           2.47 %
Securities, tax
exempt                     37,019            424           4.60 %      34,930            463           5.38 %
Total securities          128,857            992           3.10 %     122,945          1,000           3.30 %

Interest-earning
deposits with banks        22,276             22           0.40 %      21,485             47           0.89 %
Federal bank stocks         3,610             15           1.67 %       4,070             13           1.30 %
Total
interest-earning
other assets               25,886             37           0.57 %      25,555             60           0.95 %

Total
interest-earning
assets                    475,804          5,406           4.57 %     456,999          5,440           4.83 %
Cash and due from
banks                       2,617                                       2,467
Other
noninterest-earning
assets                     20,728                                      22,042

Total Assets            $ 499,149                                   $ 481,508

Interest-bearing
liabilities:
Interest-bearing
demand deposits         $ 190,805     $      103           0.22 %   $ 181,046     $      136           0.30 %
Time deposits             144,667            966           2.69 %     147,898          1,039           2.85 %
Total
interest-bearing
deposits                  335,472          1,069           1.28 %     328,944          1,175           1.45 %

Borrowed funds,
short-term                      -              -           0.00 %       5,261             60           4.63 %
Borrowed funds,
long-term                  20,000            234           4.71 %      25,000            281           4.56 %
Total borrowed funds       20,000            234           4.71 %      30,261            341           4.57 %

Total
interest-bearing
liabilities               355,472          1,303           1.47 %     359,205          1,516           1.71 %

Noninterest-bearing
demand deposits            87,259              -              -        78,837              -              -

Funding and cost of
funds                     442,731          1,303           1.18 %     438,042          1,516           1.40 %

Other
noninterest-bearing
liabilities                 5,251                                       4,187

Total Liabilities         447,982                                     442,229
Stockholders' Equity       51,167                                      39,279

Total Liabilities and
Stockholders' Equity    $ 499,149                                   $ 481,508

Net interest income                   $    4,103                                  $    3,924

Interest rate spread
(difference between
weighted average rate
on interest-earning
assets and
interest-bearing
liabilities)                                               3.10 %                                      3.12 %

Net interest margin
(net interest income
as a percentage of
average
interest-earning
assets)                                                    3.47 %                                      3.48 %

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,
                                                 2012 versus 2011
                                            Increase (Decrease) due to
                                        Volume           Rate         Total
Interest income:
Loans                                  $     175       $    (178 )    $   (3 )
Securities                                    48             (56 )        (8 )
Interest-earning deposits with banks           2             (27 )       (25 )
Federal bank stocks                           (2 )             4           2

Total interest-earning assets                223            (257 )       (34 )

Interest expense:
Interest-bearing deposits                     23            (129 )      (106 )
Borrowed funds                              (120 )            13        (107 )

Total interest-bearing liabilities           (97 )          (116 )      (213 )

Net interest income                    $     320       $    (141 )    $  179

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

Information pertaining to the allowance for loan losses and non-performing assets for the quarter ended March 31, 2012 and 2011 is as follows:

(Dollar amounts in thousands)                                  At or for the three months ended
                                                                           March 31,
                                                                 2012                     2011
Balance at the beginning of the period                     $          3,536         $          4,132
Provision for loan losses                                               113                      120
Charge-offs                                                            (112 )                   (321 )
Recoveries                                                              105                       11
Balance at the end of the period                           $          3,642         $          3,942

Non-performing loans                                       $          4,594         $          7,428
Non-performing assets                                                 4,850                    7,747
Non-performing loans to total loans                                    1.42 %                   2.44 %
Non-performing assets to total assets                                  0.95 %                   1.57 %
Allowance for loan losses to total loans                               1.12 %                   1.30 %
Allowance for loan losses to non-performing loans                     79.27 %                  53.07 %

Nonperforming loans decreased $971,000 to $4.6 million at March 31, 2012 from $5.6 million at December 31, 2011. The decrease in nonperforming loans was primarily due to the successful resolution and payoff of a $450,000 nonperforming residential mortgage loan in addition to principal reductions resulting from other credit workouts and repayments. The increase in the allowance for loan losses to nonperforming loans from 63.54% at December 31, 2011 to 79.3% at March 31, 2012 was primarily a result of the aforementioned decrease in nonperforming loans.

As of March 31, 2012, the Corporation's classified and criticized assets amounted to $11.1 million or 2.2% of total assets, with $7.1 million classified as substandard and $3.9 million identified as special mention. This compares to classified and criticized assets of $11.8 million or 2.4% of total assets, with $7.3 million classified as substandard and $4.5 million identified as special mention at December 31, 2011. The decrease in criticized and classified assets was primarily the result of the aforementioned credit workouts and principal payments.

The provision for loan losses decreased $7,000 or 5.8% to $113,000 for the three month period ended March 31, 2012 from $120,000 for the same period in the prior year as net charge-offs decreased to $7,000 for the three months ended March 31, 2012 from $310,000 for the same period in the prior year. While net charge-offs decreased significantly, the provision for loan losses decreased only slightly as average loans receivable increased $12.6 million or 4.1% to $321.1 million for the three months ended March 31, 2012, compared to $308.5 million for the same period in the prior year.

Noninterest income. Noninterest income increased $289,000 or 31.1% to $1.2 million during the three months ended March 31, 2012, compared to $930,000 during the same period in the prior year. This increase was primarily due to increases in gains on the sale of securities, other noninterest income and fees and service charges of $320,000, $41,000 and $16,000, respectively. During the first quarter of 2012, the Corporation recognized $424,000 in gains related to the sale of a community bank stock. The increase in other noninterest income resulted from increased interchange fee income while the increase in fees and service charges resulted from increased overdraft fees. These favorable variances were partially offset by a $77,000 decrease in commissions on financial services, which relates to the Corporation employing one financial services representative during the quarter ended March 31, 2012 compared to three representatives during the same period in the prior year. The Corporation is currently looking to expand this division by recruiting additional representatives to improve production and revenue levels.

Noninterest expense. Noninterest expense increased $50,000 or 1.4% to $3.6 million during the three months ended March 31, 2012 and 2011. This increase in noninterest expense can be attributed to increases in other noninterest expense, compensation and employee benefits and professional fees of $112,000, $54,000 and $18,000, respectively, partially offset by decreases in premises and equipment expense, intangible asset amortization and FDIC insurance of $61,000, $26,000 and $47,000, respectively.

Other noninterest expense increased $112,000 or 16.7% to $783,000 for the three months ended March 31, 2012, compared to $671,000 for the same period in the prior year. This unfavorable variance can be attributed primarily to increased costs associated with debit card processing and start-up expenses of a debit card reward program launched in the first quarter of 2012.

Compensation and employee benefits increased $54,000 or 2.9% to $1.9 million for the three months ended March 31, 2012 and 2011. This increase can be primarily attributed to normal salary and wage increases, partially offset by a decrease in commissions paid to financial services representatives.

Premises and equipment expense decreased $61,000 or 10.5% to $518,000 for the three months ended March 31, 2012, compared to $579,000 for the same period in the prior year. This decrease can be primarily attributed to decreases of $33,000 and $26,000, respectively, in building maintenance costs and depreciation.

FDIC insurance decreased $47,000 or 32.9% to $96,000 for the three months ended March 31, 2012, compared to $143,000 for the same period in the prior year. This was the result of 2011 legislative changes that adjusted the assessment base, which reduced the assessment rate for the Bank and favorably impacted premium expense.

As a result of a branch purchase completed in the third quarter of 2009, the Corporation recognized $93,000 of core deposit intangible amortization expense during the first quarter of 2012, compared to $119,000 for the same period in the prior year. Further discussion related to goodwill and intangible assets related to the branch office purchase can be found in the "Notes to Consolidated Financial Statements" beginning on page 5.

Provision for income taxes. The provision for income taxes increased $164,000 or 90.1% to $346,000 for the three months ended March 31, 2012 compared to $182,000 for the same period in the prior year, as the Corporation's effective tax rate increased to 25.0% for the first quarter of 2012 from 18.9% from the same quarter in the prior year due to an increase in taxable income, primarily from gains realized from the sale of a community bank stock during the quarter and a decline in tax-exempt income. The difference between the statutory rate of 34% and the Corporation's effective tax rate of 25.0% for the quarter ended March 31, 2012, is 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, 2012, the Corporation used its sources of funds primarily to reduce borrowed funds and to fund loan originations and security purchases. As of March 31, 2012, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $49.0 million, and standby letters of credit totaling $219,000.

At March 31, 2012, time deposits amounted to $142.7 million or 32.6% of the Corporation's total consolidated deposits, including approximately $46.7 million of which are scheduled to mature within the next year. Management of the Corporation believes it has adequate resources to fund all of its commitments, all of its commitments will be funded as required by related maturity dates and, based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities.

Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation has alternative sources of funds such as a term borrowing capacity from the FHLB and the Federal Reserve's discount window. At March 31, 2012, the Corporation's borrowing capacity with the FHLB, net of funds borrowed, was $139.3 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. 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 . . .