UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at August 10, 2003
Common stock $.10 par value 643,250
1
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 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 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)
June 30, December 31,
2003 2002
---------------- -----------------
ASSETS
Cash and due from banks $ 2,270 $2,429
Interest bearing deposits in other financial institutions 5,748 5,688
---------------- -----------------
Total cash and cash equivalents 8,018 8,117
Securities available-for-sale 18,733 13,448
Federal Home Loan Bank stock 3,503 3,409
Loans, net of allowance for loan losses of
$737 in 2003 and $690 at December 31, 2002 68,518 67,544
Bank premises and equipment 2,379 1,906
Accrued interest receivable 541 541
Other assets 684 551
---------------- -----------------
TOTAL ASSETS $102,376 $95,516
================ =================
LIABILITIES
Deposits:
Noninterest bearing $8,014 $7,153
Interest bearing 70,742 65,334
---------------- -----------------
Total deposits 78,756 72,487
Federal Home Loan Bank advances 9,000 9,000
Other borrowings 554 284
Accrued interest payable 188 218
Other liabilities 1,073 809
---------------- -----------------
TOTAL LIABILITIES 89,571 82,798
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at June 30, 2003 or December 31, 2002 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued at June 30, 2003 and December 31, 2002, respectively 66 66
Surplus 6,068 6,066
Retained earnings 6,968 6,653
Accumulated other comprehensive income 156 94
Treasury Stock, 18,000 shares at cost at June 30, 2003 (299) -
Unearned Employee Stock Ownership Plan shares (154) (161)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,805 12,718
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,376 $95,516
================ =================
See the accompanying notes to unaudited consolidated financial statements.
3
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ---------------
Interest Income and dividend income:
Loans, including fees $1,090 $1,096 $2,198 $2,189
Securities 164 173 291 357
Federal Home Loan Bank dividends 56 46 99 102
Interest-bearing deposits in other banks 14 7 32 18
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST AND FEE INCOME 1,324 1,322 2,620 2,666
---------------- ---------------- ---------------- ---------------
Interest Expense:
Deposits 504 598 1,033 1,249
Federal Home Loan Bank advances 64 36 128 57
Other borrowings - 3 2 4
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST EXPENSE 568 637 1,163 1,310
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 756 685 1,457 1,356
Provision for loan losses 22 21 45 42
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 734 664 1,412 1,314
---------------- ---------------- ---------------- ---------------
Noninterest Income:
Service charges on deposit accounts 19 21 39 39
Other service charges and fees 17 16 31 31
Loan servicing fees 9 3 17 9
Gain on sale of loans 189 1 257 19
Gain on sale of investments - - - 4
Gain on sale of assets 15 - 15 -
Other 17 46 18 45
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST INCOME 266 87 377 147
---------------- ---------------- ---------------- ---------------
Noninterest Expense:
Salaries and employee benefits 323 294 652 563
Occupancy and equipment, net 66 68 130 134
Data processing 54 52 114 109
Advertising and marketing 24 9 33 24
Directors' fees 32 25 62 49
Audit and accounting fees 34 30 52 48
Legal & collection expense 50 13 70 22
Other 94 106 183 193
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE 677 597 1,296 1,142
---------------- ---------------- ---------------- ---------------
Net income before income taxes 323 154 493 319
Income taxes 116 52 178 102
---------------- ---------------- ---------------- ---------------
NET INCOME $ 207 $ 102 $315 $217
================ ================ ================ ===============
Average Shares Outstanding:
Basic and Diluted 631,737 648,550 636,658 649,266
Basic and Diluted Earnings Per Share $.33 $.16 $.50 $.34
See the accompanying notes to unaudited consolidated financial statements.
4
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (Unaudited)
(Dollars in Thousands)
Six Months Ended June 30, 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 -- -- 315 -- -- -- 315
Other comprehensive
income, net of tax:
Change in unrealized -- -- -- 62 -- -- 62
gain on securities
available-for-sale
arising during the
period, net of tax of
$(23)
--------------
Comprehensive income 377
--------------
Allocation of ESOP shares -- 2 -- -- -- 7 9
Purchase of treasury stock -- -- -- -- (299) -- (299)
--------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $ 66 $ 6,068 $ 6,968 $ 156 $ (299) $ (154) $ 12,805
========== ======== ======== ========== ========== ========== ==========
See the accompanying notes to unaudited consolidated financial statements.
5
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
----------------------------------------------
2003 2002
-------------------- ---------------------
Cash Flows from Operating Activities
Net income $ 315 $217
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 61 71
Provision for loan losses 45 42
Net amortization (accretion) on investments 112 17
Deferred tax provision (15) 67
Realized gain on sale of investments - (4)
Federal Home Loan Bank stock dividend (94) (102)
Gain on sale of loans (257) (19)
Gain on sale of assets (15) -
Proceeds from sales of loans held for sale 9,296 3,070
Origination of loans held for sale (9,039) (3,051)
Decrease (increase) in accrued interest receivable - (7)
(Increase)/Decrease in other assets (133) 46
Decrease in accrued interest payable (30) (67)
Increase/(Decrease) in other liabilities 256 (361)
-------------------- ---------------------
Net cash provided by (used in) operating activities 502 (81)
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (12,842) (4,090)
Proceeds of sales and maturities of securities available-for-sale and paydowns 7,524 3,158
Proceeds on sale of assets 20
Purchase of Federal Home Loan Bank stock, net - (200)
Increase in loans, net (1,019) (4,136)
Purchases of premises and equipment (533) (18)
-------------------- ---------------------
Net cash provided by (used in) investing activities (6,850) (5,286)
-------------------- ---------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits 6,269 (10,585)
Proceeds from Federal Home Loan Bank advances - 5,500
Net increase in securities sold under agreements to repurchase 270 21
Loans to ESOP for purchase of shares - (141)
Allocation of ESOP shares 9 -
Purchase of Treasury Stock (299) -
Costs associated with issuance of stock - (68)
-------------------- ---------------------
Net cash provided by (used in) financing activities 6,249 (5,273)
-------------------- ---------------------
Net decrease in cash and cash equivalents (99) (10,640)
Cash and cash equivalents:
Beginning 8,117 12,792
-------------------- ---------------------
Ending $8,018 $2,152
==================== =====================
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $1,193 $1,377
Income taxes 121 2
Supplemental disclosure of non cash investing activities
Assets acquired through foreclosure - 49
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 Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Net income available to common shareholders $207 $102 $315 $217
Weighted average shares outstanding 643,343 661,250 647,024 661,250
Weighted average ESOP shares (11,688) (12,700) (11,732) (11,984)
---------------- ---------------- ---------------- ----------------
Basic average shares outstanding 631,655 648,550 635,292 649,266
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings per share $.33 $.16 $.50 $.34
================ ================ ================ ================
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion describes Clover Leaf Financial's results of
operations during the three-month and six-month periods ended June 30, 2003 and
2002, and its financial condition, asset quality, and capital resources as of
June 30, 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 June 30, 2003, total assets were $102.4 million, an increase of $6.9 million,
or 7.2%, from $95.5 million at December 31, 2002. Loans receivable at June 30,
2003 were $68.5 million, an increase of $974,000, or 1.4%, from $67.5 at
December 31, 2002. The commercial real estate portfolio increased $3.3 million,
or 14.4% compared to the 2002 year end. This increase was due to a continued
focus by the Bank on commercial lending. This increase was partially offset by a
$2.1 million, or 45.3% decline in consumer installment loans, and a $237,000, or
31.1% decline in construction loans. Securities, including Federal Home Loan
Bank stock, increased $5.3 million, or 31.9%, to $22.2 million at June 30, 2003
from $16.9 million at December 31, 2002. The Bank experienced significant
deposit growth resulting in higher cash balances. The Bank used those funds to
purchase additional securities, which have a more attractive yield than interest
bearing cash accounts. Bank premises and equipment increased $473,000, or 24.8%
to $2.4 million at June 30, 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 June 30, 2003 were $78.8 million, an increase of $6.3 million, or
8.6%, 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 June 30, 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 June 30, 2003 was $12.8 million, an increase of
$87,000 or 0.7% from $12.7 million at December 31, 2002. The increase in equity
from December 31, 2002 to June 30, 2003 was the result of the recording of
$315,000 in net income, and $62,000 in the unrealized gain on investment
securities available for sale. These increases were partially offset by the
purchase of 18,000 shares of treasury stock totaling $299,000 by Clover Leaf
Financial during the first six months of 2003. At June 30, 2003 there were
643,250 shares of common stock outstanding, at a book value of $19.91 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 are classified as substandard, doubtful or loss if they are determined to
be of lesser quality. Assets which possess some weaknesses, but do not warrant
classification in the aforementioned categories are required to be designated as
special mention. Management regularly reviews the asset portfolio to determine
whether any assets require classification in accordance with applicable
regulatory guidelines and accounting principles generally accepted in the United
States of America.
At June 30, 2003, nonperforming assets totaled $1,765,000, or 1.72% of
total assets, compared to nonperforming assets at year-end 2002 of $1,742,000,
or 1.80% of total assets. Nonperforming assets at June 30, 2003 included $16,000
relating to 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 June 30, 2003.
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)
June 30, 2003 December 31, 2002
---------------------------------------- ----------------------------------------
Loans and Loans and
Foreclosed Non-performing Foreclosed Non-performing
Assets Assets Assets Assets
------------------ ------------------ ------------------ ------------------
Real Estate
One- to four-family...................... $34,294 $1,088 $34,300 $838
Commercial............................... 26,101 212 22,797 210
Construction and land.................... 524 - 761 182
Non-real estate
Consumer................................ 2,531 147 4,631 201
Commercial business..................... 5,805 302 5,759 293
------------------ ------------------ ------------------ ------------------
Gross loans................................ 69,255 1,749 68,248 1,724
Foreclosed assets.......................... 16 16 18 18
------------------ ------------------ ------------------ ------------------
Total............................ $69,271 $1,765 $68,266 $1,742
================== ================== ================== ==================
Nonaccrual loans........................... $1,680 $1,529
Accruing loans past due
90 days or more....................... 69 195
Troubled debt restructurings............... - -
------------------ ------------------
Total nonperforming loans............. 1,749 1,724
Foreclosed assets.......................... 16 18
------------------ ------------------
Total nonperforming assets............ $1,765 $1,742
================== ==================
Nonperforming loans to gross loans......... 2.53% 2.53%
Nonperforming assets to gross loans
and foreclosed assets................. 2.55% 2.55%
Nonperforming assets to total assets....... 1.72% 1.80%
The Bank recorded net charge-offs of $2,000 for the second quarter of
2003 compared to net charge-offs of $35,000 for the second quarter of 2002.
During the first six months of 2003, net recoveries totaled $2,000 compared to
net charge-offs of $46,000 for the first six months of 2002. Net recoveries as a
percentage of average total loans was less than .01% for the three and six
months ended June 30, 2003 compared to net charge offs as a percentage of
average total loans of .05% and .07% for the three and six months ended June 30,
2002, respectively.
Clover Leaf Financial's allowance for loan losses at June 30, 2003,
increased to $737,000 from $690,000 at December 31, 2002. At June 30, 2003, the
allowance for loan losses represented 42.14% of non-performing loans compared to
40.02% at December 31, 2002. The ratio of the allowance for loan losses to total
loans was 1.06% at June 30, 2003 compared to 1.01% at December 31, 2002.
Management believes that the allowance for loan losses at June 30, 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, 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 June 30, 2003 and December 31, 2002, were $2.6
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.
Allowance For Loan Losses
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------ ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Balance at beginning of period................... $717 $656 $690 $646
Loans charged off:
Commercial, financial and agricultural...... - - - -
Consumer.................................... 11 41 14 62
---------------- ---------------- ---------------- ----------------
Total charge-offs................. 11 41 14 62
---------------- ---------------- ---------------- ----------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural...... - - 1 -
Consumer.................................... 9 6 15 16
---------------- ---------------- ---------------- ----------------
Total recoveries.................. 9 6 16 16
---------------- ---------------- ---------------- ----------------
Net charge-offs (recoveries)..................... 2 35 (2) 46
Provision for loan losses........................ 22 21 45 42
---------------- ---------------- ---------------- ----------------
Balance at end of period......................... $737 $642 $737 $642
================ ================ ================ ================
Net charge-offs (recoveries) as a percent of
average total loans......................... - .05% - .07%
Allowance for loan losses to gross loans......... 1.06% .97% 1.06% .97%
Allowance for loan losses to
nonperforming loans......................... 42.14% 38.38% 42.14% 38.38%
Income Information - Quarter
Net income for the three months ended June 30, 2003 was $207,000, an increase of
$105,000, or 102.9% from $102,000 for the three months ended June 30, 2002.
Interest income for the three months ended June 30, 2003 increased $2,000, or
0.2% to $1.3 million. Despite a decline in average yields on loans and
securities, this loss of income was offset by increased income from higher
average loan and security balances. Average interest-earning assets for the
three months ended June 30, 2003 was $98.6, an increase of $13.9 million, or
16.4%, over average interest-earning assets for the three months ended June 30,
2002 of $84.7 million. Average loan balances increased $6.4 million, or 10.0%
over the same period last year. Average security balances increased $4.3
million, or 22.6% over the same period last year. Interest bearing deposits in
other financial institutions increased $3.4 million. The average loan yield
declined 73 basis points to 5.98% at June 30, 2003 from 6.71% 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 84 basis points to 3.79% at June 30,
2003 from 4.63% 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 a large number of security
calls, which were then replaced with lower yielding securities.
Interest expense for the most recent three-month period fell by $69,000 to
$568,000, a decrease of 10.8% 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 June 30, 2003 declined by 84 basis points to 2.81% from 3.65% for
the same period last year. The average interest rate paid on certificates of
deposit fell by 130 basis points to 3.23% for the three months ended June 30,
2003, from 4.53% for the prior-year period.
13
Provision for loan losses for the three months ended June 30, 2003 was $22,000,
compared to $21,000 for the three months ended June 30, 2002, an increase of
$1,000, or 4.8%. 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.
Net interest income after provision for loan losses for the three months ended
June 30, 2003 was $734,000, compared to $664,000 for the three months ended June
30, 2002, an increase of $70,000, or 10.5%. The increase in net interest income
resulted primarily from the growth in interest earning assets, and a decline in
the rate paid on interest bearing liabilities to 2.81% from 3.65% for the same
period last year.
Non-interest income for the three months ended June 30, 2003 was $266,000
compared to $87,000 for the three months ended June 30, 2002, an increase of
$179,000, or 205.7%. This increase is attributable to the gain on sale of loans
of $189,000 for the current year period, compared to the gain on sale of loans
of $1,000 for the same period last year. Due to the current declining interest
rate environment, the Bank has been actively selling residential mortgage loans
in the secondary market, while retaining servicing rights for the sold loans.
Non-interest expense for the three months ended June 30, 2003 was $677,000, an
increase of $80,000, or 13.4% from $597,000 for the three months ended June 30,
2002. The increase was primarily attributable to increases in legal and
collection expenses of $37,000, or 284.6%, increases in compensation and
employee benefits of $29,000, or 9.9%, and increases in advertising and
marketing of $15,000, or 166.7% 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 on form 10-QSB for the quarter ended March 31, 2003.
Advertising and Marketing increased as a result of the Bank engaging in a more
active marketing campaign.
Income Information - Six Months
Net income for the six months ended June 30, 2003 was $315,000, or 45.2% higher
than net income of $217,000 for the six months ended June 30, 2002.
Interest income for the six months ended June 30, 2003 decreased $46,000 or 1.7%
to $2.6 million. The decrease was primarily due to lower average yields on loans
and securities, partially offset by higher average balances in loans, interest
bearing deposits in other financial institutions and securities. Average
interest-earning assets for the six months ending June 30, 2003 were $96.2
million, an increase of $12.2 million, or 14.6%, over average interest-earning
assets for the six months ended June 30, 2002 of $84.0 million. Average loan
balances increased $6.4 million. Average interest bearing deposits in other
financial institutions increased $3.7 million, and average security balances
increased $2.3 million. The average loan yield declined 76 basis points to 6.08%
at June 30, 2003 from 6.84% for the same period in the prior year. As stated
above in the quarterly income analysis, the Bank's loan rate was negatively
impacted by the high volume of mortgage loan refinancing activity and the
declining prime rate. The average security yield declined 120 basis points to
3.78% at June 30, 2003 from 4.98% 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 was a large number of security
calls, which were then replaced with lower yielding securities.
Interest expense for the six-month period ended June 30, 2003 decreased to $1.2
million, a decline of $147,000, or 11.2%, compared to the same period last year.
The decrease was due to lower rates paid on interest-bearing deposits and
borrowings. The average rate paid on interest-bearing liabilities for the six
months ended June 30, 2003 declined by 87 basis points to 2.94% from 3.81% for
the same period last year. The average interest paid on certificates of deposit
fell by 122 basis points to 3.43% for the six months ended June 30, 2003, from
4.65% for the prior-year period.
14
Net interest income after provision for loan losses for the six months ended
June 30, 2003 increased $98,000 to $1.4 million, compared to $1.3 million for
the same period in the prior year. The increase in the Bank's net interest
income resulted primarily from the growth in interest earning assets, and a
decline in the rate paid on interest bearing liabilities to 2.94% from 3.81% for
the same period last year.
Non-interest income for the six months ended June 30, 2003 was $377,000 compared
to $147,000 for the six months ended June 30, 2002, an increase of $230,000, or
156.5%. This increase was primarily attributable to the increase in the gain on
sale of loans of $238,000. These loans were sold with servicing rights being
maintained by the Bank. The Bank also recorded $15,000 in gain on sale of assets
for the current six-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 six months ended June 30, 2003 was $1.3 million or
$154,000 more than expenses for the six months ended June 30, 2002. The increase
was primarily attributable to increases in compensation expenses, director's
fees, and legal and collection expenses. Salary expense increased $89,000, or
15.8%, as a result of staff additions and annual merit increases. Directors fees
increased $13,000, or 26.5% due to the addition of one board member as one
current director entered into emeritus status. Legal and collection expense
increased $48,000, or 218.2%, primarily due to expenses associated with a
lawsuit brought against the Bank by the Bank's former President, as disclosed in
the Company's Quarterly Report on form 10-QSB for the quarter ended March 31,
2003.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity increased $87,000 from $12.7 million, at
December 31, 2002 to $12.8 million, at June 30, 2003. This increase in
stockholders' equity during the first six months of 2003 was a result of net
income of $315,000, and an increase of $62,000 in the unrealized gain on
investment securities available for sale, partially offset by the purchase of
18,000 shares of treasury stock totaling $299,000 during the period.
Financial institutions are required to maintain ratios of capital to
assets in accordance with guidelines promulgated by the federal banking
regulators. The guidelines are commonly known as "Risk-Based Guidelines" as they
define the capital level requirements of a financial institution based upon the
level of credit risk associated with holding various categories of assets. The
Risk-Based Guidelines require minimum ratios of Tier 1 and Total Capital to
risk-weighted assets of 4% and 8%, respectively. At June 30, 2003, Clover Leaf
Bank's Tier 1 and Total Capital ratios were 15.90% and 17.00%, respectively. In
addition to the Risk-Based Guidelines, the federal banking agencies have
established a minimum leverage ratio guideline for financial institutions (the
"Leverage Ratio Guideline"). The Leverage Ratio Guideline provides for a minimum
ratio of Tier 1 capital to average assets of 4%. Clover Leaf Bank's leverage
ratio at June 30, 2003, was 10.26%. 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 June 30, 2003, Clover Leaf Bank had loan commitments of $5.1 million
and unused lines of credit of $3.1 million. Clover Leaf Bank believes it has
adequate resources to fund loan commitments as they arise. If Clover Leaf Bank
requires funds beyond its internal funding capabilities, advances from the
Federal Home Loan Bank of Chicago are available. At June 30, 2003, approximately
$25.3 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.
15
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 as of the end of the period covered by this
quarterly report, that the Company's disclosure controls and procedures (as
defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 has been no change
in the Company's internal control over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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 on
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 June 30, 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
The Annual Meeting of Stockholders of the Company was held on
May 27, 2003. At the meeting, Gary D. Niebur and Philip H.
Weber were elected to serve as directors with terms expiring
in 2005. Dennis E. Ulrich was elected to serve as director
with his term expiring in 2004. Continuing with a term
expiring 2004 was Robert W. Schwartz. Continuing with terms
expiring in 2003 were Dennis M. Terry, Joseph J. Gugger, and
Kenneth P. Highlander.
The matters approved by stockholders at the meeting and the
number of votes cast for, against or withheld (as well as the
number of abstentions and broker non-votes) as to each matter
are set forth below:
Number of Votes
The election of the following directors For Witheld
for a two-year term: ----- ---------
Gary D. Niebur 34,892 -
Philip H. Weber 534,892 -
The election of the following director
for a one-year term:
Dennis E. Ulrich 534,492 400
Broker
For Against Abstain Non-Votes
The ratification of McGladrey & Pullen, LLP as independent ----- --------- --------- -----------
Auditors for the year ending December 31, 2003. 534,892 - - -
17
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by Clover Leaf
Financial during the second quarter of 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOVER LEAF FINANCIAL CORP.
(Registrant)
DATE: August 13, 2003 By: /s/ Dennis M. Terry
------------------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: August 13, 2003 By: /s/ Darlene F. McDonald
------------------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
19