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, 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
--------
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 12, 2004
--------------------------- --------------------------------
Common stock $.10 par value 622,417
1
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES 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 18
SIGNATURE AND CERTIFICATIONS 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- -----------------
ASSETS
Cash and due from banks $ 2,161 $ 1,811
Interest bearing deposits in other financial institutions 5,603 3,442
---------------- -----------------
Total cash and cash equivalents 7,764 5,253
Securities available-for-sale 24,715 23,857
Federal Home Loan Bank stock 3,851 3,680
Loans, net of allowance for loan losses of
$737 at September 30, 2004 and $725 at December 31, 2003 73,253 66,755
Bank premises and equipment 2,859 2,352
Accrued interest receivable 495 488
Other assets 498 315
---------------- -----------------
TOTAL ASSETS $113,435 $102,700
================ =================
LIABILITIES
Deposits:
Noninterest bearing $ 8,572 $ 8,002
Interest bearing 81,095 72,463
---------------- -----------------
Total deposits 89,667 80,465
Federal Home Loan Bank advances 8,455 8,000
Other borrowings 1,349 686
Accrued interest payable 177 167
Other liabilities 897 725
---------------- -----------------
TOTAL LIABILITIES 100,545 90,043
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - 250,000 shares authorized;
none issued or outstanding at September 30, 2004 or December 31, 2003 - -
Common stock, $.10 par value - 2,000,000 shares authorized; 661,250
shares issued at September 30, 2004 and December 31, 2003, respectively 66 66
Surplus 6,074 6,072
Retained earnings 7,535 7,044
Accumulated other comprehensive income 65 58
Treasury Stock, 38,833 shares and 25,300 shares at cost, at September 30, 2004 and
December 31, 2003, respectively (708) (438)
Unearned Employee Stock Ownership Plan shares (142) (145)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 12,890 12,657
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,435 $102,700
================ =================
See the accompanying notes to unaudited consolidated financial statements.
3
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Interest Income and dividend income:
Loans, including fees $ 1,044 $ 1,058 $ 3,002 $ 3,256
Securities 204 157 609 448
Federal Home Loan Bank dividends 56 58 171 157
Interest-bearing deposits in other banks 21 12 40 44
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST AND FEE INCOME 1,325 1,285 3,822 3,905
---------------- ---------------- ---------------- ---------------
Interest Expense:
Deposits 438 467 1,281 1,500
Federal Home Loan Bank advances 59 48 134 176
Other borrowings 3 1 5 3
---------------- ---------------- ---------------- ---------------
TOTAL INTEREST EXPENSE 500 516 1,420 1,679
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 825 769 2,402 2,226
Provision for loan losses - 19 - 64
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 825 750 2,402 2,162
---------------- ---------------- ---------------- ---------------
Noninterest Income:
Service charges on deposit accounts 29 17 85 56
Other service charges and fees 21 17 58 48
Loan servicing fees 17 16 47 33
Gain on sale of loans 17 16 131 273
Gain on sale of investments - - 3 -
Gain on sale of assets - 58 - 73
Other 1 26 20 44
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST INCOME 85 150 344 527
---------------- ---------------- ---------------- ---------------
Noninterest Expense:
Salaries and employee benefits 368 333 1,051 985
Occupancy and equipment, net 72 70 210 200
Data processing 56 58 171 172
Advertising and marketing 34 19 92 52
Directors' fees 26 31 92 93
Audit and accounting fees 13 15 68 67
Legal & collection expense 7 365 48 435
Other 99 94 297 277
---------------- ---------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE 675 985 2,029 2,281
---------------- ---------------- ---------------- ---------------
Net income (loss) before income taxes (credits) 235 (85) 717 408
Income taxes (credits) 74 (38) 226 140
---------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) $ 161 $ (47) $ 491 $ 268
================ ================ ================ ===============
Average Shares Outstanding:
Basic and Diluted 611,549 629,317 613,089 633,670
Basic and Diluted Earnings (loss) Per Share $.26 $(.08) $.80 $.42
==== ====== ===== ====
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, 2004
---------------------------------------------------------------------------------------------------
Unearned
Accumulated Employee
Other Stock
Retained Comprehensive Treasury Ownership
Common Stock Surplus Earnings Income Stock Plan Shares Total Equity
------------ ------- -------- ------ ----- ----------- ------------
Balance at December 31, 2003 $ 66 $ 6,072 $ 7,044 $ 58 $ (438) $ (145) $ 12,657
Comprehensive income
Net income -- -- 491 -- -- -- 491
Other comprehensive
income, net of tax: -- -- -- -- -- -- --
Change in unrealized
gain on securities
available-for-sale
arising during the
period, net of tax of
$6 -- -- -- 9 -- -- 9
Reclassification (2) (2)
adjustment,
Net of tax of ($1)
--------------
Comprehensive income 498
--------------
Allocation of ESOP shares -- 2 -- -- -- 3 5
Purchase of treasury stock -- -- -- -- (270) -- (270)
-------------------------- -------------- ------------ -------------- -------------- --------------
Balance at September 30, 2004 $ 66 $ 6,074 $ 7,535 $ 65 $ (708) $ (142) $ 12,890
======== =========== =========== =-======== ========== ========== ============
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,
----------------------------------------------
2004 2003
-------------------- ---------------------
Cash Flows from Operating Activities
Net income $ 491 $ 268
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 106 92
Provision for loan losses - 64
Net amortization on investments 205 179
Deferred tax provision 48 16
Realized gain on sale of investments (3) -
Federal Home Loan Bank stock dividend (171) (151)
Gain on sale of loans (131) (273)
Gain on sale of assets - (73)
Proceeds from sales of loans held for sale 9,733 11,911
Origination of loans held for sale (9,602) (11,638)
Allocation of ESOP shares 5 12
Increase in accrued interest receivable (7) (15)
Increase in other assets (82) (190)
Increase (decrease) in accrued interest payable 10 (42)
Increase in other liabilities 124 472
-------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 726 632
-------------------- ---------------------
Cash Flows from Investing Activities:
Purchase of securities available-for-sale (11,627) (16,935)
Proceeds of sales and maturities of securities available-for-sale and paydowns 10,579 10,068
Proceeds on sale of assets - 139
Increase in loans, net (6,604) (2,418)
Purchases of premises and equipment (613) (563)
-------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (8,265) (9,709)
-------------------- ---------------------
Cash Flows from Financing Activities
Increase in deposits 9,202 7,689
Proceeds from Federal Home Loan Bank advances 1,455 -
Repayment of Federal Home Loan Bank advances (1,000) -
Net increase in other borrowings 663 571
Purchase of Treasury Stock (270) (342)
-------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,050 7,918
-------------------- ---------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,511 (1,159)
Cash and cash equivalents:
Beginning 5,253 8,117
-------------------- ---------------------
Ending $ 7,764 $ 6,958
==================== =====================
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $ 1,410 $ 1,721
Income taxes 110 168
Supplemental disclosure of non cash investing activities
Assets acquired through foreclosure 106 -
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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 161 $ (47) $ 491 $ 268
Weighted average shares outstanding 622,416 640,921 624,036 645,359
Weighted average ESOP shares (10,867) (11,604) (10,947) (11,689)
---------------- ---------------- ---------------- ----------------
Basic average shares outstanding 611,549 629,317 613,089 633,670
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings (loss) per share $ .26 $ (.08) $ .80 $ .42
================ ================ ================ ================
NOTE D-INVESTMENT SECURITIES LOSSES
Declines in the fair value of available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for an
anticipated recovery in fair value. The following table shows the gross
unrealized losses over and under twelve months at September 30, 2004:
Continuous unrealized losses Continuous unrealized losses
existing for less than 12 months existing greater than 12 months Total
---------------------------------- ---------------------------------- ------------------------------
Unrealized Unrealized Unrealized
Description of Security Fair Value Losses Fair Value Losses Fair Value Losses
------------------ --------------- ----------------- ---------------- --------------- --------------
US Government Agencies $6,193,672 $13,293 $1,997,124 $10,285 $ 8,190,796 $23,578
State & Municipals - - - - - -
Corporate Securities - - - - - -
Mortgage Backed Securities 3,154,136 22,239 614,505 9,988 3,768,641 32,227
------------------ --------------- ----------------- ---------------- --------------- --------------
Total temporarily impaired
securities $9,347,808 $35,532 $2,611,629 $20,273 $11,959,437 $55,805
================== =============== ================= ================ =============== ==============
For the above investment securities, the unrealized losses are generally due to
changes in interest rates and, as such, are considered to be temporary by the
Company.
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, 2004 and 2003,
and its financial condition, asset quality, and capital resources as of
September 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 September 30, 2004, total assets were $113.4 million, an increase of $10.7
million, or 10.5%, from $102.7 million at December 31, 2003. Loans receivable at
September 30, 2004 were $73.3 million, an increase of $6.5 million or 9.7%, from
$66.8 million at December 31, 2003. Commercial real estate loans increased $11.3
million, or 46.3% 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 $404,000 or 6.6% compared to
the 2003 year end. Consumer loans increased $611,000 or 14.5% compared to 2003
year end. These increases were partially offset by a $5.6 million, or 17.5%
decline in one-to-four family mortgage loans, and a $227,000, or 20.5% decline
in construction and land loans. The decline in one-to-four family mortgage loans
was due to the sale of $9.6 million in loans to the Federal Home Loan Bank
during the first nine 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 $47,000 in the first nine
months of 2004 compared to $30,000 for the first nine months of 2003. Interest
earning cash deposits increased $2.5 million, or 47.8% compared to 2003 year
end. This large increase was due to a significant increase in deposits. Cash was
held at a higher level due to a strong loan pipeline, and the need to fund
several large loan closings in October 2004. Securities, including Federal Home
Loan Bank stock, increased $1.1 million, or 3.7%, to $28.6 million at September
30, 2004 from $27.5 million at December 31, 2003. Bank premises and equipment
increased $507,000, or 21.6% to $2.9 million at September 30, 2004. The increase
resulted from expenditures related to the planning, design, and current
construction for the future new branch office. Other assets increased $183,000,
or 58.1% to $498,000 at September 30, 2004 from $315,000 at December 31, 2003.
The primary reason for the increase was a $106,000 increase in foreclosed
assets.
Deposits as of September 30, 2004 were $89.7 million, an increase of $9.2
million, or 11.4%, from December 31, 2003. Non-interest bearing deposits
increased $570,000 or 7.1% due to an increase in the number of commercial
deposit accounts held at the Bank. Interest-bearing deposits increased $8.6
million or 11.9%. This increase was in time deposits as a large deposit was
received from a local public entity.
Federal Home Loan Bank advances as of September 30, 2004 were $8.5 million, an
increase of $455,000, or 5.7% from December 31, 2003. Lower borrowing rates and
the volatility of the deposit portfolio have made Federal Home Loan Bank
advances an attractive alternative for funding increased loan volumes.
9
Total stockholders' equity as of September 30, 2004 was $12.9 million, an
increase of $233,000 or 1.8% from December 31, 2003. The increase in equity from
December 31, 2003 to September 30, 2004 was the result of the recording of
$491,000 in net income and $7,000 in the unrealized gain on investment
securities available for sale. These increases were partially offset by the
purchase of 13,533 shares of treasury stock totaling $270,000 by Clover Leaf
Financial during the first nine months of 2004. At September 30, 2004 there were
622,417 shares of common stock outstanding, at a book value of $20.71 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, 2004, nonperforming assets totaled $827,000, or 0.73%
of total assets, compared to nonperforming assets at year-end 2003 of $908,000,
or 0.88% of total assets. The Bank held foreclosed assets at September 30, 2004
of $106,000, 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) September 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................. $26,146 $519 $31,709 $656
Commercial.......................... 35,601 158 24,335 -
Construction and land............... 878 - 1,105 -
Non-real estate
Consumer............................ 4,819 44 4,208 92
Commercial business................. 6,537 - 6,133 160
---------------- ------------------- -------------- ------------------
Gross loans........................... 73,981 721 67,490 908
Foreclosed assets..................... 106 106 - -
---------------- ------------------- -------------- ------------------
Total....................... $74,087 $827 $67,490 $908
================ =================== ============== ==================
Nonaccrual loans...................... $721 $896
Accruing loans past due
90 days or more.................. - 12
Troubled debt restructurings.......... - -
------------------- ------------------
Total nonperforming loans........ 721 908
Foreclosed assets..................... 106 -
------------------- ------------------
Total nonperforming assets....... $827 $908
=================== ==================
Nonperforming loans to gross loans.... .97 % 1.35%
Nonperforming assets to gross loans
and foreclosed assets............ 1.12 % 1.35%
Nonperforming assets to total assets.. .73 % .88%
The Bank recorded net recoveries of $23,000 for the third quarter of
2004 compared to net charge-offs of $5,000 for the third quarter of 2003. During
the first nine months of 2004, net recoveries totaled $12,000 compared to net
recoveries of $7,000 for the first nine months of 2003. Net recoveries as a
percentage of average total loans were 0.03% and 0.02%, respectively, for the
three and nine months ended September 30, 2004 compared to net recoveries as a
percentage of average total loans of 0.01% for the three and nine months ended
September 30, 2003.
Clover Leaf Financial's allowance for loan losses at September 30, 2004,
increased to $737,000 from $725,000 at December 31, 2003. At September 30, 2004,
the allowance for loan losses represented 102.22% of non-performing loans
compared to 79.85% at December 31, 2003. The ratio of the allowance for loan
losses to gross loans was 1.00% at September 30, 2004 compared to 1.07% at
December 31, 2003. Management believes that the allowance for loan losses at
September 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
11
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, 2004 and December 31, 2003, were $836,000, 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 Nine Months Ended
September 30 September 30
----------------------------------- -----------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
Balance at beginning of period................ $714 $737 $725 $690
Loans charged off:
Commerical, financial and agricultural... - - 10 -
Consumer................................. 4 1 17 15
--------------- ---------------- --------------- ----------------
Total charge-offs.............. 4 1 27 15
--------------- ---------------- --------------- ----------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural... 19 - 19 1
Consumer................................. 8 6 20 21
--------------- ---------------- --------------- ----------------
Total recoveries............... 27 6 39 22
--------------- ---------------- --------------- ----------------
Net charge-offs (recoveries).................. (23) (5) (12) (7)
Provision for loan losses..................... - 19 - 64
--------------- ---------------- --------------- ----------------
Balance at end of period...................... $737 $761 $737 $761
=============== ================ =============== ================
Net charge-offs (recoveries) as a percent of
average total loans...................... (.03)% (.01)% (.02)% (.01)%
Allowance for loan losses to gross loans...... 1.00% 1.08% 1.00% 1.08%
Allowance for loan losses to
nonperforming loans...................... 102.22% 35.59% 102.22% 35.59%
INCOME INFORMATION - QUARTER
The Company recorded net income for the three months ended September 30, 2004 of
$161,000, compared to a net loss of $47,000 for the three months ended September
30, 2003.
Interest income for the three months ended September 30, 2004 increased $40,000,
or 3.1% to $1.3 million. The average loan yield remained relatively unchanged,
increasing only 3 basis points to 5.73% at September 30, 2004 from 5.70% for the
same period in the prior year. The average security yield decreased 13 basis
points to 3.72% at September 30, 2004 from 3.85% for the same period in the
prior year. The security yield was negatively impacted by $8.8 million of
investment securities maturing or being called during the first nine months of
2004, and replacing those securities with lower yielding instruments due to the
lower yielding interest rate environment. Offsetting this decline in the average
yield on securities was an increase in average security volume. Average security
balances increased $5.6 million, or 24.9% to $28.0 million at September 30, 2004
compared to $22.4 million for the three months ended September 30, 2003.
Interest expense for the most recent three-month period fell by $16,000 to
$500,000, a decrease of 3.1% 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
September 30, 2004 declined by 25 basis points to 2.28% from 2.53% for the same
period last year. The largest rate decline was in certificates of deposits where
the average interest rate paid fell by 46 basis points to 2.61% for the three
months ended September 30, 2004, from 3.07% for the prior-year period.
No provision expense was recorded for the period ended September 30, 2004,
compared to $19,000 for the three months ended September 30, 2003. Despite loan
growth, the Bank has experienced very little loss, and non-performing loan
balances have declined to $721,000 at September 30, 2004. During 2003, the
Bank's non-performing
13
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 loans receivable, allowing the Bank to record
no monthly provision expense during the first nine months of 2004. Management
reevaluates the allowance for loan losses at least quarterly to maintain the
provision 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
September 30, 2004 was $825,000, compared to $750,000 for the three months ended
September 30, 2003 an increase of $75,000, or 10.0%. The increase in net
interest income resulted from the increase in net interest margin to 3.23% from
3.18% for the same period last year, an increase in earning assets of $5.9
million for the three month period ended September 30, 2004 compared to the same
period in the prior year, and the decrease in the provision expense as discussed
above.
Non-interest income for the three months ended September 30, 2004 was $85,000
compared to $150,000 for the three months ended September 30, 2003, a decrease
of $65,000, or 43.3%. The decrease was primarily attributable to a decline in
the gain on sale of Assets which declined $58,000, or 100.0% compared to 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 of 2003 represents the value received
for the property over the bank's recorded value. Also contributing to the
decline in non-interest income was a $25,000 decline in miscellaneous other
income. In the third quarter of 2003 $17,000 in income was recorded from the
Illinois Department of Transportation to compensate the Bank for use of the
Bank's land during the highway expansion project. These declines were slightly
offset by an increase in service charges on deposit accounts, and miscellaneous
service charges during the quarter ended September 30, 2004.
Non-interest expense for the three months ended September 30, 2004 decreased
$310,000, or 31.5% from $985,000 for the three months ended September 30, 2003.
The decrease was primarily attributable to a decrease in legal expenses of
$358,000. This decrease in legal expense is due to the expenses incurred during
2003 associated with and the resolution of a lawsuit brought against the Bank by
the Bank's former President, as disclosed in the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2003. Offsetting this decrease in
expense was an increase in compensation and advertising and marketing expenses.
Compensation expenses increased $35,000, or 10.5% as a result of staff additions
and annual merit increases. Marketing and advertising expenses increased
$15,000, or 78.9% due to the Bank hiring a marketing consultant and initiating a
more aggressive advertising campaign focused on promoting the Bank and various
new products. Other expenses increased $5,000, or 5.3% over the prior year
period This increase is primarily made up of an increase in foreclosed property
expense which increased $11,000 for the period ended September 30, 2004.
Income taxes for the three months ended September 30, 2004 increased $112,000,
or 294.7%. This is due to the increase in the Bank's earnings for the three
months ended September 30, 2004 compared to the net loss recorded in the same
period in the prior year.
INCOME INFORMATION - NINE MONTHS
Net income for the nine months ended September 30, 2004 was $491,000, or
$223,000 (83.2%) higher than net income of $268,000 for the nine months ended
September 30, 2003.
Interest income for the nine months ended September 30, 2004 decreased $83,000,
or 2.1% to $3.8 million. The decrease was primarily due to lower average yields
on loans and securities, as well as decreased loan balances, partially offset by
higher average balances in securities. Average interest-earning assets for the
nine months ended September 30, 2004 were $100.9 million, an increase of $3.5
million, or 3.6%, over average interest-earning assets for the nine months ended
September 30, 2003 of $97.4 million. Average security balances increased $6.5
million, while lower yielding interest-bearing deposits in other financial
institutions decreased $1.0 million. Also offsetting the increase in security
balances was a decline in loan volume of $1.9 million. The average loan yield
declined 25 basis points to 5.70% at September 30, 2004 from 5.95% for the same
period in the prior year. The average security yield declined five basis points
to 3.75% at September 30, 2004 from 3.80% for the same period in the prior year.
14
As stated above in the quarterly analysis, the Bank's security yield was
negatively impacted by the $8.8 million in securities maturing or being called
in the first nine months of 2004.
Interest expense for the nine-month period ended September 30, 2004 decreased to
$1.4 million, a decline of $259,000, or 15.4% 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, 2004 declined by 53 basis points to 2.27% from 2.80%
for the same period last year. The average interest paid on certificates of
deposit fell by 62 basis points to 2.69% for the nine months ended September 30,
2004, from 3.31% for the prior-year period.
Net interest income after provision for loan losses for the nine months ended
September 30, 2004 increased $240,000 to $2.4 million, compared to $2.2 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 2.27% from 2.80% 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 nine months ended September 30, 2004 was $344,000
compared to $527,000 for the nine months ended September 30, 2003, a decrease of
$183,000, or 34.7%. The decrease was primarily attributable to a decline in the
gain on sale of loans, which declined $142,000, or 52.0% compared to the same
period last year. This decline is due to a $2.0 million decline in the volume of
loans sold during the nine months ended September 30, 2004 compared to the nine
months ended September 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 $73,000 as a sale of a portion of the Bank's property to
the Illinois Department of Transportation occurred during the nine months ended
September 30, 2003. This sale of property to the Illinois Department of
Transportation was completed in order to facilitate highway expansion, as
discussed above in the quarterly income analysis. Other miscellaneous income
declined $24,000 from the prior year period as the Bank received $17,000 in the
third quarter of 2003 from the Illinois Department of Transportation to
compensate the Bank for use of the Bank's land during the highway expansion
project. These declines were partially offset by increases in service charges on
deposit accounts and miscellaneous service charges, as well as an increase in
loan servicing fees for the nine months ended September 30, 2004.
Non-interest expense for the nine months ended September 30, 2004 was $2.0
million, or $252,000 less than expenses for the nine months ended September 30,
2003. The decrease was attributable to a decrease in legal expense of $387,000.
The decrease in legal expense is due to the expenses incurred during 2003
associated with the resolution of a lawsuit brought against the Bank by the
Bank's former President, as discussed above. Offsetting this decline in expense
was an increase in compensation and advertising and marketing expenses.
Compensation expense increased $66,000, or 6.7%, as a result of staff additions
and annual merit increases. Advertising and marketing expense increased $40,000
or 76.9% due to the Bank hiring a marketing consultant and initiating a more
aggressive advertising campaign focused on promoting the Bank and various new
products.
LIQUIDITY AND CAPITAL RESOURCES
Total stockholders' equity increased $233,000 from December 31, 2003 and
was $12.9 million, at September 30, 2004. This increase in stockholders' equity
during the first nine months of 2004 was the result of the recording of $491,000
in net income and $7,000 in the unrealized gain on investment securities
available for sale. These increases were partially offset by the purchase of
13,533 shares of treasury stock totaling $270,000 by Clover Leaf Financial
during the first nine months of 2004.
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, 2004, Clover
Leaf Bank's Tier 1 and Total Capital ratios were 14.84% and 15.81%,
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
15
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, 2004, was 10.31%. Accordingly, Clover Leaf Bank has satisfied these
regulatory guidelines.
Clover Leaf Bank's primary sources of liquidity or internally generated
funds are principal and interest payments on loans receivable, cash flows
generated from operations, and cash flows generated by investments. External
sources of liquidity consist primarily of increases in customer deposits and
advances from the FHLB.
At September 30, 2004, Clover Leaf Bank had loan commitments of $6.7
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 second 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 September 30, 2004, approximately $33.8 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
------------ ------------ --------------------- -----------------------
July 1, 2004 to
July 31, 2004............ - - - -
August 1, 2004 to
August 31, 2004.......... - - - -
September 1, 2004 to
September 30, 2004........ - - - -
------------ ------------ --------------------- -----------------------
Total.................... - - -
============ ============ ===================== =======================
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
17
ITEM 6. EXHIBITS
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.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLOVER LEAF FINANCIAL CORP.
-----------------------------------
(Registrant)
DATE: November 12, 2004 By: /s/ Dennis M. Terry
------------------------ -------------------
Dennis M. Terry
President and Chief
Executive Officer
DATE: November 12, 2004 By: /s/ Darlene F. McDonald
------------------------ -----------------------
Darlene F. McDonald
Senior Vice President and
Treasurer (Principal Financial
And Accounting Officer)
19