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, 2004
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
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CLOVER LEAF FINANCIAL CORP.
---------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-1416016
(State of incorporation) (IRS Employer Identification No.)
200 East Park Street, Edwardsville, Illinois 62025
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(618) 656-6122
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at August 12, 2004
----- ---------------------------------
Common stock $.10 par value 622,417
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
SIGNATURE AND CERTIFICATIONS 19
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,
2004 2003
---------------- -----------------
ASSETS
Cash and due from banks $ 1,139 $1,811
Interest bearing deposits in other financial institutions 3,753 3,442
---------------- -----------------
Total cash and cash equivalents 4,892 5,253
Securities available-for-sale 24,287 23,857
Federal Home Loan Bank stock 3,795 3,680
Loans, net of allowance for loan losses of
$714 at June 30, 2004 and $725 at December 31, 2003 68,420 66,755
Bank premises and equipment 2,516 2,352
Accrued interest receivable 503 488
Other assets 580 315
---------------- -----------------
TOTAL ASSETS $104,993 $102,700
================ =================
LIABILITIES
Deposits:
Noninterest bearing $ 8,945 $8,002
Interest bearing 72,892 72,463
---------------- -----------------
Total deposits 81,837 80,465
Federal Home Loan Bank advances 8,455 8,000
Other borrowings 1,161 686
Accrued interest payable 138 167
Other liabilities 860 725
---------------- -----------------
TOTAL LIABILITIES 92,451 90,043
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at June 30, 2004 or December 31, 2003 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued at June 30, 2004 and December 31, 2003, respectively 66 66
Surplus 6,073 6,072
Retained earnings 7,374 7,044
Accumulated other comprehensive income (loss) (120) 58
Treasury Stock, 38,833 shares and 25,300 shares at cost, at June 30, 2004 and
December 31, 2003, respectively (708) (438)
Unearned Employee Stock Ownership Plan shares (143) (145)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,542 12,657
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,993 $102,700
================ =================
See the accompanying notes to unaudited consolidated financial statements.
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Interest Income and dividend income:
Loans, including fees $973 $1,090 1,958 $2,198
Securities 199 164 405 291
Federal Home Loan Bank dividends 55 56 115 99
Interest-bearing deposits in other banks 11 14 19 32
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST AND FEE INCOME 1,238 1,324 2,497 2,620
---------------- ---------------- ---------------- ---------------
Interest Expense:
Deposits 418 504 843 1,033
Federal Home Loan Bank advances 36 64 75 128
Other borrowings 1 - 2 2
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST EXPENSE 455 568 920 1,163
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 783 756 1,577 1,457
Provision for loan losses - 22 - 45
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 783 734 1,577 1,412
---------------- ---------------- ---------------- ---------------
Noninterest Income:
Service charges on deposit accounts 29 19 56 39
Other service charges and fees 20 17 37 31
Loan servicing fees 17 9 30 17
Gain on sale of loans 79 189 114 257
Gain on sale of investments - - 3 -
Gain on sale of assets - 15 - 15
Other 1 17 19 18
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST INCOME 146 266 259 377
---------------- ---------------- ---------------- ---------------
Noninterest Expense:
Salaries and employee benefits 346 323 683 652
Occupancy and equipment, net 72 66 138 130
Data processing 57 54 115 114
Advertising and marketing 25 24 58 33
Directors' fees 27 32 66 62
Audit and accounting fees 30 34 55 52
Legal & collection expense 26 50 41 70
Other 110 94 198 183
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE 693 677 1,354 1,296
---------------- ---------------- ---------------- ---------------
Net income before income taxes 236 323 482 493
Income taxes 67 116 152 178
---------------- ---------------- ---------------- ---------------
NET INCOME $ 169 $ 207 $ 330 $315
================ ================ ================ ===============
Average Shares Outstanding:
Basic and Diluted 611,469 631,655 613,867 635,292
Basic and Diluted Earnings Per Share $.28 $.33 $.54 $.50
================ ================ ================ ===============
See the accompanying notes to unaudited consolidated financial statements.
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in Thousands)
Six Months Ended June 30, 2004
-------------------------------------------------------------------------------------------------
Unearned
Accumulated Employee
Other Stock
Retained Comprehensive Treasury Ownership
Common Stock Surplus Earnings Income (Loss) Stock Plan Shares Total Equity
------------ ------- -------- ------------- ----- ----------- ------------
Balance at December 31, 2003 $ 66 $ 6,072 $ 7,044 $ 58 $ (438) $ (145) $ 12,657
Comprehensive income
Net income -- -- 330 -- -- -- 330
Other comprehensive
income, net of tax:
Change in unrealized
gain (loss) on
securities
available-for-sale (176) --
arising during the -- -- -- -- (176)
period, net of tax of
($ 104)
Reclassification
adjustment, (2) (2)
Net of tax of ($1)
--------
Comprehensive income 152
--------
Allocation of ESOP shares -- 1 -- -- -- 2 3
Purchase of treasury stock -- -- -- -- (270) -- (270)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2004 $ 66 $ 6,073 $ 7,374 $ (120) $ (708) $ (143) $ 12,542
======== ======== ======== ======== ======== ======== ========
See the accompanying notes to unaudited consolidated financial statements.
================================================================================
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
---------------------------------------
2004 2003
---------------- ------------------
Cash Flows from Operating Activities
Net income $ 330 $ 315
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 70 61
Provision for loan losses -- 45
Net amortization on investments 149 112
Deferred tax provision 39 (15)
Realized gain on sale of investments (3) --
Federal Home Loan Bank stock dividend (115) (94)
Gain on sale of loans (114) (257)
Gain on sale of assets -- (15)
Proceeds from sales of loans held for sale 7,715 9,296
Origination of loans held for sale (7,601) (9,039)
Increase in accrued interest receivable (15) --
Increase in other assets (64) (133)
Decrease in accrued interest payable (29) (30)
Increase in other liabilities 96 256
-------- --------
Net cash provided by operating activities 458 502
-------- --------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (5,519) (12,842)
Proceeds of sales and maturities of securities available-for-sale and paydowns 4,660 7,524
Proceeds on sale of assets -- 20
Increase in loans, net (1,762) (1,019)
Purchases of premises and equipment (233) (533)
-------- --------
Net cash used in investing activities (2,854) (6,850)
-------- --------
Cash Flows from Financing Activities
Increase in deposits 1,372 6,269
Proceeds from Federal Home Loan Bank advances 1,455 --
Repayment of Federal Home Loan Bank advances (1,000) --
Net increase in other borrowings 475 270
Allocation of ESOP shares 3 9
Purchase of Treasury Stock (270) (299)
-------- --------
Net cash provided by financing activities 2,035 6,249
-------- --------
Net decrease in cash and cash equivalents (361) (99)
Cash and cash equivalents:
Beginning 5,253 8,117
-------- --------
Ending $ 4,892 $ 8,018
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $ 949 $ 1,193
Income taxes 71 121
Supplemental disclosure of non cash investing activities
Assets acquired through foreclosure 97 --
See the accompanying notes to unaudited consolidated financial statements.
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 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, and 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,
--------------------------- ---------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income $ 169 $ 207 $ 330 $ 315
Weighted average shares outstanding 622,417 643,343 624,854 647,024
Weighted average ESOP shares (10,948) (11,688) (10,987) (11,732)
--------- --------- --------- ---------
Basic average shares outstanding 611,469 631,655 613,867 635,292
--------- --------- --------- ---------
Basic and diluted earnings per share $ .28 $ .33 $ .54 $ .50
========= ========= ========= =========
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, 2004 and 2003, and
its financial condition, asset quality, and capital resources as of June 30,
2004. 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, 2004, total assets were $105.0 million, an increase of $2.3 million,
or 2.2%, from $102.7 million at December 31, 2003. Loans receivable at June 30,
2004 were $68.4 million, an increase of $1.6 million or 2.4%, from $66.8 million
at December 31, 2003. Commercial real estate loans increased $6.3 million, or
25.9% compared to the 2003 year end. This increase was due to a continued focus
by the Bank on commercial lending and a favorable interest rate environment.
Commercial business loans increased $148,000 or 2.4% compared to the 2003 year
end. These increases were partially offset by a $4.4 million, or 13.8% decline
in one-to-four family mortgage loans, and a $524,000, or 47.4% decline in
construction and land loans. The decline in one-to-four family mortgage loans
was due to the sale of $7.6 million in loans to the Federal Home Loan Bank
during the first six months of the year, as part of the Mortgage Partnership
Finance program, where the Bank sells the loans and retains servicing rights.
Servicing income on loans sold generated income of $30,000 in the first half of
2004 compared to $17,000 for the first half of 2003. Securities, including
Federal Home Loan Bank stock, increased $545,000, or 2.0%, to $28.1 million at
June 30, 2004 from $27.5 million at December 31, 2003. Bank premises and
equipment increased $164,000, or 7.0% to $2.5 million at June 30, 2004. The
increase resulted from expenditures related to the planning and design for the
future construction of a new branch office.
Deposits as of June 30, 2004 were $81.8 million, an increase of $1.4 million, or
1.7%, from December 31, 2003. Non-interest bearing deposits increased $943,000
or 11.8% due to an increase in the number of commercial deposit accounts held at
the Bank. Interest-bearing deposits increased $429,000 or 0.6%. This increase
was primarily in time deposits.
Federal Home Loan Bank advances as of June 30, 2004 were $8.5 million, an
increase of $455,000, or 5.7% from December 31, 2003. Lower borrowing rates have
made Federal Home Loan Bank advances an attractive alternative for funding
increased loan volumes.
Total stockholders' equity as of June 30, 2004 was $12.5 million, a decrease of
$115,000 or 0.9% from December 31, 2003. The decrease in equity was the result
of the purchase of 13,533 shares of treasury stock totaling $270,000 during the
first six months of 2004. Also contributing to the decline in equity was the
change in the net unrealized holding losses on investment securities held for
sale. This decrease was $178,000 from December 31, 2003 to June
9
30, 2004. These decreases in equity were partially offset by the recording of
$330,000 in net income. At June 30, 2004 there were 622,417 shares of common
stock outstanding, at a book value of $20.15 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 June 30, 2004, nonperforming assets totaled $794,000, or .76% of
total assets, compared to nonperforming assets at year-end 2003 of $908,000, or
..88% of total assets. The Bank held foreclosed assets at June 30, 2004 of
$97,000, compared to no foreclosed assets at December 31, 2003.
10
The following table sets forth a summary of Clover Leaf Financial's
loan portfolio mix and nonperforming assets.
(Dollars in Thousands) June 30, 2004 December 31, 2003
----------------------------- -----------------------------
Loans and Loans and
Foreclosed Non-performing Foreclosed Non-performing
Assets Assets Assets Assets
--------- --------- --------- ---------
Real Estate
One- to four-family .............. $27,355 $ 477 $31,709 $ 656
Commercial ....................... 30,653 158 24,335 --
Construction and land ............ 581 -- 1,105 --
Non-real estate
Consumer ......................... 4,276 62 4,208 92
Commercial Business .............. 6,281 -- 6,133 160
------- ------- ------- -------
Gross loans ........................ 69,146 697 67,490 908
Foreclosed assets .................. 97 97 -- --
------- ------- ------- -------
Total .................... $69,243 $ 794 $67,490 $ 908
======= ======= ======= =======
Nonaccrual loans ................... $ 689 $ 896
Accruing loans past due
90 days or more ............... 8 12
Troubled debt restructurings ....... -- --
------- -------
Total nonperforming loans ..... 697 908
Foreclosed assets .................. 97 --
------- -------
Total nonperforming assets .... $ 794 $ 908
======= =======
Nonperforming loans to gross loans . 1.01% 1.35%
Nonperforming assets to gross loans
and foreclosed assets ......... 1.15% 1.35%
Nonperforming assets to total assets .76% .88%
The Bank recorded net charge-offs of $7,000 for the second quarter of
2004 compared to net charge-offs of $2,000 for the second quarter of 2003.
During the first six months of 2004, net charge-offs totaled $11,000 compared to
net recoveries of $2,000 for the first six months of 2003. Net charge-offs as a
percentage of average total loans was 0.01% and 0.02%, respectively, for the
three and six months ended June 30, 2004 compared to net recoveries as a
percentage of average total loans of 0.01% for the three and six months ended
June 30, 2003.
Clover Leaf Financial's allowance for loan losses at June 30, 2004,
decreased to $714,000 from $725,000 at December 31, 2003. At June 30, 2004, the
allowance for loan losses represented 102.44% of non-performing loans compared
to 79.85% at December 31, 2003. The ratio of the allowance for loan losses to
gross loans was 1.03% at June 30, 2004 compared to 1.07% at December 31, 2003.
Management believes that the allowance for loan losses at June 30, 2004 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
11
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 June 30, 2004 and December 31, 2003, were
$937,000, and $1.3 million, respectively.
Critical Accounting Policy. 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 Six Months Ended
June 30 June 30
---------------------- ----------------------
2004 2003 2004 2003
------- ------- ------- -------
Balance at beginning of period ............. $ 721 $ 717 $ 725 $ 690
Loans charged off:
Commerical, financial and agricultural -- -- 10 --
Consumer .............................. 11 11 13 14
----- ----- ----- -----
Total charge-offs ........... 11 11 23 14
----- ----- ----- -----
Recoveries of loans previously charged off:
Commercial, financial and agricultural -- -- -- 1
Consumer .............................. 4 9 12 15
----- ----- ----- -----
Total recoveries ............ 4 9 12 16
----- ----- ----- -----
Net charge-offs (recoveries) ............... 7 2 11 (2)
Provision for loan losses .................. -- 22 -- 45
----- ----- ----- -----
Balance at end of period ................... $ 714 $ 737 $ 714 $ 737
===== ===== ===== =====
Net charge-offs (recoveries) as a percent of
average total loans ................... .01% -- .02% --
Allowance for loan losses to gross loans ... 1.03% 1.06% 1.03% 1.06%
Allowance for loan losses to
nonperforming loans ........................ 102.44% 42.14% 102.44% 42.14%
Income Information - Quarter
The Company recorded net income for the three months ended June 30, 2004 of
$169,000, compared to net income of $207,000 for the three months ended June 30,
2003.
Interest income for the three months ended June 30, 2004 decreased $86,000, or
6.5% to $1.2 million. The average loan yield declined 33 basis points to 5.65%
at June 30, 2004 from 5.98% 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 decreased 15 basis points to 3.64% at June 30, 2004 from 3.79% for the
same period in the prior year. The security yield was negatively impacted by
$3.8 million of investment securities maturing or being called during the first
six months of 2004, and replacing those securities with lower yielding
instruments due to the lower yielding interest rate environment. Also
contributing to the decline in interest income was a decline in average loan
balances. Average loan balances declined $3.4 million, or 4.8% to $67.4 million
at June 30, 2004 compared to $70.8 million for the period ended June 30, 2003.
Interest expense for the most recent three-month period fell by $113,000 to
$455,000, a decrease of 19.9% 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 three
months ended June 30, 2004 declined by 60 basis points to 2.21% from 2.81% for
the same period last year. The largest rate decline was in certificates of
deposits where the average interest rate paid fell by 54 basis points to 2.69%
for the three months ended June 30, 2004, from 3.23% for the prior-year period.
No provision expense was recorded for the period ended June 30, 2004, compared
to $22,000 for the three months ended June 30, 2003. Despite loan growth, the
Bank has experienced very little loss, and non-performing loan
13
balances have declined to $697,000 at June 30, 2004. During 2003, the Bank's
non-performing loan balances had reached a high of $2.1million. Since the Bank's
non-performing assets have declined so significantly with very little loss
recorded, the Bank believes the allowance is adequate to support the current
non-performing loan volume and total outstanding gross loan receivables,
allowing the Bank to record no monthly provision expense during the first six
months of 2004. Management reevaluates the allowance for loan losses at least
quarterly to maintain the provision is maintained at a level that represents
management's best estimate of probable loan losses in the loan portfolio. There
can be no guarantee that provisions will not be required in future periods.
Net interest income after provision for loan losses for the three months ended
June 30, 2004 was $783,000, compared to $734,000 for the three months ended June
30, 2003 an increase of $49,000, or 6.7%. The increase in net interest income
resulted primarily from the increase in net interest margin to 3.22% from 3.11%
for the same period last year, and the decrease in the provision expense as
discussed above.
Non-interest income for the three months ended June 30, 2004 was $146,000
compared to $266,000 for the three months ended June 30, 2003, a decrease of
$120,000, or 45.1%. The decrease was primarily attributable to a decline in the
gain on sale of loans which declined $110,000, or 58.2% compared to the same
period last year. This decline is due to a $2.6 million decline in the volume of
loans sold during the three months ended June 30, 2004 compared to three months
ended June 30, 2003. Also contributing to the decline in income was the
declining rate environment and spreads narrowing on sold loans. Gain on sale of
assets also declined $15,000 as a sale of a portion of the Bank's property to
the Illinois Department of Transportation in order to facilitate highway
expansion occurred during the quarter ended June 30, 2003. These declines were
slightly offset by an increase in service charges on deposit accounts during the
quarter ended June 30, 2004.
Non-interest expense for the three months ended June 30, 2004 increased by
$16,000, or 2.4% from $677,000 for the three months ended June 30, 2003. The
increase was primarily attributable to an increase in compensation, other and
occupancy expenses. Compensation increased $23,000 as a result of staff
additions and annual merit increases. Other expenses increased $16,000. This
increase is made up of increases in several expense categories, the largest of
these being supervisory expense of $4,000, and office supplies, postage and
insurance at $3,000 each. Occupancy expense increased $6,000 due to expenses
related to the planning and design for the future construction of a new branch
office. These increases were slightly offset by a decrease in legal expense of
$24,000. Legal expense was higher in 2003 because of an ongoing legal suit that
was settled in September 2003.
Income taxes for the three months ended June 30, 2004 decreased $49,000, or
42.2%. $24,000 of the decline is due to the lower pretax income recorded for the
three months ended June 30, 2004 compared to June 30, 2003. The remaining
$25,000 decline is due to a decrease in the effective tax rate which decreased
to 28.4% at June 30, 2004 compared to 35.9% at June 30, 2003. This decrease is
due to a re-evaluation of the Bank's tax position with the State of Illinois,
and a re-evaluation of the Bank's ability to offset current taxable earnings
with a net operating loss carry forward from prior years. The adjustment made to
the bank's tax provision at June 30, 2004 represented a cumulative year to date
adjustment.
Income Information - Six Months
Net income for the six months ended June 30, 2004 was $330,000, or 4.8% higher
than net income of $315,000 for the six months ended June 30, 2003.
Interest income for the six months ended June 30, 2004 decreased $123,000, or
4.7% to $2.5 million. The decrease was primarily due to lower average yields on
loans and decreased loan balances, partially offset by higher average balances
in securities. Average interest-earning assets for the six months ended June 30,
2004 were $99.3 million, an increase of $3.1 million, or 3.2%, over average
interest-earning assets for the six months ended June 30, 2003 of $96.2 million.
Average security balances increased $6.9 million, while lower yielding
interest-bearing deposits in other financial institutions decreased $1.7
million. Also offsetting the increase in security balances was a decline in loan
volume of $2.7 million. The average loan yield declined 40 basis points to 5.68%
at June 30, 2004 from 6.08% 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
decline in the prime rate.
14
Interest expense for the six-month period ended June 30, 2004 decreased to
$920,000, a decline of $243,000, or 20.9% 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 six
months ended June 30, 2004 declined by 68 basis points to 2.26% from 2.94% for
the same period last year. The average interest paid on certificates of deposit
fell by 69 basis points to 2.74% fro the six months ended June 30, 2004, from
3.43% for the prior-year period.
Net interest income after provision for loan losses for the six months ended
June 30, 2004 increased $165,000 to $1.6 million, compared to $1.4 million for
the same period in the prior year. The increase in the Bank's net interest
income resulted from the growth in earning assets, the decline in the rate paid
on interest bearing liabilities to 2.26% from 2.94% for the same period last
year, and the decrease in the provision for loan losses as discussed in the
quarterly income analysis.
Non-interest income for the six months ended June 30, 2004 was $259,000 compared
to $377,000 for the six months ended June 30, 2003, a decrease of $118,000, or
31.3%. The decrease was primarily attributable to a decline in the gain on sale
of loans, which declined $143,000, or 55.6% compared to the same period last
year. This decline is due to a $1.4 million decline in the volume of loans sold
during the six months ended June 30, 2004 compared to the six months ended June
30, 2004. Also contributing to the decline in income was the declining rate
environment as discussed in the quarterly income analysis. Gain on sale of
assets also declined $15,000 as a sale of a portion of the Bank's property to
the Illinois Department of Transportation occurred during the six months ended
June 30, 2003. These declines were partially offset by increases in services
charges on deposit accounts and miscellaneous service charges, as well as an
increase in loan servicing fees for the six months ended June 30, 2004.
Non-interest expense for the six months ended June 30, 2004 was $1.4 million, or
$58,000 more than expenses for the six months ended June 30, 2003. The increase
was primarily attributable to increases in compensation expenses, advertising
and marketing, and occupancy expenses. Compensation expense increased $31,000,
or 4.8%, as a result of staff additions and annual merit increases. Advertising
and marketing expense increased $25,000 or 75.8% due to the Bank hiring a
marketing consultant and initiating a more aggressive advertising campaign
focused on promoting the Bank and various new products. Occupancy expense
increased $8,000 or 6.2% due to expenses incurred related to the planning and
design for the future construction of a new branch office. These increases were
partially offset by a $29,000 decline in legal and collection expense. Legal
expense was higher in 2003 because of an ongoing legal suit that was settled in
September 2003.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity decreased $115,000 from December 31, 2003
and was $12.5 million, at June 30, 2004. This decrease in stockholders' equity
during the first six months of 2004 was the result of the purchase of 13,533
shares of treasury stock totaling $270,000, and a decrease of $178,000 in the
unrealized gain on investment securities available for sale, partially offset by
the recording of $330,000 in net income and amortization of Unearned Employee
Stock Ownership Plan shares of $3,000.
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 June 30, 2004, Clover Leaf
Bank's Tier 1 and Total Capital ratios were 15.89% and 16.91%, 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, 2004, was 10.56%. 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 customer deposits and
advances from the FHLB.
At June 30, 2004, Clover Leaf Bank had loan commitments of $5.2 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. The Bank has begun
construction of a new facility in Edwardsville. Cost of the project is estimated
at $2.2 million with completion expected in the first quarter of 2005. 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, 2004,
approximately $21.9 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 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
None
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet
of Shares Price Paid Announced Plans or Be Purchased Under
Purchased per Share Programs the Plans or Programs
April 1, 2004 to
April 30, 2004............ - - - -
May 1, 2004 to
May 31, 2004............. - - - -
June 1, 2004 to
June 30, 2004............. - - - -
Total.................... - - -
================================================================================================================
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 25, 2004. At the meeting, Dennis Terry, Kenneth
Highlander, and Joseph Gugger were elected to serve as
directors with terms expiring in 2006. Continuing with a term
expiring in 2005 was Gary D. Neibur. Continuing with a term
expiring in 2004 were Robert W. Schwartz and Dennis E.
Ulrich.
The matters approved by stockholders at the meeting and the
number of votes cast for, against or withheld (as well as the
number of abstentions and broker non-votes) as to each matter
are set forth below:
Number of Votes
---------------
For Withheld
--- --------
The election of the following directors for a three-year term:
Dennis Terry 521,900 130
Kenneth Highlander 521,930 100
Joseph Gugger 522,000 30
17
FOR Against Abstain Non-Votes
--- ------- ------- ---------
The ratification of McGladrey & Pullen, LLP as independent
Auditors for the year ending December 31, 2004. 521,880 150 - -
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: None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOVER LEAF FINANCIAL CORP.
(Registrant)
DATE: August 12, 2004 By:/s/ Dennis M. Terry
---------------------- ------------------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: August 12, 2004 By:/s/ Darlene F. McDonald
---------------------- ------------------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
19