Emclaire Financial 10Q 2011 Q1 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 March 31, 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: 000-18464

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 [ ] 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 May 13, 2011.[Missing Graphic Reference]

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, 2011 and December 31, 2010	1

	Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010	2

	Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010	3

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 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	25

Item 4.	Controls and Procedures	26

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	(Removed and Reserved)	27

Item 5.	Other Information	27

Item 6.	Exhibits	27

Signatures		28

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

Emclaire Financial Corp.

Consolidated Balance Sheets

As of March 31, 2011 (Unaudited) and December 31, 2010

(Dollar amounts in thousands, except per share data)

	March 31,			December 31,
	2011			2010

Assets

Cash and due from banks	$	2,926		$	2,507
Interest earning deposits with banks		39,575			16,520
Cash and cash equivalents		42,501			19,027
Securities available for sale, at fair value		120,833			125,820
Loans receivable, net of allowance for loan losses of $3,942 and $4,132		300,126			306,152
Federal bank stocks, at cost		3,964			4,129
Bank-owned life insurance		5,648			5,596
Accrued interest receivable		1,653			1,763
Premises and equipment, net		9,091			9,241
Goodwill		3,664			3,664
Core deposit intangible		1,902			2,021
Prepaid expenses and other assets		4,068			4,472

Total Assets	$	493,450		$	481,885

Liabilities and Stockholders' Equity

Liabilities:
Deposits:
Non-interest bearing	$	84,733		$	75,941
Interest bearing		331,245			333,717
Total deposits		415,978			409,658
Short-term borrowed funds		5,000			5,000
Long-term borrowed funds		25,000			25,000
Accrued interest payable		618			649
Accrued expenses and other liabilities		2,737			2,460

Total Liabilities		449,333			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		7,451			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		19,056			14,812
Treasury stock, at cost; 102,017 shares		(2,114	)		(2,114	)
Retained earnings		18,155			17,705
Accumulated other comprehensive loss		(831	)		(769	)

Total Stockholders' Equity		44,117			39,118

Total Liabilities and Stockholders' Equity	$	493,450		$	481,885

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp.

Consolidated Statements of Operations (Unaudited)

For the three months ended March 31, 2011 and 2010

(Dollar amounts in thousands, except per share data)

	For the three months ended
	March 31,
	2011		2010

Interest and dividend income:
Loans receivable, including fees	$	4,332	$	4,413
Securities:
Taxable		537		608
Exempt from federal income tax		323		265
Federal bank stocks		13		11
Interest earning deposits with banks		47		84
Total interest and dividend income		5,252		5,381

Interest expense:
Deposits		1,175		1,426
Borrowed funds		341		446
Total interest expense		1,516		1,872

Net interest income		3,736		3,509
Provision for loan losses		120		128

Net interest income after provision for loan losses		3,616		3,381

Noninterest income:
Fees and service charges		340		322
Commissions on financial services		163		180
Title premiums		29		18
Net gain on sales of available for sale securities		104		99
Earnings on bank-owned life insurance		60		58
Other		234		165
Total noninterest income		930		842

Noninterest expense:
Compensation and employee benefits		1,889		1,830
Premises and equipment		579		550
Intangible asset amortization		119		152
Professional fees		182		114
Federal deposit insurance		143		141
Other		671		604
Total noninterest expense		3,583		3,391

Income before provision for income taxes		963		832
Provision for income taxes		182		150

Net income		781		682
Accumulated preferred stock dividends and discount accretion		98		98

Net income available to common stockholders	$	683	$	584

Basic and diluted earnings per common share	$	0.47	$	0.41

Average common shares outstanding		1,460,626		1,431,404

See accompanying notes to consolidated financial statements.

Emclaire Financial Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2011 and 2010

(Dollar amounts in thousands)

	For the three months ended
	March 31,
	2011			2010

Cash flows from operating activities
Net income	$	781		$	682
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment		207			216
Provision for loan losses		120			128
Net amortization		52			(16	)
Amortization of intangible assets and mortgage servicing rights		123			156
Realized gains on sales of available for sale securities, net		(104	)		(99	)
Net (gains) losses on foreclosed real estate		(3	)		32
Restricted stock and stock option compensation		30			41
Increase in bank-owned life insurance, net		(52	)		(51	)
(Increase) decrease in accrued interest receivable		110			(132	)
(Increase) decrease in prepaid expenses and other assets		382			(275	)
Increase (decrease) in accrued interest payable		(31	)		18
Increase (decrease) in accrued expenses and other liabilities		277			(45	)
Net cash provided by operating activities		1,892			655

Cash flows from investing activities
Loan originations and principal collections, net		5,767			1,149
Available for sale securities:
Sales		12,079			5,080
Maturities, repayments and calls		3,061			17,013
Purchases		(10,132	)		(49,272	)
Redemption of federal bank stocks		165			-
Proceeds from the sale of foreclosed real estate		129			35
Purchases of premises and equipment		(57	)		(142	)
Net cash provided by (used in) investing activities		11,012			(26,137	)

Cash flows from financing activities
Net increase in deposits		6,320			14,337
Dividends paid		(327	)		(294	)
Proceeds from the issuance of common stock		4,577			-
Net cash provided by financing activities		10,570			14,043

Increase (decrease) in cash and cash equivalents		23,474			(11,439	)
Cash and cash equivalents at beginning of period		19,027			38,952
Cash and cash equivalents at end of period	$	42,501		$	27,513

Supplemental information:
Interest paid	$	1,547		$	1,854
Income taxes paid		-			100

Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		72			51

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, 2011 and 2010

(Dollar amounts in thousands, except per share data)

	For the three months ended
	March 31,
	2011			2010

Balance at beginning of period	$	39,118		$	37,034

Net income		781			682

Other comprehensive income:
Change in net unrealized gains on available for sale
securities, net of taxes		7			332
Less: reclassification adjustment for gains
included in net income, net of taxes		69			65
Other comprehensive income (loss)		(62	)		267

Total comprehensive income		719			949

Stock compensation expense		30			41

Dividends declared on preferred stock		(94	)		(94	)

Dividends declared on common stock		(233	)		(200	)

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

Balance at end of period	$	44,117		$	37,730

Common cash dividend per share	$	0.16		$	0.14

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 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 individual and institutional accredited investors at $15.95 per share. The Corporation realized $4.6 million in gross proceeds from the offering, or $4.5 million in net proceeds after recognizing $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
		March 31,
		2011		2010
Earnings per share - basic

Net income		$	781	$	682
Preferred stock dividends and discount accretion			98		98
Net income available to common stockholders		$	683	$	584
Average common shares outstanding			1,460,626		1,431,404
Basic earnings per common share		$	0.47	$	0.41
Earnings per share - diluted
Net income available to common stockholders		$	683	$	584
Average common shares outstanding			1,460,626		1,431,404
Add: Dilutive effects of assumed exercises of stock options			3,512		-
Average shares and dilutive potential common shares			1,464,138		1,431,404
Diluted earnings per common share		$	0.47	$	0.41
Stock options, restricted stock awards and warrants
	not considered in computing diluted earnings per
	share because they were antidilutive		144,111		158,861

4. Securities.

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


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

Available for sale:
March 31, 2011:
U.S. Treasury and federal agency	$	6,344	$	-	$	(181	)	$	6,163
U.S. government sponsored entities and agencies		52,776		5		(757	)		52,024
Mortgage-backed securities: residential		23,522		169		(25	)		23,666
State and political subdivisions		35,483		985		(27	)		36,441
Equity securities		2,542		1		(4	)		2,539
	$	120,667	$	1,160	$	(994	)	$	120,833
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 March 31, 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	$	961
Due after one year through five years		43,850		43,355
Due after five through ten years		38,679		38,975
Due after ten years		11,075		11,337
Mortgage-backed securities		23,522		23,666
	$	118,125	$	118,294

Information pertaining to securities with gross unrealized losses at March 31, 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

March 31, 2011:
U.S. Treasury and federal agency	$	6,163	$	(181	)	$	-	$	-		$	6,163	$	(181	)
U.S. government sponsored entities and agencies		49,020		(757	)		-		-			49,020		(757	)
Mortgage-backed securities: residential		1,952		(25	)		-		-			1,952		(25	)
State and political subdivisions		1,673		(27	)		-		-			1,673		(27	)
Equity securities		14		(2	)		165		(2	)		179		(4	)
	$	58,823	$	(992	)	$	165	$	(2	)	$	58,988	$	(994	)

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 two equity securities in an unrealized loss position as of March 31, 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 March 31, 2011 to be other-than-temporarily impaired.

There were 49 debt securities in an unrealized loss position as of March 31, 2011, all of which were in an unrealized loss position for less than 12 months. Of these securities, 32 were U.S. government sponsored entities and agencies, 11 were U.S. Treasury securities, five were state and political subdivisions and one was a residential mortgage-backed security 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 March 31, 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)	March 31,		December 31,
	2011		2010

Mortgage loans on real estate:
Residential first mortgages	$	86,162	$	84,575
Home equity loans and lines of credit		73,012		75,458
Commercial real estate		89,872		93,028
		249,046		253,061
Other loans:
Commercial business		41,961		43,780
Consumer		13,061		13,443
		55,022		57,223

Total loans, gross		304,068		310,284
Less allowance for loan losses		3,942		4,132
Total loans, net	$	300,126	$	306,152

Nonaccrual loans	$	7,352	$	6,570
Loans 90 days or more past due and still accruing		76		41
Total nonperforming loans	$	7,428	$	6,611

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

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


(Dollar amounts in thousands)	March 31,		December 31,
	2011		2010

Loans with no allocated allowance for loan losses	$	3,087	$	2,209
Loans with allocated allowance for loan losses		1,992		3,215
Total impaired loans	$	5,079	$	5,424
Amount of the allowance for loan losses allocated	$	896	$	1,246
Average of individually impaired loans during year	$	5,252	$	2,101
Interest income on impaired loans recognized on a cash basis		42		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 March 31, 2011 and December 31, 2010:


(Dollar amounts in thousands)


	Impaired Loans with						Impaired Loans with
	Specific Allowance						No Specific Allowance

	Unpaid						Unpaid
	Principal		Recorded		Related		Principal		Recorded
	Balance		Investment		Allowance		Balance		Investment

March 31, 2011:
Residential first mortgages	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		911		686		78		1,064		925
Commercial business		1,306		1,306		818		130		105
Consumer		-		-		-		2,057		2,057
Total impaired loans	$	2,217	$	1,992	$	896	$	3,251	$	3,087

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

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 March 31, 2011 and December 31, 2010, the Corporation had $768,000 and $774,000, respectively, of loans classified as TDR’s, which are included in impaired loans above. The Corporation had $77,000 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. To further delineate and add granularity to the classification process, a risk of default assessment is made for each criticized and classified borrower and an assessment of risk of loss for each classified loan. In addition to the quarterly special asset review, loans greater than $150,000 are reviewed at least annually to determine the adequacy of risk ratings.

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.

From these fundamental assumptions, a standardized weighting is applied to each risk weighting, with consideration for the additional risk of default and risk of loss components. Management uses the following definitions for risk ratings:

Pass: Loans classified as pass typically exhibit good payment performance, acceptable financial trends and 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 March 31, 2011 and December 31, 2010:


(Dollar amounts in thousands)

					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total

March 31, 2011:
Residential first mortgages	$	84,958	$	-	$	-	$	1,204	$	-	$	86,162
Home equity and lines of credit		73,012		-		-		-		-		73,012
Commercial real estate		-		82,077		4,162		3,633		-		89,872
Commercial business		-		38,373		1,050		2,538		-		41,961
Consumer		10,623		-		-		2,438		-		13,061
Total	$	168,593	$	120,450	$	5,212	$	9,813	$	-	$	304,068

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 March 31, 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

March 31, 2011:
Residential first mortgages	$	83,401	$	1,326	$	230	$	49	$	1,156	$	86,162
Home equity and lines of credit		72,280		329		22		27		354		73,012
Commercial real estate		87,542		56		25		-		2,249		89,872
Commercial business		40,462		10		-		-		1,489		41,961
Consumer		10,901		25		31		-		2,104		13,061
Total loans	$	294,586	$	1,746	$	308	$	76	$	7,352	$	304,068

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 March 31, 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

March 31, 2011:
Residential first mortgages	$	-	$	-	$	-	$	1,156	$	1,156
Home equity and lines of credit		-		-		-		354		354
Commercial real estate		574		229		-		1,446		2,249
Commercial business		108		-		-		1,381		1,489
Consumer		2,104		-		-		-		2,104
Total loans	$	2,786	$	229	$	-	$	4,337	$	7,352

December 31, 2010:
Residential first mortgages	$	-	$	-	$	-	$	490	$	490
Home equity and lines of credit		-		-		-		337		337
Commercial real estate		682		161		813		424		2,080
Commercial business		79		6		1,251		174		1,510
Consumer		2,136		-		-		17		2,153
Total loans	$	2,897	$	167	$	2,064	$	1,442	$	6,570

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 non-performing 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.

Following is an analysis of the changes in the ALL for the three months ended March 31, 2011 and 2010:



(Dollar amounts in thousands)	At or for the three months ended
	March 31,
	2011			2010
Balance at the beginning of the period	$	4,132		$	3,202
Provision for loan losses		120			128
Charge-offs		(321	)		(167	)
Recoveries		11			11
Balance at the end of the period	$	3,942		$	3,174

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

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at March 31, 2011 and December 31, 2010:


(Dollar amounts in thousands)

				Home Equity
	Residential			& Lines			Commercial			Commercial
	Mortgages			of Credit			Real Estate			Business			Consumer			Total

March 31, 2011:
Beginning Balance	$	398		$	572		$	1,707		$	1,323		$	132		$	4,132
Charge-offs		-			(30	)		-			(281	)		(10	)		(321	)
Recoveries		-			-			-			10			1			11
Provision		7			11			(241	)		338			5			120
Ending Balance	$	405		$	553		$	1,466		$	1,390		$	128		$	3,942

Ending ALL balance attributable to loans:
Individually evaluated for impairment		-			-			78			818			-			896
Collectively evaluated for impairment		405			553			1,388			572			128			3,046

Total loans:
Individually evaluated for impairment		-			-			1,611			1,411			2,057			5,079
Collectively evaluated for impairment		86,162			73,012			88,261			40,550			11,004			298,989

December 31, 2010:
Beginning Balance	$	356		$	452		$	1,895		$	448		$	51		$	3,202
Charge-offs		(40	)		(45	)		(61	)		(216	)		(190	)		(552	)
Recoveries		2			2			147			5			20			176
Provision		80			163			(274	)		1,086			251			1,306
Ending Balance	$	398		$	572		$	1,707		$	1,323		$	132		$	4,132

Ending ALL balance attributable to loans:
Individually evaluated for impairment		-			-			387			859			-			1,246
Collectively evaluated for impairment		398			572			1,320			464			132			2,886

Total loans:
Individually evaluated for impairment		-			-			1,769			1,519			2,136			5,424
Collectively evaluated for impairment		84,575			75,458			91,259			42,261			11,307			304,860

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.

6. Goodwill and Intangible Assets.

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of March 31, 2011 and December 31, 2010:



(Dollar amounts in thousands)	March 31, 2011				December 31, 2010
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Goodwill	$	3,664	$	-	$	3,664	$	-
Core deposit intangibles		4,027		2,125		4,027		2,006
Total	$	7,691	$	2,125	$	7,691	$	2,006

During the third quarter of 2009, the Corporation recorded goodwill and a core deposit intangible of $2.2 million and $2.8 million, respectively, associated with a branch purchase transaction. 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 2010 or in the first three months of 2011. 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 period ending March 31, 2011, the Corporation recorded intangible amortization expense totaling $119,000.

7. 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 or liability instruments issued.

A summary of option activity under the Plan as of March 31, 2011, 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, 2011		100,750	$	24.44	$	-		6.9
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited		-		-		-		-
Outstanding as of March 31, 2011		100,750	$	24.44	$	27		6.7
Exercisable as of March 31, 2011		76,000	$	26.00	$	-		6.3

A summary of the status of the Corporation’s nonvested option shares as of March 31, 2011, and changes during the period then ended is presented below:


				Weighted-Average
	Options			Grant-date Fair Value

Nonvested at January 1, 2011		25,750		$	1.89
Granted		-			-
Vested		(1,000	)		2.65
Forfeited		-			-
Nonvested as of March 31, 2011		24,750		$	1.84

A summary of the status of the Corporation’s nonvested restricted stock awards as of March 31, 2011, and changes during the period then ended is presented below:



			Weighted-Average
	Shares		Grant-date Fair Value

Nonvested at January 1, 2011		19,000	$	16.79
Granted		-		-
Vested		-		-
Forfeited		-		-
Nonvested as of March 31, 2011		19,000	$	16.79

For the three month period ended March 31, 2011 and 2010, the Corporation recognized $30,000 and $41,000, respectively, in stock compensation expense. As of March 31, 2011, there was $199,000 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.

8. Fair Values of Financial Instruments.

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction on the dated indicated. The estimated fair value amounts have been measured as of their respective dates and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at such dates.

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: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

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 the fair value of each type of financial instrument:

Available for sale securities – The fair value of available for sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying on quoted prices for the specific securities but rather by relying on securities’ relationships to other benchmark quoted securities (Level 2 inputs).

Impaired loans – Fair value on impaired loans is measured using the estimate fair market value of the collateral less the estimate costs to sell. Fair value of the loan’s collateral is typically determined by appraisals or independent valuation. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to 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, 2011 the fair value consists of loan balances of $2.0 million, net of a valuation allowance of $896,000, compared to loan balances of $3.2 million, net of a valuation allowance of $1.2 million at December 31, 2010. There was no additional provision for loan losses recorded during the quarter ended March 31, 2011 for impaired loans.

8. Fair Values of Financial Instruments (continued).

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, 2011:
U.S. Treasury and federal agency	$	6,163	$	-	$	6,163	$	-
U.S. government sponsored entities and agencies		52,024		-		52,024		-
Mortgage-backed securities: residential		23,666		-		23,666		-
State and political subdivision		36,441		-		36,441		-
Equity securities		2,539		168		2,371		-
	$	120,833	$	168	$	120,665	$	-

December 31, 2010:
U.S. Treasury and federal agency	$	6,729	$	-	$	6,729	$	-
U.S. government sponsored entities and agencies		62,362				62,362
Mortgage-backed securities: residential		19,380		-		19,380		-
Collateralized mortgage obligations		922		-		922		-
State and political subdivision		33,902		-		33,902		-
Equity securities		2,525		154		2,371		-
	$	125,820	$	154	$	125,666	$	-

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, 2011:
Impaired commercial real estate loans	$	608	$	-	$	-	$	608
Impaired commercial business loans		488		-		-		488
	$	1,096	$	-	$	-	$	1,096


December 31, 2010:
Impaired commercial real estate loans	$	1,382	$	-	$	-	$	1,382
Impaired commercial business loans		587		-		-		587
	$	1,969	$	-	$	-	$	1,969

8.	Fair Values of Financial Instruments (continued).

The following table sets forth the carrying amount and fair value of the Corporation’s financial instruments included in the consolidated balance sheet as of March 31, 2011:


(Dollar amounts in thousands)	March 31, 2011				December 31, 2010
	Carrying amount		Fair value		Carrying amount		Fair value

Financial assets:
Cash and cash equivalents	$	42,501	$	42,599	$	19,027	$	19,027
Securities		120,833		120,833		125,820		125,820
Loans receivable, net		300,126		305,186		306,152		308,776
Federal bank stocks		3,964		N/A		4,129		N/A
Accrued interest receivable		1,653		1,653		1,763		1,763

Financial liabilities:
Deposits		415,978		423,708		409,658		415,040
Borrowed funds		30,000		32,816		30,000		33,163
Accrued interest payable		618		618		649		649

Off-balance sheet commitments		-		-		-		-

This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values of the Corporation’s financial instruments at March 31, 2011 and December 31, 2010:

Carrying amount is the estimated fair value for cash and cash equivalents, securities, accrued interest receivable and payable, demand deposits, short-term borrowed funds, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of federal bank stocks due to restrictions placed on the stocks transferability.

Estimates of the fair value of off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Also, unfunded loan commitments relate principally to variable rate commercial loans.

9.	New Accounting Standards.

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance requiring additional disclosures regarding fair value measurements. Specifically, the guidance requires entities to disclose the amounts and reasons for significant transfers between Level 1 and Level 2 of the fair value hierarchy, to disclose reasons for any transfers in or out of Level 3 and to separately disclose information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements. In addition, the guidance also clarifies certain existing disclosure requirements. Except for the requirement to disclose information about purchases, sales, issuances and settlements in the reconciliation of recurring Level 3 measurements separately, the amendments to the guidance were effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance on January 1, 2010 did not have a material impact on the Corporation’s consolidated financial statements. The requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 measurements is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of the remaining provisions of this guidance on January 1, 2011 did not have a material impact on the Corporation’s consolidated financial statements.

In April 2011, the Financial Accounting Standards Board (FASB) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the guidance clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. The Corporation does not expect the guidance to have a material impact on its 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, 2011, compared to the same period in 2010 and should be read in conjunction with the Corporation’s December 31, 2010 Annual Report on Form 10-K filed with the SEC and with the accompanying consolidated financial statements and notes presented on pages 1 through 18 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 $11.6 million or 2.4% to $493.5 million at March 31, 2011 from $481.9 million at December 31, 2010. This increase resulted primarily from an increase in cash and cash equivalents of $23.5 million, partially offset by decreases in securities and loans of $5.0 million and $6.0 million, respectively. The net increase in the Corporation’s assets was primarily funded by increases in customer deposits and stockholders’ equity of $6.3 million and $5.0 million, respectively.

Total liabilities increased $6.6 million or 1.5% to $449.3 million at March 31, 2011 from $442.8 million at December 31, 2010, resulting primarily from a $6.3 million or 1.5% increase in customer deposits, which consisted of an $8.8 million or 11.6% increase in noninterest bearing deposits offset by a $2.5 million decrease in interest bearing deposits.

Stockholders’ equity increased $5.0 million or 12.8% to $44.1 million at March 31, 2011 from $39.1 million at December 31, 2010. During the quarter ended March 31, 2011, the Corporation raised $4.6 million in capital, net of expenses, following the issuance of 290,004 shares of common stock in a private placement offering to accredited investors.

At March 31, 2011, 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 8.54%, 14.79% and 16.04%, respectively, compared to 7.92%, 13.27% and 14.52%, respectively, at December 31, 2010.

RESULTS OF OPERATIONS

Comparison of Results for the Three Month Period Ended March 31, 2011 and 2010

General. Net income before accumulated preferred stock dividends and discount accretion increased $99,000 to $781,000 for the three months ended March 31, 2011 from $682,000 for the same period in 2010. This increase was the result of increases in net interest income and noninterest income of $227,000 and $88,000, respectively, and a decrease in the provision for loan losses of $8,000. Partially offsetting these favorable items, noninterest expense and the provision for income taxes increased $192,000 and $32,000, respectively.

Net interest income. Net interest income on a tax equivalent basis increased $269,000 or 7.4% to $3.9 million for the three months ended March 31, 2011 from $3.7 million for the same period in 2010. This increase can be attributed to a decrease in interest expense of $356,000 partially offset by a decrease in tax equivalent interest income of $87,000.

Interest income. Interest income on a tax equivalent basis decreased $87,000 or 1.6% to $5.4 million for the three months ended March 31, 2011, compared to $5.5 million for the same period in the prior year. This decrease can be attributed to decreases in interest on loans and interest-earning deposits with banks of $62,000 and $37,000, respectively, partially offset by increases in interest on securities and federal bank stocks of $10,000 and $2,000, respectively.

Tax equivalent interest earned on loans receivable decreased $62,000 or 1.4% at $4.4 million for the three months ended March 30, 2011 and 2010. This decrease resulted as the average yield on loans receivable decreased 34 basis points to 5.76% for the three months ended March 31, 2011, versus 6.10% for the same period in 2010. This unfavorable yield variance accounted for a $257,000 decrease in interest income. Partially offsetting this unfavorable yield variance, average loans increased $13.3 million or 4.5%, accounting for $195,000 in additional loan interest income.

Interest earned on interest-earning deposit accounts decreased $37,000 or 44.0% to $47,000 for the three months ended March 31, 2011 from $84,000 for the same period in 2010. The average balance of these assets decreased $6.9 million primarily due to the deployment of cash into higher yielding assets, decreasing interest income by $18,000. In addition to this volume decrease, the average yield on interest-earning deposit accounts decreased 31 basis points to 0.89% for the three months ended March 31, 2011, compared to 1.20% for the same period in the prior year, accounting for a $19,000 decrease in interest income.

Tax equivalent interest earned on securities increased $10,000 or 1.0% to $1.0 million for the three months ended March 31, 2011, compared to $990,000 for the same period in 2010. The average balance of securities increased $7.9 million or 6.8%, accounting for a $66,000 increase in interest income. Offsetting this favorable volume increase, the average yield on securities decreased 19 basis points to 3.30% for the three months ended March 31, 2011, versus 3.49% for the same period in 2010, due primarily to the deployment of cash received from the U.S. government agency calls into shorter-termed investment securities at market yields lower than the overall average of the existing portfolio. This unfavorable yield variance accounted for a $56,000 decrease in interest income.

Interest expense. Interest expense decreased $356,000 or 19.0% to $1.5 million for the three months ended March 31, 2011 from $1.9 million for the same period in 2010. This decrease in interest expense can be attributed to a decrease in interest incurred on deposits and borrowed funds of $251,000 and $105,000, respectively.

Interest expense incurred on deposits decreased $251,000 or 17.6% to $1.2 million for the three months ended March 31, 2011 compared to $1.4 million for the same period in 2010. The average cost of interest-bearing deposits decreased 36 basis points to 1.45% for the three months ended March 31, 2011, compared to 1.81% for the same period in 2010 causing a $292,000 decrease in interest expense. This decrease was primarily due to deposits repricing during 2010 and the first quarter of 2011 in the overall low interest-rate environment. Partially offsetting this favorable rate variance, the average balance of interest-bearing deposits increased $9.4 million or 2.9% to $328.9 million for the three months ended March 31, 2011, compared to $319.6 million for the same period in 2010 causing a $41,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $105,000 or 23.5% to $341,000 for the three months ended March 31, 2011, compared to $446,000 for the same period in the prior year. The average balance of borrowed funds decreased $9.7 million or 24.3%, accounting for an $110,000 decrease in interest expense. Partially offsetting this favorable volume variance, the average cost of borrowed funds increased 5 basis points to 4.57% for the three months ended March 31, 2011, compared to 4.52% for the same period in 2010, causing a $5,000 increase in interest expense. Both the decrease in volume and increase in rate were primarily related to the Bank’s early retirement of $10.0 million in long term FHLB borrowings during the third quarter of 2010.

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,

	2011							2010
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate

Interest-earning assets:
Loans, taxable	$	295,929	$	4,222		5.79	%	$	288,234	$	4,347		6.12	%
Loans, tax exempt		12,570		158		5.11	%		6,965		95		5.53	%
Total loans receivable		308,499		4,380		5.76	%		295,199		4,442		6.10	%

Securities, taxable		88,015		537		2.47	%		88,522		608		2.79	%
Securities, tax exempt		34,930		463		5.38	%		26,562		382		5.83	%
Total securities		122,945		1,000		3.30	%		115,084		990		3.49	%

Interest-earning deposits with banks		21,485		47		0.89	%		28,354		84		1.20	%
Federal bank stocks		4,070		13		1.30	%		4,125		11		1.08	%
Total interest-earning cash equivalents		25,555		60		0.95	%		32,479		95		1.19	%

Total interest-earning assets		456,999		5,440		4.83	%		442,762		5,527		5.06	%
Cash and due from banks		2,467							2,156
Other noninterest-earning assets		22,042							23,183

Total Assets	$	481,508						$	468,101

Interest-bearing liabilities:
Interest-bearing demand deposits	$	181,046	$	136		0.30	%	$	158,314	$	230		0.59	%
Time deposits		147,898		1,039		2.85	%		161,236		1,196		3.01	%
Total interest-bearing deposits		328,944		1,175		1.45	%		319,550		1,426		1.81	%

Borrowed funds, short-term		5,261		60		4.63	%		5,001		59		4.78	%
Borrowed funds, long-term		25,000		281		4.56	%		35,000		387		4.48	%
Total borrowed funds		30,261		341		4.57	%		40,001		446		4.52	%

Total interest-bearing liabilities		359,205		1,516		1.71	%		359,551		1,872		2.11	%

Noninterest-bearing demand deposits		78,837		-		-			67,912		-		-

Funding and cost of funds		438,042		1,516		1.40	%		427,463		1,872		1.78	%

Other noninterest-bearing liabilities		4,187							3,135

Total Liabilities		442,229							430,598
Stockholders' Equity		39,279							37,503

Total Liabilities and Stockholders' Equity	$	481,508						$	468,101

Net interest income			$	3,924						$	3,655

Interest rate spread (difference between						3.12	%						2.95	%
weighted average rate on interest-earning
assets and interest-bearing liabilities)

Net interest margin (net interest						3.48	%						3.35	%
income as a percentage of average
interest-earning assets)

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,
	2011 versus 2010
	Increase (Decrease) due to
	Volume			Rate			Total
Interest income:
Loans	$	195		$	(257	)	$	(62	)
Securities		66			(56	)		10
Interest-earning deposits with banks		(18	)		(19	)		(37	)
Federal bank stocks		-			2			2

Total interest-earning assets		243			(330	)		(87	)

Interest expense:
Interest-bearing deposits		41			(292	)		(251	)
Borrowed funds		(110	)		5			(105	)

Total interest-bearing liabilities		(69	)		(287	)		(356	)

Net interest income	$	312		$	(43	)	$	269

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, 2011 and 2010 is as follows:

(Dollar amounts in thousands)	At or for the three months ended
	March 31,
	2011			2010
Balance at the beginning of the period	$	4,132		$	3,202
Provision for loan losses		120			128
Charge-offs		(321	)		(167	)
Recoveries		11			11
Balance at the end of the period	$	3,942		$	3,174

Non-performing loans	$	7,428		$	3,237
Non-performing assets		7,747			3,470
Non-performing loans to total loans		2.44	%		1.10	%
Non-performing assets to total assets		1.57	%		0.72	%
Allowance for loan losses to total loans		1.30	%		1.08	%
Allowance for loan losses to non-performing loans		53.07	%		98.04	%

Nonperforming loans increased $4.2 million to $7.4 million at March 31, 2011 from $3.2 million at March 31, 2010. The increase in nonperforming loans was primarily due to the addition of four separate credit relationships which were placed on non-accrual status during 2010, as previously disclosed in the Corporation’s 2010 Annual Report on Form 10-K, and two separate credit relationships which were placed on non-accrual status during the first quarter of 2011 due to deterioration in the financial condition of the borrowers, as a result of poor economic conditions, and a general decline in their ability to comply with contractual repayment terms on a timely basis. The decrease in the allowance for loan losses to nonperforming loans from 98.04% at March 31, 2010 to 53.07% at March 31, 2011 was a result of the aforementioned increase in nonperforming loans primarily related to these six credit relationships. During the three months ended March 31, 2011, nonperforming loans increased by $817,000 to $7.4 million from $6.6 million at December 31, 2010. This increase was primarily due to the aforementioned addition of two separate credit relationships which were placed on non-accrual status during the quarter.

As of March 31, 2011, the Corporation’s classified and criticized assets amounted to $15.0 million or 3.0% of totals assets, with $9.8 million classified as substandard and $5.2 million identified as special mention. This compares to classified and criticized assets of $12.4 million or 2.6% of total assets, with $8.3 million classified as substandard, $44,000 classified as doubtful and $4.1 million identified as special mention at December 31, 2010. The increase in criticized and classified assets was primarily the result of downgrading two separate large commercial relationships which have certain credit problems currently or potentially impacting the ability of the borrowers to comply with their present loan repayment terms on a timely basis.

The provision for loan losses decreased $8,000 or 6.3% to $120,000 for the three month period ended March 31, 2011 from $128,000 for the same period in the prior year. While net charge-offs increased to $310,000 for the three months ended March 31, 2011 from $156,000 for the same period in the prior year, a significant portion of the charge-offs experienced during the quarter ended March 31, 2011 were loans with specific reserves allocated and did not affect the Corporation’s general reserves. In addition, the provision for loan losses decreased slightly as the Corporation recognized a $147,000 recovery of a previously charged-off commercial real estate loan during 2010. This recovery decreased the Corporation’s historical loss experience utilized for the quarter ended March 31, 2011 compared to the same quarter in the prior year, and resulted in an overall reduction in general reserves allocated to this portfolio segment. Further, due to the estimated value of the collateral supporting the loans placed on non-accrual status during the quarter, the Corporation did not require additional provision for impaired loans.

Noninterest income. Noninterest income increased $88,000 or 10.5% to $930,000 during the three months ended March 31, 2011, compared to $842,000 during the same period in the prior year. This increase was primarily due to increases in customer service fees and other noninterest income of $18,000 and $69,000, respectively. Other noninterest income increased as a result of increased interchange fee income.

Noninterest expense. Noninterest expense increased $192,000 or 5.7% to $3.6 million during the three months ended March 31, 2011 compared to $3.4 million for the same period in 2010. This increase in noninterest expense can be attributed to increases in compensation and employee benefits, premises and equipment, professional fees and other noninterest expenses of $59,000, $29,000, $68,000 and $67,000, respectively, partially offset by a decrease in intangible amortization of $33,000.

Compensation and employee benefits increased $59,000 or 3.2% to $1.9 million for the three months ended March 31, 2011 compared to $1.8 million for the same period in the prior year. This increase can be primarily attributed to normal salary and wage increases.

Premises and equipment increased $29,000 or 5.3% to $579,000 for the three months ended March 31, 2011, compared to $550,000 for the same period in the prior year. This increase was primarily related to the fourth quarter 2010 purchase of the Titusville office building purchase.

Professional fees increased $68,000 or 59.7% to $182,000 for the three months ended March 31, 2011, compared to $114,000 for the same period in the prior year. This increase was primarily related to costs associated with human resources consulting, legal fees relating to foreclosure activities and increased audit fees.

Other noninterest expenses increased $67,000 or 11.1% to $671,000 for the three months ended March 31, 2011, compared to $604,000 for the same period in the prior year. This increase was primarily related to increased marketing and collection costs.

As a result of the third quarter 2009 branch purchase, the Bank recognized $119,000 of core deposit intangible amortization expense during the first quarter of 2011, compared to $152,000 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 $32,000 to $182,000 for the three months ended March 31, 2011 compared to $150,000 for the same period in the prior year. This increase was primarily related to an increase in pre-tax income of $131,000 to $963,000 for the three months ended March 31, 2011, compared to $832,000 for the same period in 2010. The difference between the statutory rate of 34% and the Corporation’s effective tax rate of 18.9% for the quarter ended March 31, 2011, 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, 2011, the Corporation used its sources of funds primarily to fund loan originations and security purchases. As of March 31, 2011, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling $49.6 million, and standby letters of credit totaling $306,000.

At March 31, 2011, time deposits amounted to $152.7 million or 36.7% of the Corporation’s total consolidated deposits, including approximately $44.3 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, 2011, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed, was $147.2 million.

Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.

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 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 December 31, 2010, 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, at March 31, 2011, the Corporation’s interest-earning assets maturing or repricing within one year totaled $147.2 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled $141.6 million, providing an excess of interest-earning assets over interest-bearing liabilities of $5.6 million. At March 31, 2011, the percentage of the Corporation’s liabilities to assets maturing or repricing within one year was 96.2%.

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

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, 2011, 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, 2010, 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

The shares of common stock issued in the private offering were exempt from registration under the Securities Act of 1933 as amended (the “Securities Act”), pursuant to Section 4(2) thereof and Regulation D thereunder. The Corporation agreed to file a registration statement to register the shares of common stock issued in the offering for resale under the Securities Act within 90 days of issuance and to use its best efforts to have the registration statement declared effective promptly after filing.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

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

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 13, 2011	By: /s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer

Date: May 13, 2011	By: /s/ Matthew J. Lucco
	Matthew J. Lucco
	Chief Financial Officer
	Treasurer

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Emclaire Financial (EMCF) 10-Q2011 Q1 Quarterly report

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