EMCLAIRE FINANCIAL CORP

Tax equivalent interest earned on loans receivable decreased $309,000, or 3.9%, to $8.3 million for the three months ended March 31, 2021 compared to $8.0 million for the same period in 2020. The average balance of loans increased $80.2 million, or 11.1%, accounting for an $854,000 increase in interest income.  Partially offsetting this favorable variance, the average yield on loans decreased by 26 basis points to 4.21% for the three months ended March 31, 2021, versus 4.47% for the same period in 2020.  The average yield was impacted by the 150 basis point decline in the Wall Street Journal Prime Rate in March 2020 which resulted in the immediate decrease in interest rates on adjustable rate loans linked to that index.  Accretion of purchase accounting adjustments on acquired loans offset the loan yield decrease by approximately 3 basis points.  This unfavorable yield variance accounted for a $545,000 decrease in interest income.  Included in interest earned on loans for the three months ended March 31, 2021, is $713,000 of interest and fees earned on the SBA's PPP lending program.

Interest expense incurred on deposits decreased $673,000, or 34.7%, to $1.3 million for the three months ended March 31, 2021 compared to $1.9 million for the same period in 2020. The average cost of interest-bearing deposits decreased 49 basis points to 0.74% for the three months ended March 31, 2021, versus 1.23% for the same period in 2020, accounting for an $845,000 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 $61.0 million, or 9.6%, to $693.8 million for the three months ended March 31, 2021, compared to $632.9 million for the same period in 2020 causing a $172,000 increase in interest expense.  The increase in deposit balances was driven by increases in public funds and government stimulus deposits coupled with decreased consumer spending.

Interest expense incurred on borrowed funds decreased $94,000, or 34.4%, to $179,000 for the three months ended March 31, 2021, compared to $273,000 for the same period in the prior year.  This decrease was primarily the result of a $15.1 million, or 32.0%, reduction in the average balance of borrowed funds to $32.1 million for the three months ended March 31, 2021, compared to $47.1 million for the same period in 2020 causing a $107,000 decrease in interest expense.  Additionally, a decrease of 19 basis points in the average cost of long-term borrowed funds to 2.12% for the three months ended March 31, 2021 from 2.31% for the same period in 2020 caused a $17,000 decrease in interest expense.  Partially offsetting this reduction, a 191 basis point increase in the average cost of short-term borrowed funds to 4.31% for the three months ended March 31, 2021 from 2.40% for the same period in 2020 caused a $30,000 increase in interest expense.

The provision for loan losses decreased $517,000, or 65.3%, to $275,000 for the three months ended March 31, 2021 from $792,000 for the same period in 2020. The provision for loan losses for the first quarter of 2020 was driven by a $39.4 million increase in loan portfolio balances and the addition of a specific pandemic qualitative factor to the allowance for loan losses calculation.  Significant uncertainty remains regarding future levels of criticized and classified loans, nonperforming loans and charge-offs.  The Corporation will continue to closely monitor changes in the loan portfolio and adjust the provision accordingly.

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. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. As part of the Corporation's qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that significant change in the general ecomnic environment and financial markets, including the Corporation's market capitalization, represented an interim impairment indicator requiring continued evaluation.  Because of the economic uncertainty surrounding the pandemic, the Corporation engaged an independent third party to perform the Step 1, quantitative analysis of goodwill as of November 30, 2020.  Based on the analysis performed, management concluded that the Corporation's goodwill was not impaired oas of November 30, 2020.  While it is impossible to know the future impact of the evolving economic conditions, the impact could be material. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.