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 March 31, 2003
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)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act 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 May 13, 2003
Common stock $.10 par value 646,450
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)
March 31, December 31,
2003 2002
---------------- -----------------
ASSETS
Cash and due from banks $ 3,065 $2,429
Interest bearing deposits in other financial institutions 6,659 5,688
---------------- -----------------
Total cash and cash equivalents 9,724 8,117
Securities available-for-sale 16,572 13,448
Federal Home Loan Bank stock 3,461 3,409
Loans, net of allowance for loan losses of
$717 in 2003 and $690 at December 31, 2002 71,173 67,544
Bank premises and equipment 2,384 1,906
Accrued interest receivable 468 541
Other assets 571 551
---------------- -----------------
TOTAL ASSETS $104,353 $95,516
================ =================
LIABILITIES
Deposits:
Noninterest bearing $8,078 $7,153
Interest bearing 72,406 65,334
---------------- -----------------
Total deposits 80,484 72,487
Federal Home Loan Bank advances 9,000 9,000
Other borrowings 1,151 284
Accrued interest payable 211 218
Other liabilities 905 809
---------------- -----------------
TOTAL LIABILITIES 91,751 82,798
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at March 31, 2003 or December 31, 2002 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued 66 66
Surplus 6,068 6,066
Retained earnings 6,761 6,653
Accumulated other comprehensive income 104 94
Treasury Stock, 14,800 shares at cost at March 31, 2003 (243) -
Unearned Employee Stock Ownership Plan shares (154) (161)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,602 12,718
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,353 $95,516
================ =================
See the accompanying notes to unaudited consolidated financial statements.
3
CLOVER LEAF FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended
March 31,
------------------------------------
2003 2002
---------------- ----------------
Interest Income and dividend income:
Loans, including fees $1,108 $1,093
Securities 127 184
Federal Home Loan Bank dividends 43 56
Interest-bearing deposits in other banks 18 11
---------------- ----------------
TOTAL INTEREST AND FEE INCOME 1,296 1,344
---------------- ----------------
Interest Expense:
Deposits 528 651
Federal Home Loan Bank advances 64 21
Other borrowings 3 1
---------------- ----------------
TOTAL INTEREST EXPENSE 595 673
---------------- ----------------
NET INTEREST INCOME 701 671
Provision for loan losses 23 21
---------------- ----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 678 650
---------------- ----------------
Noninterest Income:
Service charges on deposit accounts 20 18
Other service charges and fees 14 15
Loan servicing fees 8 3
Gain on sale of loans 68 18
Gain on sale of investments - 4
Other 1 2
---------------- ----------------
TOTAL NONINTEREST INCOME 111 60
---------------- ----------------
Noninterest Expense:
Salaries and employee benefits 329 269
Occupancy and equipment, net 64 66
Data processing 60 57
Advertising and marketing 9 15
Directors' fees 30 24
Audit and accounting fees 18 18
Legal & collection expense 20 9
Other 89 87
---------------- ----------------
TOTAL NONINTEREST EXPENSE 619 545
---------------- ----------------
Net income before income taxes 170 165
Income taxes 62 50
---------------- ----------------
NET INCOME $ 108 $ 115
================ ================
Average Shares Outstanding:
Basic and Diluted 641,549 649,990
Basic and Diluted Earnings Per Share $.17 $.18
See 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)
Three Months Ended March 31, 2003
--------------------------------------------------------------------------------------------------
Unearned
Accumulated Employee
Other Stock
Retained Comprehensive Treasury Ownership
Common Stock Surplus Earnings Income (Loss) Stock Plan Shares Total Equity
------------ --------- ---------- --------------- --------- ----------- ------------
Balance at December 31, 2002 $ 66 $ 6,066 $ 6,653 $ 94 -- $ (161) $ 12,718
Comprehensive income
Net income -- -- 108 -- -- -- 108
Other comprehensive income,
net of tax:
Change in unrealized -- -- -- 10 -- -- 10
gain on securities
available-for-sale
arising during the
period, net of tax of
$(5)
------------
Comprehensive income 118
------------
Allocation of ESOP shares -- 2 -- -- -- 7 9
Purchase of treasury stock -- -- -- -- (243) -- (243)
-------------- ---------- -------------- -------------- -------------- -------------- ------------
Balance at March 31, 2003 $ 66 $ 6,068 $ 6,761 $ 104 $ (243) $ (154) $ 12,602
============== ========== ============== ============== ============== ============== ============
See the accompanying notes to unaudited consolidated financial statements.
----------------------------------------------------------------------------------------------------------------------------------
5
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31,
----------------------------------------------
2003 2002
-------------------- ---------------------
Cash Flows from Operating Activities
Net income $ 108 $ 115
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 30 36
Provision for loan losses 23 21
Net amortization (accretion) on investments (18) 6
Deferred tax provision (2) (7)
Realized gain on sale of investments - (4)
Federal Home Loan Bank stock dividend (52) (44)
Gain on sale of loans (68) (18)
Proceeds from sales of loans held for sale 2,418 3,070
Origination of loans held for sale (2,350) -
Decrease in accrued interest receivable 73 44
Decrease (increase) in other assets (20) 90
Decrease in accrued interest payable (7) (34)
Increase (decrease) in other liabilities 93 (384)
-------------------- ---------------------
Net cash provided by operating activities 228 2,891
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (6,650) (1,633)
Proceeds of sales and maturities of securities available-for-sale and paydowns 3,559 1,396
Purchase of Federal Home Loan Bank stock, net - (1,500)
Increase in loans, net (3,652) (2,003)
Purchases of premises and equipment (508) (12)
-------------------- ---------------------
Net cash (used in) investing activities (7,251) (3,752)
-------------------- ---------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits 7,997 (5,959)
Increase (decrease) in other borrowings 867 (349)
Loans to ESOP for purchase of shares - (141)
Allocation of ESOP shares 9 -
Purchase of Treasury Stock (243) -
Costs associated with issuance of stock - (11)
-------------------- ---------------------
Net cash provided by (used in) financing activities 8,630 (6,460)
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 1,607 (7,321)
Cash and cash equivalents:
Beginning 8,117 12,792
-------------------- ---------------------
Ending $9,724 $5,471
==================== =====================
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $602 $707
Income taxes 27 -
Supplemental disclosure of non cash investing activities
Assets acquired through foreclosure - 32
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 commercial 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.
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
March 31,
---------------------------
2003 2002
------------ ------------
Net income available to common shareholders $108 $ 115
Weighted average shares outstanding 653,855 661,250
Weighted average ESOP shares (12,306) (11,260)
------------ ------------
Basic average shares outstanding 641,549 649,990
------------ ------------
Basic and diluted earnings per share $.17 $.18
============ ============
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 periods ended March 31, 2003 and 2002, and its
financial condition, asset quality, and capital resources as of March 31, 2003.
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
At March 31, 2003, total assets were $104.4 million, an increase of
$8.9 million, or 9.3%, from $95.5 million at December 31, 2002. Loans receivable
at March 31, 2003 were $71.2 million, an increase of $3.6 million, or 5.4%, from
$67.5 at December 31, 2002. The real estate mortgage portfolio increased $3.8
million, or 11.0%, compared to the portfolio at 2002 year end. This increase is
primarily due to the current attractive rate environment and increased demand
for new loans and loan refinancing. The commercial real estate portfolio
increased $2.1 million, or 9.2% compared to the 2002 year end. This increase was
due to an increased focus by the Bank on commercial lending. These increases
were offset slightly by a $2.0 million, or 42.5% decline in consumer installment
loans. Securities, including Federal Home Loan Bank stock, increased $3.2
million, or 18.8%, to $20.0 million at March 31, 2003 from $16.9 million at
December 31, 2002. Cash and cash equivalents increased $1.6 million, or 19.8%,
to $9.7 million at March 31, 2003 from $8.1 million at December 31, 2002. Bank
premises and equipment increased $478,000, or 25.1% to $2.4 million at March 31,
2003. The increase resulted from a purchase of land that the Bank completed in
January of 2003. The land is being held for the purpose of building an
additional branch office.
Deposits as of March 31, 2003 were $80.5 million, an increase of $8.0
million, or 11.0%, from December 31, 2002. The increase in deposits was
primarily in the interest-bearing categories, with time deposits showing the
greatest increase. Short-term time deposits have continued to be a popular
product due to the volatile stock market and lack of high yielding investment
options for consumers.
Federal Home Loan Bank advances as of March 31, 2003 remained at $9.0
million, showing no change from December 31, 2002. Increased deposit volume has
allowed the Bank to fund loan growth and security purchases without borrowing
additional funds.
Total stockholders' equity as of March 31, 2003 was $12.6 million, a
decrease of $116,000 or 0.9% from $12.7 million at December 31, 2002. The
decrease in equity from December 31, 2002 to March 31, 2003 was primarily the
result of the purchase of 14,800 shares of treasury stock totaling $243,000 by
Clover Leaf Financial during the first quarter of 2003. This decrease in equity
was partially offset by the recording of $108,000 in net income. At March 31,
2003 there were 646,450 shares of common stock outstanding, at a book value of
$19.49 per share.
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 be 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 March 31, 2003, nonperforming assets totaled $1,610,000, or 1.54% of
total assets, compared to nonperforming assets at year-end 2002 of $1,742,000,
or 1.82% of total assets. Nonperforming assets at March 31, 2003 included
$12,000 of foreclosed assets. The Bank held $18,000 of foreclosed assets at
December 31, 2002. Management does not anticipate any material losses upon
disposition of the foreclosed assets held at March 31, 2003.
10
The following table sets forth a summary of Clover Leaf Financial's
loan portfolio mix and nonperforming assets.
(Dollars in Thousands)
March 31, 2003 December 31, 2002
------------------ ----------------------
Loans and Loans and
Foreclosed Non-performing Foreclosed Non-performing
Assets Assets Assets Assets
---------- -------------- ---------- --------------
Real Estate
One- to four-family .............. $38,067 $ 786 $34,300 $ 838
Commercial ....................... 24,895 166 22,797 210
Construction and land ............ 698 182 761 182
Non-real estate
Consumer ......................... 2,665 181 4,631 201
Commercial Business .............. 5,565 283 5,759 293
------- ------- ------- -------
Gross loans ........................ 71,890 1,598 68,248 1,724
Foreclosed assets .................. 12 12 18 18
------- ------- ------- -------
Total .................... $71,902 $ 1,610 $68,266 $ 1,742
======= ======= ======= =======
Nonaccrual loans ................... $ 1,598 $ 1,529
Accruing loans past due
90 days or more ............... -- 195
Troubled debt restructurings ....... -- --
------- -------
Total nonperforming loans ..... 1,598 1,724
Foreclosed assets .................. 12 18
------- -------
Total nonperforming assets .... $ 1,610 $ 1,742
======= =======
Nonperforming loans to gross loans . 2.22% 2.53%
Nonperforming assets to gross loans
and foreclosed assets ......... 2.24% 2.55%
Nonperforming assets to total assets 1.54% 1.82%
The Bank recorded net recoveries of $4,000 for the first quarter of
2003 compared to net charge-offs of $11,000 for the first quarter of 2002. Net
recoveries as a percentage of average total loans was (.01)% for the first
quarter of 2003 compared to net charge-offs as a percentage of average total
loans of .02% for the first quarter of 2002.
Clover Leaf Financial's allowance for loan losses at March 31, 2003,
increased to $717,000 from $690,000 at December 31, 2002. At March 31, 2003, the
allowance for loan losses represented 44.87% of non-performing loans compared to
40.02% at December 31, 2002. The ratio of the allowance for loan losses to total
loans was 1.00% at March 31, 2003 compared to 1.01% at December 31, 2002.
Management believes that the allowance for loan losses at March 31, 2003 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,
11
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 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 March 31, 2003 and December 31, 2002, were $2.4
million, and $2.1 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.
(Dollars in Thousands)
Three Months Ended
March 31
-----------------
2003 2002
----- -----
Balance at beginning of period ............. $ 690 $ 646
Loans charged off:
Consumer .............................. 3 21
----- -----
Total charge-offs ........... 3 21
----- -----
Recoveries of loans previously charged off:
Commercial, financial and agricultural 1 --
Consumer .............................. 6 10
----- -----
Total recoveries ............ 7 10
----- -----
Net charge-offs (recoveries) ............... (4) 11
Provision for loan losses .................. 23 21
----- -----
Balance at end of period ................... $ 717 $ 656
===== =====
Net charge-offs (recoveries) as a percent of
average total loans ................... (.01)% .02%
Allowance for loans losses to gross loans
1.00% 1.06%
Allowance for loan losses to
nonperforming loans ................... 44.87% 41.00%
Income Information
Net income for the three months ended March 31, 2003 was $108,000, or
6.1% lower than net income of $115,000 for the three months ended March 31,
2002.
Interest income for the three months ended March 31, 2003 declined
$48,000, or 3.6% to $1.3 million. The decrease was primarily due to lower
average yields on loans and securities, partially offset by higher average
balances in loans and interest bearing deposits in other financial institutions.
Average interest-earning assets for the three months ended March 31, 2003 were
$93.9 million, an increase of $10.9 million, or 13.1%, over average
interest-earning assets for the three months ended March 31, 2002 of $83.0
million. Average loan balances increased $7.0 million. Interest bearing deposits
in other financial institutions increased $3.8 million. The average loan yield
declined 79 basis points to 6.18% at March 31, 2003 from 6.97% for the same
period in the prior year. The Bank's loan rate was negatively impacted by the
high volume of mortgage loan refinancing activity as well as the decline in the
prime rate, which impacted those commercial loans that re-price with the prime
rate. The average security yield declined 154 basis points to 3.78% at March 31,
2003 from 5.32% for the same period in the prior year. The security yield was
negatively impacted by the re-pricing of floating rate instruments. Also
contributing to the decline in security yield was the high volume of early
pay-downs in the mortgage backed security portfolio, which were then replaced
with lower yielding securities.
Interest expense for the most recent three-month period fell by $78,000
to $595,000, a decrease of 11.6% compared to the same period last year. The
decrease was primarily due to lower rates paid on interest-bearing deposits and
borrowings. The average rate paid on interest-bearing liabilities for the three
months ended March 31, 2003 declined by 91 basis points to 3.07% from 3.98% for
the same period last year. The average interest rate paid on certificates of
deposit fell by 115 basis points to 3.63% for the three months ended March 31,
2003, from 4.78% for the prior-year period.
Net interest income after provision for loan losses for the three
months ended March 31, 2003 was $678,000, compared to $650,000 for the three
months ended March 31, 2002, an increase of $28,000, or 4.3%. The increase in
13
net interest income resulted primarily from a decrease in the rate paid on
interest bearing liabilities to 3.07% from 3.98% for the same period last year.
Non-interest income for the three months ended March 31, 2003 was
$111,000 compared to $60,000 for the three months ended March 31, 2002, an
increase of $51,000, or 85.0%. This increase was primarily attributable to the
gain on sale of loans of $68,000 for the current year period, compared to the
gain on sale of loans of $18,000 for the same period last year. The Bank
periodically sells residential mortgage loans on the secondary market, while
retaining servicing rights for the sold loans.
Non-interest expense for the three months ended March 31, 2003
increased by $74,000 to $619,000, or 13.6% more than the expense of $545,000 for
the three months ended March 31, 2002. The increase was primarily attributable
to increases in compensation and employee benefits of $60,000, or 22.3%, and
increases in legal and collection expenses of $11,000, or 122.2%. Compensation
increased as a result of staff additions and annual merit and bonus increases.
The increase in legal and collection expense is primarily due to the expenses
associated with a lawsuit brought against the Bank by the Bank's former
President, as disclosed in the Company's Quarterly Report 10-QSB for the quarter
ended September 30, 2002.
Provision for loan losses for the three months ended March 31, 2003 was
$23,000, compared to $21,000 for the three months ended March 31, 2002, an
increase of $2,000, or 9.5%. Despite significant loan growth, improvement in the
Bank's asset quality has allowed the Bank to record only a modest increase to
the monthly provision expense in order to maintain an adequate loan loss reserve
in relation to the total non-performing loans and total outstanding gross loan
receivables. Management periodically reevaluates the allowance for loan losses
to ensure the provision is maintained at a level that represents management's
best estimate of probable loan losses in the loan portfolio.
Income tax expense for the three months ended March 31, 2003 was
$62,000, compared to $50,000 for the three months ended March 31, 2002, an
increase of $12,000 or 24%. The majority of this increase is related to an
increase in the tax rate being applied to earnings. The effective tax rate for
the period ending March 31, 2003 is 37% compared to a tax rates of 30% for the
period ending March 31, 2002. In the tax year 2002, the Bank had a net operating
loss carry-forward with the State of Illinois, due to the profitable year in
2002, that carry-forward has been utilized and the Bank's earnings are once
again taxable in the State of Illinois.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity decreased $116,000 from $12.7 million, at
December 31, 2002 to $12.6 million, at March 31, 2003. This decrease in
stockholders' equity during the first three months of 2003 was primarily the
result of the purchase of 14,800 shares of treasury stock totaling $243,000
during the first quarter of 2003. This decrease was partially offset by the
recording of $108,000 in net income.
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 March 31, 2003, Clover Leaf
Bank's Tier 1 and Total capital ratios were 15.57% and 16.64%, 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 March 31, 2003, was 10.47%. Accordingly, at March 31, 2003 Clover Leaf
Bank 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.
14
At March 31, 2003, Clover Leaf Bank had loan commitments of $8.0
million and unused lines of credit of $6.0 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 March 31, 2003,
approximately $26.1 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.
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.
15
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" statutes. 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 March 31, 2003, 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
16
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 first quarter of 2003.
17
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: May 13, 2003 By: /s/ Dennis M. Terry
------------- ------------------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: May 13, 2003 By: /s/ Darlene F. McDonald
------------- ------------------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
18
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: May 13, 2003 By: /s/ Dennis M. Terry
-------------- -------------------------------------
Dennis M. Terry
President and Chief Executive Officer
19
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: May 13, 2003 By: /s/ Darlene F. McDonald
-------------- -------------------------------------
Darlene F. McDonald
Vice President and Treasurer (Chief
Financial Officer)
20