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EX-32 - EXHIBIT 32 - First Clover Leaf Financial Corp.ex32.htm
EX-31.1 - EXHIBIT 31.1 - First Clover Leaf Financial Corp.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - First Clover Leaf Financial Corp.ex31_2.htm
 

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 September 30, 2009

OR

o           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 000-50820

FIRST CLOVER LEAF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

Maryland
20-4797391
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
   
6814 Goshen Road, Edwardsville, IL
62025
(Address of principal executive office)
(Zip Code)

Registrant's telephone number, including area code (618) 656-6122

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ý.  No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer  ¨
Accelerated filer ¨
   
Non-accelerated filer ¨    (do not check if smaller reporting company)
Smaller reporting company  ý


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨.  No ý.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding November 10, 2009
Common Stock, par value $.10 per share
 
8,007,996


 
 

 
FIRST CLOVER LEAF FINANCIAL CORP.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2009

INDEX

 
PAGE NO.
   
   
 
   
 
   
3
   
4
   
5
   
6
   
8
   
23
   
38
   
41
   
   
 
   
42
   
42
   
43
   
43
   
43
   
43
   
43
   
44



 
 

FIRST CLOVER LEAF FINANCIAL CORP.
 Consolidated Balance Sheets
(Unaudited)

   
September 30,
   
December 31,
 
Assets
 
2009
   
2008
 
Cash and due from banks
  $ 7,246,835     $ 19,290,559  
Interest-earning deposits
    13,769,636       13,562,730  
Federal funds sold
    33,853,199       34,282,095  
Total cash and cash equivalents
    54,869,670       67,135,384  
Interest-earning time deposits
    -       5,210,461  
Securities available for sale
    96,482,283       103,567,578  
Federal Home Loan Bank stock
    6,306,273       6,306,273  
Loans, net of allowance for loan losses
               
of $5,231,952 and $3,895,246, respectively
    413,944,253       430,678,727  
Loans held for sale
    925,120       240,000  
Property and equipment, net
    11,243,309       12,512,865  
Accrued interest receivable
    2,251,228       2,461,320  
Goodwill
    11,385,323       20,685,323  
Core deposit intangible
    1,579,001       1,948,001  
Foreclosed assets
    696,554       632,796  
Mortgage servicing rights
    733,552       657,660  
Other assets
    2,467,391       1,288,406  
Total assets
  $ 602,883,957     $ 653,324,794  
Liabilities and Stockholders' Equity
               
Liabilities:
               
Deposits:
               
Non-interest bearing deposits
  $ 28,236,454     $ 24,994,196  
Interest bearing deposits
    416,845,963       422,308,722  
Total deposits
    445,082,417       447,302,918  
Federal Home Loan Bank advances
    40,680,000       49,967,919  
Securities sold under agreements to repurchase
    29,595,275       55,103,313  
Subordinated debentures
    3,919,192       3,886,144  
Accrued interest payable
    1,454,608       1,245,555  
Other liabilities
    2,567,458       2,162,236  
Total liabilities
    523,298,950       559,668,085  
                 
Stockholders' Equity:
               
    Preferred stock, $.10 par value; 10,000,000 shares
               
authorized; no shares issued
    -       -  
    Common stock, $.10 par value; 20,000,000 shares authorized;
               
10,142,123 shares issued; 8,076,001 and 8,793,753 shares outstanding
               
at September 30, 2009 and December 31, 2008, respectively
    1,014,212       1,014,212  
Additional paid-in capital
    81,356,361       81,339,895  
Retained earnings
    14,217,323       23,230,811  
Accumulated other comprehensive income
    1,765,620       1,195,673  
Unearned Employee Stock Ownership Plan shares
    (625,913 )     (658,856 )
Treasury Stock, at cost; 2,066,122 and 1,348,370 shares at
               
September 30, 2009 and December 31, 2008, respectively
    (18,142,596 )     (12,465,026 )
Total stockholders' equity
    79,585,007       93,656,709  
Total liabilities and stockholders' equity
  $ 602,883,957     $ 653,324,794  
                 
See Accompanying Notes to Consolidated Financial Statements.
               

 
3

FIRST CLOVER LEAF FINANCIAL CORP.
Consolidated Statements of Operations
(Unaudited)

      Three Months Ended    
Nine Months Ended
 
      September 30,    
September 30,
 
    2009    
2008
   
2009
   
2008
 
Interest income:
                       
Interest and fees on loans
  $ 5,975,400     $ 5,018,585     $ 18,048,966       14,700,713  
Securities:
                               
Taxable interest income
    782,349       548,579       2,597,157       1,826,602  
Non-taxable interest income
    159,802       48,728       435,184       145,707  
Interest-earning deposits, federal funds sold, and other
    26,085       160,558       122,673       611,894  
Total interest income
    6,943,636       5,776,450       21,203,980       17,284,916  
                                 
Interest expense:
                               
Deposits
    2,561,187       2,556,489       7,862,894       7,927,332  
Federal Home Loan Bank advances
    367,103       188,139       1,291,979       519,224  
Securities sold under agreements to repurchase
    16,826       104,151       54,525       310,863  
Subordinated debentures
    75,094       75,093       223,192       223,888  
Total interest expense
    3,020,210       2,923,872       9,432,590       8,981,307  
                                 
Net interest income
    3,923,426       2,852,578       11,771,390       8,303,609  
                                 
Provision for loan losses
    1,000,000       145,000       1,668,990       501,866  
                                 
Net interest income after provision for loan losses
    2,923,426       2,707,578       10,102,400       7,801,743  
                                 
Non-interest income:
                               
Service fees on deposit accounts
    89,158       64,319       224,704       170,742  
Other service charges and fees
    73,952       55,456       197,211       130,050  
Loan servicing fees
    54,613       18,126       135,095       68,378  
Gain on sale of loans
    105,265       87,512       491,540       214,117  
Other
    9,336       2,802       34,459       10,060  
Total non-interest income
    332,324       228,215       1,083,009       593,347  
                                 
Non-interest expense:
                               
Compensation and employee benefits
    1,122,790       901,479       3,398,746       2,529,982  
Occupancy expense
    370,092       286,214       1,087,476       769,753  
Data processing services
    140,808       114,294       417,899       338,873  
Director fees
    51,750       56,000       160,700       188,850  
Professional fees
    204,212       111,053       597,400       354,328  
Federal Deposit Insurance Corporation insurance premiums
    173,175       15,371       602,591       31,393  
Amortization of core deposit intangible
    108,000       85,000       369,000       317,000  
Amortization of mortgage servicing rights
    11,068       14,052       175,767       68,929  
Goodwill impairment
    -       -       9,300,000       -  
Impairment loss on assets
    355,989       -       355,989       -  
Other
    436,277       339,570       1,273,525       955,345  
Total non-interest expense
    2,974,161       1,923,033       17,739,093       5,554,453  
                                 
Income (loss) before income taxes
    281,589       1,012,760       (6,553,684 )     2,840,637  
                                 
Income taxes
    70,100       367,300       974,496       1,026,825  
Net income (loss)
  $ 211,489     $ 645,460     $ (7,528,180 )   $ 1,813,812  
                                 
Basic and diluted income (loss) per share (see Note 6)
  $ 0.03     $ 0.08     $ (0.91 )   $ 0.22  
Dividends per share
  $ 0.06     $ 0.06     $ 0.18     $ 0.18  
 
See Accompanying Notes to Consolidated Financial Statements.
       

 
 
4

FIRST CLOVER LEAF FINANCIAL CORP.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income (loss)
  $ 211,489     $ 645,460     $ (7,528,180 )   $ 1,813,812  
Other comprehensive income (loss):
                               
Unrealized gains (losses) on securities
                         
        arising during the period, net of tax
    342,806       (297,963 )     569,946       (289,661 )
Comprehensive income (loss)
  $ 554,295     $ 347,497     $ (6,958,234 )   $ 1,524,151  
                                 
                                 
See Accompanying Notes to Consolidated Financial Statements.
                 








 
5

FIRST CLOVER LEAF FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net (loss) income
  $ (7,528,180 )   $ 1,813,812  
Adjustments to reconcile net (loss) income to net cash provided by
               
(used in) operating activities:
               
Amortization of:
               
Deferred loan origination costs, net
    48,249       57,904  
Premiums and discounts on securities
    (115,651 )     (146,824 )
Core deposit intangible
    369,000       317,000  
Mortgage servicing rights
    175,767       68,929  
Amortization of fair value adjustments on:
               
Loans
    (50,300 )     (227,000 )
Time deposits
    (125,500 )     15,000  
Federal Home Loan Bank advances
    (32,999 )     16,000  
Subordinated debentures
    33,048       33,048  
Investment securities
    (41,700 )     (86,200 )
Property and equipment
    12,054       12,054  
Goodwill impairment
    9,300,000       -  
Impairment loss on assets
    355,989       -  
Provision for loan losses
    1,668,990       501,866  
Depreciation expense
    538,206       373,413  
ESOP expense
    49,409       60,229  
Gain on sale of loans
    (491,540 )     (214,117 )
Loss on sale of foreclosed real estate
    47,638       15,000  
Proceeds from sales of loans held for sale
    24,232,976       13,747,635  
Originations of loans held for sale
    (24,426,556 )     (14,142,918 )
Change in assets and liabilities:
               
Decrease (increase) in accrued interest receivable
    210,092       (75,581 )
Increase in mortgage servicing rights
    (251,659 )     (142,208 )
Increase in other assets
    (353,985 )     (531,882 )
Increase (decrease) in accrued interest payable
    209,053       (294,549 )
Increase in other liabilities
    70,185       258,885  
Net cash flows from operating activities
    3,902,586       1,429,496  
Cash flows from investing activities:
               
Proceeds from maturity of interest-earning time deposits
    25,847,832       17,619,286  
Purchase of interest-earning time deposits
    (20,637,371 )     (12,852,194 )
Available for sale securities:
               
Purchases
    (92,450,000 )     (119,740,000 )
Proceeds from calls, maturities and paydowns
    100,597,630       95,993,584  
Net decrease (increase) in loans
    13,953,232       (41,644,152 )
Purchase of property and equipment
    (461,693 )     (3,385,359 )
Proceeds from the sale of foreclosed real estate
    1,002,907       285,000  
Net cash flows provided by (used in) investing activities
  $ 27,852,537     $ (63,723,835 )
                 
(Continued)
               

 
6

FIRST CLOVER LEAF FINANCIAL CORP.
(Continued)
           
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
Cash flows from financing activities:
           
Net (decrease) increase in deposits
  $ (2,095,001 )   $ 40,930,937  
Net (decrease) increase in securities sold under agreements to repurchase
    (25,508,038 )     25,528,020  
Proceeds from Federal Home Loan Bank advances
    5,000,000       10,000,000  
Repayment of Federal Home Loan Bank advances
    (14,254,920 )     (3,000,000 )
Repurchase of Common Stock
    (5,677,570 )     (4,192,830 )
Cash dividends
    (1,485,308 )     (1,447,321 )
         Net cash flows (used in) provided by financing activities
    (44,020,837 )     67,818,806  
Net (decrease) increase in cash and cash equivalents
    (12,265,714 )     5,524,467  
Cash and cash equivalents at beginning of period
    67,135,384       37,084,575  
Cash and cash equivalents at end of period
  $ 54,869,670     $ 42,609,042  
                 
                 
                 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 9,348,988     $ 9,211,808  
Income tax payments, net
    1,233,593       940,071  
                 
Non-cash transactions
               
Loans transferred to foreclosed assets
    1,114,303       -  
Property and equipment transferred to other assets
    825,000       -  
                 
                 
See Accompanying Notes to Consolidated Financial Statements.
               



 
7

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(1)
Summary of Significant Accounting Policies:

The information contained in the accompanying consolidated financial statements is unaudited.  In the opinion of management, the consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results which may be expected for the entire fiscal year.  These consolidated financial statements should be read in conjunction with the consolidated financial statements of First Clover Leaf Financial Corp. (the “Company” or “First Clover Leaf”) for the year ended December 31, 2008 contained in the 2008 Annual Report to Stockholders that is filed as an exhibit to the Company’s Annual Report on Form 10-K.

The Company is a Maryland corporation that was incorporated in March 2006 as the successor corporation to First Federal Financial Services, Inc., in connection with the July 2006 “second-step” conversion of First Federal Financial Services, MHC and the simultaneous acquisition of Clover Leaf Financial Corp. and its wholly owned savings bank subsidiary, Clover Leaf Bank.  The accompanying interim consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, First Clover Leaf Bank (the “Bank”) and its wholly owned subsidiary, Clover Leaf Financial Services.  First Clover Leaf’s common stock is traded on the NASDAQ Capital Market under the symbol “FCLF.”

Reclassifications have been made to certain balances, with no effect on net income or stockholders’ equity, for the nine months ended September 30, 2008, to be consistent with the classifications adopted for the nine months ended September 30, 2009.
 
 
 

 
8

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(2)
Intangible Assets:

The gross carrying value and accumulated amortization of the core deposit intangible is presented below:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Core deposit intangible
  $ 3,258,000     $ 3,258,000  
Accumulated amortization
    (1,678,999 )     (1,309,999 )
  Total
  $ 1,579,001     $ 1,948,001  

Amortization expense on the core deposit intangible for the three and nine months ended September 30, 2009 was $108,000 and $369,000, respectively and $85,000 and $317,000 for the comparable periods in 2008.

Estimated amortization expense on the core deposit intangible for the remaining three months of 2009 and each of the five succeeding fiscal years is as follows:

   
Core
 
   
Deposit
 
   
Intangible
 
       
Three months ending December 31, 2009
  $ 99,000  
Year ending December 31, 2010
    359,000  
Year ending December 31, 2011
    304,000  
Year ending December 31, 2012
    281,000  
Year ending December 31, 2013
    223,000  
Year ending December 31, 2014
    116,001  


 
9

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(3)
Investment Securities:

The following table sets forth the composition of our available-for-sale securities portfolio at the dates indicated:

   
September 30, 2009
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
(Losses)
   
Value
 
Investment Securities:
                       
U.S. government sponsored agency obligations
  $ 55,736,998     $ 855,342     $ (72,799 )   $ 56,519,541  
Corporate bonds
    2,595,052       31,739       (102,436 )     2,524,355  
State and municipal securities
    14,621,026       895,184       -       15,516,210  
Other Securities
    75,251       -       -       75,251  
Mortgage-backed securities
    20,651,059       1,195,957       (90 )     21,846,926  
                                 
Total Investment Securities available for sale
  $ 93,679,386     $ 2,978,222     $ (175,325 )   $ 96,482,283  
 
   
December 31, 2008
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
(Losses)
   
Value
 
Investment Securities:
                       
U.S. government sponsored agency obligations
  $ 58,413,597     $ 965,204     $ (32,656 )   $ 59,346,145  
Corporate bonds
    3,093,991       -       (264,725 )     2,829,266  
State and municipal securities
    12,238,209       303,990       (91,616 )     12,450,583  
Other Securities
    75,251       -       -       75,251  
Mortgage-backed securities
    27,848,619       1,018,724       (1,010 )     28,866,333  
                                 
Total Investment Securities available for sale
  $ 101,669,667     $ 2,287,918     $ (390,007 )   $ 103,567,578  
 
 

 
10

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(3)
Investment Securities (Continued):

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2009 and December 31, 2008, are summarized as follows:

   
September 30, 2009
 
                                     
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
loss
   
Value
   
loss
   
Value
   
loss
 
                                     
U.S. government sponsored
                                   
agency obligations
  $ 15,734,920       72,799     $ -     $ -     $ 15,734,920     $ 72,799  
Corporate bonds
    -       -       744,564       102,436       744,564       102,436  
Mortgage-backed securities
    52,006       90       -       -       52,006       90  
    $ 15,786,926     $ 72,889     $ 744,564     $ 102,436     $ 16,531,490     $ 175,325  
 
   
December 31, 2008
 
                                     
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
loss
   
Value
   
loss
   
Value
   
loss
 
                                     
U.S. government sponsored
                                   
agency obligations
  $ 4,996,362       32,656     $ -     $ -     $ 4,996,362     $ 32,656  
Corporate bonds
    2,152,307       94,684       676,959       170,041       2,829,266       264,725  
State and municipal securities
    1,657,919       91,616       -       -       1,657,919       91,616  
Mortgage-backed securities
    297,325       1,010       -       -       297,325       1,010  
    $ 9,103,913     $ 219,966     $ 676,959     $ 170,041     $ 9,780,872     $ 390,007  
 
Management evaluates the investment portfolio on at least a quarterly basis to determine if investments have suffered an other-than-temporary decline in value.  In addition, management monitors market trends, investment grades, bond defaults and other circumstances to identify trends and circumstances that might impact the carrying value of equity securities.

At September 30, 2009, the Company had 14 securities in an unrealized loss position which included: 10 U.S. government sponsored agency obligations, two corporate bonds, and two mortgaged-backed securities.  The unrealized losses resulted from changes in market interest rates and liquidity, not from changes in the probability of contractual cash flows.  The Company does not intend to sell the securities, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of amortized cost.  Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.


 
11

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(3)
Investment Securities (Continued):

The amortized cost and fair value at September 30, 2009, by contractual maturity, are shown below.  Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.  Therefore, stated maturities are not disclosed.

   
Available for Sale
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Due in one year or less
  $ 4,412,654     $ 4,473,915  
Due after one year through five years
    38,246,441       39,218,587  
Due after five years through ten years
    26,254,938       26,811,224  
Due after ten years
    4,039,043       4,056,380  
Mortgage-backed securities
    20,651,059       21,846,926  
Other Securities
    75,251       75,251  
                 
    $ 93,679,386     $ 96,482,283  
 
Securities with a carrying amount of approximately $90,320,000 and $86,796,000 were pledged to secure deposits as required or permitted by law at September 30, 2009 and December 31, 2008, respectively.


 
12

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(4)
Loans:

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:

   
At September 30,
   
At December 31,
 
   
2009
   
2008
 
   
Amount
   
Percent
   
Amount
   
Percent
 
                         
Real Estate Loans
                       
One- to four-family residential loans(1)
  $ 100,113,763       23.7 %   $ 110,925,168       25.3 %
Multi-family
    20,746,817       4.9       18,150,435       4.2  
Commercial
    177,151,044       41.9       168,432,417       38.4  
Construction and land
    54,910,237       13.0       52,337,453       11.9  
Total real estate loans
    352,921,862       83.5       349,845,473       79.8  
                                 
Commercial business
    55,367,752       13.1       78,159,496       17.8  
                                 
Consumer Loans
    14,338,925       3.4       10,269,781       2.4  
                                 
Total loans and loans held for sale
    422,628,538       100.0 %     438,274,750       100.0 %
Less:
                               
Undisbursed portion of construction loans
    2,513,177               3,401,803          
Deferred loan origination fees, net
    14,036               58,974          
Allowance for loan losses
    5,231,952               3,895,246          
                                 
Total loans and loans held for sale, net
  $ 414,869,373             $ 430,918,727          
                                 
(1) Includes loans held for sale of $925,120 and $240,000 at September 30, 2009 and December 31, 2008, respectively.
 

 
13

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(5)
Asset Quality:

The following table sets forth information with respect to the Company’s nonperforming and impaired loans at the dates indicated:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Loans 90 days or more past due and still accruing
  $ 849,770     $ 763,659  
Nonaccrual loans, including $9,947,599 and $3,500,954 classified as impaired
         
as of September 30, 2009 and December 31, 2008, respectively
    11,253,121       5,617,507  
Other impaired loans
    17,861,243       1,152,151  
  Total nonperforming and impaired loans
  $ 29,964,134     $ 7,533,317  
                 
Allowance for loan losses on nonperforming and impaired loans
  $ 2,876,107     $ 670,547  
                 
Asset Quality Ratios:                 
                 
                 
Non-performing assets and impaired loans to total assets
    4.97 %     1.15 %
Non-performing and impaired loans to total loans
    7.24       1.75  
Allowance for loan losses to non-performing and impaired loans
    17.46       51.71  
Allowance for loan losses to total loans
    1.26       0.90  
 
Following is a summary of the activity in the allowance for loan losses:

   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
Balance at beginning of period
  $ 3,895,246     $ 1,897,945  
   Charge-offs
    (332,284 )     (96,177 )
   Recoveries
    -       15,517  
   Provision charged to expense
    1,668,990       501,866  
Balance at end of period
  $ 5,231,952     $ 2,319,151  
 
Further discussion of asset quality and of the adequacy of the allowance for loan losses at September 30, 2009 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 
14

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(6)
Earnings (losses) per Share:

Basic and diluted earnings (losses) per share represents net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding.  Employee stock ownership plan shares which are committed to be released are considered outstanding for basic and diluted earnings (losses) per share.

    Three Months Ended    
Nine Months Ended
 
    September 30,    
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net earnings (losses) available to common stockholders
  $ 211,489     $ 645,460     $ (7,528,180 )   $ 1,813,812  
                                 
Basic potential common shares:
                               
Weighted average shares outstanding
    8,111,107       8,176,731       8,363,902       8,229,111  
Weighted average unallocated Employee Stock
                         
      Ownership Plan shares
    (123,280 )     (131,784 )     (125,390 )     (133,902 )
          Basic weighted average shares outstanding
    7,987,827       8,044,947       8,238,512       8,095,209  
                                 
Dilutive potential common shares
    -       -       -       -  
                                 
Dilutive weighted average shares outstanding
    7,987,827       8,044,947       8,238,512       8,095,209  
                                 
Basic and diluted earnings (losses) per share
  $ 0.03     $ 0.08     $ (0.91 )   $ 0.22  

(7)
Employee Stock Ownership Plan:

The Company has an employee stock ownership plan (ESOP) which covers substantially all employees who have attained the age of 21 and completed one year of service.  In connection with its initial stock offering in 2004, the Company loaned funds to the ESOP for the purchase of its common stock at the initial public offering price.  The loan is being repaid based on a variable interest rate over 20 years beginning December 31, 2004.  All shares are held in a suspense account for allocation among the participants as the loan is repaid.  Shares are released for allocation to participants based upon the ratio of the current year’s debt service to the sum of total principal and interest payments over the remaining life of the note.  Shares released from the suspense account are allocated among the participants based upon their pro rata annual compensation.  The purchase of shares by the ESOP was recorded by the Company as unearned ESOP shares in a contra equity account.  As ESOP shares are committed to be released to compensate employees, the contra equity account is reduced and the Company recognizes compensation expense equal to the average fair market value of the shares committed to be released.  Compensation expense of $16,244 and $49,409 was incurred for the three and nine months ended September 30, 2009, respectively and $18,927 and $60,229 for the comparable periods in 2008.


 
15

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(7)
Employee Stock Ownership Plan (Continued):

Dividends on unallocated ESOP shares, together with Company contributions, are used by the ESOP to repay principal and interest on the outstanding note.

The following table reflects the shares held by the plan at September 30, 2009 and December 31, 2008:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Unallocated shares (fair value at September 30, 2009 and
       
December 31, 2008 of $848,239 and $875,027, respectively)
    121,177     $ 127,555  
Allocated Shares
    49,582       43,204  
Total ESOP Shares
    170,759     $ 170,759  

(8)
Recent Accounting Pronouncements:
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01 (formerly Statement No. 168), Topic 105 – Generally Accepted Accounting Principles - amendments based on-Statement of Financial Accounting Standards No. 168 -The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.  The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”).  The Codification does not change current GAAP, but rather it is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place.  The Company adopted this standard for the interim reporting period ending September 30, 2009.  The adoption of this statement did not have a material impact on the Company’s financial condition, results of operations or cash flows.

On January 1, 2010, the Company will be required to follow the new disclosure guidance in FASB Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, which is related to transfers of assets.  This guidance is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets.  The Company is currently evaluating the impact of adopting the guidance.


 
16

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(9)
Fair Value of Financial Instruments:

FASB ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet.  Fair value is determined under the framework established by ASC Topic 820, Fair Value Measurements and Disclosures.  ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirement.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.  The following information presents estimated fair values of the Company’s financial instruments as of September 30, 2009 and December 31, 2008 and the methods and assumptions used to estimate those fair values.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents:  The carrying amounts of cash and cash equivalents approximate fair values.

Interest-earning time deposits:  Due to the short term nature of these deposits, generally three months or less, the carrying amounts of these deposits approximate fair values.

Securities:  When available, quoted market prices are used to determine the fair value of investment securities and such items are classified within Level 1 of the fair value hierarchy.  An example is U.S. Treasury securities.  For other securities, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable.  Securities measured at fair value by such methods are classified as Level 2.

 
Federal Home Loan Bank stock:  The Company is required to maintain these equity securities as a member of the Federal Home Loan Bank of Chicago and in amounts as required by this institution.  These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par.  Therefore, they are less liquid than other tradable securities and their fair value is not readily available.

Loans:  Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect and other consumer loans.  Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.  The fair value of fixed rate loans and non-performing loans is estimated by discounting future cash flows using discount rates that reflect the Company’s current pricing for loans with similar characteristics, such as loan type, credit risk, pricing and remaining maturity.

Accrued interest receivable:  The carrying amount of accrued interest receivable approximates its fair value.


 
17

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(9)
Fair Value of Financial Instruments (Continued):

Deposit liabilities:  The fair values disclosed for demand deposits (savings) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank advances:  The fair value of variable rate Federal Home Loan Bank advances approximate carrying value. The fair value of fixed rate Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on current rates for similar advances.

Securities sold under agreements to repurchase:  The carrying amounts of securities sold under agreements to repurchase approximate fair value.

Subordinated debentures:  The fair value of fixed rate trust preferred debentures are estimated using discounted cash flow analyses based on current rates for similar advances.

Accrued interest payable:  The carrying amount of accrued interest payable approximates its fair value.


 
18

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(9)
Fair Value of Financial Instruments (Continued):

The estimated fair values and related carrying or notional amounts of the Company's financial instruments are as follows:

   
September 30, 2009
   
December 31, 2008
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 54,869,670     $ 54,869,670     $ 67,135,384     $ 67,135,384  
Interest-earning time deposits
    -       -       5,210,461       5,210,461  
Securities available for sale
    96,482,283       96,482,283       103,567,578       103,567,578  
Federal Home Loan Bank stock
    6,306,273       6,306,273       6,306,273       6,306,273  
Loans, net
    414,869,373       408,433,325       430,918,727       437,952,913  
Accrued interest receivable
    2,251,228       2,251,228       2,461,320       2,461,320  
                                 
Financial liabilities:
                               
Non-interest bearing deposits
    28,236,454       28,236,454       24,994,196       24,994,196  
Interest bearing deposits
    416,845,963       420,669,963       422,308,722       424,696,738  
Federal Home Loan Bank advances
    40,680,000       41,732,000       49,967,919       50,673,734  
Securities sold under agreement
                               
to repurchase
    29,595,275       29,595,275       55,103,313       55,103,313  
Subordinated debentures
    3,919,192       3,898,192       3,886,144       3,957,709  
Accrued interest payable
    1,454,608       1,454,608       1,245,555       1,245,555  
 
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items.

(10)
Fair Value Disclosures:

The Company determines the fair market values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.
 
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  Level 2 inputs are inputs other than quoted prices included with Level 1 that are observable for the asset or liability either directly or indirectly.  These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks,

 
19

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(10)
Fair Value Disclosures (Continued):

etc.) or inputs that are derived from or corroborated by market data by correlation or other means.  Level 3 inputs are unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis segregated by fair value hierarchy level during the period ended September 30, 2009 are summarized below:
 
   
Quoted Prices in
Active Markets for
Identical Assets
   
Significant Other
Observable Inputs
   
Significant
Unobservable
 Inputs
 
 
 
Assets:
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
                         
Investment Securities:
                       
U.S. government sponsored agency obligations
  $ -     $ 56,519,541     $ -     $ 56,519,541  
Corporate bonds
    -       2,524,355       -       2,524,355  
State and municipal securities
    -       15,516,210       -       15,516,210  
Other securities
    -       75,251       -       75,251  
Mortgage-backed securities
    -       21,846,926       -       21,846,926  
Total Investment Securites available for sale
  $ -     $ 96,482,283     $ -     $ 96,482,283  
 
Assets and liabilities measured at fair value on a nonrecurring basis by fair value hierarchy level during the period ended September 30, 2009 are summarized below:
 
   
Quoted Prices in
 Active Markets for
Identical Assets
   
Significant Other
Observable Inputs
   
Significant
 Unobservable
 Inputs
   
 
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
                         
Impaired loans
  $ -     $ 27,639,187     $ 169,655     $ 27,808,842  
Foreclosed assets
  $ -     $ 696,554     $ -     $ 696,554  
Goodwill
  $ -     $ 11,385,323     $ -     $ 11,385,323  
 
Impaired loans that are collateral dependent have been written down to the fair value of the collateral, less estimated costs to sell, of $27.8 million through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds the fair value of the collateral.  Valuation techniques consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs.  In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy.  The calculated valuation amount does not necessarily represent the fair value of the loan.  Management believes it is more likely than not that a workout solution or liquidation of the collateral is the best use of the asset and therefore has measured fair value based on the underlying collateral of the loan.  If management were to sell the impaired loan portfolio to a third party instead of liquidating the collateral, the measurement of fair value could be significantly different.


 
20

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(10)
Fair Value Disclosures (Continued):

As noted in Note 11, an implied fair value of goodwill was measured for the reporting unit, in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  The fair values disclosed in Note 9 reflect the estimated fair values of the assets and liabilities assuming the sale of those assets and liabilities to a willing third party.

(11)
Goodwill Impairment:

The company reported goodwill from its acquisition of Clover Leaf Bank in 2006 in the amount of $9.4 million and its acquisition of Partners Bank in 2008 in the amount of $11.3 million, for a total of $20.7 million in goodwill.  In accordance with ASC Topic 350, Intangibles-Goodwill and Other, goodwill and intangible assets with indefinite useful lives are no longer amortized, rather they are assessed, at least annually, for impairment.  The Company tests goodwill for impairment on an annual basis as of September 30, or more often if events or circumstances indicate there may be impairment.  Management has determined that the Company has only one reporting unit for purposes of evaluating goodwill.

As outlined in ASC Topic 350, the goodwill impairment analysis involves a two-step test.  Step one includes two valuation methodologies; (i) the comparable transactions approach, and (ii) the control premium approach. The first valuation methodology, used to identify potential impairment, involves comparing the fair value of the reporting unit to its carrying value including goodwill.  If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired.  If the carrying value exceeds fair value, there is an indication of impairment, and the second valuation methodology is performed to measure the amount of impairment.  The second valuation methodology involves calculating an implied fair value of goodwill for the reporting unit, in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first valuation methodology, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment charge is recorded against earnings for the excess.
 
As a result of ongoing volatility in the financial industry, primarily a decline in pricing ratios recently paid in the sale or merger of banking franchises, and the corresponding decline in the industry based control premiums, First Clover Leaf determined it was necessary to perform an interim goodwill impairment test during the second quarter of 2009.  An independent third party was engaged to assist with the impairment assessment.  The two step valuation approach was performed as of June 30, 2009, and the results indicated that goodwill was impaired.  As a result, a non-cash goodwill impairment charge of $9.3 million was recorded as of June 30, 2009.  The impairment charge was included in noninterest expense and did not affect our regulatory or tangible capital ratios.  
 
Effective September 30, 2009, we performed our annual goodwill impairment test. Upon completion of the first step of the goodwill impairment test, the fair value of the reporting unit was less than its carrying value by approximately $300,000. As such, the second step of the goodwill impairment test was required to determine the amount of impairment loss, if any. The second step is being completed with the assistance of an independent valuation firm and the preliminary results indicate that no further goodwill impairment loss is necessary, beyond what was recorded as of June 30, 2009. The preliminary results show an increase in non-performing loans during the third quarter, which resulted in assigning a lower fair value to certain of the Company’s net assets in the second step of the goodwill impairment test as compared to their carrying amounts. This increased the implied fair value of goodwill to an amount greater than the recorded amount. We will complete the second step of the goodwill impairment test in the fourth quarter and if our preliminary results change such that a goodwill impairment loss is required, we will record that loss in the fourth quarter.

 
21

FIRST CLOVER LEAF FINANCIAL CORP.

Notes to Consolidated Financial Statements

(11)
Goodwill Impairment (Continued):

Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future, and we may be required to record additional goodwill impairment losses in future periods.  It is not possible at this time to determine if any such future impairment loss would result or, it if does, whether such charge would be material.  However, any such future impairment loss would be limited to the remaining goodwill balance of $11.4 million at September 30, 2009.  Subsequent reversal of goodwill impairment losses is not permitted.

(12)
Subsequent Events:

Events occurring subsequent to September 30, 2009, have been evaluated as to their potential impact to the financial statements through November 12, 2009, the date of filing this Form 10-Q.

On October 27, 2009, the Board of Directors of the Company declared a cash dividend on the Company’s common stock of $0.06 per share for the quarter ended September 30, 2009. The dividend will be payable to stockholders of record as of November 13, 2009 and is expected to be paid on November 20, 2009.




 
22

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties including changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The Company wishes to caution you not to place undue reliance on any such forward-looking statements, which only speak as of the date made.  The Company wishes to advise you that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.


 
Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.  Management makes significant estimates and has identified the allowance for loan losses and goodwill and other intangible assets as critical accounting policies.

Allowance for loan losses.  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.



 
23

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention and also considered to be impaired. For such loans an allowance is established when the fair value of the collateral, less estimated costs to sell, is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Goodwill and Other Intangible Assets.  Over the past several years, First Clover Leaf has grown through acquisitions accounted for under the purchase method of accounting.  Under the purchase method, First Clover Leaf was required to allocate the cost of an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition.  The excess cost over the net assets acquired represents goodwill, which is not subject to amortization.
 
Customer relationship intangibles are required to be amortized over their estimated useful lives.  The method of amortization reflects the pattern in which the economic benefits of the intangible assets are estimated to be consumed or otherwise used up.  Since First Clover Leaf’s acquired customer relationships are subject to routine customer attrition, the relationships are more likely to produce greater benefits in the near-term than in the long-term, which typically supports the use of an accelerated method of amortization for the related intangible assets.  Management is required to evaluate the useful life of customer relationship intangibles to determine if events or circumstances warrant a change in the estimated life.  Should management determine that the estimated life of any intangible asset is shorter than originally estimated, First Clover Leaf would adjust the amortization of that asset, which could increase future amortization expense.
 


 
24

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired.  Goodwill recorded by First Clover Leaf in connection with its acquisitions relates to the inherent value in the businesses acquired, and this value is dependent upon First Clover Leaf’s ability to provide quality, cost effective services in a competitive market place.  The continued value of recorded goodwill is impacted by the value of our stock and continued profitability of the organization.  In the event that the stock price experiences significant declines or the operations of the company lack profitability an impairment of goodwill would need to be recognized.  Any impairment recognized would adversely impact earnings in the period in which it is recognized.

First Clover Leaf utilizes a two step valuation approach to test for goodwill impairment.  We estimate the fair value as of the measurement date utilizing two valuation methodologies including the comparable transactions approach, and the control premium approach.  We then compare the estimated fair value to the current carrying value to determine if goodwill impairment had occurred as of the measurement date.  Future events, such as adverse changes to First Clover Leaf’s business or changes in the economic market, could cause management to conclude that impairment indicators exist and require management to re-evaluate goodwill.  Should such re-evaluation determine that goodwill is impaired, the resulting impairment loss recognized could have a material, adverse impact on First Clover Leaf’s financial condition and results of operations.  In accordance with current accounting guidance, management has determined that the Company has only one reporting unit for purposes of evaluating goodwill.  See Item 1 Note 11 for additional information on goodwill impairment.

Overview

Net income decreased to $211,000 for the three months ended September 30, 2009 from $645,000 for the same period last year.  This decrease was due primarily to an increase in provision for loan losses, an impairment loss on assets related to a building held for sale, and higher expenses for compensation and FDIC insurance premiums offset by higher net interest income.  For the nine months ended September 30, 2009, First Clover Leaf recorded a net loss of $7.5 million compared to net income of $1.8 million for the same period in 2008 due primarily to the $9.3 million goodwill impairment charge recorded as of June 30, 2009.  Net interest income increased $3.5 million over the prior period.  During the nine-month period of 2009, we incurred a $356,000 impairment loss on assets, a $280,000 FDIC special assessment charge, and also experienced higher expenses for compensation and employee benefits and occupancy as a result of the opening of a new branch in June 2008 and the acquisition of Partners Bank in October 2008.  We also experienced higher expenses for provisions for loan losses, regular FDIC insurance premiums, and professional fees.


 
25

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Total Assets.  Total assets decreased to $602.9 million at September 30, 2009 from $653.3 million at December 31, 2008.  Total cash and cash equivalents decreased to $54.9 million at September 30, 2009 from $67.1 million at December 31, 2008.  The decrease in cash and cash equivalents was due primarily to a decrease in cash and due from banks as the balance in our securities sold under agreements to repurchase decreased $25.5 million.  Securities available for sale decreased to $96.5 million at September 30, 2009 from $103.6 million at December 31, 2008.  The decrease was due primarily to calls, maturities and pay-downs of $100.6 million, partially offset by purchases of $92.5 million.  Loans, net amounted to $414.9 million at September 30, 2009, compared to $430.9 million at December 31, 2008.  This decrease was a result of loan paydowns and maturities exceeding new loan originations.  Due to the current economic environment, new loan demand, especially in the commercial real estate market, is not as strong as it has been in prior periods.  Goodwill decreased to $11.4 million at September 30, 2009 from $20.7 million at December 31, 2008.  This decrease was a result of a $9.3 million impairment charge recorded in June 2009.

Total Liabilities.  Deposits decreased slightly to $445.1 million at September 30, 2009 from $447.3 million at December 31, 2008.  Securities sold under agreements to repurchase decreased to $29.6 million at September 30, 2009 from $55.1 million at December 31, 2008.  The change in securities sold under agreements to repurchase was due primarily to fluctuations by one significant customer.  This type of fluctuation is a normal occurrence for this customer.  Federal Home Loan Bank advances at September 30, 2009 were $40.7 million compared to $50.0 million at December 31, 2008.

Stockholders’ Equity.  Stockholders’ equity decreased to $79.6 million at September 30, 2009 from $93.7 million at December 31, 2008, principally as a result of a $7.5 million net loss which included a $9.3 million goodwill impairment charge recorded in June 2009 that did not impact our regulatory capital ratios, including our classification as “well capitalized.”  Stockholders’ equity was also reduced as a result of the repurchase of $5.7 million of the Company’s common stock, and the payment of cash dividends of $1.5 million during the nine months ended September 30, 2009.

Asset Quality

The Company has experienced an increase in nonperforming loans due to the current economic slowdown.  Detailed information concerning the Company’s nonaccrual, impaired and substandard loans is described in the paragraphs that follow.  Overall, the Company has a very limited number and value of what would be classified as high risk loans.  The Company does not originate subprime loans and holds a very small number and dollar value of ARM products.  The Company does hold some junior lien mortgages and high loan-to-value ratio mortgages; however, they total a very insignificant portion of our loan portfolio.  The Company is reviewing these loans regularly and has not seen any increase in the delinquency trends for these products.  Our allowance for loan loss methodology has remained consistent. As commercial loans mature and requests for renewals are processed, either a new appraisal is obtained or the Company performs an internal valuation of the collateral based on comparable sales.  Additionally, the original appraisal is discounted if the Company believes it is warranted.



 
26

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

At September 30, 2009, the Company’s nonaccrual loans increased $5.7 million to $11.3 million from $5.6 million at December 31, 2008, while other impaired loans increased $16.7 million to $17.9 million from $1.2 million at December 31, 2008.  The increase in nonaccrual loans was a result of nine loans being reclassified to nonaccrual status.  The largest loan is a $1.9 million loan to a real estate investor, who is experiencing high vacancy rates and property repairs resulting in decreased cash flows due to the economic slowdown.  The borrower is currently working with a management company to decrease the vacancy rates.  The next largest loan is a $1.4 million loan to a commercial contractor whose project has been adversely impacted by the current economic slowdown.  The next largest loan is a $750,000 real estate development for single family residences.  This is a new development that, due to economic conditions, has had a very slow start. The next largest loan is a $674,000 loan to a real estate developer.  This loan is in the process of being restructured.  The remaining balance is made up of small credits, each less than $500,000. Appraisals have been obtained for all of the above mentioned credits and shortfalls are being reserved through provisions for loan losses.

The increase in other impaired loans was due to the addition of several accounts that were all related to investment real estate.  The largest credit reclassified to impaired loans was a $6.9 million credit to a builder with excess inventory.  This loan is secured by residential investment property for which appraisals have been obtained.  Currently the collateral on this loan is sufficient to cover the majority of the outstanding balance, and sufficient reserves have been set aside for the remaining outstanding balance. The next largest loan is a $3.9 million development loan to a subdivision developer with excess inventory that is selling slowly due to the economic slowdown.  The loan is secured by the residential property, and the appraisal for the property has been reviewed and updated to reflect current market conditions and sales values. The next three largest relationships are a $2.1 million credit to a commercial contractor, a $2.0 million credit secured by residential investment property, and a $1.6 million credit to a residential builder.  The $2.1 million credit is to a builder whose situation has been impacted by the current economic slowdown and other business issues.  This credit is currently being evaluated for a possible restructuring arrangement.  The $2.0 million credit is secured by rental property for which vacancies have increased substantially, and the $1.6 million credit is secured by single family residences.  The Company has appraisals on all of the aforementioned properties. The appraised values are sufficient to cover the outstanding balance on two of the credits, and reserves have been allocated for the shortfall in the appraised value of the remaining credit.  The remaining $1.6 million increase in impaired loans is made up of several properties that each have outstanding balances of less than $1.0 million.

Under the Company’s internal review policy, loans classified as substandard totaled $27.8 million at September 30, 2009 and $6.1 million at December 31, 2008.  The $21.7 million increase was due to the reclassification of several real estate related accounts that had been previously classified as special mention, but due to no significant improvement in their financial condition since year end, we have elected to downgrade the credits to substandard.  The largest addition was a $6.9 million credit to a builder with excess inventory (as discussed above).  This loan is secured by residential investment property for which recent appraisals have been obtained.  The next largest loan is a $3.9 million development loan to a subdivision developer with excess inventory that is selling slowly due to the economy (as discussed above). The loan is secured by the residential property.  The appraisal has been reviewed and updated to reflect current market conditions and sales values.  The next four largest relationships are (i) a $2.1 million credit to a commercial contractor (as discussed above), (ii) a $2.0 million credit secured by residential investment property (as discussed above), (iii) a $2.0 million credit to a real estate builder and developer, and (iv) a $1.3 million credit to a real estate broker.  The $2.1 million credit is to a builder whose project has been impacted by the current economic slowdown.


 
27

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This credit is currently being evaluated for a possible restructuring arrangement.  One of the $2.0 million credits is secured by rental property for which vacancies have increased substantially, and the remaining $2.0 million credit is secured by residential and commercial real estate.  A restructuring of this last credit has been proposed to the borrower and is currently being evaluated.  The $1.3 million credit is primarily secured by commercial real estate.  The borrower in this case is struggling with decreased cash flows.  The remaining $2.7 million increase in substandard loans is made up of several properties that each have outstanding balances of less than $1.0 million.

The allowance for loan losses to non-performing and impaired loans, which is listed in the “Asset Quality Ratios” table in Item 1 Note 5, decreased significantly to 17.46% at September 30, 2009, compared to 51.71% at December 31, 2008.  This decline is due to the large increase in non-performing loans that did not require proportionate reserves under our allowance methodology.  The loans that were reclassified to impaired loan status were previously classified as special mention loans.  Loans classified as special mention are not evaluated individually for loan loss reserves.  The loan loss reserve for special mention loans is calculated on a percentage allocation, which is based on the Company’s historical loss performance adjusted for qualitative factors. Once a special mention loan is reclassified to an impaired or substandard loan, they are evaluated individually with consideration being given to vacancies, market stabilization, cash flows and appraisals.  Specific loan loss reserves are allocated to each loan based on the above conditions.  Of the loans that were reclassified to impaired status in the third quarter of 2009, the majority required little to no special allocation of loan loss reserve.  Therefore, our loan loss reserve balance did not increase proportionately to the increase in the volume of non-performing loans.

 
Results of Operations

General.  Net income decreased by $9.3 million to a $7.5 million loss for the nine months ended September 30, 2009 compared to $1.8 million in net income for the same period last year.  The decrease in net income was due primarily to a $9.3 million goodwill impairment charge, discussed above.  Despite the overall net loss due to the above charges, the Company recorded higher net interest income and non-interest income for the three and nine months ended September 30, 2009 compared to the same periods in 2008.

Yields on all interest-earning assets declined for the nine months ended September 30, 2009 compared to the same period in 2008 due to the interest rate cuts instituted by the Federal Reserve.  These rate cuts resulted in declining yields in our loan portfolio, as a significant number of our loans are adjustable-rate loans that reprice according to the prime rate changes. The rate cuts also impacted our interest-earning deposits with depository institutions as those assets also have adjustable-rates versus fixed rates.  The declining rate environment has resulted in a number of the bonds in our securities portfolio being called and the Company reinvesting the proceeds in lower yielding bonds.  We continue to attempt to absorb the effects of the interest rate cuts through lowering the rates we pay on deposits.  However, a significant number of our interest-bearing deposits are time deposits, which are fixed-rate contracts until maturity that do not allow for immediate repricing as rates fluctuate.  Overall, further downward pressure on interest rates is unlikely to benefit our net interest margin or net income.

 
28

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The results for the three and nine months ended September 30, 2009 reflect the October 2008 acquisition of Partners Bank, which had $170.0 million in assets, $101.6 million in loans, and $108.7 million of deposits at the time of acquisition.

Net interest income.  Net interest income increased by $1.0 million to $3.9 million for the three months ended September 30, 2009 from $2.9 million for the same period last year.  Net interest income increased by $3.5 million to $11.8 million for the nine months ended September 30, 2009 from $8.3 million for the comparable period in 2008.  Net average interest-earning assets were $71.4 million for the nine months ended September 30, 2009, compared to $76.3 million for the same period in 2008. The ratio of interest-earning assets to interest-bearing liabilities decreased to 113.68% for the nine months ended September 30, 2009 from 123.63% for the same period in 2008.  The net interest rate spread increased to 2.36% for the nine months ended September 30, 2009, compared to 2.06% for the comparable period in 2008.  The average rate earned on interest-earning assets decreased by 100 basis points for the nine months ended September 30, 2009 to 4.78% from 5.78% for the same period in 2008, while the average rate paid on interest-bearing liabilities decreased by 130 basis points during these periods.  The increase in the interest rate spread was attributable to the cost of funds declining faster than the yield on interest-earning assets.
 
 

 
29

FIRST CLOVER LEAF FINANCIAL CORP.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following tables set forth the average balance sheets, average yields and costs, and certain other information for the periods indicated.  No tax-equivalent yield adjustments were made, as the effect thereof was not material.  All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of deferred loan fees, discounts and premiums that are amortized or accreted to interest income or expense.  Yields and rates have been annualized.
 
   
Three Months Ended September 30,
   
Three Months Ended September 30,
 
   
2009
   
2008
 
   
Average
Outstanding
Balance
   
Interest (4)
   
Yield/
Rate
   
Average
Outstanding
Balance
   
Interest (4)
   
Yield/
Rate
 
   
(Dollars in thousands)
 
Interest-earning assets:
                                   
Loans, gross
  $ 421,621     $ 5,975       5.62 %   $ 327,564     $ 5,019       6.10 %
Securities
    99,183       942       3.77       53,182       597       4.47  
Federal Home Loan Bank stock
    6,306       -       -       5,604       -       -  
Interest-earning balances from depository institutions
    46,290       27       0.23       26,920       161       2.38  
Total interest-earning assets
    573,400       6,944       4.80       413,270       5,777       5.56  
Non-interest-earning assets
    39,267                       30,725                  
Total assets
  $ 612,667                     $ 443,995                  
                                                 
Interest-bearing liabilities:
                                               
Interest-bearing transaction
  $ 167,404       719       1.70     $ 111,237       728       2.60  
Savings deposits
    18,815       51       1.08       18,029       102       2.25  
Time deposits
    218,540