This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three months ended March 31, 2022, compared to the same periods in 2021 and should be read in conjunction with the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC and with the accompanying consolidated financial statements and notes presented in 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.

USE OF NON-GAAP FINANCIAL MEASURES

In addition to the results of operations presented in accordance with generally accepted accounting principals (GAAP), management uses certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. Management believes these non-GAAP financial measures provide information that is useful to investors in understanding the underlying operational performance and business and performance trends as they facilitate comparison with the performance of others in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors' understanding of the Corporation's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

Management believes that the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Net Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 23 for the three months ended March 31, 2022 and 2021, respectively.

CHANGES IN FINANCIAL CONDITION

Total assets remained nearly unchanged at $1.1 billion at March 31, 2022 and December 31, 2021. Net loans receivable increased $14.9 million, or 1.9%, to $794.9 million at March 31, 2022 from $780.0 million at December 31, 2021. During the first quarter, the Corporation's loan production totaled $47.0 million in commitments and resulted in new outstanding loan balances of $38.3 million at March 31, 2022. Nearly half of this loan production was concentrated in commercial real estate. Securities decreased $20.1 million, or 10.8%, to $166.2 million at March 31, 2022 from $186.3 million at December 31, 2021 due to a $15.2 million decrease in the market value of securities following an increase in market interest rates. Liabilities increased $8.4 million to $970.9 million at March 31, 2022 from $962.5 million at December 31, 2021 due to a $17.5 million increase in customer deposits, partially offset by a $4.0 million reduction in borrowed funds.

Stockholders' equity decreased $10.3 million, or 10.6%, to $86.7 million at March 31, 2022 from $97.0 million at December 31, 2021 primarily due to a $12.0 million decrease in accumulated other comprehensive income as unrealized losses in the Corporation's securities portfolio were impacted due to the recent rise in market interest rates. Partially offsetting this reduction, retained earnings increased $1.6 million as a result of $2.4 million of net income available to common stockholders, less $848,000 of common dividends paid. The Corporation remains well capitalized and is positioned for continued growth with total stockholders' equity at 8.2% of total assets. Book value per common share was $30.15 at March 31, 2022, compared to $33.91 at December 31, 2021.

At March 31, 2022, the Bank was considered "well-capitalized" with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 8.18%, 11.86%, 11.86% and 13.11%, respectively. The Bank was also considered "well-capitalized" at December 31, 2021 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.98%, 11.86%, 11.86% and 13.11%, respectively.





RESULTS OF OPERATIONS

Comparison of Results for the Three Months Ended March 31, 2022 and 2021

General. Net income available to common stockholders increased $262,000, or 12.1%, to $2.4 million for the three months ended March 31, 2022 from $2.2 million for the same period in 2021. This increase resulted from a $88,000 increase in net interest income and a $355,000 decrease in the provision for loan losses, partially offset by a $45,000 decrease in noninterest income and increases in noninterest expense and the provision for income taxes of $59,000 and $77,000, respectively.

Net interest income. Tax equivalent net interest income increased $93,000, or 1.2%, to $7.8 million for the three months ended March 31, 2022 from $7.7 million for the same period in 2021. This increase was attributed to a decrease in interest expense of $519,000, partially offset by a decrease in tax equivalent interest income of $426,000.

Interest income. Tax equivalent interest income decreased $426,000, or 4.7%, to $8.7 million for the three months ended March 31, 2022 from $9.2 million for the same period in 2021. This decrease was attributed to decreases in interest earned on loans and interest-earning deposits with banks of $689,000 and $27,000, respectively, partially offset by increases in interest on securities and dividends on federal bank stocks of $288,000 and $2,000, respectively.


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Tax equivalent interest earned on loans receivable decreased $689,000, or 8.3%, to $7.6 million for the three months ended March 31, 2022 compared to $8.3 million for the same period in 2021. The average yield on loans decreased by 34 basis points to 3.87% for the three months ended March 31, 2022, versus 4.21% for the same period in 2021, causing a $663,000 decrease in interest income. During the first quarter of 2021, the Corporation recognized $713,000 of interest income related to PPP loans, compared to $22,000 for the same period in 2022. Excluding PPP loan balances and the related interest income, the Corporation would have experienced a yield on loans of 3.87% for the three months ended March 31, 2022, compared to 3.99% for the same period in 2021.

Tax equivalent interest earned on securities increased $288,000, or 39.4%, to $1.0 million for the three months ended March 31, 2022 compared to $731,000 for the same period in 2021. The average balance of securities increased $62.5 million, or 52.9%, accounting for a $ 358,000 increase in interest income. Partially offsetting this favorable variance, the average yield on securities decreased by 22 basis points to 2.29% for the three months ended March 31, 2022 versus 2.51% for the same period in 2021. This unfavorable yield variance accounted for a $70,000 decrease in interest income.

Interest earned on deposits with banks decreased $27,000, or 87.1%, to $4,000 for the three months ended March 31, 2022 compared to $31,000 for the same period in 2021. The average balance of deposits with banks decreased $29.6 million, or 77.2%, accounting for a $17,000 decrease in interest income. Additionally, a 14 basis point decrease in the average yield on these balances to 0.19% for the three months ended March 31, 2022, versus 0.33% for the same period in 2021, accounted for a $10,000 decrease in interest income.

Interest expense. Interest expense decreased $519,000, or 35.9%, to $927,000 for the three months ended March 31, 2022 from $1.4 million for the same period in 2021. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $445,000 and $74,000, respectively.

Interest expense incurred on deposits decreased $445,000, or 35.1%, to $822,000 for the three months ended March 31, 2022 compared to $1.3 million for the same period in 2021. The average cost of interest-bearing deposits decreased 26 basis points to 0.48% for the three months ended March 31, 2022, versus 0.74% for the same period in 2021, accounting for an $454,000 decrease in interest expense. This decrease in cost was driven by maturities in certificate of deposit specials and repricing money market specials initially offered in 2019 and general rate decreases as a result of current economic conditions. Partially offsetting this favorable variance, the average balance of interest-bearing deposits increased $4.7 million to $698.6 million for the three months ended March 31, 2022, compared to $693.8 million for the same period in 2021 causing a $9,000 increase in interest expense.

Interest expense incurred on borrowed funds decreased $74,000, or 41.3%, to $105,000 for the three months ended March 31, 2022, compared to $179,000 for the same period in the prior year. This decrease was primarily the result of a $4.2 million, or 13.1%, reduction in the average balance of borrowed funds to $27.9 million for the three months ended March 31, 2022, compared to $32.1 million for the same period in 2021 causing a $40,000 decrease in interest expense. Additionally, a decrease of 73 basis points in the average cost of borrowed funds to 1.53% for the three months ended March 31, 2022 from 2.26% for the same period in 2021 caused a $34,000 decrease in interest expense.

The following table reconciles interest income in the Consolidated Statements of Net Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended March 31:

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