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 and six months ended June 30, 2012, compared to the same periods 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 $48.1 million or 9.8% to $539.9 million at June 30, 2012 from $491.9 million at December 31, 2011. This increase resulted primarily from increases in securities and loans receivable of $36.1 million and $13.4 million, respectively which was funded by an increase in customer deposits of $46.9 million.

Total liabilities increased $46.9 million to $488.1 million at June 30, 2012 from $441.2 million at December 31, 2011, resulting primarily from the aforementioned $46.9 million increase in customer deposits which consisted of a $15.2 million or 17.9% increase in noninterest bearing deposits and a $31.7 million or 9.6% increase in interest bearing deposits.

Stockholders' equity increased $1.1 million or 2.2% to $51.9 million at June 30, 2012 from $50.7 million at December 31, 2011. Book value and tangible book value per common share was $23.89 and $21.01, respectively, at June 30, 2012, compared to $23.25 and $20.26, respectively, at December 31, 2011.

At June 30, 2012, 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 8.40%, 14.72% and 15.95%, 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 June 30, 2012 and 2011

General. Net income before preferred stock dividends and discount accretion increased $406,000 or 47.8% to $1.3 million for the three months ended June 30, 2012 from $850,000 for the same period in 2011. This increase was the result of increases in net interest income and noninterest income of $196,000 and $199,000, respectively, and decreases in the provision for loan losses and noninterest expense of $5,000 and $213,000, respectively. Partially offsetting these favorable items, the provision for income taxes increased $207,000.

Net interest income. Net interest income on a tax equivalent basis increased $200,000 or 5.1% to $4.1 million for the three months ended June 30, 2012 from $3.9 million for the same period in 2011. This increase can be attributed to a decrease in interest expense of $279,000, partially offset by a decrease in tax equivalent interest income of $79,000.

Interest income. Interest income on a tax equivalent basis decreased $79,000 to $5.4 million for the three months ended June 30, 2012 as compared to $5.5 million for the three months ended June 30, 2011. This decrease can be attributed to decreases in interest on securities and interest-earning deposits with banks of $62,000 and $25,000, respectively, partially offset by increases in interest earned on loans and federal bank stocks of $7,000 and $1,000.

Tax equivalent interest earned on securities decreased $62,000 or 5.9% to $1.0 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. This decrease resulted from a decrease in the yield on securities of 55 basis points to 2.80% for the three months ended June 30, 2012, versus 3.35% for the same period in 2011, due primarily to calls of higher-yielding securities. This unfavorable yield variance accounted for an $187,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average securities increased $16.2 million or 12.9%, accounting for a $125,000 increase in interest income.

Interest earned on interest-earning deposit accounts decreased $25,000 or 46.3% to $29,000 for the three months ended June 30, 2012 from $54,000 for the same period in 2011. This decrease resulted from a decrease in the average yield on interest-earning deposit accounts of 28 basis points to 0.30% for the three months ended June 30, 2012, compared to 0.58% 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 $1.1 million, primarily as excess cash was maintained as a result of increased customer deposits, accounting for a $2,000 increase in interest income.

Tax equivalent interest earned on loans receivable increased $7,000 to $4.4 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. This increase resulted as average loans increased $21.0 million or 6.9%, accounting for an increase of $290,000 in loan interest income. Partially offsetting this favorable volume variance, the average yield on loans receivable decreased 35 basis points to 5.37% for the three months ended June 30, 2012, versus 5.72% for the same period in 2011. This unfavorable yield variance accounted for a $283,000 decrease in interest income.

Interest expense. Interest expense decreased $279,000 or 18.1% to $1.3 million for the three months ended June 30, 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 $182,000 and $97,000, respectively.

Interest expense incurred on deposits decreased $182,000 or 15.1% to $1.0 million for the three months ended June 30, 2012 compared to $1.2 million for the same period in 2011. The average cost of interest-bearing deposits decreased 30 basis points to 1.14% for the three months ended June 30, 2012, compared to 1.44% for the same period in 2011 resulting in a $265,000 decrease in interest expense. This decrease in the cost of deposits was primarily due to deposits repricing during 2011 and the first six months of 2012 in the overall low interest-rate environment. Partially offsetting this favorable rate variance, the average balance of interest-bearing deposits increased $24.5 million to $360.9 million for the three months ended June 30, 2012, compared to $336.4 million for the same period in 2011 causing a $83,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $97,000 or 29.2% to $235,000 for the three months ended June 30, 2012, compared to $332,000 for the same period in the prior year. The average balance of borrowed funds decreased $8.3 million or 29.4%, accounting for a $99,000 decrease in interest expense. Partially offsetting this favorable volume variance, the average cost of borrowed funds increased 4 basis points to 4.73% for the three months ended June 30, 2012, compared to 4.69% for the same period in 2011, causing a $2,000 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 June 30,

                                                        2012                                       2011
                                        Average                      Yield /       Average                      Yield /
                                        Balance       Interest        Rate         Balance       Interest        Rate

Interest-earning assets:
Loans, taxable                         $ 304,838     $    4,124          5.44 %   $ 292,939     $    4,199          5.75 %
Loans, tax exempt                         21,303            233          4.40 %      12,211            151          4.97 %
Total loans receivable                   326,141          4,357          5.37 %     305,150          4,350          5.72 %

Securities, taxable                      105,263            578          2.21 %      89,507            582          2.61 %
Securities, tax exempt                    36,522            409          4.50 %      36,105            467          5.18 %
Total securities                         141,785            987          2.80 %     125,612          1,049          3.35 %

Interest-earning deposits with banks      38,387             29          0.30 %      37,300             54          0.58 %
Federal bank stocks                        3,444             15          1.75 %       3,926             14          1.43 %
Total interest-earning other assets       41,831             44          0.42 %      41,226             68          0.66 %

Total interest-earning assets            509,757          5,388          4.25 %     471,988          5,467          4.65 %
Cash and due from banks                    2,507                                      2,551
Other noninterest-earning assets          20,452                                     21,549

Total Assets                           $ 532,716                                  $ 496,088

Interest-bearing liabilities:
Interest-bearing demand deposits       $ 219,777     $      122          0.22 %   $ 184,191     $      131          0.29 %
Time deposits                            141,133            905          2.58 %     152,232          1,078          2.84 %
Total interest-bearing deposits          360,910          1,027          1.14 %     336,423          1,209          1.44 %

Borrowed funds, short-term                     -              -          0.00 %       5,000             60          4.82 %
Borrowed funds, long-term                 20,000            235          4.73 %      23,333            272          4.67 %
Total borrowed funds                      20,000            235          4.73 %      28,333            332          4.69 %

Total interest-bearing liabilities       380,910          1,262          1.33 %     364,756          1,541          1.69 %

Noninterest-bearing demand deposits       95,275              -             -        83,120              -             -

Funding and cost of funds                476,185          1,262          1.07 %     447,876          1,541          1.38 %

Other noninterest-bearing
liabilities                                4,926                                      3,397

Total Liabilities                        481,111                                    451,273
Stockholders' Equity                      51,605                                     44,815

Total Liabilities and Stockholders'
Equity                                 $ 532,716                                  $ 496,088

Net interest income                                  $    4,126                                 $    3,926

Interest rate spread (difference
between weighted average rate on
interest-earning assets and
interest-bearing liabilities)                                            2.92 %                                     2.96 %

Net interest margin (net interest
income as a percentage of average
interest-earning assets)                                                 3.26 %                                     3.34 %

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 June 30,
                                                 2012 versus 2011
                                            Increase (Decrease) due to
                                        Volume          Rate         Total
Interest income:
Loans                                  $    290       $    (283 )    $    7
Securities                                  125            (187 )       (62 )
Interest-earning deposits with banks          2             (27 )       (25 )
Federal bank stocks                          (2 )             3           1
Total interest-earning assets               415            (494 )       (79 )

Interest expense:
Interest-bearing deposits                    83            (265 )      (182 )
Borrowed funds                              (99 )             2         (97 )
Total interest-bearing liabilities          (16 )          (263 )      (279 )
Net interest income                    $    431       $    (231 )    $  200

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 June 30, 2012 and 2011 is as follows:

(Dollar amounts in thousands)                                    At or for the three months ended
                                                                             June 30,
                                                                   2012                     2011
Balance at the beginning of the period                       $          3,642         $          3,942
Provision for loan losses                                                 115                      120
Charge-offs                                                               (76 )                   (530 )
Recoveries                                                                 34                       30
Balance at the end of the period                             $          3,715         $          3,562

Non-performing loans                                         $          3,904         $          6,729
Non-performing assets                                                   4,211                    7,013
Non-performing loans to total loans                                      1.18 %                   2.18 %
Non-performing assets to total assets                                    0.78 %                   1.36 %
Allowance for loan losses to total loans                                 1.13 %                   1.15 %
Allowance for loan losses to non-performing loans                       95.16 %                  52.94 %

Nonperforming loans decreased $2.8 million to $3.9 million at June 30, 2012 from $6.7 million at June 30, 2011. The decrease in nonperforming loans was primarily due to an $800,000 principal payment and $36,000 partial charge off made on one problem credit during the third quarter of 2011, the successful resolution and payoff of a $450,000 nonperforming residential mortgage loan during the first quarter of 2012 and additional principal reductions resulting from other credit workouts and repayments. The increase in the allowance for loan losses to nonperforming loans from 52.94% at June 30, 2011 to 95.16% at June 30, 2011 was primarily a result of the aforementioned decrease in nonperforming loans. During the three months ended June 30, 2012, nonperforming loans decreased by $690,000 to $3.9 million from $4.6 million at March 31, 2012.

As of June 30, 2012, the Corporation's classified and criticized assets amounted to $13.1 million or 2.4% of total assets, with $5.7 million classified as substandard and $7.4 million identified as special mention. This compares to classified and criticized assets of $14.0 million or 2.7% of total assets, with $10.4 million classified as substandard and $3.5 million identified as special mention at June 30, 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 $5,000 or 4.2% to $115,000 for the three month period ended June 30, 2012 from $120,000 for the same period in the prior year as net charge-offs decreased to $42,000 for the three months ended June 30, 2012 from $500,000 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 $21.0 million or 6.9% to $326.1 million for the three months ended June 30, 2012, compared to $305.2 million for the same period in the prior year.

Noninterest income. Noninterest income increased $199,000 or 16.3% to $1.4 million during the three months ended June 30, 2012, compared to $1.2 million during the same period in the prior year. This increase was primarily due to increases in gains on the sale of securities and other noninterest income of $160,000 and $47,000, respectively. During the second quarter of 2012, the Corporation recognized $538,000 in gains related to the sale of U.S. Treasury securities, compared to security gains of $378,000 for the same period in the prior year. The increase in other noninterest income resulted from increased interchange fee income.

Noninterest expense. Noninterest expense decreased $213,000 or 5.6% to $3.6 million during the three months ended June 30, 2012, compared to $3.8 million for the same period in 2011. This decrease in noninterest expense can be attributed to decreases in other noninterest expense, FDIC insurance, premises and equipment expense and intangible asset amortization of $204,000, $61,000, $59,000 and $26,000, respectively, partially offset by increases in compensation and benefits expense and professional fees of $125,000 and $12,000, respectively.

Other noninterest expense decreased $204,000 or 19.6% to $835,000 for the three months ended June 30, 2012, compared to $1.0 million for the same period in the prior year. This favorable variance can be attributed primarily to nonrecurring prepayment penalties totaling $334,000 assessed in connection with the early retirement of a $5.0 million FHLB long-term borrowing during the quarter ended June 30, 2011. This was partially offset by increased costs associated with debit card processing and a debit card reward program launched in the first quarter of 2012.

FDIC insurance decreased $61,000 or 39.4% to $94,000 for the three months ended June 30, 2012, compared to $155,000 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.

Premises and equipment expense decreased $59,000 or 10.6% to $500,000 for the three months ended June 30, 2012, compared to $559,000 for the same period in the prior year. This decrease can be primarily attributed to a decrease of $62,000 in depreciation 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 second 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.

Compensation and employee benefits increased $125,000 or 7.2% to $1.9 million for the three months ended June 30, 2012, compared to $1.7 million for the same period in the prior year. This increase can be primarily attributed to normal salary and wage increases and a $71,000 expense related to post-retirement life insurance benefits.

Provision for income taxes. The provision for income taxes increased $207,000 or 96.3% to $422,000 for the three months ended June 30, 2012 compared to $215,000 for the same period in the prior year, as the Corporation's effective tax rate increased to 25.1% for the second quarter of 2012 from 20.2% from the same quarter in the prior year due to an increase in taxable income, primarily from gains realized from the sale of U.S. Treasury securities during the quarter. The difference between the statutory rate of 34% and the Corporation's effective tax rate of 25.1% for the quarter ended June 30, 2012, was due to tax-exempt income earned on certain tax-free loans and securities and bank-owned life insurance.

Comparison of Results for the Six Month Period Ended June 30, 2012 and 2011

General. Net income before preferred stock dividends and discount accretion increased $663,000 or 40.7% to $2.3 million for the six months ended June 30, 2012 from $1.6 million for the same period in 2011. This increase was the result of increases in net interest income and noninterest income of $372,000 and $488,000, respectively, and decreases in the provision for loan losses and noninterest expense of $12,000 and $162,000, respectively. Partially offsetting these favorable items, the provision for income taxes increased $371,000.

Net interest income. Net interest income on a tax equivalent basis increased $377,000 or 4.8% to $8.2 million for the six months ended June 30, 2012 from $7.9 million for the same period in 2011. This increase can be attributed to a decrease in interest expense of $491,000, partially offset by a decrease in tax equivalent interest income of $114,000.

Interest income. Interest income on a tax equivalent basis decreased $114,000 to $10.8 million for the six months ended June 30, 2012 as compared to $10.9 million for the six months ended June 31, 2011. This decrease can be attributed to decreases in interest on securities and interest-earning deposits with banks of $71,000 and $51,000, respectively, partially offset by increases in interest earned on loans and federal bank stocks of $3,000 and $5,000.

Tax equivalent interest earned on securities decreased $71,000 or 3.5% to $2.0 million for the six months ended June 30, 2012, compared to $2.1 million for the six months ended June 30, 2011. This decrease resulted from a decrease in the yield on securities of 39 basis points to 2.94% for the six months ended June 30, 2012, versus 3.33% for the same period in 2011, due primarily to calls of higher-yielding securities. This unfavorable yield variance accounted for a $243,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average securities increased $11.0 million or 8.8%, accounting for a $172,000 increase in interest income.

Interest earned on interest-earning deposit accounts decreased $51,000 or 50.5% to $50,000 for the six months ended June 30, 2012 from $101,000 for the same period in 2011. This decrease resulted from a decrease in the average yield on interest-earning deposit accounts of 36 basis points to 0.33% for the six months ended June 30, 2012, compared to 0.69% for the same period in the prior year, accounting for a $54,000 decrease in interest income. Partially offsetting this unfavorable yield variance, the average balance of these assets increased $943,000, primarily as excess cash was maintained as a result of increased customer deposits, accounting for a $3,000 increase in interest income.

Tax equivalent interest earned on loans receivable increased $3,000 to $8.7 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. This increase resulted as average loans increased $16.8 million or 5.5%, accounting for an increase of $465,000 in loan interest income. Partially offsetting this favorable volume variance, the average yield on loans receivable decreased 31 basis points to 5.43% for the six months ended June 30, 2012, versus 5.74% for the same period in 2011. This unfavorable yield variance accounted for a $462,000 decrease in interest income.

Interest expense. Interest expense decreased $491,000 or 16.1% to $2.6 million for the six months ended June 30, 2012 from $3.1 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 $288,000 and $203,000, respectively.

Interest expense incurred on deposits decreased $288,000 or 12.1% to $2.1 million for the six months ended June 30, 2012 compared to $2.4 million for the same period in 2011. The average cost of interest-bearing deposits decreased 23 basis points to 1.21% for the six months ended June 30, 2012, compared to 1.44% for the same period in 2011 resulting in a $395,000 decrease in interest expense. This decrease in the cost of deposits was primarily due to deposits repricing during 2011 and the first six months of 2012 in the overall low interest-rate environment. Partially offsetting this favorable rate variance, the average balance of interest-bearing deposits increased $15.5 million to $348.2 million for the six months ended June 30, 2012, compared to $332.7 million for the same period in 2011 causing a $107,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $203,000 or 30.2% to $470,000 for the six months ended June 30, 2012, compared to $673,000 for the same period in the prior year. The average balance of borrowed funds decreased . . .