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EX-32 - EXHIBIT 32 - First Clover Leaf Financial Corp.ex32.htm
EX-21 - EXHIBIT 21 - First Clover Leaf Financial Corp.ex21.htm
EX-13 - EXHIBIT 13 - First Clover Leaf Financial Corp.ex13.htm
EX-31.2 - EXHIBIT 31.2 - First Clover Leaf Financial Corp.ex31_2.htm
EX-10.8 - EXHIBIT 10.8 - First Clover Leaf Financial Corp.ex10_8.htm
EX-31.1 - EXHIBIT 31.1 - First Clover Leaf Financial Corp.ex31_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

T
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2010
OR
£
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: 0-50820

First Clover Leaf Financial Corp.
(Exact Name of Registrant as Specified in its Charter)

Maryland
 
20-4797391
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

6814 Goshen Road, Edwardsville, Illinois
 
62025
(Address of Principal Executive Offices)
 
(Zip Code)

 
(618) 656-6122
 
 
(Issuer’s Telephone Number including area code)
 

Securities Registered Pursuant to Section 12(b) of the Act:

   
Name of Each Exchange
Title of Each Class
 
On Which Registered
     
Common Stock, par value $0.10 per share
 
The NASDAQ Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act:

None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES £ NO T.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
YES £ NO T.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such requirements for the past 90 days.

(1) YES T NO £

(2) YES T 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 such shorter period that the Registrant was required to submit and post such files). YES £ NO £
 


 
 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. T

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      
£
 
Smaller reporting company
T
(Do not check if smaller reporting company)
     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES £ NO T

As of June 30, 2010 the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of June 30, 2010 ($6.51 per share) was $40.6 million.

As of March 28, 2011, there were approximately 7,882,500 shares issued and outstanding of the Registrant’s Common Stock, par value $0.10 per share.

DOCUMENTS INCORPORATED BY REFERENCE

1.
Proxy Statement for the 2011 Annual Meeting of Stockholders (Parts II and III).
2.
Annual Report to Stockholders for the year ended December 31, 2010 (Part II).

 
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PART I

ITEM 1.             BUSINESS

Forward-Looking Statements

This Annual Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage, commercial and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products and services. These risks and uncertainties, as well as the Risk Factors set forth in Item 1A below, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.

General

First Clover Leaf Financial Corp. (“First Clover Leaf”) is a Maryland corporation that was incorporated in March 2006 and was formed by our predecessor company, First Federal Financial Services, Inc., in connection with the “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, a former Illinois bank headquartered in Edwardsville, Illinois. The second-step conversion and stock offering and the simultaneous acquisition of Clover Leaf Financial Corp. were consummated in July 2006. As a result of these transactions, Clover Leaf Financial Corp. was merged with and into First Clover Leaf and Clover Leaf Bank was merged with and into our wholly owned subsidiary, First Federal Savings and Loan Association of Edwardsville, which was renamed First Clover Leaf Bank.

In October 2008 we completed our acquisition of Partners Financial Holdings Inc. (“Partners”), the holding company of Partners Bank (“Partners Bank”), an Illinois state bank located in Glen Carbon, Illinois. In the acquisition, Partners was merged with and into First Clover Leaf with First Clover Leaf being the surviving corporation in the merger, and Partners Bank was merged with and into First Clover Leaf Bank, with First Clover Leaf Bank as the surviving institution.

Our principal asset is our ownership of 100% of the outstanding common stock of First Clover Leaf Bank, a federal savings bank.

At December 31, 2010, we had total consolidated assets of $575.0 million, net loans of $387.6 million, total deposits of $447.5 million and stockholders’ equity of $77.3 million. We had net income of $3.8 million for the year ended December 31, 2010.

Our headquarters are located at 6814 Goshen Road, Edwardsville, Illinois 62025, and our telephone number is (618) 656-6122.

Our website address is www.firstcloverleafbank.com. Information on our website is not and should not be considered a part of this Annual Report on Form 10-K. Our website contains a direct link to

 
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our filings with the Securities and Exchange Commission, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any. Copies may also be obtained, without charge, by written request to Secretary, 6814 Goshen Road, Edwardsville, Illinois 62025.

First Clover Leaf Bank

General

We conduct our business through our four branch offices located in Edwardsville and Wood River, Illinois. Our principal business consists of attracting retail deposits from the general public in the areas surrounding our office locations and investing those deposits, together with funds generated from operations, primarily in one- to four-family residential real estate loans, multi-family real estate loans, commercial real estate loans, construction and land loans, commercial business loans and consumer loans, and in investment securities. Our revenues are derived principally from interest on loans and securities. Our primary sources of funds are deposits and principal and interest payments on loans and securities.

Competition

We face intense competition within our market area both in making loans and attracting deposits. The City of Edwardsville and the surrounding area have a high concentration of financial institutions, including large commercial banks, community banks and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Some of our competitors offer products and services that we currently do not offer, such as trust services. Based on Federal Deposit Insurance Corporation data as of June 30, 2010 (the latest date for which information is available), our market share of deposits was 10.1% of all deposits in Madison County making us the fourth largest institution out of 26 institutions located in Madison County as of that date. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.

Market Area

We operate in a primarily suburban market area that has a stable population and household base. The 2010 U.S. Census Report indicates that the population of Madison County increased 0.4% to 269,282, from 2005 until 2010 while the population of the City of Edwardsville increased 7.6% to 24,293. During the same period, the number of households in Madison County and in the City of Edwardsville increased 1.0% and 7.7%, respectively. The latest information available for 2009 indicates that the median household income for Madison County was $50,628. This compares to a median household income of $53,974 and $50,221 for the state of Illinois and the United States, respectively.

Our primary lending area is concentrated in Madison County and the southern portion of Macoupin County, Illinois. The City of Edwardsville is the County Seat of Madison County and is considered a “bedroom community” for St. Louis, Missouri, which is approximately 20 miles southwest of Edwardsville. The economy of our market area is characterized by a large number of small retail establishments and small industry. Additionally, major employers in our immediate market area include Southern Illinois University-Edwardsville, ConocoPhillips, the local school district and the Madison County government. Our customer base is comprised primarily of middle-income families. We believe that our local market has not experienced as severe of a downturn as certain other areas of the country, such as coastal states. While, in general, property values in our market area have fallen, homes continue to sell, but, in many cases, at a slower pace. As indicated above, the local area is not heavily reliant on any one industry.

 
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Lending Activities

Our principal lending activity includes the origination of first mortgage loans for the purchase or refinancing of one- to four-family residential property, the origination of multi-family and commercial real estate loans, construction and land loans, commercial business loans, as well as home equity loans.

One- to four-family residential real estate mortgage loans represented $99.2 million, or 24.6%, of our loan portfolio at December 31, 2010, and multi-family loans represented $26.5 million, or 6.6% of our loan portfolio at December 31, 2010. Commercial real estate loans represented $160.8 million, or 39.9% of our loan portfolio at December 31, 2010. We also offer construction and land loans secured by single-family properties and residential subdivisions. Construction and land loans represented $53.6 million, or 13.3%, of our loan portfolio at December 31, 2010. We offer commercial business loans, and these loans represented $51.7 million, or 12.8% of our loan portfolio, at December 31, 2010. We originate consumer loans, including home equity loans and automobile loans, which totaled $10.9 million, or 2.8% of our loan portfolio at December 31, 2010.

In an effort to reduce the risk to our net income from changes in market interest rates, in recent years we have emphasized the origination of commercial real estate and commercial business loans. Compared to our residential mortgage loans, commercial real estate and commercial business loans generally have higher interest rates and are more sensitive to changes in market interest rates because they often have shorter terms to maturity, and therefore, the interest rates adjust more frequently. Our acquisition of Partners Bank further increased our commercial real estate and commercial business loans, as those types of loans represented the primary lending focus of Partners Bank.

 
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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

   
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                                                             
Real Estate Loans:
                                                           
One- to four-family residential loans(1)
  $ 99,187       24.6 %   $ 98,080       23.4 %   $ 110,925       25.3 %   $ 112,764       39.2 %   $ 120,355       48.5 %
Multi-family
    26,543       6.6       20,947       5.0       18,150       4.2       13,931       4.8       8,895       3.6  
Commercial
    160,799       39.9       179,923       42.8       168,432       38.4       97,810       34.0       68,577       27.7  
Construction and land
    53,647       13.3       45,448       10.8       52,338       11.9       20,776       7.2       17,181       6.9  
Total real estate loans
    340,176       84.4       344,398       82.0       349,845       79.8       245,281       85.2       215,008       86.7  
                                                                                 
Commercial business
    51,738       12.8       63,135       15.0       78,160       17.8       34,783       12.1       25,907       10.4  
                                                                                 
Consumer Loans:
                                                                               
Automobile
    1,079       0.3       1,383       0.3       1,318       0.3       1,355       0.5       2,028       0.8  
Home equity
    9,170       2.3       9,871       2.4       7,145       1.7       5,119       1.8       3,364       1.4  
Other
    666       0.2       1,223       0.3       1,807       0.4       1,296       0.5       1,733       0.7  
Total consumer loans
    10,915       2.8       12,477       3.0       10,270       2.4       7,770       2.7       7,125       2.9  
                                                                                 
Total loans
    402,829       100.0 %     420,010       100.0 %     438,275       100.0 %     287,834       100.0 %     248,040       100.0 %
                                                                                 
Less undisbursed portion of construction loans
    (9,590 )             (1,773 )             (3,402 )             (860 )             (1,257 )        
Less deferred loan origination costs (fees), net
    57               (21 )             (59 )             (157 )             (48 )        
Less allowance for loan losses
    (5,728 )             (6,317 )             (3,895 )             (1,898 )             (1,710 )        
                                                                                 
Total loans, net
  $ 387,568             $ 411,899             $ 430,919             $ 284,919             $ 245,025          
___________________
(1) At December 31, 2009, 2008, and 2006 there were $1.8 million, $240,000, and $1.0 million respectively, in loans held for sale. At December 31, 2010 and 2007 there were no loans held for sale.

 
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Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2010.

   
One- to Four-Family
   
Multi-Family
   
Commercial Real
Estate
   
Construction and
Land(2)
 
   
Amount
   
Weighted
Average
Yield
   
Amount
   
Weighted
Average
Yield
   
Amount
   
Weighted
Average
Yield
   
Amount
   
Weighted
Average
Yield
 
   
(Dollars in thousands)
 
Due During the Years
Ending December 31,
                                               
2011 (1)
  $ 4,462       5.54 %   $ 6,320       6.22 %   $ 33,880       6.03 %   $ 14,353       5.52 %
2012 to 2015
    24,441       4.92       16,945       5.73       113,729       6.02       38,923       4.18  
2016 and beyond
    70,284       4.96       3,278       5.26       13,190       5.79       371       6.02  
                                                                 
Total
  $ 99,187       4.99 %   $ 26,543       5.79 %   $ 160,799       6.00 %   $ 53,647       4.55 %


   
Commercial Business
   
Consumer Loans
   
Total
 
   
Amount
   
Weighted
Average
Yield
   
Amount
   
Weighted
Average
Yield
   
Amount
   
Weighted
Average
Yield
 
   
(Dollars in thousands)
 
Due During the Years
Ending December 31,
                                   
2011 (1)
  $ 26,291       5.37 %   $ 3,913       5.47 %   $ 89,219       5.72 %
2012 to 2015
    20,815       6.23       4,826       5.92       219,679       5.57  
2016 and beyond
    4,632       5.10       2,176       6.64       93,931       5.14  
                                                 
Total
  $ 51,738       5.69 %   $ 10,915       5.90 %   $ 402,829       5.50 %
___________________
(1)
Includes demand loans, loans having no stated repayment schedule or maturity, overdraft loans and loans in process of renewal.
(2)
Includes land acquisition loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2010 that are contractually due after December 31, 2011.

   
Due After December 31, 2011
 
   
Fixed
   
Adjustable
   
Total
 
   
(In thousands)
 
                   
One- to four-family residential loans
  $ 81,962     $ 12,763     $ 94,725  
Multi-family
    17,048       3,175       20,223  
Commercial real estate
    113,114       13,805       126,919  
Construction and land
    36,151       3,143       39,294  
Total real estate loans
    248,275       32,886       281,161  
                         
Commercial business
    21,585       3,862       25,447  
Consumer loans
    6,735       267       7,002  
                         
Total loans
  $ 276,595     $ 37,015     $ 313,610  

 
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One- to Four-Family Residential Real Estate Loans. As of December 31, 2010, one- to four-family residential loans totaled $99.2 million, or 24.6% of our total loan portfolio. These loans are predominately collateralized by properties located in our market area. Virtually all of our residential real estate loans have fixed rates of interest primarily because our customers prefer fixed-rate mortgage loans in the relatively low interest rate environment that currently exists. We generally sell most of the conforming, fixed-rate loans that we originate, but we generally retain the servicing rights on these loans. At December 31, 2010, we were servicing $68.3 million in loans for others. In 2010, we originated $20.3 million and sold $22.6 million in single family residential mortgage loans to Fannie Mae.

We currently offer one- to four-family residential mortgage loans with terms of five, seven, 10, 15, 20, 30 and 40 years. Our five and seven-year loans provide for principal and interest amortization of up to 30 years with a balloon payment at the end of the five or seven-year term. All of our loans with terms of 10 years or greater amortize over the term of the loan.

For one- to four-family residential real estate loans, we may lend up to 80% of the property’s appraised value, or up to 100% of the property’s appraised value if the borrower obtains private mortgage insurance. We require title insurance on all of our one- to four-family mortgage loans, and we also require that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount equal to at least the lesser of the loan balance or the replacement cost of the improvements on the property. We require a property appraisal for all mortgage loans that are underwritten to comply with secondary market standards. Appraisals are conducted by independent appraisers from a list approved by our board of directors. Our residential real estate loans include “due-on-sale” clauses.

As a result of our conservative underwriting standards, we do not originate, sell, or place any loans in our loan portfolio that are considered sub-prime or Alt-A.

Multi-Family Real Estate Loans. Loans secured by multi-family real estate totaled $26.5 million, or 6.6%, of our total loan portfolio at December 31, 2010. Multi-family real estate loans generally are secured by apartment buildings and rental properties. All of our multi-family real estate loans are secured by properties located within our lending area. At December 31, 2010, our largest multi-family real estate loan had a principal balance of $2.8 million and was secured by apartment buildings. At December 31, 2010 the loan was performing in accordance with its repayment terms. Multi-family real estate loans generally are offered with interest rates that adjust after one, three or five years. The interest rate adjustments are tied to either a Treasury Bill Index tied to the adjustment period, or to a Cost of Funds Index.

We consider a number of factors in originating multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the mortgaged property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service), and the ratio of the loan amount to the appraised value of the mortgaged property. Multi-family real estate loans are originated in amounts up to 80% of the lower of the sale price or the appraised value of the mortgaged property securing the loan. All multi-family real estate loans over $250,000 are appraised by outside independent appraisers approved by the board of directors. All multi-family real estate loans below $250,000 must either have an independent appraisal or an opinion of value, which, generally, is the property’s tax bill. Borrowers are required to sign multi-family notes in their individual (not corporate) capacity.

 
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Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful operation of the real estate property securing the loan. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Commercial Real Estate Loans. Loans secured by commercial real estate totaled $160.8 million, or 39.9% of our total loan portfolio as of December 31, 2010. Our commercial real estate loans are secured predominately by office buildings, and to a lesser extent warehouse properties, and more specialized properties such as churches. We originate commercial real estate loans with a typical term of five years with balloon payments. These loans generally amortize over 15 to 20 years. We offer both adjustable and fixed rates of interest on commercial real estate loans, with the interest rate for adjustable rate loans tied to the prime interest rate. Our largest commercial real estate loan at December 31, 2010 had a principal balance of $4.6 million and was collateralized primarily by the land and building of a car dealership. This loan was performing in accordance with its repayment terms as of December 31, 2010.

Commercial real estate loans generally have higher interest rates than the interest rates on residential mortgage loans, and are more sensitive to changes in market interest rates because they often have shorter terms to maturity, and therefore, the interest rates adjust more frequently. Commercial real estate loans often have significant additional risk compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the repayment of commercial real estate loans typically depends on the successful operation of the related real estate project, and thus may be subject to a greater extent than residential mortgage loans to adverse conditions in the real estate market or in the economy generally.

In our underwriting of commercial real estate loans, we may lend up to 80% of the property’s appraised value in the case of loans secured by multi-family real estate, and up to 75% of the property’s appraised value on loans secured by other commercial properties. We require independent appraisals for all commercial real estate loans in excess of $250,000. For loans that do not exceed this amount, we require that one of our officers prepare a memorandum of value detailing comparable values based upon tax bills, prior appraisals, and income information on revenue-producing property. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. Creditworthiness is determined by considering the character, experience, management and financial strength of the borrower, and the ability of the property to generate adequate funds to cover both operating expenses and debt service. In evaluating whether to make a commercial real estate loan, we place primary emphasis on the ratio of net cash flow to debt service on the property, and we generally require a ratio of cash flow to debt service of at least 120%, computed after deduction for a vacancy factor and property expenses we deem appropriate.

We require title insurance on all of our commercial real estate loans, and we also require that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained. In addition, we generally require that the borrower personally guarantee the repayment of the loan.

Construction and Land Loans. As of December 31, 2010, construction and land loans totaled $53.6 million, or 13.3%, of our total loan portfolio. This portfolio consists of construction/speculative loans and construction/permanent loans.

Construction/speculative loans are made to area homebuilders who do not have, at the time the loan is originated, a signed contract with a homebuyer who has a commitment for permanent financing with either First Clover Leaf Bank or another lender. The homebuyer may enter into a purchase contract

 
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either during or after the construction period. These loans have the risk that the builder will have to make interest and principal payments on the loan, and finance real estate taxes and other holding costs of the completed home for a significant time after the completion of construction. Funds are disbursed in phases as construction is completed. All construction/speculative loans require that the builder-borrower personally guarantee the full repayment of the principal and interest on the loan and make interest payments during the construction phase. These loans are generally originated for a term of 12 months, with interest rates that are tied to the prime lending rate. First Clover Leaf Bank recognizes the relative increased risk element for these types of loans, particularly in the current real estate market, and therefore generally observes a loan-to-value ratio of no more than 75% of the lower of cost or the estimated value of the completed property. In addition, we generally limit our construction/speculative loans to one property per borrower at any given time, and the largest number of construction/speculative loans we have originated to a single borrower at any given time was for four properties. At December 31, 2010, the largest outstanding concentration of credit to one builder consisted of a mixed use development loan with an aggregate balance of $6.6 million, which was performing in accordance with its repayment terms at that date.

Construction/permanent loans are made to either a homebuilder or a homeowner who, at the time of construction, has a signed contract together with a commitment for permanent financing from First Clover Leaf Bank or another lender for the finished home. The construction phase of a loan generally lasts up to six months, and the interest rate charged generally corresponds to the rate of the committed permanent loan, with loan-to-value ratios of up to 80% (or up to 100% if the borrower obtains private mortgage insurance) of the appraised estimated value of the completed property or cost, whichever is less. Following the initial six-month period, construction/permanent loans convert to permanent loans, regardless of whether the construction phase has been completed. At December 31, 2010 the largest single outstanding construction loan of this type had an outstanding balance of approximately $450,000. At December 31, 2010, the loan was performing in accordance with its repayment terms.

Construction lending generally involves a greater degree of risk than our other one- to four-family mortgage lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of the home construction. Construction delays or the financial impairment of the builder may further impair the borrower’s ability to repay the loan.

Our procedures for underwriting construction/speculative loans include an assessment of the borrower’s credit history and the borrower’s ability to meet other existing debt obligations, as well as payment of principal and interest on the proposed loan. We use the same underwriting standards and procedures for construction/permanent lending as we do for one- to four-family residential real estate lending.

We also originate land development loans to area homebuilders that are secured by individual unimproved or improved residential building lots. Land loans are generally offered with variable prime-based interest rates with terms of up to two years. The general loan-to-value ratio is 75% of the lower of cost or appraised value of the property.

Commercial Business Loans. We offer commercial business loans to existing and new customers in our market area. Some of these loans are secured in part by additional real estate collateral. We make various types of secured and unsecured commercial business loans for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans are generally for less than five years. Equipment loans usually involve a one-time disbursement of funds, with repayment over the term of the loan, while operating lines of credit involve multiple disbursements and revolving notes that can be renewed annually. The loans are either negotiated on a fixed-rate basis or carry variable interest rates indexed to the prime rate. At December 31, 2010, we had commercial business loans outstanding with an aggregate balance of $51.7 million, or 12.8%, of the total loan portfolio. As of December 31, 2010, our largest commercial business loan relationship consisted of a $8.5 million line of credit with no outstanding balance, and a term loan of $4.2 million,

 
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both of which were secured primarily by accounts receivable and corporate assets, and were performing in accordance with their terms. An additional $5.1 million of this relationship was participated to another financial institution.

We have continued our emphasis on commercial business lending. These loans tend to have higher rates of interest than residential mortgage loans, and are more sensitive to changes in market interest rates because they often have shorter terms to maturity, and therefore, the interest rates adjust more frequently. In addition, commercial business lending gives us greater access to commercial borrowers that may open transactional checking accounts with First Clover Leaf Bank.

Commercial credit decisions are based upon a complete credit review of the borrower. A determination is made as to the borrower’s ability to repay in accordance with the proposed terms as well as an overall assessment of the credit risks involved. Personal guarantees of borrowers are generally required. In evaluating a commercial business loan, we consider debt service capabilities, actual and projected cash flows and the borrower’s inherent industry risks. Credit agency reports of the borrower’s credit history as well as bank checks and trade investigations supplement the analysis of the borrower’s creditworthiness. Collateral supporting a secured transaction is also analyzed to determine its marketability and liquidity. Commercial business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory, equipment or real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the projected cash flow of the company or liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Consumer Loans. Our consumer loans consist primarily of home equity lines of credit, automobile loans and overdraft loans, loans secured by deposits and securities, and unsecured personal loans. As of December 31, 2010, consumer loans totaled $10.9 million, or 2.8%, of our total loan portfolio.

At December 31, 2010, home equity lines of credit totaled $9.2 million, or 2.3%, of total loans. Home equity lines of credit are generally made for owner-occupied homes, and are secured by first or second mortgages on residential properties. We generally offer home equity lines of credit with a maximum loan to appraised value ratio of 90% (including senior liens on the subject property). We currently offer these loans for terms of up to five years and with adjustable rates that are tied to the prime lending rate. Clover Leaf Bank previously offered these products with a maximum loan to appraised value of 85% with terms of up to 10 years, and we still retain some of these longer-term loans. To date, we are seeing minimal stress in our home equity portfolio or signs of material default risks. We do review reports periodically of the higher advanced credit lines and look at payment patterns and advance patterns in an effort to detect potential problems.

Automobile loans are generally offered with maturities of up to 60 months for new automobiles, while loans secured by used automobiles have maximum terms that vary depending on the age of the automobile. We require all borrowers to maintain collision insurance on automobiles securing loans in excess of $1,000, with First Clover Leaf Bank listed as loss payee. In those instances where the borrower fails to maintain adequate insurance coverage, we are further protected against loss through a third-party

 
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policy insurance coverage. Our automobile loan portfolio totaled $1.1 million, or 0.3%, of total loans at December 31, 2010.

Consumer loans generally entail greater credit risk than residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining value often does not warrant further substantial collection efforts against the borrower. Further, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Our procedures for underwriting consumer loans include an assessment of the borrower’s credit history and ability to meet other existing debt obligations, as well as payments of principal and interest on the proposed loans. The stability of the borrower’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Although the borrower’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount. We require independent appraisals for all consumer loans in excess of $50,000 if secured by real estate. For loans that do not exceed this amount, we require that an officer prepare a memorandum of value detailing comparable values based upon tax bills for real estate loans and National Automobile Dealers Association values for automobile loans.

Loan Originations, Purchases, Sales and Servicing. Although we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by competing lenders in our market area. This includes banks, savings institutions, credit unions, mortgage banking companies, and life insurance companies. Loan originations are derived from a number of sources, including existing or prior customers and walk-in customers.

Loan originations are adversely affected by rising interest rates, which typically result in decreased loan demand. Accordingly, the volume of our loan originations and the interest rates we can charge on loans vary from period to period. One- to four-family residential mortgage loans are generally underwritten to conform to Fannie Mae and Freddie Mac seller/servicer guidelines, and are currently originated on a fixed interest rate basis only. We generally sell most of our conforming, fixed-rate, one- to four-family loans but retain the servicing rights on loans that we originate, which means that we will continue to collect payments on the loans and supervise foreclosure proceedings, if necessary. We retain a portion of the interest paid by the borrower on the loans, generally 25 basis points, as consideration for our services. We currently service $68.3 million of loans for others. In 2010, we originated $20.3 million in single family residential mortgage loans held for sale and sold $22.6 million of such loans to Fannie Mae.

Loan Approval Procedures and Authority. Our lending activities are subject to written underwriting standards and loan origination procedures adopted by management and the board of directors. For single family, owner-occupied real estate loans, the President of First Clover Leaf Bank and the Senior Vice President – Chief Lending Officer are authorized to approve loans up to $500,000. For secured commercial real estate loans and construction and land loans, these officers are authorized to approve loans up to $750,000; for secured consumer loans, these officers may approve loans up to $250,000; and for overdrafts and unsecured credits, these officers may approve loans up to $100,000. They may approve renewals of commercial business and commercial real estate loans by a total of their combined lending limits where there has been no deterioration in either the payment pattern or financial strength of the borrower. However, the entire board of directors must approve all loans in excess of $4.0 million. In addition, a list of all preauthorized loans is presented to the board of directors’ loan committee on a monthly basis.
 

 
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Loans to One Borrower. At December 31, 2010, the maximum amount that First Clover Leaf Bank could have loaned to any one borrower under the 15% limit of risk-based capital was approximately $9.6 million. At that date, the largest lending relationship with First Clover Leaf Bank totaled $21.5 million and consisted of two loans secured primarily by accounts receivable, real estate and corporate assets. First Clover Leaf Bank also has an agreement in place with another financial institution to participate in this loan and had participated $12.5 million to this financial institution at year end. First Clover Leaf Bank’s remaining outstanding balance on this loan at year end was $4.2 million.

Appraisal Policies. We obtain appraisals on property for all new loan originations secured by real estate. Appraisals are completed prior to the closing of the new loan. We will also request a new appraisal on a renewing loan if the credit appears to be distressed and we do not feel that we can properly assess the value from our own resources. The bank also subscribes to a service that provides access to current property listings and sales on single family residences which allows access to comparative sales prices. We will obtain a new appraisal on a commercial property when a borrower is experiencing cash flow difficulties which appear to be more than temporarily impaired and we do not feel that we have the resources necessary to properly assess the situation. In addition, if we have determined that it is necessary to foreclose on a property, we will obtain a new appraisal.

Asset Quality

Loan Delinquencies and Collection Procedures. When a borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to correct the delinquency and restore the loan to a current status. We will send a borrower a reminder notice 15 days after an account becomes delinquent, and our employees are authorized to use their discretion whether direct telephone contact is required at that time. If the borrower does not remit the entire payment due by the end of the month, we try to make direct contact with the borrower to arrange a payment plan. If a satisfactory payment plan is not established within 50 days of a delinquency, we will send a demand letter to the borrower. If a satisfactory payment plan has not been arranged within 60 days following a delinquency, we may instruct our attorneys to institute foreclosure proceedings depending on the loan-to-value ratio or our relationship with the borrower. Foreclosed property is held as other real estate owned.

Our policies require that management continuously monitor the status of the loan portfolio and report to the board of directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate and our actions and plans to cure the delinquent status of the loans and to dispose of any real estate acquired through foreclosure.

The Company has experienced a decrease in our non-performing and impaired loans, and an increase in our non-performing assets. Detailed information concerning the Company’s non-performing and impaired loans is described in the paragraphs that follow. Overall, the loans that would be classified as high risk loans by the Company are very limited in number and in value. 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 an immaterial 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.

 
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Non-Accrual Loans. All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, there is reasonable probability of loss of principal or the collection of additional interest is deemed insufficient to warrant further accrual. Generally, we place all loans 90 days or more past due on non-accrual status. However, exceptions may occur when a loan is in process of renewal, but it has not yet been completed. In addition, we may place any loan on non-accrual status if any part of it is classified as loss or if any part has been charged-off. When a loan is placed on non-accrual status, total interest accrued and unpaid to date is reversed. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Loans are charged-off no later than 120 days following their delinquency, unless the loans are well-collateralized or in the process of collection.

As of December 31, 2010, our total non-accrual loans amounted to $12.2 million compared to $11.7 million at December 31, 2009. Details of the largest non-accrual relationships are included below.

Non-Performing and Impaired Loans and Non-Performing Assets. As of December 31, 2010, our total non-performing and impaired loans and non-performing assets were $23.5 million compared to $30.2 million at December 31, 2009.

At December 31, 2010, First Clover Leaf Bank had seven relationships classified as non-accrual with balances in excess of $500,000. The largest non-accrual relationship is a $3.8 million development credit to a subdivision with excess inventory that is selling slowly due to the economic slowdown. The credit is secured by the residential property and an updated appraisal was obtained in the first quarter of 2010. The note is currently being re-evaluated on a quarterly basis under a discounted cash flow analysis. We are currently working with the developer on a plan to increase lot sales. The second non-accrual relationship is a $1.5 million group of credits to a real estate investor, who is experiencing high vacancy rates and property repairs resulting in decreased cash flows due to the economic slowdown. A charge-off of $464,000 was recorded on this loan during the third quarter of 2010. We are working with a management company to continue leasing the properties. During the fourth quarter of 2010, we began foreclosure procedures on most of the properties. The third relationship is a $1.5 million credit to a residential real estate developer who is struggling with the economic downturn. The credit is currently secured by single family residences and some farm land. We are working with the developer on possible restructuring alternatives. Currently the collateral is sufficient to cover the outstanding balance. The fourth non-accrual relationship is a $1.2 million credit for a mobile home park. A $600,000 charge-off was recorded for this property in 2010. There was a pending contract on this property at September 30, 2010, which has since been rescinded. We began foreclosure proceedings late in the fourth quarter of 2010, and we acquired possession of this property in the first quarter of 2011. The fifth non-accrual relationship is a $900,000 credit to a real estate investor. The majority of this borrower’s property is residential real estate. The investor is experiencing cash flow difficulties due to higher vacancy rates and the need for property repairs. Currently the collateral is sufficient to cover the outstanding balance. The sixth non-accrual relationship is a $704,000 credit to a real estate investor. This relationship relates to several credits which are all related by common ownership. Most of the credits are single family residential properties, but some are related to commercial property. We have recently re-assessed the values of most of these properties. We began taking possession of several of the properties, totaling $367,000 in the fourth quarter of 2010. The seventh non-accrual relationship is a $661,000 credit to a real estate developer. The primary collateral consists of 30 vacant lots. The lots are continuing to sell in a manner that is allowing the borrower to continue to make principal payments. Two of these lots were under contract at December 31, 2010, and the sales were finalized in the first quarter of 2011.

In addition to the non-accrual loans in the previous paragraph, at December 31, 2010, our total other impaired loans amounted to $7.3 million compared to $14.8 million at December 31, 2009. There

 
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are three impaired credits with balances in excess of $500,000 at December 31, 2010. The largest loan is a $3.7 million credit to a real estate investor. The majority of this borrower’s property is residential real estate. The investor is experiencing cash flow difficulties due to higher vacancy rates and the need for property repairs. Currently the collateral is sufficient to cover the outstanding balance. The second loan is a $1.6 million credit for a hotel/condominium development in a resort area. Currently the collateral is sufficient to cover the outstanding balance. The third credit is a $1.0 million credit to an investor who holds real estate and financial institution stock. The collateral for this credit is stock in a financial institution and multi-family real estate. The investor paid this credit down by $500,000 since the third quarter of 2010. Currently, the collateral is sufficient to cover the outstanding balance.

At December 31 2010, First Clover Leaf Bank had 13 properties classified as Real Estate Owned. The collateral on these properties consisted of a commercial building, a commercial land site with an outbuilding, farmland, two residential lot developments and eight single family residences. All of these properties were transferred into Real Estate Owned at the property’s fair value, less cost of disposal, at the date of foreclosure.

 
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The table below sets forth the amount and categories of our non-performing and impaired loans and non-performing assets at the dates indicated. At each date presented, we had an insignificant amount of troubled debt restructurings, (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) which are considered to be impaired loans. At December 31, 2010, we had loans of approximately $250,000 that were classified as troubled debt restructurings.

   
At December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
Non-accrual loans:
                             
One- to four-family
  $ 1,856     $ 2,260     $ 1,598     $ 1,269     $ 579  
Multi-family
    2,435       2,324       556       412       395  
Commercial real estate
    1,290       1,346       3,463       977       396  
Construction and land
    6,177       5,410                    
Commercial business
    109       293                    
Consumer
    382       100       1       11       1  
Total non-accrual loans
    12,249       11,733       5,618       2,669       1,371  
                                         
Accruing loans delinquent 90 days or more:
                                       
One- to four-family
    81       107       764       285       16  
Construction and land
          1,600                    
Commercial business
    12       873                    
Total accruing loans delinquent 90 days or more
    93       2,580       764       285       16  
                                         
Total non-performing loans
    12,342       14,313       6,382       2,954       1,387  
                                         
Other impaired loans:
                                       
One- to four-family
    80                          
Multi-family
    653       6,122                    
Commercial real estate
    5,407       4,932       1,037       1,198       918  
Construction and land
    55       2,407                   1,467  
Commercial business
    604       1,357       114       133       149  
Consumer
    480                          
Total other impaired loans
    7,279       14,818       1,151       1,331       2,534  
                                         
Total non-performing and impaired loans
    19,621       29,131       7,533       4,285       3,921  
                                         
Real estate owned:
                                       
One- to four-family
    440       200       408              
Commercial real estate
    854       230       225              
Construction and land
    2,550       655                    
Total real estate owned
    3,844       1,085       633              
                                         
Total non-performing and impaired assets
  $ 23,465     $ 30,216     $ 8,166     $ 4,285     $ 3,921  
Allowance for loan losses attributable to
non-performing and impaired loans
  $ 2,186     $ 2,126     $ 553     $ 307     $ 396  
                                         
Ratios:
                                       
Non-performing and impaired loans to total loans
    5.06 %     7.07 %     1.75 %     1.50 %     1.60 %
Non-performing and impaired assets to total assets
    4.08 %     5.16 %     1.25 %     1.04 %     0.96 %

 
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For the year ended December 31, 2010, $754,361 of gross interest income would have been recorded had our non-accruing loans been current in accordance with their original terms. We recorded $562,527 of income on such loans for the year ended December 31, 2010.

At December 31, 2010, we had no loans which were not currently classified as non-accrual, 90 days past due or impaired, but where known information about possible credit problems of the borrower caused management to have serious concerns as to the ability of the borrower to comply with present loan repayment terms and would result in disclosure as non-accrual, 90 days past due or impaired.

Real Estate Owned. Real estate owned consists of property acquired through formal foreclosure or by deed in lieu of foreclosure and is recorded at the lower of recorded investment or fair value. Write-downs from recorded investment to fair value which are required at the time of foreclosure are charged to the allowance for loan losses. After transfer, the property is carried at the lower of recorded investment or fair value, less estimated selling expenses. Adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. At December 31, 2010, we held 13 properties as real estate owned with a total value of $3.8 million.

Classification of Assets. Our policies, consistent with regulatory guidelines, require that we classify loans and other assets, such as securities, that are considered to be of lesser quality, as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that First Clover Leaf Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectable and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated as special mention by management.

General allowances represent loss allowances that have been established to recognize the probable risk associated with lending activities, but which have not been allocated to particular problem assets. When we classify problem assets as loss, we are required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge-off the amount of the assets. Our determination as to the classification of assets and the amount of valuation allowances is subject to review by regulatory agencies, which can order the establishment of additional loss allowances. All loans classified as doubtful are also classified as impaired. As a general rule, loans classified as substandard are also classified as impaired. The loans that are an exception to this classification are generally mortgage and consumer loans, and they represent a small amount and percentage of the substandard category. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulatory guidelines and accounting principles generally accepted in the United States of America.

On the basis of management’s review of our assets, at December 31, 2010, we had classified $16.0 million of our assets as substandard and $4.4 million as doubtful.

 
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The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

   
Loans Delinquent For
             
   
60-89 Days
   
90 Days or Over
   
Total
 
   
Number
   
Amount
   
Number
   
Amount
   
Number
   
Amount
 
   
(Dollars in thousands)
 
At December 31, 2010
                                   
One- to four-family residential
    4     $ 296       11     $ 818       15     $ 1,114  
Multi-family
                8       2,435       8       2,435  
Commercial real estate
    3       162       3       1,240       6       1,402  
Construction and land
                6       4,928       6       4,928  
Commercial business
                2       43       2       43  
Consumer
    3       96       3       367       6       463  
Total
    10     $ 554       33     $ 9,831       43     $ 10,385  
                                                 
At December 31, 2009
                                               
One- to four-family residential
    3     $ 178       5     $ 734       8     $ 912  
Multi-family
                3       585       3       585  
Commercial real estate
    1       56       17       1,890       18       1,946  
Construction and land
                3       1,462       3       1,462  
Commercial business
    1       43       5       1,155       6       1,198  
Consumer
    1       12       1       100       2       112  
Total
    6     $ 289       34     $ 5,926       40     $ 6,215  
                                                 
At December 31, 2008
                                               
One- to four-family residential
    8     $ 683       12     $ 1,267       20     $ 1,950  
Multi-family
                3       555       3       555  
Commercial real estate
    4       487       29       1,528       33       2,015  
Construction and land
                4       2,535       4       2,535  
Commercial business
    3       225       1       495       4       720  
Consumer
    4       67       1       1       5       68  
Total (1)
    19     $ 1,462       50     $ 6,381       69     $ 7,843  
                                                 
At December 31, 2007
                                               
One- to four-family residential
    4     $ 249       14     $ 1,554       18     $ 1,803  
Multi-family
                1       412       1       412  
Commercial real estate
    1       304       5       977       6       1,281  
Construction and land
    1       985                   1       985  
Commercial business
    2       1,280                   2       1,280  
Consumer
                2       11       2       11  
Total (1)
    8     $ 2,818       22     $ 2,954       30     $ 5,772  
                                                 
At December 31, 2006
                                               
One- to four-family residential
    2     $ 94       4     $ 102       6     $ 196  
Multi-family
                1       395       1       395  
Commercial business
    2       147       1       18       3       165  
Consumer
    2       28                   2       28  
Total
    6       269       6       515       12       784  
___________________
(1)
The category of 90 Days or Over includes all non-accrual loans.

 
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Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.

   
At or For the Years Ended
December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(Dollars in thousands)
 
                               
Balance at beginning of year
  $ 6,317     $ 3,895     $ 1,898     $ 1,710     $ 428  
                                         
Charge-offs:
                                       
One-to-four family residential
    (268 )     (244 )                  
Commercial real estate
    (1,936 )     (832 )     (56 )            
Construction and land
          (1,644 )     (124 )     (142 )      
Commercial Business
    (1,020 )     (414 )           (15 )      
Consumer
    (86 )           (91 )     (7 )     (1 )
Total charge-offs
    (3,310 )     (3,134 )     (271 )     (164 )     (1 )
                                         
Recoveries:
                                       
Commercial real estate
    148                          
Commercial Business
          2                    
Consumer
                16       5       5  
Total recoveries
    148       2       16       5       5  
                                         
Net (charge-offs) recoveries
    (3,162 )     (3,132 )     (255 )     (159 )     4  
Allowance acquired
                1,476             911  
Provision for loan losses
    2,573       5,554       776       347       367  
                                         
Balance at end of year
  $ 5,728     $ 6,317     $ 3,895     $ 1,898     $ 1,710  
                                         
Ratios:
                                       
Net charge-offs (recoveries) to average loans outstanding
    0.78 %     0.74 %     0.07 %     0.06 %     0.00 %
Allowance for loan losses to non-performing and impaired loans
    29.19 %     21.68 %     51.71 %     44.27 %     43.61 %
Allowance for loan losses to total loans
    1.48 %     1.53 %     0.90 %     0.67 %     0.70 %

 
19

 

The allowance for loan losses is a valuation account that reflects our evaluation of the credit losses inherent in our loan portfolio. We maintain the allowance through provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely.

Our evaluation of risk in maintaining the allowance for loan losses includes the review of all loans on which the collectibility of principal may not be reasonably assured. We consider the following factors as part of this evaluation: our historical loan loss 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. Management evaluates the total balance of the allowance for loan losses based on several factors that are not loan specific but are reflective of the losses inherent in the loan portfolio, including management’s periodic review of loan collectibility in light of historical experience, the nature and volume of the loan portfolio, prevailing economic conditions such as housing trends, inflation rates and unemployment rates, and geographic concentrations of loans within First Clover Leaf Bank’s immediate market area.

There may be other factors that may warrant our consideration in maintaining an allowance at a level sufficient to provide for probable losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. During 2010, management increased the general allocation percentages used in the calculation of our allowance for loan losses. Management evaluated several factors in determining the need to increase these percentages. The loss history was the primary reason the general allocation was increased. Management also revised the watch and criticized/non-impaired allocation percentages to more accurately reflect the risk of our current portfolio. Management also reviewed the current economic conditions and determined that no adjustment was necessary to any of the qualitative factors during 2010.

In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our loan portfolio and the related allowance for loan losses. The Office of Thrift Supervision may require us to increase the allowance for loan losses based on its judgments of information available to it at the time of its examination, thereby adversely affecting our results of operations.

 
20

 

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

   
At December 31,
 
   
2010
   
2009
   
2008
 
   
Allowance
for Loan
Losses
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category to
Total Loans
   
Allowance
for Loan
Losses
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category to
Total Loans
   
Allowance
for Loan
Losses
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category to
Total Loans
 
   
(Dollars in thousands)
 
                                                       
Real Estate Loans:
                                                     
One- to four-family
  $ 731     $ 99,186       24.6 %   $ 1,517     $ 98,080       23.4 %   $ 758     $ 110,925       25.3 %
Multi-family
    179       26,543       6.6       745       20,947       5.0       479       18,150       4.2  
Commercial
    1,714       160,799       39.9       2,402       179,923       42.8       1,453       168,432       38.4  
Construction and land
    2119       53,647       13.3       883       45,448       10.8       529       52,338       11.9  
Commercial business
    868       51,738       12.8       760       63,135       15.0       624       78,160       17.8  
Consumer
    117       10,915       2.8       10       12,477       3.0       52       10,270       2.4  
Total
  $ 5,728     $ 402,829       100.0 %   $ 6,317     $ 420,010       100.0 %   $ 3,895     $ 438,275       100.0 %


   
At December 31,
 
   
2007
   
2006
 
   
Allowance
for Loan
Losses
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category to
Total Loans
   
Allowance
for Loan
Losses
   
Loan
Balances by
Category
   
Percent of
Loans in
Each
Category to
Total Loans
 
   
(Dollars in thousands)
 
                                     
Real Estate Loans:
                                   
One- to four-family
  $ 532     $ 112,764       39.2 %   $ 400     $ 120,355       48.5 %
Multi-family
    84       13,931       4.8       65       8,895       3.6  
Commercial
    832       97,810       34.0       753       68,577       27.7  
Construction and land
    290       20,776       7.2       324       17,181       6.9  
Commercial business
    114       34,783       12.1       145       25,907       10.4  
Consumer
    46       7,770       2.7       23       7,125       2.9  
Total
  $ 1,898     $ 287,834       100.0 %   $ 1,710     $ 248,040       100.0 %

 
21

 

Investment Activities

We are permitted under federal law to invest in various types of liquid assets, including U.S. Government obligations, securities of various federal agencies and of state and municipal governments, deposits at the Federal Home Loan Bank of Chicago, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Within certain regulatory limits, we may also invest a portion of our assets in commercial paper and corporate debt securities. First Clover Leaf Bank is also required to invest in Federal Home Loan Bank stock.

The Financial Accounting Standards Board’s guidance regarding the accounting for certain investments in debt and equity securities requires that securities be categorized as “held to maturity,” “trading securities” or “available for sale,” based on management’s intent as to the ultimate disposition of each security. We have classified all of our securities as available for sale at December 31, 2010.

The guidance allows debt securities to be classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held to maturity.”

Debt and equity securities held for current resale are classified as “trading securities.” These securities are reported at fair value, and unrealized gains and losses on the securities are included in earnings. We do not currently use or maintain a trading account. Debt and equity securities not classified as either “held to maturity” or “trading securities” are classified as “available for sale.” These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity.

All of our securities carry market risk insofar as increases in market interest rates may cause a decrease in their market value. Many also carry prepayment risk insofar as they may be called prior to maturity in times of low market interest rates, so that we may have to reinvest the funds at a lower interest rate. Investments in securities are made based on certain considerations, which include the interest rate, tax considerations, yield, settlement date and maturity of the security, our liquidity position, and anticipated cash needs and sources. The effect that the proposed security would have on our credit and interest rate risk and risk-based capital is also considered. We purchase securities to provide necessary liquidity for day-to-day operations, and when investable funds exceed loan demand.

Generally, our investment policy, as established by the board of directors, is to invest funds among various categories of investments and maturities based upon our liquidity needs, asset/liability management policies, investment quality, marketability and performance objectives.

Our investment policy does not permit engaging directly in hedging activities or purchasing high-risk mortgage derivative products.

Our debt securities are mainly composed of securities issued by the U.S. Government, government agencies and government-sponsored enterprises (primarily the Federal Home Loan Bank, Fannie Mae and Freddie Mac) and investment grade corporate debt securities, although from time to time we make other investments as permitted by applicable laws and regulations.

 
22

 

First Clover Leaf Financial Corp. utilizes a third party vendor for investment portfolio accounting. The vendor provides a monthly report indicating by individual bond the gain or loss position of the security, as well as any downgrades that have occurred. When a bond is downgraded, we contact a broker to gain a better understanding of the reason for the downgrade and any known or anticipated defaults by the issuer. We consider the grade of the bond and the payment history when determining if a bond should be classified as other than temporarily impaired and if a write down of the security is necessary. The board of directors is informed monthly of any bond downgrades and the overall gain or loss position of the investment portfolio. As of December 31, 2010, we had no securities considered to be other-than-temporarily impaired.

 
23

 

Available for Sale Portfolio. The following table sets forth the composition of our available for sale portfolio at the dates indicated. For further information see Notes 1 and 2 of the Notes to our Consolidated Financial Statements.

   
At December 31,
 
   
2010
   
2009
   
2008
 
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
Investment Securities:
                                   
U.S. government agency obligations
  $ 41,857     $ 42,690     $ 47,783     $ 48,514     $ 58,414     $ 59,346  
Corporate bonds
    2,096       2,058       2,596       2,546       3,094       2,829  
State and municipal securities
    17,803       17,774       14,468       15,379       12,238       12,451  
Other securities
    4       4       4       4       75       75  
Mortgage-backed securities
    15,739       15,949       18,816       19,964       27,849       28,866  
                                                 
Total investment securities available for sale
  $ 77,499     $ 78,475     $ 83,667     $ 86,407     $ 101,670     $ 103,567  

At December 31, 2010, we held 33 available-for-sale securities that had been in a loss position for less than twelve months, and one available-for-sale security that had been in a loss position for twelve months or more. Included in the 33 securities in the less-than-twelve month position are (a) two U.S. government agency obligations, both of which have been in a loss position for two months (b) 10 Mortgage-backed securities, five of which have been in a loss position for one month, three have been in a loss position for two months, one has been in a loss position for three months, and one has been in a loss position for four months (c) 21 state and municipal securities, two of which have been in a loss position for one month, 17 have been in a loss position for two months, one has been in a loss position for three months, and one has been in a loss position for four months. The security in the twelve-months-or-more position is a corporate bond.

As of December 31, 2010, management believes that the estimated fair values of the securities noted above are primarily dependent on movements in market interest rates. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Management believes that these fair values will recover as the underlying portfolios mature. We do not intend to sell or expect that it is more likely than not that we will be required to sell these investment securities prior to the anticipated recovery in fair value. Accordingly, management does not believe any individual unrealized loss as of December 31, 2010, represents an other-than-temporary impairment.

 
24

 

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio and the mortgage-backed securities portfolio at December 31, 2010 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis.

   
One Year or Less
   
More than One Year
through Five Years
   
More than Five Years
through Ten Years
   
More than Ten Years
   
Total Securities
 
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Fair
Value
   
Weighted
Average
Yield
 
   
(Dollars in thousands)
 
                                                                   
Available for Sale:
                                                                 
Investment Securities
                                                                 
U.S. Government agency
obligations
  $ 16,521       2.43 %   $ 25,336       2.80 %   $ ---       --- %   $ ---       --- %   $ 41,857     $ 42,690       2.66 %
Corporate bonds
    146       5.39       1,250       4.71       ---       ---       700       5.05       2,096       2,058       4.87  
State and municipal securities
    1,066       5.43       4,810       5.86       3,657       5.02       8,270       5.33       17,803       17,774       5.42