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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _______________ to __________________
Commission File No. 0-33413
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 November 13, 2002
Common stock $.10 par value 661,250
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
ITEM 3. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE AND CERTIFICATIONS 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in Thousands, except per share data)
September 30, December 31,
2002 2001
---------------- -----------------
ASSETS
Cash and due from banks $ 1,904 $2,513
Interest bearing deposits in other financial institutions 2,316 10,279
---------------- -----------------
Total cash and cash equivalents 4,220 12,792
Securities available-for-sale 14,223 14,306
Federal Home Loan Bank stock 3,409 3,065
Loans, net of allowance for loan losses of
$670 in 2002 and $646 at December 31, 2001 65,384 62,435
Bank premises and equipment 2,518 2,601
Accrued interest receivable 409 488
Other assets 361 414
---------------- -----------------
TOTAL ASSETS $90,524 $96,101
================ =================
LIABILITIES
Deposits:
Noninterest bearing $6,885 $13,061
Interest bearing 62,259 67,872
---------------- -----------------
Total deposits 69,144 80,933
Federal Home Loan Bank advances 8,000 1,500
Other borrowings 406 354
Accrued interest payable 227 315
Other liabilities 177 489
---------------- -----------------
TOTAL LIABILITIES 77,954 83,591
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at September 30, 2002 or December 31, 2001 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued at September 30, 2002 and December 31, 2001, respectively 66 66
Surplus 6,066 6,134
Retained earnings 6,511 6,158
Accumulated other comprehensive income 93 177
Unearned Employee Stock Ownership Plan shares (166) (25)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,570 12,510
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,524 $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 Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ---------------
Interest Income and dividend income:
Loans, including fees $1,142 $1,143 $3,331 $3,470
Securities 168 235 525 730
Federal Home Loan Bank dividends 42 43 144 60
Interest-bearing deposits in other banks 10 35 28 146
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST AND FEE INCOME 1,362 1,456 4,028 4,406
Interest Expense:
Deposits 555 953 1,804 2,904
Federal Home Loan Bank advances 62 21 119 87
Other borrowings 1 2 5 2
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST EXPENSE 618 976 1,928 2,993
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 744 480 2,100 1,413
Provision for loan losses 24 12 66 28
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 720 468 2,034 1,385
Noninterest Income:
Service charges on deposit accounts 22 18 61 55
Other service charges and fees 15 13 46 51
Loan servicing fees 5 3 14 9
Gain on sale of loans 50 - 69 -
Gain on sale of investments 3 - 7 11
Other 3 3 48 11
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST INCOME 98 37 245 137
Noninterest Expense:
Salaries and employee benefits 306 260 869 748
Occupancy and equipment, net 106 67 240 203
Data processing 51 53 160 161
Advertising and marketing 12 13 36 28
Directors' fees 25 24 74 74
Audit and accounting fees 17 9 65 54
Legal & collection expense 7 10 61 16
Other 92 85 253 200
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE 616 521 1,758 1,484
Net (loss) income before income taxes 202 (16) 521 38
Income (benefit) Taxes 66 (8) 168 (8)
---------------- ---------------- ---------------- ---------------
NET (LOSS) INCOME $ 136 $ (8) $353 $46
================ ================ ================ ===============
Average Shares Outstanding:
Basic and Diluted 648,550 N/A 649,025 N/A
Basic and Diluted Earnings Per Share $.21 N/A $.54 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)
Nine Months Ended September 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 - - 353 - - 353
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 $(42)
Reclassification adjustment, - - - (5) (5)
Net of tax of $(2) ---------
Other comprehensive income (loss) (84)
net of tax of $(44) ---------
Comprehensive income 269
Loan to ESOP for purchase of - - - - (141) (141)
shares
Costs related to issuance of - (68) - - - (68)
common stock --------------------------------------------------------------------------------------------
Balance at September 30, 2002 $66 $6,066 $6,511 $93 $(166) $12,570
===== ====== ====== ==== ===== =======
See the accompanying notes to unaudited consolidated financial statements.
5
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30,
----------------------------------------------
2002 2001
-------------------- ---------------------
Cash Flows from Operating Activities
Net income $ 353 $46
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 106 123
Provision for loan losses 66 28
Net amortization (accretion) on investments 27 (17)
Deferred tax provision 50 7
Realized gain on sale of investments (7) (11)
Federal Home Loan Bank stock dividend (144) (67)
Gain on sale of loans (69) -
Proceeds from sales of loans held for sale 2,054 -
Origination of loans held for sale (1,986) -
Decrease in accrued interest receivable 79 14
Decrease in other assets 3 96
Increase (decrease) in accrued interest payable (88) 302
Decrease in other liabilities (312) (510)
-------------------- ---------------------
Net cash provided by operating activities 132 11
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (4,177) (5,608)
Proceeds of sales and maturities of securities available-for-sale and paydowns 4,156 5,490
Purchase of Federal Home Loan Bank stock, net (200) (2,500)
Increase in loans, net (3,014) (4,471)
Purchases of premises and equipment (23) (10)
-------------------- ---------------------
Net cash provided by (used in) investing activities (3,258) (7,099)
-------------------- ---------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits (11,789) 2,547
Proceeds from Federal Home Loan Bank advances 6,500 -
Repayments of Federal Home Loan Bank advances - (1,500)
Net increase in securities sold under agreements to repurchase 52 187
Loans to ESOP for purchase of shares (141) -
Costs associated with issuance of stock (68) -
-------------------- ---------------------
Net cash provided by (used in) financing activities (5,446) 1,234
-------------------- ---------------------
Net decrease in cash and cash equivalents (8,572) (5,854)
Cash and cash equivalents:
Beginning 12,792 9,211
-------------------- ---------------------
Ending $4,220 $3,357
==================== =====================
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $2,016 $2,691
Income taxes 33 -
Supplemental disclosure of non cash investing activities
Assets acquired through foreclosure 5 -
See the accompanying notes to unaudited consolidated financial statements.
6
CLOVER LEAF FINANCIAL CORP.
NOTES TO UNAUDITED CONSOLIDATED 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 nine-month periods ending September 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 Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Net income available to common shareholders $136 $(8) $353 $46
Weighted average shares outstanding 661,250 N/A 661,250 N/A
Weighted average ESOP shares (12,700) N/A (12,225) N/A
---------------- ---------------- ---------------- ----------------
Basic average shares outstanding 648,550 N/A 649,025 N/A
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings per share $.21 N/A $.54 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 nine-month periods ended September 30,
2002 and 2001, and its financial condition, asset quality, and capital resources
as of September 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.
FINANCIAL CONDITION
Total assets as of September 30, 2002 were $90.5 million, a decrease of $5.6
million, or 5.8%, from assets of $96.1 million at December 31, 2001. The
decrease in assets resulted primarily from stock offering subscription funds
held by the Bank at December 31, 2001 that had been returned to but not yet
cashed by subscribers. Net loans as of September 30, 2002 were $65.4 million, an
increase of $3.0 million, or 4.7%, from net loan balances of $62.4 million at
December 31, 2001. The commercial real estate loan portfolio increased $6.9
million, or 49.5%, compared to fiscal year-end. During the past year, the Bank
has increased its focus on commercial lending, and has begun to sell residential
loans on the secondary market, while retaining servicing rights for the sold
loans. Securities, including Federal Home Loan Bank stock, increased $261,000,
or 1.5% to $17.6 million at September 30, 2002 from $17.3 million at December
31, 2001. Cash and cash equivalents decreased $8.6 million, or 67.0% to $4.2
million at September 30, 2002 from $12.8 million at December 31, 2001. This
decrease in cash resulted primarily from the subscription funds held by the Bank
at December 31, 2001, as part of the stock offering as discussed above.
Non-performing loans decreased $304,000 to $1.2 million at September 30, 2002
from $1.6 million at December 31, 2001. The non-performing loans to total loans
ratio at September 30, 2002 was 1.89% compared to 2.46% at December 31, 2001.
Deposits as of September 30, 2002 were $69.1 million, a decrease of $11.8
million, or 14.6%, from December 31, 2001. The decline in deposits resulted
primarily from stock offering subscription funds held by the Bank at December
31, 2001 that had been returned to but not yet cashed by subscribers. The
remaining decline in deposits is attributable to decreased activity in time
deposits during a period of declining interest rates.
Total shareholders' equity as of September 30, 2002 was $12.6 million, an
increase of $60,000 or 0.5% from the $12.5 million at December 31, 2001. The
increase in equity from December 31, 2001 to September 30, 2002 was primarily
the result of the addition of earnings of $353,000, offset by the purchase of
10,700 shares of stock to fund the ESOP and a decrease in the unrealized gain on
investment securities available for sale. At September 30, 2002 there were
661,250 shares of common stock outstanding, at a book value per share of $19.01.
9
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 September 30, 2002, nonperforming assets totaled $1,255,000, or 1.39% of
total assets, compared to nonperforming assets at year-end 2001 of $1,554,000,
or 1.62% of total assets. Nonperforming assets at September 30, 2002 included
$5,000 relating to foreclosed assets. The Bank held no foreclosed assets at
December 31, 2001. Management does not anticipate any material losses upon
disposition of the foreclosed assets held at September 30, 2002.
10
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)
September 30, 2002 December 31, 2001
---------------------------------- ----------------------------------
Loans and Loans and
Foreclosed Non-performing Foreclosed Non-performing
Assets Assets Assets Assets
--------------- --------------- -------------- ----------------
Real Estate
One- to four-family $35,406 $ 600 $33,773 $ 406
Commercial 20,890 22 13,971 --
Construction and land 710 182 1,193 483
Non-real estate
Consumer 3,287 163 6,412 175
Commercial Business 5,761 283 7,732 490
------- ------- ------- -------
Gross loans 66,054 1,250 63,081 1,554
Foreclosed assets 5 5 -- --
------- ------- ------- -------
Total $66,059 $ 1,255 $63,081 $ 1,554
======= ======= ======= =======
Nonaccrual loans $ 1,156 $ 1,439
Accruing loans past due
90 days or more 94 115
Troubled debt restructurings -- --
------- -------
Total nonperforming loans 1,250 1,554
Foreclosed assets 5 --
------- -------
Total nonperforming assets $ 1,255 $ 1,554
======= =======
Nonperforming loans to gross loans
1.89% 2.46%
Nonperforming assets to gross loans
and foreclosed assets 1.90% 2.46%
Nonperforming assets to total assets 1.39% 1.62%
The Bank recorded net recoveries of $4,000 for the third quarter of 2002
compared to net charge-offs of $46,000 for the third quarter of 2001. During the
first nine months of 2002, net charge-offs (recoveries) totaled $42,000 compared
to $51,000 for the first nine months of 2001. Net charge-offs as a percentage of
average total loans was (.01)% for the third quarter of 2002 compared to .08%
for the third quarter of 2001. For the nine months ended September 30, 2002 and
2001, net charge-offs as a percentage of average total loans was .06% and .09%,
respectively.
Clover Leaf Financial's allowance for loan losses at September 30, 2002,
increased to $670,000 from $646,000 at December 31, 2001. At September 30, 2002,
the allowance for loan losses represented 53.60% of non-performing loans
compared to 41.57% at December 31, 2001. The ratio of the allowance for loan
losses to total loans was 1.01% at September 30, 2002 compared to 1.02% at
December 31, 2001. Management believes that the allowance for loan losses at
September 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.
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 board of directors of our subsidiary bank, 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.
11
Our determination as to the classification of our assets and the amount of
our valuation allowances is subject to review by the Bank's primary regulators,
which can require the establishment of additional general or specific loss
allowances. The Office of Banks and Real Estate, 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 report 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 September, 2002 and December 31, 2001, were $1.7 million,
and $2.2 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.
12
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 Nine Months Ended
September 30 September 30
------------------------ --------------------
2002 2001 2002 2001
---------- ---------- -------- ---------
Balance at beginning of period $ 642 $ 636 $ 646 $ 625
Loans charged off:
Commercial, financial and agricultural -- -- -- 4
Consumer 23 60 85 97
----- ----- ----- -----
Total charge-offs 23 60 85 101
----- ----- ----- -----
Recoveries of loans previously charged off:
Consumer 27 14 43 50
----- ----- ----- -----
Total recoveries 27 14 43 50
----- ----- ----- -----
Net charge-offs (recoveries) (4) 46 42 51
Provision for loan losses 24 12 66 28
----- ----- ----- -----
Balance at end of period $ 670 $ 602 $ 670 $ 602
===== ===== ===== =====
Net charge-offs (recoveries) as a percent of
average total loans (.01)% .08% .06% .09%
Allowance for loan losses to gross loans
1.01% .97% 1.01% .97%
Allowance for loan losses to
nonperforming loans 53.60% 41.18% 53.60% 41.18%
Income Information - Quarter
Net income for the 3 months ended September 30, 2002 was $136,000, compared
to a net loss of $8,000 for the prior year's quarter ended September 30, 2001.
Net interest income after provision for loan losses for the three months
ended September 30, 2002 was $720,000, compared to $468,000 for the three months
ended September 30, 2001, an increase of $252,000 or 53.8%. The increase in net
interest income resulted primarily from a 132 basis point increase in the
average net interest margin to 3.43% from 2.11% in the prior year. This increase
in the average net interest margin is largely attributed to a decrease of 149
basis points paid on time deposits to 4.25% at September 30, 2002 from 5.74% in
the prior year.
Interest income for the three months ended September 30, 2002 declined to
$1.4 million, a decrease of $94,000, or 6.5% 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 September 30, 2002 were $86.3 million, an
increase of $3.7 million, or 4.5%, over average interest-earning assets for the
three months ended September 30, 2001 of $82.6 million. Average loan balances
increased $5.8 million while average security balances decreased by $265,000.
This net growth was partially offset by a decline of $1.8 million in interest
bearing deposits in other financial institutions. The average loan yield
declined 79 basis points to 6.58% at September 30, 2002 from 7.37% in the prior
year. The average security yield declined 137 basis points to 4.62% at September
30, 2002 from 5.99% in the prior year.
Interest expense for the most recent three-month period fell by $358,000 to
$618,000, a decrease of 36.7% 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 September 30, 2002 declined by 174 basis
points to 3.41% from 5.15% for the same period last year. The average interest
rate paid on certificates of deposit fell by 149 basis points to 4.25% for the
three months ended September 30, 2002, from 5.74% for the prior-year period. For
the three months ended September 30,2002, the average balances of lower-cost
savings and money market accounts increased by $1.9 million, while the average
balances of higher yielding certificates of deposits declined by $12.5 million
compared to the three months ended September 30, 2001.
13
Non-interest income for the three months ended September 30, 2002 was $98,000
compared to $37,000 for the three months ended September 30, 2001, an increase
of $61,000, or 164.9%. This increase was primarily attributable to the gain on
sale of loans of $50,000. These loans were sold with servicing rights being
maintained by the Bank. Service charges on deposits and other service charges
and fees increased a total of $6,000 or 19.4% between the two periods. The
Company also recorded net gains on sales of securities of $3,000 for the quarter
ended September 30, 2002 compared to no gains for the same quarter last year.
Non-interest expense for the three months ended September 30, 2002 was
$95,000, or 18.2% more than expense for the three months ended September 30,
2001. The increase was primarily attributable to increases in compensation and
employee benefits of $46,000, or 17.7%, and in occupancy expenses of $39,000, or
58.2%. Compensation increased as a result of staff additions and annual merit
increases, and additional occupancy costs were attributable to a $27,000
increase in real estate property taxes, and a $15,000 increase in building
maintenance as several projects were completed to enhance the efficiency and
appearance of the current building.
Income Information - Nine Months
Net income for the nine months ended September 30, 2002 was $353,000,
compared to net income of $46,000 for the nine months ended September 30, 2001,
an increase of 667.4%.
Net interest income after provision for loan losses for the nine months ended
September 30, 2002 was $2.0 million, compared to $1.4 million for the nine
months ended September 30, 2001, an increase of $649,000, or 46.9%. The net
interest margin for the nine-month period was 3.33%, compared to a net interest
margin of 2.26% for the nine-month period ended September 30, 2001.
Interest income declined $378,000, or 8.6%, 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-earning
assets for the nine months ended September 30, 2002 were $84.6 million, an
increase of $4.0 million, or 5.0%, over average interest-earning assets of $80.6
million for the nine months ended September 30, 2001. Average loan balances
increased $4.8 million, or 8.1% to $64.0 million for the period ended September
30, 2002 compared to $59.2 million for the same period in the prior year.
Average security balances increased $1.2 million, or 7.0% to $18.4 million for
the period ended September 30, 2002 compared to $17.2 million for the same
period in the prior year. The average loan yield declined 84 basis points to
6.75% at September 30, 2002 from 7.59% in the prior year. The average security
yield declined 121 basis points to 4.86% at September 30, 2002 from 6.07% in the
prior year.
Interest expense for the nine-month period ended September 30, 2002 decreased
to $1.9 million, a decline of $1.1 million or 35.6%, 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 150 basis points to 4.52% for
the nine months ended September 30, 2002, from 6.02% for the prior-year period.
The average balances of lower-cost savings and money market accounts increased
by $5.8 million, while average balances of higher-yielding certificates of
deposit declined by $12.3 million compared to the nine months ended September
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.
14
Non-interest income for the nine months ended September 30, 2002 was $245,000
compared to $137,000 for the nine months ended September 30, 2001, an increase
of $108,000, or 78.8%. This increase was primarily attributable to the gain on
sale of loans of $69,000. The Company also recorded a gain on the sale of NYCE
Stock, which was classified as an Other Asset for balance sheet purposes, of
$42,000 for the current nine-month period compared to no such gains for the same
period a year ago. These increases were partially offset by a slight decline in
other operating income.
Non-interest expense for the nine months ended September 30, 2002 was $1.8
million, or $274,000 more than expenses for the nine months ended September 30,
2001. The increase was primarily attributable to increases in compensation
expenses, occupancy, and legal and collection expenses. Salary expense increased
$121,000, or 16.2%, as a result of staff additions and annual merit increases.
Occupancy expense increased $37,000, or 18.2%, due to increases in real estate
property taxes and building maintenance as discussed above. Legal and collection
expense increased $45,000, or 281.2% as a result of the filing and accounting
regulations related to being a public company, and as a result of expenses
incurred related to collection efforts on our non-performing consumer loan
portfolio. The remaining increase is a result of slight increases in several
expense categories, of which none are due to significant events.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity increased $60,000 from $12.5 million, at December
31, 2001 to $12.6 million, at September 30, 2002. This increase in stockholders'
equity during the first nine months of 2002 was a result of net income of
$353,000, partially offset by decreases due to the additional purchase of shares
by the Employee Stock Ownership Plan, 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.
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 September 30, 2002, Clover Leaf Bank's
Tier 1 and Total capital ratios were 17.04% and 18.17%, 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 September 30, 2002, was 11.03%. Accordingly, Clover Leaf Bank has
satisfied these regulatory guidelines.
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 September 30, 2002, Clover Leaf Bank had loan commitments of $4.9 million
and unused lines of credit of $2.3 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 September 30, 2002,
approximately $26.5 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
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.
15
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Clover Leaf Bank and Clover Leaf Financial are defendants in a lawsuit,
Michael A. Schell v. Clover Leaf Bank, SB, Clover Leaf Financial
Corporation, brought by Clover Leaf Bank's former President, alleging
that the plaintiff's termination in May 2, 2000 violated Federal
"whistle-blowing" statues. The plaintiff brought the lawsuit in the
United States District Court for the Southern District of Illinois, and
is seeking damages of $2.8 million for lost pay, as well as punitive
damages. Clover Leaf Bank and Clover Leaf Financial have retained
counsel and are vigorously defending against the plaintiff's claim.
Clover Leaf Bank is otherwise involved, from time to time, as plaintiff
or defendant in various legal actions arising in the normal course of
its business. Other than as described above, at September 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
None
ITEM 5. OTHER INFORMATION
None
17
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 third quarter of 2002.
18
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: November 13, 2002 By: /s/ Dennis M. Terry
------------------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: November 13, 2002 By: /s/ Darlene F. McDonald
------------------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
19
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dennis M. Terry, President and Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Clover Leaf
Financial Corp.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: November 13, 2002 By: /s/ Dennis M. Terry
------------------------
Dennis M. Terry
President and Chief
Executive Officer
20
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Darlene F. McDonald, Vice President and Treasurer (Chief Financial Officer),
certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Clover Leaf
Financial Corp.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: November 13, 2002 By: /s/ Darlene F. McDonald
----------------------------
Darlene F. McDonald
Vice President and Treasurer
(Chief Financial Officer)
21
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
September 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.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
DATE: November 13, 2002 By: /s/ Dennis M. Terry
------------------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: November 13, 2002 By: /s/ Darlene F. McDonald
------------------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)