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, but not limited to 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, capital requirements and allowance for loan losses 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 due to the higher degree of judgment and complexity than its other significant accounting estimates.

Allowance for loan losses. The allowance for loan losses is a valuation account that reflects our evaluation of the probable incurred 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. Subsequent recoveries, if any, are credited to the allowance.

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 probable incurred losses 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.

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

There may be other factors that may warrant our consideration in maintaining an allowance at a level sufficient to provide for probable incurred 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.

In addition, the Office of the Comptroller of the Currency ("OCC"), as an integral part of its examination process, periodically reviews our loan portfolio and the related allowance for loan losses. The OCC 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.

Goodwill and Other Intangible Assets. Historically, First Clover Leaf has grown through acquisitions accounted for under the purchase method of accounting in effect at the time of the acquisitions. 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 periodic 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 these intangible assets are estimated to be consumed or otherwise used up. Our customer relationship intangibles are being amortized over 7.6 and 9.7 years using the double declining balance method. 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.

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 may 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 under the guidance of ASU 2011-08, Topic 350. This guidance also allows for a qualitative assessment of the reporting unit. A qualitative assessment may be performed if in the prior period two-step impairment test the fair value was greater than the carrying value by a substantial margin. If in the prior period two-step test goodwill was impaired or fair value was not greater than the carrying amount by a substantial margin, First Clover Leaf would go straight to the two-step impairment test. In step one, we estimate the fair value of our single reporting unit as of the measurement date utilizing two valuation methodologies including the comparable transactions approach, and the control premium approach which utilizes the Company's stock price. We then compare the estimated fair value of the reporting unit to the current carrying value of the reporting unit to determine if goodwill impairment had occurred as of the measurement date. At our annual impairment assessment date of September 30, 2011, our analysis indicated that no impairment existed. At March 31, 2012, no indications of impairment existed for which an interim assessment was considered necessary. 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 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 5 for additional information on goodwill impairment.

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

Overview

First Clover Leaf had net income of $923,000 for the three months ended March 31, 2012 compared to net income of $906,000 for the same period in 2011. The increase was due to an increase in net interest income and other income partially offset by increases in provision for loan losses and other expenses. Basic and diluted income per share was $0.12 for each of the three-month periods ended March 31, 2012 and 2011.

Financial Condition

Total Assets. Total assets decreased to $556.4 million at March 31, 2012 from $562.7 million at December 31, 2011. Total cash and cash equivalents decreased to $30.8 million at March 31, 2012 from $39.4 million at December 31, 2011. The decrease in cash and cash equivalents was due primarily to a decrease in federal funds sold resulting from a decline in securities sold under agreements to repurchase resulting from a normal fluctuation in one customer's account.

Securities available for sale increased to $87.5 million at March 31, 2012 from $85.6 million at December 31, 2011. The increase was due primarily to purchases of $16.8 million partially offset by calls, maturities and pay-downs of $15.0 million.

Federal Home Loan Bank stock decreased to $4.2 million at March 31, 2012 from $6.3 million at December 31, 2011. The Federal Home Loan Bank redeemed $2.1 million of excess voluntary stock during the first quarter of 2012. The Company is required to hold $2.0 million in Federal Home Loan Bank stock in order to be a member bank. Prior to the first quarter of 2012 the Federal Home Loan Bank was prohibited from redeeming excess voluntary stock. They have since started a program to redeem the stock in increments.

Net loans amounted to $390.6 million at March 31, 2012, compared to $387.6 million at December 31, 2011. This increase was a result of new loan origination exceeding loan paydowns and maturities.

Foreclosed assets decreased to $5.6 million at March 31, 2012 from $5.8 million at December 31, 2011. We transferred one loan into foreclosed assets during the three months ended March 31, 2012. During the same time period we received proceeds of $400,000 from the sale of four properties that had been classified as foreclosed assets.

Total Liabilities. Total liabilities decreased to $478.5 million at March 31, 2012 from 485.0 million at December 31, 2011. Deposits increased to $422.8 million at March 31, 2012 from $414.8 million at December 31, 2011. Non-interest bearing deposits increased $3.0 million to $42.3 million at March 31, 2012 from $39.3 million at December 31, 2011. Interest bearing deposits increased $5.1 million totaling $380.6 million at March 31, 2012 compared to $375.5 million at December 31, 2011. Securities sold under agreements to repurchase decreased $14.0 million to $22.9 million at March 31, 2012 from $36.9 million at December 31, 2011. This decrease was due primarily to normal fluctuations in one customer's account.

Stockholders' Equity. Stockholders' equity increased to $77.9 million at March 31, 2012 from $77.7 million at December 31, 2011, principally as a result of $923,000 in net income partially offset by the payment of cash dividends of $462,000 and repurchases of common stock of $248,000 during the three months ended March 31, 2012.

                          FIRST CLOVER LEAF FINANCIAL CORP.

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


Asset Quality



The following tables set forth information with respect to the Company's
nonperforming and impaired loans at the dates indicated:



                                                     March 31,       December 31,
                                                        2012             2011

Loans 90 days or more past due and still accruing   $    790,344     $     404,984
Non-accrual loans1                                    12,677,361        11,166,843
Other impaired loans                                   3,023,972         8,017,158
Total non-performing loans                            16,491,677        19,588,985
Foreclosed assets                                      5,579,924         5,822,864
Total non-performing assets                         $ 22,071,601     $  25,411,849

(1) The entire balance is also classified as impaired as of March 31, 2012 and December 31, 2011, respectively.

                                                       March 31,     December 31,
                                                         2012            2011
Non-performing assets to total assets                        3.97 %          4.52 %
Non-performing loans to total loans                          4.22            5.05
Allowance for loan losses to non-performing loans           33.74           39.76
Allowance for loan losses to total loans                     1.42            2.01

Non-Performing, Impaired Loans and Non-Performing Assets. As of March 31, 2012, our total non-performing and impaired loans and non-performing assets were $22.1 million compared to $25.4 million at December 31, 2011.

At March 31 2012, the Company's non-accrual loans increased $1.5 million to $12.7 million from $11.2 million at December 31, 2011. At March 31, 2012, First Clover Leaf Bank had four relationships classified as non-accrual with balances in excess of $1.0 million. The largest non-accrual relationship is a $2.8 million commercial development credit. This credit was downgraded during the three months ended March 31, 2012 from substandard to doubtful as shown in the construction and land class in the credit quality tables in Item 1, Note 3. The developers are experiencing cash flow difficulties due to the current economic downturn. A charge-off of $1.3 million of specific reserves was recorded on this relationship during the first quarter of 2012. The Company intends to foreclose on a portion of this property. We believe the collateral on this loan is sufficient to cover the remaining outstanding balance. The second relationship is a $1.7 million commercial credit secured by a retail strip center. The center recently experienced a great deal of tenant turnover. The building is now fully leased and cash flow is expected to be sufficient to cover the shortfall. A restructuring of the loan is in process that will allow a portion of the loan to resume performing status after an acceptable period of payment performance. A deficiency note will be signed for the remaining balance. The third credit is a $1.7 million development credit for a subdivision with excess inventory that is selling slowly due to the economic slowdown. A charge-off of $843,000 of specific reserves was recorded on this relationship during the first quarter of 2012. The credit is secured by the residential property. The Company continues to work with the developer and is currently developing a forbearance agreement with the borrower. The fourth relationship is a $1.2 million credit to a real estate investor; a mobile home park is the largest piece of the collateral. Currently the park is struggling with vacancies. The Company is working with the borrower on a possible restructuring of the loan.

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

In addition to the non-accrual loans in the previous paragraph, we have loans that are still accruing interest that we categorize as impaired due to observed credit deterioration that we believe in the future may impact our ability to collect all principal and interest according to the current contractual terms. We have elected to downgrade these loans to impaired status in order to individually evaluate them for our allowance for loan losses. At March 31, 2012, our total other impaired loans amounted to $3.0 million compared to $8.0 million at December 31, 2011. The decrease in other impaired loans is due to $2.0 million in credits moving to nonaccrual status and $2.5 million in credits with an improved status which are no longer considered impaired. There is one impaired credit not classified as non-accrual with a balance in excess of $500,000 at March 31, 2012. The credit is a $2.5 million credit to a real estate investor. The majority of this property is multi-family residential real estate. The investor is experiencing cash flow difficulties due to higher vacancy rates and the need for property repairs. The borrower is currently discussing a possible restructuring with another financial institution.

In a directive, the Office of the Comptroller of the Currency required all specific valuation allowances on collateral-dependent loans (valuation allowances established when the recorded investment in an impaired loan exceeded the measured value of the collateral) maintained by savings institutions to be charged-off by March 31, 2012. The Company adopted this methodology effective for the quarter ended March 31, 2012. As a result, reported loan charge-offs of $2.7 million for the quarter ended March 31, 2012 were impacted by the charge-off of specific valuation allowances of $2.4 million on these collateral-dependent loans. The Company had not charged-off the specific valuation allowances on these collateral-dependent loans as of December 31, 2011 because, although risk of loss was present, the loss was not yet confirmed at that date. This one time charge-off did not impact the provision for loan losses for the quarter ended March 31, 2012; however, reported loan charge-offs during the March 2012 quarter increased, and the allowance for loan losses as of March 31, 2012 decreased.

At March 31, 2012, First Clover Leaf Bank had 15 properties classified as foreclosed assets with a value of $5.6 million. The collateral on these properties consisted of a commercial mobile-home site, farmland, three residential lot developments and 10 single-family residences. All of these properties were transferred into foreclosed assets at the property's fair value, less estimated costs of disposal, at the date of foreclosure.

Results of Operations

General.Net income increased to $923,000 for the three months ended March 31, 2012 compared to net income of $906,000 for the same period in 2011. The increase was due to an increase in net interest income and other income partially offset by increases in provision for loan losses and other expenses. Basic and diluted income per share was $0.12 for each of the three-month periods ended March 31, 2012 and 2011.

The overall net interest rate spread and net interest margin increased to 3.25% from 3.01% and to 3.43% from 3.22%, respectively, for the three months ended March 31, 2012 compared to the same period in 2011. Yields on loans and securities continued to decline for the three months ended March 31, 2012 compared to the same period in 2011. The increase in the interest rate spread was attributable to the cost of funds declining faster than the yield on interest-earning assets. However, our ability to lower rates paid on deposits is limited due to the already low deposit rates and the competitive environment in which we operate. In addition, a significant number of our interest-bearing deposits are time deposits, which are fixed-rate contracts until maturity that do not allow for immediate re-pricing as rates fluctuate.

Net interest income. Net interest income increased by $124,000 to $4.4 million for the three months ended March 31, 2012 from $4.2 million for the same period last year. Net average interest-earning assets, which represent our average total interest-earning assets less our average total interest-bearing liabilities, were $79.0 million for the three months ended March 31, 2012, compared to $71.5 million for the same period in 2011. The ratio of interest-earning assets to interest-bearing liabilities increased to 118.31% for the three months ended March 31, 2012 from 115.52% for the same period in 2011. The net interest rate spread increased to 3.25% for the three months ended March 31, 2012, compared to 3.01% for the comparable period in 2011. The average rate earned on interest-earning assets decreased by 20 basis points for the three months ended March 31, 2012 to 4.39% from 4.59% for the same period in 2011, while the average rate paid on interest-bearing liabilities decreased by 44 basis points during these periods to 1.14% from 1.58%.

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

The following table sets forth the average balance sheets, average yields and cost of funds, 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 March 31,                   Three Months Ended March 31,
                                                                                       2012                                           2011
                                                                     Average                                          Average
                                                                   Outstanding                          Yield/      Outstanding        Interest       Yield/
                                                                     Balance         Interest (4)        Rate         Balance            (4)           Rate
                                                                                                     (Dollars in thousands)
Interest-earning assets:
Loans, gross                                                       $    400,605      $       5,013         5.03 %   $    396,210      $    5,400         5.53 %
Securities                                                               84,049                548         2.63           80,878             598         3.00
Federal Home Loan Bank stock                                              5,287                  -            -            6,306               1         0.06
Interest-earning balances from depository institutions                   20,750                 18         0.35           48,778              25         0.21
Total interest-earning assets                                           510,691              5,579         4.39          532,172           6,024         4.59
Non-interest-earning assets                                              43,245                                           41,143
Total assets                                                       $    553,936                                     $    573,315

Interest-bearing liabilities:
Interest-bearing transaction                                       $    200,010                312         0.63     $    206,295             496         0.98
Savings deposits                                                         22,690                 31         0.55           20,878              37         0.72
Time deposits                                                           150,788                724         1.93          187,104           1,081         2.34
Securities sold under agreements to repurchase                           27,231                  3         0.04           20,500               6         0.12
Federal Home Loan Bank advances                                          26,946                130         1.94           21,925             126         2.33
Subordinated debentures                                                   4,000                 25         2.51            3,978              48         4.89
Total interest-bearing liabilities                                      431,665              1,225         1.14          460,680           1,794         1.58
Non-interest-bearing liabilities                                         43,950                                           34,781
Total liabilities                                                       475,615                                          495,461
Stockholders' equity                                                     78,321                                           77,854
Total liabilities and stockholders' equity                         $    553,936                                     $    573,315

Net interest income                                                                  $       4,354                                    $    4,230
Net interest rate spread (1)                                                                               3.25 %                                        3.01 %
Net interest-earning assets (2)                                    $     79,026                                     $     71,492
Net interest margin (3)                                                                                    3.43 %                                        3.22 %
Ratio of interest-earning assets to interest-bearing liabilities                                         118.31 %                                      115.52 %

(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) Interest on loans includes loan fees collected in the amount of $33,927 and $61,599 for the three months ended March 31, 2012 and 2011, respectively.

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

Interest and fee income. Interest and fee income on loans decreased to $5.0 million for the three months ended March 31, 2012 from $5.4 million for the comparable period in 2011 as a result of a lower average yield in the 2012 . . .