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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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Commission File No. 0-33413
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CLOVER LEAF FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-1416016
(State of incorporation) (IRS Employer Identification No.)
200 East Park Street, Edwardsville, Illinois 62025
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(618) 656-6122
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at November 13, 2003
--------------------------- --------------------------------
Common stock $.10 par value 640,950
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 17
SIGNATURES 18
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,
2003 2002
---------------- -----------------
ASSETS
Cash and due from banks $ 3,658 $2,429
Interest bearing deposits in other financial institutions 3,300 5,688
---------------- -----------------
Total cash and cash equivalents 6,958 8,117
Securities available-for-sale 20,132 13,448
Federal Home Loan Bank stock 3,560 3,409
Loans, net of allowance for loan losses of
$761 at September 30, 2003 and $690 at December 31, 2002 69,898 67,544
Bank premises and equipment 2,311 1,906
Accrued interest receivable 556 541
Other assets 741 551
---------------- -----------------
TOTAL ASSETS $104,156 $95,516
================ =================
LIABILITIES
Deposits:
Noninterest bearing $7,584 $7,153
Interest bearing 72,592 65,334
---------------- -----------------
Total deposits 80,176 72,487
Federal Home Loan Bank advances 9,000 9,000
Other borrowings 855 284
Accrued interest payable 176 218
Other liabilities 1,296 809
---------------- -----------------
TOTAL LIABILITIES 91,503 82,798
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at September 30, 2003 or December 31, 2002 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued at September 30, 2003 and December 31, 2002, respectively 66 66
Surplus 6,069 6,066
Retained earnings 6,921 6,653
Accumulated other comprehensive income 91 94
Treasury Stock, 20,300 shares at cost at September 30, 2003 (342) -
Unearned Employee Stock Ownership Plan shares (152) (161)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,653 12,718
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,156 $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 Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ---------------
Interest Income and dividend income:
Loans, including fees $1,058 $1,142 $3,256 $3,331
Securities 157 168 448 525
Federal Home Loan Bank dividends 58 42 157 144
Interest-bearing deposits in other banks 12 10 44 28
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST AND FEE INCOME 1,285 1,362 3,905 4,028
---------------- ---------------- ---------------- ---------------
Interest Expense:
Deposits 467 555 1,500 1,804
Federal Home Loan Bank advances 48 62 176 119
Other borrowings 1 1 3 5
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST EXPENSE 516 618 1,679 1,928
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 769 744 2,226 2,100
Provision for loan losses 19 24 64 66
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 750 720 2,162 2,034
---------------- ---------------- ---------------- ---------------
Noninterest Income:
Service charges on deposit accounts 17 22 56 61
Other service charges and fees 17 15 48 46
Loan servicing fees 16 5 33 14
Gain on sale of loans 16 50 273 69
Gain on sale of investments - 3 - 7
Gain on sale of assets 58 - 73 -
Other 26 3 44 48
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST INCOME 150 98 527 245
---------------- ---------------- ---------------- ---------------
Noninterest Expense:
Salaries and employee benefits 333 306 985 869
Occupancy and equipment, net 70 106 200 240
Data processing 58 51 172 160
Advertising and marketing 19 12 52 36
Directors' fees 31 25 93 74
Audit and accounting fees 15 17 67 65
Legal & collection expense 365 7 435 61
Other 94 92 277 253
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE 985 616 2,281 1,758
---------------- ---------------- ---------------- ---------------
Net income (loss) before income taxes (credits) (85) 202 408 521
Income taxes (credits) (38) 66 140 168
---------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) $ (47) $ 136 $268 $353
================ ================ ================ ===============
Average Shares Outstanding:
Basic and Diluted 629,317 648,550 633,670 649,025
Basic and Diluted Earnings (Loss) Per Share $(.08) $.21 $.42 $.54
====== ==== ==== ====
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, 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 -- -- 268 -- -- -- 268
Other comprehensive
income, net of tax:
Change in unrealized -- -- -- (3) -- -- (3)
gain on securities
available-for-sale
arising during the
period, net of tax of $1
--------------
Comprehensive income 265
--------------
Allocation of ESOP shares -- 3 -- -- -- 9 12
Purchase of treasury stock -- -- -- -- (342) -- (342)
----------- ----------- -------------- -------------- -------------- -------------- --------------
Balance at September 30, 2003 $ 66 $ 6,069 $ 6,921 $ 91 $ (342) $ (152) $ 12,653
======= ======== ========== ========== ========== ========== ==========
--------------------------------------------------------------------------------
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,
----------------------------------------------
2003 2002
-------------------- ---------------------
Cash Flows from Operating Activities
Net income $ 268 $353
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 92 106
Provision for loan losses 64 66
Net amortization (accretion) on investments 179 27
Deferred tax provision 16 50
Realized gain on sale of investments - (7)
Federal Home Loan Bank stock dividend (151) (144)
Gain on sale of loans (273) (69)
Gain on sale of assets (73) -
Proceeds from sales of loans held for sale 11,911 2,054
Origination of loans held for sale (11,638) (1,986)
Allocation of ESOP shares 12 -
Decrease (increase) in accrued interest receivable (15) 79
(Increase)/Decrease in other assets (190) 103
Decrease in accrued interest payable (42) (88)
Increase/(Decrease) in other liabilities 472 (312)
-------------------- ---------------------
Net cash provided by (used in) operating activities 632 132
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (16,935) (4,177)
Proceeds of sales and maturities of securities available-for-sale and paydowns 10,068 4,156
Proceeds on sale of assets 139 -
Purchase of Federal Home Loan Bank stock, net - (200)
Increase in loans, net (2,418) (3,014)
Purchases of premises and equipment (563) (23)
-------------------- ---------------------
Net cash provided by (used in) investing activities (9,709) (3,258)
-------------------- ---------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits 7,689 (11,789)
Proceeds from Federal Home Loan Bank advances - 6,500
Net increase in other borrowings 571 52
Loans to ESOP for purchase of shares - (141)
Purchase of Treasury Stock (342) -
Costs associated with issuance of stock - (68)
-------------------- ---------------------
Net cash provided by (used in) financing activities 7,918 (5,446)
-------------------- ---------------------
Net decrease in cash and cash equivalents (1,159) (8,572)
Cash and cash equivalents:
Beginning 8,117 12,792
-------------------- ---------------------
Ending $6,958 $4,220
==================== =====================
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $1,721 $2,016
Income taxes 168 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 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. Significant estimates which are particularly
susceptible to change in a short period of time include the determination of the
market value of investments and the allowance for loan losses. 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 (Loss) Per Share
Basic earnings (loss) per share are determined by dividing net income
(loss) 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 (loss) are the same as basic
earnings (loss) 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,
------------------------------------ ----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- --------------
Net income (loss) $(47) $136 $268 $353
Weighted average shares outstanding 640,921 661,250 645,359 661,250
Weighted average ESOP shares (11,604) (12,700) (11,689) (12,225)
---------------- ---------------- ---------------- ----------------
Basic average shares outstanding 629,317 648,550 633,670 649,025
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings (loss) per share $(.08) $.21 $.42 $.54
================ ================ ================ ================
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,
2003 and 2002, and its financial condition, asset quality, and capital resources
as of September 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 September 30, 2003, total assets were $104.1 million, an increase of $8.6
million, or 9.0%, from $95.5 million at December 31, 2002. Loans receivable at
September 30, 2003 were $69.9 million, an increase of $2.4 million, or 3.6%,
from $67.5 at December 31, 2002. Commercial business, one-to-four family and
commercial real estate loans increased $98,000 (1.7%), $1.5 million (4.3%) and
$3.6 million (15.8%), respectively, compared to the 2002 year end. These
increases were due to a continued focus by the Bank on commercial lending and an
interest rate environment that favors consumers. The increases were partially
offset by a $2.6 million, or 55.9% decline in consumer installment loans, and a
$187,000, or 24.6% decline in construction loans. Securities, including Federal
Home Loan Bank stock, increased $6.8 million, or 40.6%, to $23.7 million at
September 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. As a result of this increased
investment activity, the Bank's cash balances decreased $1.1 million or 14.3% to
$7.0 million at September 30, 2003 from $8.1 million at December 31, 2002. Bank
premises and equipment increased $405,000, or 21.2% to $2.3 million at September
30, 2003. The increase resulted, primarily, 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 September 30, 2003 were $80.2 million, an increase of $7.7
million, or 10.6%, 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 September 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.
9
Total stockholders' equity as of September 30, 2003 was $12.7 million, a
decrease of $65,000 or 0.5% from December 31, 2002. The decrease in equity from
December 31, 2002 to September 30, 2003 was the result of the purchase of 20,300
shares of treasury stock totaling $342,000 by Clover Leaf Financial during the
first nine months of 2003. This decrease in equity was partially offset by the
recording of $268,000 in net income and the amortization of Unearned Employee
Stock Ownership Plan shares of $12,000. The remaining increase was due to the
change in the unrealized gain on investment securities held of sale. At
September 30, 2003 there were 640,950 shares of common stock outstanding, at a
book value of $19.74 per share.
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, 2003, nonperforming assets totaled $2,138,000, or
2.05% of total assets, compared to nonperforming assets at year-end 2002 of
$1,742,000, or 1.80% of total assets. There were no foreclosed assets at
September 30, 2003. The Bank held $18,000 of foreclosed assets at December 31,
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, 2003 December 31, 2002
---------------------------------------- ----------------------------------------
Loans and Loans and
Foreclosed Non-performing Foreclosed Non-performing
Assets Assets Assets Assets
------------------ ------------------ ------------------ ------------------
Real Estate
One- to four-family...................... $35,781 $1,080 $34,300 $838
Commercial............................... 26,403 608 22,797 210
Construction and land.................... 574 - 761 182
Non-real estate
Consumer................................ 2,044 142 4,631 201
Commercial business..................... 5,857 308 5,759 293
------------------ ------------------ ------------------ ------------------
Gross loans................................ 70,659 2,138 68,248 1,724
Foreclosed assets.......................... - - 18 18
------------------ ------------------ ------------------ ------------------
Total............................ $70,659 $2,138 $68,266 $1,742
================== ================== ================== ==================
Nonaccrual loans........................... $1,697 $1,529
Accruing loans past due
90 days or more....................... 441 195
Troubled debt restructurings............... - -
------------------ ------------------
Total nonperforming loans............. 2,138 1,724
Foreclosed assets.......................... - 18
------------------ ------------------
Total nonperforming assets............ $2,138 $1,742
================== ==================
Nonperforming loans to gross loans.........
3.03% 2.53%
Nonperforming assets to gross loans
and foreclosed assets................. 3.03% 2.55%
Nonperforming assets to total assets....... 2.05% 1.80%
The Bank recorded net recoveries of $5,000 for the third quarter of
2003 compared to net recoveries of $4,000 for the third quarter of 2002. During
the first nine months of 2003, net recoveries totaled $7,000 compared to net
charge-offs of $42,000 for the first nine months of 2002. Net recoveries as a
percentage of average total loans was .01% for the three and nine months ended
September 30, 2003 compared to net charge offs as a percentage of average total
loans of (.01)% and .06% for the three and nine months ended September 30, 2002,
respectively.
Clover Leaf Financial's allowance for loan losses at September 30,
2003, increased to $761,000 from $690,000 at December 31, 2002. At September 30,
2003, the allowance for loan losses represented 35.59% of non-performing loans
compared to 40.02% at December 31, 2002. The ratio of the allowance for loan
losses to total loans was 1.08% at September 30, 2003 compared to 1.01% at
December 31, 2002. Management believes that the allowance for loan losses at
September 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.
11
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.
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 30, 2003 and December 31, 2002, were
$1.9 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 judgments, 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
------------------------------------ ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Balance at beginning of period................... $737 $642 $690 $646
Loans charged off:
Consumer.................................... 1 23 15 85
---------------- ---------------- ---------------- ----------------
Total charge-offs................. 1 23 15 85
---------------- ---------------- ---------------- ----------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural...... - - 1 -
Consumer.................................... 6 27 21 43
---------------- ---------------- ---------------- ----------------
Total recoveries.................. 6 27 22 43
---------------- ---------------- ---------------- ----------------
Net charge-offs (recoveries)..................... (5) (4) (7) 42
Provision for loan losses........................ 19 24 64 66
---------------- ---------------- ---------------- ----------------
Balance at end of period......................... $761 $670 $761 $670
================ ================ ================ ================
Net charge-offs (recoveries) as a percent of
average total loans......................... (.01)% (.01)% (.01)% .06%
Allowance for loan losses to gross loans......... 1.08% 1.01% 1.08% 1.01%
Allowance for loan losses to
nonperforming loans......................... 35.59% 53.60% 35.59% 53.60%
Income Information - Quarter
The Bank recorded a net loss for the three months ended September 30, 2003 of
$47,000, compared to net income of $136,000 for the three months ended September
30, 2002.
Interest income for the three months ended September 30, 2003 decreased $77,000,
or 5.7% to $1.3 million. The average loan yield declined 89 basis points to
5.69% at September 30, 2003 from 6.58% 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 77 basis points to 3.85% at September 30, 2003 from 4.62% 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 maturities and security calls, which were
then replaced with lower yielding securities. Despite a decline in average
yields on loans and securities, this loss of income was partially offset by
increased income from higher average loan and security balances. Average
interest-earning assets for the three months ended September 30, 2003 was $98.2,
an increase of $11.3 million, or 13.0%, over average interest-earning assets for
the three months ended September 30, 2002 of $86.9 million. Average loan
balances increased $4.0 million, or 6.0% over the same period last year. Average
security balances increased $4.2 million, or 23.0% over the same period last
year. Although the end of period balance has declined, activity during the
period has caused the balance of average interest bearing deposits in other
financial institutions to increase $3.1 million.
Interest expense for the most recent three-month period fell by $102,000 to
$516,000, a decrease of 16.5% 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 September 30, 2003 declined by 88 basis points to 2.53% from 3.41%
for the same period last year. The largest rate decline was seen in certificates
of deposits where the average interest rate paid fell by 118 basis points to
3.07% for the three months ended September 30, 2003, from 4.25% for the
prior-year period.
13
Provision for loan losses for the three months ended September 30, 2003 was
$19,000, compared to $24,000 for the three months ended September 30, 2002, a
decrease of $5,000, or 20.8%. Despite significant loan growth, the Bank has
experienced very little loss, which has allowed the Bank to record less monthly
provision expense and still 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
September 30, 2003 was $750,000, compared to $720,000 for the three months ended
September 30, 2002, an increase of $30,000, or 4.2%. 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 2.53% from
3.41% for the same period last year.
Non-interest income for the three months ended September 30, 2003 was $150,000
compared to $98,000 for the three months ended September 30, 2002, an increase
of $52,000, or 53.1%. This increase is attributable to the gain on sale of
assets of $58,000 for the current year period, compared to no similar gains the
same period last year. Due to highway expansion, the Bank was required to sell a
portion of its property to the Illinois Department of Transportation. The
$58,000 gain recorded in the third quarter represents the value received for the
property over the Bank's recorded value.
Non-interest expense for the three months ended September 30, 2003 increased by
$369,000, or 59.9% from $616,000 for the three months ended September 30, 2002.
The increase was primarily attributable to increases in legal and collection
expenses of $358,000, or 5,114.3%, and increases in compensation and employee
benefits of $27,000, or 8.8%. The increase in legal and collection expense is
due to expenses associated with and the resolution of a lawsuit brought against
the Bank by the Bank's former President, as previously disclosed. Compensation
increased as a result of staff additions and annual merit and bonus increases.
These increases were slightly offset by a decrease in occupancy and equipment
expenses.
Income Information - Nine Months
Net income for the nine months ended September 30, 2003 was $268,000, or 24.1%
lower than net income of $353,000 for the nine months ended September 30, 2002.
Interest income for the nine months ended September 30, 2003 decreased $123,000
or 3.1% to $3.9 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 nine months ending September 30, 2003
were $99.0 million, an increase of $12.6 million, or 14.6%, over average
interest-earning assets for the nine months ended September 30, 2002 of $86.4
million. Average loan balances increased $4.6 million. Average interest bearing
deposits in other financial institutions increased $2.9 million, and average
security balances increased $5.1 million. The average loan yield declined 80
basis points to 5.95% at September 30, 2003 from 6.75% 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 106 basis points to 3.80% at September 30, 2003 from 4.86% 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 maturities and security calls, which were then replaced with
lower yielding securities.
Interest expense for the nine-month period ended September 30, 2003 decreased to
$1.7 million, a decline of $249,000, or 12.9%, 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 nine
months ended September 30, 2003 declined by 88 basis points to 2.80% from 3.68%
for the same period last year. The average interest paid on certificates of
deposit fell by 121 basis points to 3.31% for the nine months ended September
30, 2003, from 4.52% for the prior-year period.
14
Provision for loan losses for the nine months ended September 30, 2003 was
$64,000, compared to $66,000 for the nine months ended September 30, 2002, a
decrease of $2,000, or 3.0%. As stated above in the quarterly income analysis,
despite significant loan growth, the Bank has been able to record less monthly
provision expense and still maintain an adequate loan loss reserve in relation
to total nonperforming loans and total outstanding gross loan receivables.
Net interest income after provision for loan losses for the nine months ended
September 30, 2003 increased $128,000, or 6.3% to $2.2 million. 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 2.80% from 3.68% for the same period last year.
Non-interest income for the nine months ended September 30, 2003 was $527,000
compared to $245,000 for the nine months ended September 30, 2002, an increase
of $282,000, or 115.1%. This increase was primarily attributable to the increase
in the gain on sale of loans of $204,000. These loans were sold with servicing
rights being maintained by the Bank. The Bank also recorded $73,000 in gain on
sale of assets for the current nine-month period compared to no such gains for
the same period a year ago. This gain related to the sale of a portion of the
Bank's property to the Illinois Department of Transportation in order to
facilitate highway expansion, as discussed above in the quarterly income
analysis.
Non-interest expense for the nine months ended September 30, 2003 was $2.3
million or $523,000 more than expenses for the nine months ended September 30,
2002. The increase was primarily attributable to increases in legal and
collection expenses, compensation expenses, directors' fees, and advertising
expense. Legal expense increased $374,000, or 613.1% as a result of the expenses
associated with and the resolution of a lawsuit brought against the Bank by the
Bank's former President, as previously disclosed. Salary expense increased
$116,000, or 13.3%, as a result of staff additions and annual merit increases.
Directors' fees increased $19,000, or 25.7% due to the addition of one board
member as one current director retired and elected emeritus status. Advertising
expense increased $16,000, or 44.4% due to increased focus on promoting the Bank
and various new products. These increases were offset slightly by a $40,000, or
16.7% decrease in occupancy and equipment expense. Occupancy and equipment costs
were higher in 2002 due to a $27,000 one time adjustment to real estate property
tax expense and a $15,000 increase in building maintenance as several projects
were completed to enhance the efficiency and appearance of the current building.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity decreased $65,000 from December 31, 2002 and
was $12.7 million, at September 30, 2003. This decrease in stockholders' equity
during the first nine months of 2003 was the result of the purchase of 20,300
shares of treasury stock totaling $342,000, and a decrease of $3,000 in the
unrealized gain on investment securities available for sale, partially offset by
the recording of $268,000 in net income and amortization of Unearned Employee
Stock Ownership Plan shares of $12,000.
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, 2003, Clover
Leaf Bank's Tier 1 and Total Capital ratios were 15.71% and 16.84%,
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, 2003, was 10.29%. Accordingly,
Clover Leaf Bank has satisfied these regulatory guidelines.
15
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, 2003, Clover Leaf Bank had loan commitments of $6.6
million and unused lines of credit of $4.2 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, 2003,
approximately $24.4 million of time deposits were scheduled to mature within one
year. We expect that substantially all of these time deposits either will be
renewed upon maturity or will be placed in money market accounts at Clover Leaf
Bank. Clover Leaf Bank intends to sell a greater percentage of its residential
real estate loan originations, which will provide additional liquidity.
Sources of Funds
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. Matured and called investments have added
significantly to the Bank's source of funds during 2003, with over $10 million
either being called or maturing. 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 is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of its
business. At September 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
None
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: A Form 8-K was filed by Clover Leaf
Financial on August 7, 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: November 13, 2003 By:/s/ Dennis M. Terry
------------------------- ------------------------------
Dennis M. Terry
President and Chief Executive
Officer
DATE: November 13, 2003 By:/s/ Darlene F. McDonald
------------------------ ------------------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
18