UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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Commission File No. 0-33413
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CLOVER LEAF FINANCIAL CORP.
---------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-1416016
(State of incorporation) (IRS Employer Identification No.)
200 East Park Street, Edwardsville, Illinois 62025
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(618)656-6122
-------------
(Registrant's Telephone Number, including area code)
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 such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at August 12, 2002
----------------------------------------- ------------------------------
Common stock $.10 par value 648,550
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in
Stockholders' Equity
and Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE PAGE 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in Thousands, except per share data)
June 30, December 31,
2002 2001
---------------- -----------------
ASSETS
Cash and due from banks $ 1,271 $2,513
Interest bearing deposits in other financial institutions 881 10,279
Investment securities:
Available-for-sale, at fair value (cost of $14,952 and
$14,037 at June 30, 2002 and December 31, 2001, respectively) 15,160 14,306
Federal Home Loan Bank stock 3,367 3,065
Loans 67,103 63,081
Allowance for loan losses (642) (646)
---------------- -----------------
Net loans 66,461 62,435
Accrued interest receivable 495 488
Bank premises and equipment 2,548 2,601
Other assets 352 414
---------------- -----------------
TOTAL ASSETS $90,535 $96,101
================ =================
LIABILITIES
Deposits:
Noninterest bearing $6,183 $13,061
Interest bearing 64,165 67,872
---------------- -----------------
Total deposits 70,348 80,933
Securities sold under agreements to repurchase 375 354
Federal Home Loan Bank advances 7,000 1,500
Accrued interest payable 248 315
Other liabilities 128 489
---------------- -----------------
TOTAL LIABILITIES 78,099 83,591
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at June 30, 2002 or December 31, 2001 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued at June 30, 2002 and December 31, 2001, respectively 66 66
Surplus 6,066 6,134
Retained earnings 6,375 6,158
Accumulated other comprehensive income 95 177
Unearned Employee Stock Ownership Plan shares (166) (25)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,436 12,510
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,535 $96,101
================ =================
See the accompanying notes to unaudited consolidated financial statements.
3
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ---------------
Interest and Fee Income:
Interest and fees on loans $1,096 $1,168 $2,189 $2,327
Interest on U.S. treasuries and agencies 163 249 334 473
Interest on other securities 10 1 23 22
Federal Home Loan Bank dividends 46 7 102 17
Interest on deposits with banks 7 32 18 111
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST AND FEE INCOME 1,322 1,457 2,666 2,950
Interest Expense:
NOW, money market and savings deposits 118 138 223 245
Certificates of deposit 480 837 1,026 1,706
Securities sold under agreements to repurchase 3 - 4 -
Federal Home Loan Bank advances 36 22 57 66
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST EXPENSE 637 997 1,310 2,017
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 685 460 1,356 933
Provision for loan losses 21 12 42 16
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 664 448 1,314 917
Noninterest Income:
Service charges on deposit accounts 21 18 39 37
Other service charges and fees 16 21 31 38
Gain on sale of investment securities, net - 5 4 11
Gain on sale of loans 1 - 19 -
Other 49 12 54 14
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST INCOME 87 56 147 100
Noninterest Expense:
Salaries and employee benefits 294 244 563 488
Occupancy and equipment, net 68 66 134 136
Data processing 52 54 109 108
Advertising and marketing 9 14 24 15
Directors' fees 25 26 49 50
Audit and accounting fees 30 40 48 45
Other 119 65 215 121
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE 597 509 1,142 963
---------------- ---------------- ---------------- ---------------
INCOME BEFORE INCOME TAXES 154 (5) 319 54
Income Tax Expense (Benefit) 52 (18) 102 -
---------------- ---------------- ---------------- ---------------
NET INCOME $ 102 $ 13 $217 $54
================ ================ ================ ===============
Average Shares Outstanding:
Basic and Diluted 648,550 N/A 649,266 N/A
Basic and Diluted Earnings Per Share $.16 N/A $.34 N/A
================ ================ ================ ===============
See the accompanying notes to unaudited consolidated financial statements.
4
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (Unaudited)
(Dollars in Thousands)
Six Months Ended June 30, 2002
----------------------------------------------------------------------------------------------
Unearned
Accumulated Employee
Other Stock
Common Retained Comprehensive Ownership Total
Stock Surplus Earnings Income (Loss) Plan Shares Equity
----------------------------------------------------------------------------------------------
Balance at December 31, 2001 $66 $6,134 $6,158 $177 $(25) $12,510
Comprehensive income
Net income - - 217 - - 217
Other comprehensive income, net of tax:
Change in unrealized gain - - - (79) - (79)
on securities available-for-sale
arising during the period,
net of tax of $(41)
Reclassification adjustment, - - - (3) (3)
Net of tax of $(1)
---------
Other comprehensive income (82)
net of tax of $(42)
---------
Comprehensive income 135
Loan to ESOP for purchase of - - - - (141) (141)
shares
Costs related to issuance of - (68) - - - (68)
common stock
----------------------------------------------------------------------------------------------
Balance at June 30, 2002 $66 $6,066 $6,375 $95 $(166) $12,436
======= ======== ======= ===== ======= =========
See the accompanying notes to unaudited consolidated financial statements.
5
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
----------------------------------------------
2002 2001
-------------------- ---------------------
Cash Flows from Operating Activities
Net income $ 217 $54
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 71 83
Provision for loan losses 42 16
Net amortization of premiums on investments 17
Deferred tax provision/(benefit) 67 (25)
Realized gain on sale of investments (4) (10)
Federal Home Loan Bank stock dividend (102) (9)
Gain on sale of loans (19) -
Proceeds from sales of loans held for sale 3,070
Origination of loans held for sale (3,051)
Increase in accrued interest receivable (7) (15)
(Increase) decrease in other assets 46 (8)
Decrease in accrued interest payable (67) (45)
Decrease in other liabilities (361) (24)
-------------------- ---------------------
Net cash used in operating activities (81) 17
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (4,090) (3,314)
Proceeds of sales and maturities of securities available-for-sale and paydowns 3,158 3,593
Purchase of Federal Home Loan Bank stock, net (200) (1,508)
Increase in loans, net (4,136) (3,083)
Purchases of premises and equipment (18) (10)
-------------------- ---------------------
Net cash used in investing activities (5,286) (4,322)
-------------------- ---------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits (10,585) 3,357
Proceeds from Federal Home Loan Bank advances 5,500 -
Repayments of Federal Home Loan Bank advances - (1,500)
Net increase in securities sold under agreements to repurchase 21
Loans to ESOP for purchase of shares (141) -
Cost associated with issuance of stock (68) -
-------------------- ---------------------
Net cash used in financing activities (5,273) 1,857
-------------------- ---------------------
Net decrease in cash and cash equivalents (10,640) (2,448)
Cash and cash equivalents:
Beginning 12,792 9,211
-------------------- ---------------------
Ending $2,152 $6,763
==================== =====================
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $1,377 $2,062
Income taxes 2 -
Supplemental disclosure of non cash investing activities
Assets acquired through foreclosure 49 4
See the accompanying notes to unaudited consolidated financial statements.
6
CLOVER LEAF FINANCIAL CORP.
NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS
Note A--Principles of Accounting
The consolidated financial statements of Clover Leaf Financial Corp.
("Clover Leaf Financial") or (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America and in
the banking industry and with the instructions to Form 10-QSB. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for annual
reporting. Reference is hereby made to the notes to consolidated financial
statements contained in Clover Leaf Financial's annual report on Form 10-KSB.
The foregoing consolidated financial statements are unaudited. However, in the
opinion of management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been made. All such adjustments are of a
normal recurring nature. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for the full year.
The consolidated financial statements include the accounts of the
Company's subsidiary. Clover Leaf Financial is a bank holding company that
engages in its business through its sole subsidiary, Clover Leaf Bank (the
"Bank"), an Illinois chartered state savings bank. All material intercompany
transactions and balances are eliminated. Clover Leaf Financial was organized at
the direction of the Board of Directors of the Bank for the purpose of owning
all of the outstanding capital stock of the Bank following the completion of the
Bank's mutual-to- stock conversion. Clover Leaf Financial offered for sale
661,250 shares of its outstanding common stock in a public offering to eligible
depositors and members of the general public and this offering was completed on
December 27, 2001. Prior to that date, Clover Leaf Financial had no assets or
liabilities. Accordingly, the accompanying unaudited consolidated financial
statements for the three month and six month periods ending June 30, 2001
represent only the accounts of the Bank and its wholly owned subsidiary, Clover
Leaf Financial Services, Inc.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
Note B--Business Segments
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information," requires business segments to be
reported based on the way management organizes segments within an organization
for making operating decisions and assessing performance. Management has not
included disclosures regarding segments since management makes operating
decisions and assesses performance based on Clover Leaf Financial as a whole.
Note C--Net Income Per Share
Basic earnings per share are determined by dividing net income by the
weighted average number of common shares outstanding. Shares acquired by the
ESOP are held in trust but are not considered in the weighted average shares
outstanding until the shares are committed for allocation or vested to an
employee's individual account.
The Company has not issued any stock options or other potentially
dilutive shares, therefore, diluted earnings are the same as basic earnings per
share.
7
CLOVER LEAF FINANCIAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data) Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Net income available to common shareholders $102 $13 $217 $54
Weighted average shares outstanding 661,250 N/A 661,250 N/A
Weighted average ESOP shares (12,700) N/A (11,984) N/A
---------------- ---------------- ---------------- ----------------
Basic average shares outstanding 648,550 N/A 649,266 N/A
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings per share $.16 N/A $.34 N/A
================ ================ ================ ================
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion describes Clover Leaf Financial's results of
operations during the three-month and six-month periods ended June 30, 2002 and
2001, and its financial condition, asset quality, and capital resources as of
June 30, 2002. This discussion should be read in conjunction with Clover Leaf
Financial's unaudited consolidated financial statements and notes thereto. The
results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the full year.
FORWARD-LOOKING STATEMENTS
This filing and future filings made by Clover Leaf Financial with the
Securities and Exchange Commission, as well as other filings, reports and press
releases made or issued by Clover Leaf Financial, and oral statements made by
executive officers or directors of Clover Leaf Financial may include
forward-looking statements, which are based on assumptions and describe future
plans, strategies, projections and expectations of Clover Leaf Financial. These
forward-looking statements are generally identified by use of terms "believe",
"expect", "anticipate", "should", "planned", "estimated" and "potential".
Examples of forward-looking statements include, but are not limited to,
estimates with respect to Clover Leaf Financial's 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 and other loans, real estate values, and
competition; changes in accounting principles, policies or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting Clover Leaf Financial's
operations, pricing, products and services.
OVERVIEW
Net income for the second quarter of 2002 was $102,000 or $.16 per
diluted common share compared to net income of $13,000 for the second quarter of
2001. Net income for the first six months of 2002 was $217,000 or $.34 per
diluted common share compared to net income of $54,000 for the first six months
of 2001. Prior to the formation and incorporation of Clover Leaf Financial in
December 2001, the existing entity consisted of Clover Leaf Bank, a
state-chartered mutual savings bank. Return on average assets for the second
quarter and first six months of 2002 was .46% and .49%, respectively, compared
to .06% and .13% for the second quarter and first six months of 2001,
respectively. Return on average equity for the second quarter and first six
months of 2002 was 3.28% and 3.51%, respectively, compared to .83% and 1.75% for
the second quarter and first six months of 2001, respectively.
The increase in net income, for the quarters and six-month periods
compared, resulted from increases in net interest income and noninterest income,
partially offset by increases in the provision for loan losses, noninterest
expenses, and income tax expense.
Total assets at June 30, 2002 decreased to $90,535,000 from $96,101,000
at December 31, 2001. Interest bearing due from bank balances decreased
$9,398,000 during the first six months of 2002. Investment securities increased
$1,156,000 from $17,371,000 at December 31, 2001 to $18,527,000 at June 30,
2002. Net loans increased $4,026,000 during the first six months of 2002. Total
deposits decreased $10,585,000 during the first six months of 2002 to
$70,348,000 from $80,933,000 at year-end 2001. A portion of the overall decrease
in deposits and interest bearing deposits with banks was attributable to
subscription funds of $6,411,000 held by the Bank at December 31, 2001as part of
the stock offering that were subsequently returned to subscribers. Federal Home
Loan Bank advances outstanding increased from $1,500,000 at December 31, 2001 to
$7,000,000 at June 30, 2002.
9
Income Information - Quarter
Net interest income after provision for loan losses for the three months ended
June 30, 2002 was $664,000, compared to $448,000 for the three months ended June
30, 2001, an increase of $216,000 or 48.2%. The increase in net interest income
resulted primarily from a 93 basis point increase in the average net interest
margin to 3.28% from 2.35% in the prior year. This increase in the average net
interest margin is largely attributed to a decrease of 155 basis points paid on
time deposits to 4.53% at June 30, 2002 from 6.08% in the prior year.
Interest income for the three months ended June 30, 2002 declined to $1.3
million, a decrease of $135,000, or 9.27% compared to the year-ago period. The
decrease was primarily due to lower average yields on loans and securities,
partially offset by higher average balances in loans. Average interest-earning
assets for the three months ended June 30, 2002 were $84.3 million, an increase
of $4.7 million, or 5.9%, over average interest-earning assets for the three
months ended June 30, 2001 of $79.6 million. Average loan balances increased
$4.0 million and average security balances grew by $2.1 million. This growth was
partially offset by a decline of $1.4 million in interest bearing deposits in
other financial institutions. The average loan yield declined 88 basis points to
6.71% at June 30, 2002 from 7.59% in the prior year. The average security yield
declined 147 basis points to 4.63% at June 30, 2002 from 6.10% in the prior
year.
Interest expense for the most recent three-month period fell by $361,000 to
$637,000, a decrease of 36.2% compared to the same period last year. The
decrease was primarily due to lower rates paid on interest-bearing deposits and
borrowings, as well as to lower balances of certificates of deposit accounts and
a higher concentration of non-interest-bearing and low interest-bearing deposits
among total deposits for the period. Average rates paid on interest-bearing
liabilities for the three months ended June 30, 2002 declined by 185 basis
points to 3.65% from 5.50% for the same period last year. The average interest
rate paid on certificates of deposit fell by 155 basis points to 4.53% for the
three months ended June 30, 2002, from 6.08% for the prior-year period. For the
three months ended June 30, 2002, average balances of lower-cost savings and
money market accounts increased by $9.7 million, while average balances of
certificates of deposits declined by $13.4 million compared to the three months
ended June 30, 2001.
Non-interest income for the three months ended June 30, 2002 was $87,000
compared to $56,000 for the three months ended June 30, 2001, an increase of
$31,000, or 55.4%. This increase was primarily attributable to a gain on sale of
NYCE Corporation stock of $42,000. The stock, which was considered an Other
Asset for balance sheet presentation, was liquidated due to a merger in the ATM
servicing industry, which mandated our liquidation of the asset. This increase
was partially offset by a slight decline in service charges and fees of $5,000
between the two periods. The Company also recorded net gains on sales of
securities of $5,000 for the quarter ended June 30, 2001 compared to no gains
for the current quarter ended.
Non-interest expense for the three months ended June 30, 2002 were $88,000, or
17.3% more than expense for the three months ended June 30, 2001. The increase
was primarily attributable to increases in compensation and employee benefits of
$50,000, or 20.5%, and in legal and collection expenses of $33,000. Compensation
increased as a result of staff additions and annual merit increases, and
additional legal and collection costs were attributable to the expenses related
to working out our largest non-performing asset, and expenses related to the
company's conversion to a public company. A portion of the expenses related to
the non-performing asset is expected to be recovered when the loan settlement is
received.
Income Information - Six Months
Net interest income after provision for loan losses for the six months ended
June 30, 2002 was $1.3 million, compared to $917,000 for the six months ended
June 30, 2001, an increase of $397,000, or 43.3%. The net interest margin for
the six-month period was 3.09%, compared to a net interest margin of 2.21% for
the six-month period ended June 30, 2001.
Interest income declined $284,000, or 9.6%, compared to the year-ago period. The
decrease was primarily due to lower average yields on loans and securities,
partially offset by higher average balances in loans. Average interest-
10
earning assets for the six months ended June 30, 2002 were $83.7 million, an
increase of $4.1 million, or 5.2%, over average interest-earning assets of $79.6
million for the six months ended June 30, 2001. Average loan balances increased
$5.8 million, or 9.7% to $65.9 million for the period ended June 30, 2002
compared to $60.1 million for the same period in the prior year. Average
security balances increased $2.0 million, or 12.1% to $18.5 million for the
period ended June 30, 2002 compared to $16.5 for the same period in the prior
year. The average loan yield declined 91 basis points to 6.84% at June 30, 2002
from 7.75% in the prior year. The average security yield declined 131 basis
points to 4.98% at June 30, 2002 from 6.29% in the prior year.
Interest expense for the six-month period ended June 30, 2002 fell to $1.3
million, a decline of $707,000, or 35.1%, compared to the same period last year.
The decrease was primarily due to lower rates paid on interest-bearing deposits,
as well as to lower balances of certificate of deposit accounts and a higher
concentration of non-interest-bearing and low interest-bearing deposits among
total deposits for the period. The average interest paid on certificates of
deposit fell by 151 basis points to 4.65% for the six months ended June 30,
2002, average balances of lower-cost savings and money market accounts increased
by $11.1 million, while average balances of certificates of deposit declined by
$12.2 million compared to the six months ended June 30, 2001.
As noted in the above discussion, the increase in the Bank's net interest income
is due, in large part, to the relative changes in the yield and cost of the
Bank's assets and liabilities as a result of decreasing market interest rates in
calendar 2001 and early 2002. This decrease in market interest rates has reduced
the cost of interest-bearing liabilities faster and to a greater extent than the
rates on interest-earning assets such as loans and securities.
Non-interest income for the six months ended June 30, 2002 was $147,000 compared
to $100,000 for the six months ended June 30, 2001, an increase of $47,000, or
47.0%. This increase was primarily attributable to a one- time gain of $42,000
from the sale of NYCE Corporation stock, as discussed above. The Company also
recorded net gains on sale of loans of $19,000 for the current six-month period
compared to no such gains for the same period a year ago. These increases to
income are partially offset by a decline of $7,000, or 18.4% in services charges
and other fees between the two periods, as well as a slight decline in other
operating income.
Non-interest expense for the six months ended June 30, 2002 was $1.1 million, or
$179,000 more than expenses for the six months ended June 30, 2001. The increase
was primarily attributable to increases in compensation expenses, advertising,
and legal and collection expenses. Salary expense increased $75,000, or 15.4%,
as a result of staff additions and annual merit increases. Advertising expense
increased $9,000, or 60.0%, as we have engaged an advertising firm to run an
on-going advertising campaign for the bank. Legal and collection expense
increased $48,000, or 800.0% as a result of the filing and accounting
regulations related to being a public company, and as a result of expenses
incurred related to working out our largest non-performing asset. A portion of
the expenses related to the non-performing asset is expected to be recovered
when the loan settlement is received.
FINANCIAL CONDITION
General
Certain components of Clover Leaf Financial's consolidated balance
sheet at June 30, 2002 compared to December 31, 2001 are presented in summary
form in the following table. Total assets decreased $5,566,000 to $90,535,000
compared to $96,101,000 at December 31, 2001. This decrease resulted from a
decrease in interest bearing due from bank balances in the amount of $9,398,000,
partially offset by an increase in gross loans outstanding of $4,022,000 and an
increase in investment securities of $1,156,000. Total deposits decreased
$10,585,000 from December 31, 2001 to June 30, 2002. Outstanding Federal Home
Loan Bank advances increased from $1,500,000 at December 31, 2001 to $7,000,000
at June 30, 2002.
11
Selected Comparative Balance Sheet Items
(Dollars in Thousands)
June 30 December 31
2002 2001
------- -------
Total assets .......................................... $90,535 $96,101
Loans ................................................. 67,103 63,081
Investment securities ................................. 18,527 17,371
Deposits .............................................. 70,348 80,933
Securities sold under agreements to repurchase ........ 375 354
Federal Home Loan Bank advances ....................... 7,000 1,500
Stockholders' equity .................................. 12,436 12,510
Loans
Gross loans increased 6.4%, or $4,022,000, from December 31, 2001 to
June 30, 2002. Commercial real estate loans increased $6,929,000 during the
first six months of 2002.
The following table presents the composition of the loan portfolio by
type of borrower and major loan category and the percentage of each to the total
portfolio at the date presented.
Loan Portfolio Composition
(Dollars in Thousands)
June 30, December 31,
2002 2001
----------------- ------------------
Commercial borrowers: .................. Amount Percent Amount Percent
------- ------ ------- ------
Commercial, financial .................. $ 6,039 9.0% $ 7,732 12.3%
and agricultural
Commercial real estate ................. 20,900 31.1 13,971 22.1
Real estate construction ............... 577 0.9 1,193 1.9
------- ------ ------- ------
Total commercial ............. 27,516 41.0 22,896 36.3
------- ------ ------- ------
Consumer borrowers:
1-4 family residential
real estate ....................... 35,932 53.6 33,773 53.5
Other consumer loans ................... 3,655 5.4 6,412 10.2
------- ------ ------- ------
Total consumer ............... 39,587 59.0 40,185 63.7
------- ------ ------- ------
Total loans .................. $67,103 100.0% $63,081 100.0%
======= ====== ======= ======
Investments
Total investments increased to $18,527,000, at June 30, 2002 compared
to $17,371,000 at year-end 2001.
Investments in securities are made based on certain considerations,
which include the interest rate, tax yield, settlement date and maturity date of
the securities, Clover Leaf Financial's liquidity position, and anticipated cash
needs and sources. The effect that the proposed securities would have on Clover
Leaf Financial's credit and interest rate risk and risk-based capital is also
considered. Clover Leaf Financial purchases securities to provide necessary
liquidity for day-to-day operations, and when investable funds exceed loan
demand.
Available-for-sale investment securities are recorded at fair value.
Net unrealized gains on available-for-sale investment securities totaled
$145,000 and $269,000 at June 30, 2002 and December 31, 2001, respectively.
12
The following table presents the composition of investment securities at their
carrying values at the date presented.
Investment Securities Portfolio Composition
(Dollars in Thousands)
June 30 December 31
2002 2001
------- -------
Available-for-sale securities:
Obligations of U. S. government corporations and agencies ................... $ 7,695 $ 8,532
Mortgage-backed securities .................................................. 6,070 4,365
Obligations of states and political subdivisions ............................ 856 874
Federal Home Loan Bank stock ................................................ 3,367 3,065
Corporate securities ........................................................ 539 535
------- -------
Total available-for-sale ............................................... $18,527 $17,371
======= =======
Deposits
Clover Leaf Financial's deposit base is its primary source of liquidity
and consists of deposits originating within the communities served by its
banking locations. Deposits are Clover Leaf Financial's primary and most
reliable funding source for interest earning assets.
Total deposits decreased $10,585,000 to $70,348,000 at June 30, 2002
from $80,933,000 at December 31, 2001. The overall decrease in deposits was
partially attributable to subscription funds of $6,411,000 held in a
non-interest bearing demand deposit account by the Bank as part of the stock
offering that were subsequently returned to the subscribers. Those funds were on
deposit at the Bank at December 31, 2001, as checks had already been returned to
subscribers but not cashed until the first quarter of 2002. Time deposits
decreased $5,907,000 from year-end 2001. Savings and money market deposits
increased $2,051,000 from year-end 2001.
Balances in noninterest bearing demand deposits decreased $6,878,000
from year-end 2001. This decrease was primarily attributable to the subscription
funds held by the Bank at December 31, 2001, as discussed above.
The following table sets forth the composition of deposits and the
percentage of each category to total deposits at the dates presented.
Deposit Liability Composition
(Dollars in Thousands)
June 30 December 31
2002 2001
------------------- -----------------
Amount Percent Amount Percent
------- ------ ------- ------
Noninterest bearing demand deposits .......................... $ 6,183 8.8 % $13,061 16.1%
Interest bearing demand deposits ............................. 2,953 4.2 2,804 3.5
Savings and money market deposits ............................ 19,927 28.3 17,876 22.1
Time deposits $100,000 or more ............................... 4,782 6.8 7,445 9.2
Time deposits less than $100,000 ............................. 36,503 51.9 39,747 49.1
------- ------ ------- ------
Total deposits .......................................... $70,348 100.0% $80,933 100.0%
======= ====== ======= ======
13
Borrowings
Clover Leaf Bank may obtain advances from the Federal Home Loan Bank of
Chicago upon the security of the common stock it owns in that bank and certain
of its residential mortgage loans and mortgage-backed securities, provided
certain standards related to creditworthiness have been met. These advances are
made pursuant to several credit programs, each of which has its own interest
rate and range of maturities. Federal Home Loan Bank advances are generally
available to meet seasonal and other deposit withdrawals and to permit increased
lending.
Clover Leaf Bank had $7,000,000 and $1,500,000 outstanding in Federal
Home Loan Bank advances at June 30, 2002 and December 31, 2001, respectively.
The Federal Home Loan Bank advances outstanding at June 30, 2002 consisted of
four advances. These advances were in the amount of $500,000, $1,000,000,
$3,000,000 and $2,500,000 and had rates of 5.96%, 5.49%, 2.13%, and 2.12%,
respectively. The increase in Federal Home Loan Bank advances during the first
six months of 2002 was a result of increased loan demand and a decrease in
available deposits to fund such demand.
Repurchase agreements in the amount of $375,000 and $354,000 were
outstanding as of June 30, 2002 and December 31, 2001, respectively.
ASSET QUALITY
Clover Leaf Financial's asset quality management program, particularly
with regard to loans, is designed to analyze potential risk elements and to
support the growth of a high quality loan portfolio. Clover Leaf Financial's
policies, consistent with regulatory guidelines, require that loans and other
assets are classified as substandard, doubtful or loss if they are determined to
be of lesser quality. Assets which possess some weaknesses, but do not warrant
classification in the aforementioned categories are required to be designated as
special mention. Management regularly reviews the 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.
At June 30, 2002, nonperforming assets totaled $1,692,000, or 1.87% of
total assets, compared to nonperforming assets at year-end 2001 of $1,554,000 or
1.62% of total assets. Nonperforming assets at June 30, 2002 included $19,000
relating to foreclosed assets. There were no foreclosed assets in the
nonperforming assets at December 31, 2001. Management does not anticipate any
significant losses upon disposition of the foreclosed assets held at June 30,
2002.
14
The following table sets forth a summary of Clover Leaf Financial's loan
portfolio mix and nonperforming assets.
Loan Portfolio Mix and Nonperforming Assets
(Dollars in Thousands)
June 30, 2002 December 31, 2001
-------------------------------- ----------------------------
Loans and Loans and
Foreclosed Non-performing Foreclosed Non-performing
Property Assets Property Assets
------------- ---------------- ----------- -----------
Commercial borrowers:
Commercial, financial and
agricultural .................. $ 6,039 $ 449 $ 7,732 $ 490
Commercial real estate ............. 20,900 -- 13,971 --
Real estate construction ........... 577 503 1,193 483
------- ------- ------- -------
Total commercial ......... 27,516 952 22,896 973
Consumer borrowers:
1-4 family residential
real estate ................... 35,932 528 33,773 406
Other consumer loans ............... 3,655 193 6,412 175
------- ------- ------- -------
Total consumer ........... 39,587 721 40,185 581
------- ------- ------- -------
Total loans .............. 67,103 1,673 63,081 1,554
Foreclosed assets .................. 19 19 -- --
------- ------- ------- -------
Total .................... $67,122 $ 1,692 $63,081 $ 1,554
======= ======= ======= =======
Nonaccrual loans ................... $ 1,673 $ 1,439
Accruing loans past due
90 days or more ............... -- 115
Troubled debt restructurings ....... -- --
------- -------
Total nonperforming loans ..... 1,673 1,554
Foreclosed assets .................. 19 --
------- -------
Total nonperforming assets .... $ 1,692 $ 1,554
======= =======
Nonperforming loans to total loans . 2.49% 2.46%
Nonperforming assets to total loans
and foreclosed assets ......... 2.52% 2.46%
Nonperforming assets to total assets 1.87% 1.62%
Net charge-offs for the second quarter of 2002 totaled $35,000 compared
to net recoveries of $2,000 for the second quarter of 2001. During the first six
months of 2002, net charge-offs totaled $46,000 compared to $5,000 for the first
six months of 2001. Net charge-offs as a percentage of average total loans was
..22% for the second quarter of 2002. During the second quarter of 2001, the
Company reported net recoveries of $2,000. For the six months ended June 30,
2002 and 2001, net charge-offs as a percentage of average total loans was .15%
and .02%, respectively.
Clover Leaf Financial's allowance for loan losses at June 30, 2002,
decreased to $642,000 from $646,000 at December 31, 2001. At June 30, 2002, the
allowance for loan losses represented 38.38% of non-performing loans compared to
41.57% and 102.75% at December 31, 2001 and June 30, 2001, respectively. The
ratio of the allowance for loan losses to total loans was .97% at June 30, 2002
compared to 1.02% and 1.02% at December 31, 2001 and June 30, 2001,
respectively. Management believes that the allowance for loan losses at June 30,
2002 was adequate to absorb probable losses inherent in the loan portfolio.
However, past loan loss experience as it relates to current portfolio mix,
evaluation of potential losses in the portfolio, subsequent changes in economic
conditions and other factors may require changes in the levels of the allowance
for loan losses.
15
Potential Problem Loans. We utilize an internal asset classification
system as a means of reporting problem and potential problem assets. At each
scheduled meeting of the boards of directors of our subsidiary banks, a watch
list is presented, showing all loans listed as "Special Mention," "Substandard,"
"Doubtful" and "Loss." An asset is classified 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 we will sustain some loss if the deficiencies are
not corrected. Assets classified as Doubtful have all 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 uncollectible and viewed as
non-bankable assets, worthy of charge-off. Assets that do not currently expose
us to sufficient risk to warrant classification in one of the aforementioned
categories, but possess weaknesses that may or may not be within the control of
the customer are deemed to be Special Mention.
Our determination as to the classification of our assets and the amount
of our valuation allowances is subject to review by our subsidiary banks'
primary regulators, which can order the establishment of additional general or
specific loss allowances. The Office of the Comptroller of the Currency, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on the allowance for loan losses. The policy statement provides
guidance for financial institutions on both the responsibilities of management
for the assessment and establishment of adequate allowances and guidance for
banking agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that (1) institutions
have effective systems and controls to identify, monitor and address asset
quality problems; (2) management has analyzed all significant factors that
affect the collectibility of the portfolio in a reasonable manner; and (3)
management has established acceptable allowance evaluation processes that meet
the objectives set forth in the policy statement. Management believes it has
established an adequate allowance for probable loan losses. We analyze our
process regularly, with modifications made if needed, and reports those results
four times per year at meetings of our board of directors however, there can be
no assurance that regulators, in reviewing our loan portfolio, will not request
us to materially increase our allowance for loan losses at the time. Although
management believes that adequate specific and general loan loss allowances have
been established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary.
Potential problem loans are loans included on the watchlist presented
to the Board of Directors that do not meet the definition of a non-performing
loan, but where known information about possible credit problems of borrowers
causes management to have serious doubts as to the ability of such borrowers to
comply with present loan repayment terms. The aggregate principal amounts of
potential problem loans as of June 30, 2002, December 31, 2001, and June 30,
2001were approximately $1.7 million, $2.2 million, and $2.5 million,
respectively.
Allowance for Loan Losses. Management believes the allowance for loan
losses accounting policy is critical to the portrayal and understanding of our
financial condition and results of operations. As such, selection and
application of this "critical accounting policy" involves judgements, estimates
and uncertainties that are susceptible to change. In the event that different
assumptions or conditions were to prevail, and depending upon the severity of
such changes, the possibility of materially different financial condition or
results of operations is a reasonable likelihood.
16
The following table presents information pertaining to the activity in
and an analysis of Clover Leaf Financial's allowance for loan losses for the
periods presented.
Allowance For Loan Losses
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
Balance at beginning of period ............ $ 656 $ 622 $ 646 $ 625
Loans charged off:
Commercial, financial and agricultural -- -- -- 4
Consumer ............................. 41 20 62 37
----- ----- ----- -----
Total charge-offs .......... 41 20 62 41
----- ----- ----- -----
Recoveries of loans previously charged off:
Consumer ............................. 6 22 16 36
----- ----- ----- -----
Total recoveries ........... 6 22 16 36
----- ----- ----- -----
Net charge-offs (recoveries) .............. 35 (2) 46 5
Provision for loan losses ................. 21 12 42 16
----- ----- ----- -----
Balance at end of period .................. $ 642 $ 636 $ 642 $ 636
===== ===== ===== =====
Net charge-offs as a percent of
average total loans .................. .05% (.00)% .07% .01%
Allowance for loan losses to total loans .. .97% 1.02% .97% 1.02%
Allowance for loan losses to
nonperforming loans .................. 38.38% 102.75% 38.38% 102.75%
CAPITAL RESOURCES
Capital Resources
Total stockholders' equity decreased $74,000 from $12,510,000 at
December 31, 2001 to $12,436,000 at June 30, 2002. This decrease in
stockholders' equity during the first six months of 2002 was primarily due to
the additional purchase of shares by the Employee Stock Ownership Plan. Also
contributing to the decline were payments made during 2002 relative to the stock
offering completed in December 2001, and a decrease in the net unrealized gains
within the available for sale securities portfolio from the level at December
31, 2001. Net income of $217,000 for the first six months of 2002 partially
offset these items which reduced stockholders' equity during the same time
period.
Financial institutions are required to maintain ratios of capital to
assets in accordance with guidelines promulgated by the federal banking
regulators. The guidelines are commonly known as "Risk-Based Guidelines" as they
define the capital level requirements of a financial institution based upon the
level of credit risk associated with holding various categories of assets. The
Risk-Based Guidelines require minimum ratios of Tier 1 and Total Capital to
risk-weighted assets of 4% and 8%, respectively. At June 30, 2002, Clover Leaf
Bank's Tier 1 and Total capital ratios were 16.67% and 17.74%, respectively. In
addition to the Risk-Based Guidelines, the federal banking agencies have
established a minimum leverage ratio guideline for financial institutions (the
"Leverage Ratio Guideline"). The Leverage Ratio Guideline provides for a minimum
ratio of Tier 1 capital to average assets of 4%. Clover Leaf Bank's leverage
ratio at June 30, 2002, was 11.16%. Accordingly, Clover Leaf Bank has satisfied
these regulatory guidelines.
17
Liquidity and Capital Resources
Clover Leaf Bank's primary sources of liquidity or internally generated
funds are principal and interest payments on loans receivable, cash flows
generated from operations, and cash flows generated by investments. External
sources of liquidity consist primarily of increases in deposits.
At June 30, 2002, Clover Leaf Bank had loan commitments of $3.7 million
and unused lines of credit of $2.6 million. Clover Leaf Bank believes it has
adequate resources to fund loan commitments as they arise. If Clover Leaf Bank
requires funds beyond its internal funding capabilities, advances from the
Federal Home Loan Bank of Chicago are available. At June 30, 2002, approximately
$29.4 million of time deposits were scheduled to mature within one year. We
expect that substantially all of these time deposits either will be renewed upon
maturity or will be placed in money market accounts at Clover Leaf Bank. Clover
Leaf Bank intends to sell a greater percentage of its residential real estate
loan originations, which will provide additional liquidity.
Sources of Funds
General. Deposits have been our primary source of funds for lending and
other investment purposes. In addition to deposits, we derive funds primarily
from principal and interest payments on loans. These loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by market interest rates. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources, and may be used on a longer-term basis for general business
purposes.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Clover Leaf Bank is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of its
business. At June 30, 2002, Clover Leaf Bank was not involved in any
material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 28,
2002. At the meeting, Henry L. Malench and Robert W. Schwartz were
elected to serve as directors with terms expiring in 2005. Continuing
with terms expiring in 2003 were Dennis M. Terry, Joseph J. Gugger, and
Kenneth P. Highlander. Continuing with terms expiring in 2002 were Gary
D. Niebur and Philip H. Weber.
The matters approved by stockholders at the meeting and the number of
votes cast for, against or withheld (as well as the number of
abstentions and broker non-votes) as to each matter are set forth
below:
Number of Votes
For Against
The election of the following directors for a three-year term:
Henry L. Malench 532,507 0
Robert W. Schwartz 532,507 0
Broker
For Against Abstain Non-Votes
The ratification of McGladrey & Pullen, LLP as independent
auditors for the year ending December 31, 2002 532,207 0 300 0
ITEM 5. OTHER INFORMATION
None
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 99.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K: No reports on Form 8-K were filed by Clover Leaf
Financial during the second quarter of 2002.
20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOVER LEAF FINANCIAL CORP.
--------------------------------
(Registrant)
DATE: August 13, 2002 By:/s/ Dennis M. Terry
----------------------- -------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: August 13, 2002 By:/s/ Darlene F. McDonald
---------------------- -----------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
22
Exhibit 99.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------------------------------------------------
Dennis M. Terry, Chief Executive Officer and Darlene F. McDonald, Chief
Financial Officer of Clover Leaf Financial Corp. (the "Company") each certify
that we have reviewed the quarterly report on Form 10-QSB for the quarter ended
June 30, 2002. We further certify that:
(1) the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
DATE: August 13, 2002 By:/s/ Dennis M. Terry
----------------------- -------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: August 13, 2002 By:/s/ Darlene F. McDonald
---------------------- -----------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)