SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-33413
CLOVER LEAF FINANCIAL CORP.
---------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-1416016
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
200 East Park Street, Edwardsville, Illinois 62025
-------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(618) 656-6122
--------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to
Section 12(g) of the Act: Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES _X_ NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]
The registrant's revenues for the fiscal year ended December 31, 2002 were
$5.8 million.
As of February 28, 2003, there were issued and outstanding 656,450 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the closing price
of the Common Stock as of February 28, 2003 was $6.8 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 2002 Annual Report to Stockholders (Parts II and IV)
2. Proxy Statement for the 2003 Annual Meeting of Stockholders (Part III)
PART I
ITEM 1. Business
Clover Leaf Financial Corp.
Clover Leaf Financial Corp. was organized at the direction of the Board of
Directors of Clover Leaf Bank, SB for the purpose of acting as the stock holding
company of Clover Leaf Bank. Clover Leaf Financial's assets consist primarily of
the outstanding capital stock of Clover Leaf Bank and cash and investments of
$2.1 million, representing a portion of the net proceeds from Clover Leaf
Financial's stock offering completed December 27, 2001. At December 31, 2002,
661,250 shares of Clover Leaf Financial's common stock, par value $0.10 per
share, were held by the public. Clover Leaf Financial's principal business is
overseeing and directing the business of Clover Leaf Bank and investing the net
stock offering proceeds retained by it. At December 31, 2002, Clover Leaf
Financial had total consolidated assets of $95.5 million, total deposits of
$72.5 million and stockholders' equity of $12.7 million.
Clover Leaf Financial's office is located at 200 East Park Street,
Edwardsville, Illinois 62025. Its telephone number is (618) 656-6122.
Clover Leaf Bank
Founded in 1889, Clover Leaf Bank converted its charter from an
Illinois-chartered savings bank to an Illinois-chartered commercial bank in
December 2002. Clover Leaf Bank operates from its main office in Edwardsville,
Illinois, and one branch office. Clover Leaf Bank's deposits are insured by the
Bank Insurance Fund, as administered by the Federal Deposit Insurance
Corporation, up to the maximum amount permitted by law.
Clover Leaf Bank's executive office is located at 200 East Park Street,
Edwardsville, Illinois 62025. Its telephone number is (618) 656-6122.
Market Area
Clover Leaf Bank's lending and deposit-gathering area is concentrated in
the neighborhoods surrounding its two offices in Edwardsville, Illinois, which
is located in Madison County. The population of Madison County grew 3.9% from
1990 to 2000, compared to an 8.6% increase in the population of the State of
Illinois during the same period. During this same period, however, our local
market area, consisting of Edwardsville and surrounding towns, has experienced a
significant increase in housing starts. The economy in Clover Leaf Bank's market
area is not dependent on any single employer or type of business. While Madison
County's economy is primarily industrial, Edwardsville, as the county seat, has
a primarily service-oriented economy. The three largest employers in Madison
County, all of which are headquartered in Edwardsville, are Southern Illinois
University at Edwardsville, the Madison County Government and Edwardsville
Community Schools.
Competition
We face significant competition in both originating loans and attracting
deposits. Madison County has a significant number of financial institutions,
many of which are significantly larger and have greater financial resources than
Clover Leaf Bank, and all of which are our competitors to varying degrees. Our
competition for loans comes principally from commercial banks, savings
institutions, mortgage banking companies, credit unions and insurance companies.
Our most direct competition for deposits historically has come from commercial
banks and credit unions. We face additional competition for deposits from
non-depository competitors such as mutual funds, securities and brokerage firms
and insurance companies. Management believes that the Gramm-Leach-Bliley Act,
which permits affiliation among banks, securities firms and insurance companies,
will increase competition in our market area.
1
Lending Activities
General. Our loan portfolio consists primarily of one- to four-family
residential real estate loans. The vast majority of these loans have fixed rates
of interest. In addition to one- to four-family residential real estate loans,
our loan portfolio consists of commercial and consumer loans, and, to a lesser
extent, construction and overdraft loans.
In an effort to increase our interest income and to reduce the risk to our
net income from changes in market interest rates, we have emphasized the
origination of commercial real estate and commercial business loans. Compared to
our residential mortgage loans, commercial real estate and commercial business
loans generally have higher interest rates and are more sensitive to changes in
market interest rates because they have adjustable interest rates and shorter
terms to maturity. In addition, in order to improve our asset quality and reduce
our delinquencies, we have discontinued our indirect automobile lending.
Loan Portfolio Composition. The following table shows the composition of
our loan portfolio in dollar amounts and in percentages (before deductions for
deferred fees and allowances for losses) as of the dates indicated.
At December 31,
----------------------------------------
2002 2001
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family ........ $ 34,300 50.26% $ 33,773 53.53%
Commercial ................. 22,797 33.40 13,971 22.14
Construction and land ...... 761 1.12 1,193 1.89
-------- ------ -------- ------
Total real estate loans 57,858 84.78 48,937 77.56
-------- ------ -------- ------
Other Loans:
Consumer:
Deposit account .......... -- -- 80 0.13
Automobile ............... 1,425 2.09 3,136 4.97
Home equity .............. 1,611 2.36 1,639 2.60
Other .................... 1,595 2.34 1,572 2.49
-------- ------ -------- ------
Total consumer loans .. 4,631 6.79 6,427 10.19
-------- ------ -------- ------
Commercial business ....... 5,759 8.43 7,732 12.25
-------- ------ -------- ------
Total gross loans .. 68,248 100.00% 63,096 100.00%
Less:
Deferred fees and discounts 14 15
Allowance for losses ...... 690 646
-------- --------
Total loans receivable, net $ 67,544 $ 62,435
======== ========
2
The following table illustrates the interest rate sensitivity of our loan
portfolio at December 31, 2002. Mortgages that have adjustable or renegotiable
interest rates are shown as maturing in the period during which the full
principal amount of the mortgage is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
Due after one year
Due in one year or less through five years Due after five years Total
---------------------- ------------------ -------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------- -------- ------- -------- ------- -------- ------- --------
(Dollars in Thousands)
Real Estate loans:
One- to four-family .. $ 3,148 6.78% $11,306 6.60% $19,846 6.40% $34,300 6.46%
Commercial ........... 5,874 5.99 16,512 6.30 411 7.96 22,797 6.25
Construction and land 761 6.87 -- -- -- -- 761 6.87
Commercial business loans 2,863 5.50 2,457 6.69 439 5.93 5,759 5.75
Consumer loans .......... 2,923 6.49 1,389 7.80 319 7.15 4,631 7.23
Gross loans ............. $15.569 6.20% $31,664 6.50% $21,015 6.46% $68,248 6.39%
The total amount of loans due after December 31, 2003 which have
predetermined interest rates is $41 million, while the total amount of loans due
after such date which have floating or adjustable interest rates is $11 million.
One- to Four-Family Residential Real Estate Loans. Historically, we have
emphasized the origination of one- to four-family loans secured by residential
real estate. As of December 31, 2002, these loans totaled $34.3 million, or
50.3% of our total loan portfolio. Virtually all of our residential real estate
loans have fixed rates of interest. Currently, we do not offer adjustable
interest rates on our one- to four-family mortgage loans primarily because our
customers prefer fixed-rate mortgage loans in the relatively low interest rate
environment that currently exists. We generally retain most of the loans that we
originate, although in the past we have sold loans on a servicing-retained
basis. We intend to sell a greater percentage of our residential real estate
loan originations on a servicing-retained basis. At December 31, 2002, we were
servicing $10.3 million in loans for others.
We currently offer one- to four-family residential mortgage loans with
terms of 5, 15 and 30 years. Our five-year loans provide for principal and
interest amortization of up to 30 years with a balloon payment at the end of the
five-year term. All of our 15- and 30-year loans amortize over the term of the
loan.
For one- to four-family residential real estate loans, we may lend up to
80% of the property's appraised value, or up to 90% of the property's appraised
value if the borrower obtains private mortgage insurance. We require title
insurance on all of our one- to four-family mortgage loans, and we also require
that fire and extended coverage casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount equal to at least the lesser of the loan
balance or the replacement cost of the improvements on the property. We require
a property appraisal for all mortgage loans that are underwritten to comply with
secondary market standards. Appraisals are conducted by our on-staff appraisers
as well as independent appraisers from a list approved by our board of
directors. Our residential real estate loans include "due-on-sale" clauses.
Commercial Real Estate Loans. We have increased our emphasis on commercial
real estate lending in recent years. Loans secured by commercial real estate
totaled $22.8 million, or 33.4% of our total loan portfolio as of December 31,
2002. Our commercial real estate loans are secured predominately by office
buildings, and to a lesser extent warehouse properties and more specialized
properties such as churches. We originate commercial real estate loans with a
maximum term of three years. We offer both adjustable and fixed rates of
interest on commercial real estate loans, with the interest rate for adjustable
rate loans tied to the prime interest rate. Our largest commercial real estate
loan at December 31, 2002 had a principal balance of $1.1 million and was
collateralized by a law office building. This loan is performing in accordance
with its terms.
3
Commercial real estate loans generally have higher interest rates than the
interest rates on residential mortgage loans, and are more sensitive to changes
in market interest rates because they often have adjustable interest rates and
shorter terms. Commercial real estate loans have significant additional risk
compared to one- to four-family residential mortgage loans, as they typically
involve large loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the repayment of commercial real estate loans
typically depends on the successful operation of the related real estate
project, and thus may be subject to a greater extent than residential mortgage
loans to adverse conditions in the real estate market or in the economy
generally.
In our underwriting of commercial real estate loans, we may lend up to 80%
of the property's appraised value in the case of loans secured by apartments,
and up to 75% of the property's appraised value on loans secured by other
commercial properties. We require independent appraisals for all commercial real
estate loans in excess of $250,000. For loans that do not exceed this amount, we
require that an officer prepare a memorandum of value detailing comparable
values based upon tax bills, prior appraisals, and income information on
revenue-producing property. Decisions to lend are based on the economic
viability of the property and the creditworthiness of the borrower.
Creditworthiness is determined by considering the character, experience,
management and financial strength of the borrower, and the ability of the
property to generate adequate funds to cover both operating expenses and debt
service. In evaluating whether to make a commercial real estate loan, we place
primary emphasis on the ratio of net cash flow to debt service on the property,
and we generally require a ratio of cash flow to debt service of at least 120%,
computed after deduction for a vacancy factor and property expenses we deem
appropriate.
We require title insurance on all of our commercial real estate loans, and
we also require that fire and extended coverage casualty insurance (and, if
appropriate, flood insurance) be maintained. In addition, we generally require
that the borrower personally guarantee the repayment of the loan.
Construction and Land Loans. We originate two types of residential
construction loans: (i) construction/speculative loans, and (ii)
construction/permanent loans. As of December 31, 2002, construction and land
loans totaled $.8 million, or 1.1% of our total loan portfolio.
Construction/speculative loans are made to area homebuilders who do not
have, at the time the loan is originated, a signed contract with a homebuyer who
has a commitment for permanent financing with either Clover Leaf Bank or another
lender. The homebuyer may enter into a purchase contract either during or after
the construction period. These loans have the risk that the builder will have to
make interest and principal payments on the loan and finance real estate taxes
and other holding costs of the completed home for a significant time after the
completion of construction. Funds are disbursed in phases as construction is
completed. All construction/speculative loans require that the builder-borrower
personally guarantee the full repayment of the principal and interest on the
loan. These loans are generally originated for a term of twelve months, with
interest rates that are tied to the prime lending rate, and with a loan-to-value
ratio of no more than 75% of the lower of cost or the estimated value of the
completed property. Generally, we limit our construction/speculative loans to
one property per borrower at any given time, and the largest number of
construction/speculative loans we have originated to a single borrower at any
given time was for three properties. At December 31, 2002, the largest
outstanding concentration of credit to one builder consisted of one
construction/speculative loan with an aggregate balance of $170,000, which was
performing in accordance with its terms.
Construction/permanent loans are made to either a homebuilder or a
homeowner who, at the time of construction, has a signed contract together with
a commitment for permanent financing from Clover Leaf Bank for the finished
home. The construction phase of a loan generally lasts up to six months, and the
interest rate charged generally corresponds to the rate of the committed
permanent loan, with loan-to-value ratios of up to 80% (or up to 90% if the
borrower obtains private mortgage insurance) of the appraised estimated value of
the completed property or cost, whichever is less. Following the initial 6-month
period, construction/permanent loans convert to permanent loans, regardless of
whether the construction phase has been completed. At December 31, 2002 the
largest single outstanding construction loan of this type had an outstanding
balance of $155,500 and was performing in accordance with its terms.
4
Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan is,
to a great degree, dependent upon the successful and timely completion of the
home construction. Construction delays or the financial impairment of the
builder may further impair the borrower's ability to repay the loan.
Our procedures for underwriting construction/speculative loans include an
assessment of the borrower's credit history and the borrower's ability to meet
other existing debt obligations, as well as payment of principal and interest on
the proposed loan. We use the same underwriting standards and procedures for
construction/permanent lending as we do for one- to four-family residential real
estate lending.
We also originate land development loans to area homebuilders that are
secured by individual unimproved or improved residential building lots. Land
loans are generally offered with variable prime-based interest rates with terms
of up to two years. The maximum loan-to-value ratio is 65% of the lower of cost
or appraised value of the property.
Consumer Loans. Our consumer loans consist primarily of automobile loans,
home equity lines of credit and overdraft loans, loans secured by deposits and
securities, and unsecured personal loans. As of December 31, 2002, consumer
loans totaled $4.6 million, or 6.8% of our total loan portfolio.
Automobile loans are generally offered with maturities of up to 60 months
for new automobiles, while loans secured by used automobiles will have maximum
terms that vary depending on the age of the automobile. We require all borrowers
to maintain collision insurance on automobiles securing loans in excess of
$1,000, with Clover Leaf Bank listed as loss payee. In those instances where the
borrower fails to maintain adequate insurance coverage, we are further protected
against loss by vendors single interest insurance coverage.
Our indirect automobile loans have experienced higher than average
delinquency and loss rates, and we discontinued this type of automobile lending
in July 2000. Our automobile loan portfolio totaled $1.4 million, or 2.1% of
total loans at December 31, 2002, compared to $3.1 million, or 5.0% of total
loans, at December 31, 2001.
Home equity lines of credit are generally made for owner-occupied homes,
and are secured by first or second mortgages on residential properties. We are
attempting to increase our originations of home equity loans through targeted
marketing. We generally offer home equity lines of credit with a maximum loan to
appraised value ratio of 85% (including senior liens on the subject property).
We currently offer these loans for terms of up to 10 years, and with adjustable
rates that are tied to the prime lending rate.
We offer overdraft loans by providing unsecured lines of credit to
qualifying checking accountholders. The line of credit must be pre-approved by
Clover Leaf Bank's loan department. Overdraft loans totaled $.2 million, or .4%
of our total loan portfolio as of December 31, 2002.
Consumer loans generally entail greater credit risk than residential
mortgage loans, particularly in the case of loans that are unsecured or are
secured by assets that tend to depreciate in value, such as automobiles. In
these cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining value often does not warrant further substantial collection efforts
against the borrower. Further, consumer loan collections depend on the
borrower's continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Our procedures for underwriting consumer loans include an assessment of the
borrower's credit history and ability to meet other existing debt obligations,
as well as payments of principal and interest on the proposed loans. The
stability of the borrower's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Although the borrower's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount. We
require independent appraisals for all consumer loans in excess of $50,000. For
loans that do not exceed this amount, we require that an officer prepare a
memorandum of value detailing comparable values based upon tax bills or other
available information.
5
Commercial Business Loans. We currently offer commercial business loans to
existing customers in our market area, some of which are secured in part by
additional real estate collateral. We make various types of secured and
unsecured commercial business loans for the purpose of financing equipment
acquisition, expansion, working capital and other general business purposes. The
terms of these loans are generally for less than three years. Equipment loans
usually involve a one-time disbursement of funds, with repayment over the term
of the loan, while operating lines of credit involve multiple disbursements and
revolving notes that can be renewed annually. The loans are either negotiated on
a fixed-rate basis or carry variable interest rates indexed to the prime rate.
At December 31, 2002, we had 73 commercial business loans outstanding with an
aggregate balance of $5.8 million, or 8.4%, of the total loan portfolio. As of
December 31, 2002, our largest commercial business loan consisted of our
participation interest in a $632,000 loan to a car dealer, which is secured by
stock of the car dealership.
In recent years, we have increased our emphasis on commercial business
lending. These loans tend to have higher rates of interest than residential
mortgage loans, and are more sensitive to changes in market interest rates
because they often have adjustable interest rates and shorter terms. In
addition, commercial business lending gives us greater access to commercial
borrowers that may open transactional checking accounts with Clover Leaf Bank.
Commercial credit decisions are based upon a complete credit review of the
borrower. A determination is made as to the borrower's ability to repay in
accordance with the proposed terms as well as an overall assessment of the
credit risks involved. Personal guarantees of borrowers are generally required.
In evaluating a commercial real estate loan, we place primary emphasis on the
ratio of net cash flow to debt service for the property, generally requiring a
ratio of at least 120%. Credit agency reports of the borrower's credit history
as well as bank checks and trade investigations supplement the analysis of the
borrower's creditworthiness. Collateral supporting a secured transaction is also
analyzed to determine its marketability and liquidity. Commercial business loans
generally bear higher interest rates than residential loans, but they also may
involve a higher risk of default since their repayment generally depends on the
successful operation of the borrower's business.
Loan Originations, Purchases, Sales and Servicing. Although we originate
both fixed-rate and adjustable-rate loans, our ability to generate each type of
loan depends upon borrower demand, market interest rates, borrower preference
for fixed- versus adjustable-rate loans, and the interest rates offered on each
type of loan by competing lenders in our market area. This includes banks,
savings institutions, credit unions, mortgage banking companies, and life
insurance companies. Loan originations are derived from a number of sources,
including existing or prior customers and walk-in customers.
Loan originations are adversely affected by rising interest rates, which
typically result in decreased loan demand. Accordingly, the volume of our loan
originations and the interest rates we can charge on loans vary from period to
period. One- to four-family residential mortgage loans are generally
underwritten to conform to Fannie Mae and Freddie Mac seller/servicer
guidelines, and are currently originated on a fixed interest rate basis only. We
generally retain the loans that we originate. When we do sell mortgage loans, we
generally retain the servicing rights, which means that we will continue to
collect payments on the loans and supervise foreclosure proceedings, if
necessary. We retain a portion of the interest paid by the borrower on the
loans, generally 25 basis points, as consideration for our services. We
currently service $10.3 million of loans for others, and we intend to sell a
portion of our one- to four-family residential mortgage loans in the future in
an effort to reduce our interest rate risk.
6
The following table summarizes our loan origination and repayment
activities for the periods indicated. We did not purchase any loans during the
periods indicated.
Years Ended December,
--------------------
2002 2001
------- -------
(In Thousands)
Loans receivable, net, at beginning of period ........ $62,435 $56,859
Originations by type:
Real estate
One- to four-family .............................. 26,076 13,358
Commercial ....................................... 13,289 11,836
Construction and land ............................ -- --
Non-real estate
Consumer ......................................... 1,614 1,845
Commercial business .............................. -- 2,952
------- -------
Total loans originated ...................... 40,979 29,991
------- -------
Sales and Repayments
Sales:
Real estate
One- to four-family ........................... 8,204 3,091
Commercial .................................... -- --
Construction and land ......................... -- --
Non-real estate
Consumer ....................................... -- --
Commercial business
------- -------
Total loans sold ............................ 8,204 3,091
Principal repayments ............................... 27,709 21,432
------- -------
Total reductions ............................ 35,913 24,523
Increase in other items, net ........................ 43 108
------- -------
Net increase ................................ 5,109 5,576
------- -------
Loans receivable, net, at end of period .............. $67,544 $62,435
======= =======
Loan Approval Procedures and Authority. Our lending activities are subject
to written underwriting standards and loan origination procedures adopted by
management and the Board of Directors. For single family, owner-occupied real
estate loans, the President of Clover Leaf Bank is authorized to approve loans
up to $250,000, while the Senior Vice President is authorized to approve loans
up to $200,000. For secured commercial real estate loans and construction and
land loans, the President and Senior Vice President are authorized to approve
loans up to $150,000 and $75,000, respectively; for secured consumer loans,
these officers may approve loans up to $50,000; and for overdrafts and unsecured
credits, these officers may approve loans up to $25,000 and $15,000,
respectively. When acting together, these officers may approve new loans in
amounts up to 150% of their combined lending limits, and may approve renewals of
commercial business and commercial real estate loans in amounts up to 200% of
their combined lending limits where there has been no deterioration in either
the payment pattern or financial strength of the borrower. However, the entire
Board of Directors must approve all loans in excess of $625,000. In addition,
the Board of Directors generally ratifies all pre-authorized loan approvals.
7
Asset Quality
Delinquent Loans. The following table sets forth Clover Leaf Bank's
loan delinquencies by type, amount and percentage at December 31, 2002.
Loans Delinquent For:
------------------------------------------------------- --------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
Commercial ........ 1 $ 41 0.2% 1 $ 151 0.7% 2 $ 192 0.8%
One- to four-family 11 557 1.6 1 29 0.1 12 586 1.7
Consumer ............ 26 128 2.8 1 5 0.1 27 133 2.9
Commercial business . 3 272 4.7 1 10 0.2 4 282 4.9
------ ------ -------- ------ ------ -------- ------ ------ --------
Total .......... 41 $ 998 1.5% 4 $ 195 0.3% 45 $1,193 1.8%
====== ====== ======== ====== ====== ======== ====== ====== ========
Loan Delinquencies and Collection Procedures. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
correct the delinquency and restore the loan to a current status. We will send a
borrower a reminder notice 15 days after an account becomes delinquent, and our
employees are authorized to use their discretion whether direct telephone
contact is required at that time. If the borrower does not remit the entire
payment due by the end of the month, we try to make direct contact with the
borrower to arrange a payment plan. If a satisfactory payment plan is not
established within 50 days of a delinquency, we will send a demand letter to the
borrower. If a satisfactory payment plan has not been arranged within 60 days
following a delinquency, we may instruct our attorneys to institute foreclosure
proceedings depending on the loan-to-value ratio or our relationship with the
borrower. Foreclosed property is held as other real estate owned.
Our policies require that management continuously monitor the status of the
loan portfolio and report to the Board of Directors on a monthly basis. These
reports include information on delinquent loans and foreclosed real estate and
our actions and plans to cure the delinquent status of the loans and to dispose
of any real estate acquired through foreclosure.
Non-Performing Loans. All loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, there is
reasonable probability of loss of principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, we place
all loans 90 days or more past due on non-accrual status. In addition, we place
any loan on non-accrual status if any part of it is classified as loss or if any
part has been charged-off. When a loan is placed on non-accrual status, total
interest accrued and unpaid to date is reversed. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan. Loans
are charged-off no later than 120 days following their delinquency, unless the
loans are well-collateralized or in the process of collection.
As of December 31, 2002, our total non-accrual loans amounted to $1.5
million compared to $1.4 million at December 31, 2001 . The largest contributor
to the commercial non-accrual is a credit to a cabinet manufacturer that burned
in a fire. Clover Leaf Bank received partial settlement from the insurance
company in 2002, and the remaining balance of $283,000 is expected in 2003.
8
The table below sets forth the amounts and categories of non-performing
assets in our loan portfolio. For all years presented, we had no troubled debt
restructurings (which involve forgiving a portion of interest or principal on
loans or making loans at materially less than market interest rates), and no
foreclosed assets.
Years
Ended December 31,
------------------
2002 2001
------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .................................. $ 809 $ 390
Construction ......................................... 182 483
Commercial business .................................. 283 462
Commercial real estate ............................... 59 --
Consumer ............................................. 196 104
------ ------
Total ............................................. $1,529 1,439
------ ------
Accruing loans delinquent more than 90 days:
One- to four-family .................................. 29 16
Commercial business .................................. 10 28
Commercial real estate ............................... 151 --
Consumer ............................................. 5 71
------ ------
Total ............................................. 195 115
------ ------
Total non-performing loans ............................. $1,724 $1,554
====== ======
Total non-performing loans as a percentage of total
assets................................................ 1.80% 1.62%
====== ======
Allowance for loan losses as a percentage of
non-performing loans ................................. 40.02% 41.57%
====== ======
Allowance for loan losses as a percentage of gross loans
receivable ........................................... 1.01% 1.02%
====== ======
For the years ended December 31, 2002 and 2001, respectively, $119,000 and
$87,000 of gross interest income would have been recorded had our non-accruing
loans been current in accordance with their original terms.
Troubled Debt Restructurings. A troubled debt restructuring occurs when we,
for economic or legal reasons related to a borrower's financial difficulties,
grant a concession to the borrower, either as a deferment or reduction of
interest or principal on the loan, that we would not otherwise consider. We had
no troubled debt restructurings as of December 31, 2002.
Real Estate Owned. Real estate owned consists of property acquired through
formal foreclosure or by deed in lieu of foreclosure and is recorded at the
lower of recorded investment or fair value. Write-downs from recorded investment
to fair value which are required at the time of foreclosure are charged to the
allowance for loan losses. After transfer, the property is carried at the lower
of recorded investment or fair value, less estimated selling expenses.
Adjustments to the carrying value of the properties that result from subsequent
declines in value are charged to operations in the period in which the declines
occur. We held no property that was classified as real estate owned as of
December 31, 2002 and December 31, 2001.
Classification of Assets. Our policies, consistent with regulatory
guidelines, require that we classify loans and other assets, such as securities,
that are considered to be of lesser quality, as substandard, doubtful, or loss
assets. An asset is considered 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 the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of 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
uncollectable and of such little value that their continuance as assets is not
warranted. Assets that do not expose us to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated as special mention by management.
9
When we classify assets as either substandard or doubtful, we allocate for
analytical purposes a portion of our general valuation allowances or loss
reserves to these assets as deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the probable
risk associated with lending activities, but which have not been allocated to
particular problem assets. When we classify problem assets as loss, we are
required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off the amount of the
assets. Our determination as to the classification of assets and the amount of
valuation allowances is subject to review by regulatory agencies, which can
order the establishment of additional loss allowances. Management regularly
reviews our asset portfolio to determine whether any assets require
classification in accordance with applicable regulatory guidelines and generally
accepted accounting principles.
On the basis of management's review of our assets, at December 31, 2002, we
had classified a total of $3.7 million of our loans and other assets as follows:
At or For the Year
Ended
-------------------
December 31, 2002
(In Thousands)
Special Mention .......... $ 2,189
Substandard .............. 1,309
Doubtful assets .......... 186
Loss assets .............. 28
-------------------
Total ............... $ 3,712
===================
General loss allowance ... $ 426
Specific loss allowance .. 264
Charge-offs .............. --
Allowance for Loan Losses. The following table sets forth information
regarding our allowance for loan losses and other ratios at or for the dates
indicated.
Years Ended December 31,
------------------------
2002 2001
----- -----
(Dollars in Thousands)
Balance at beginning of period ...................... $ 646 $ 625
Charge-offs:
One- to four-family ............................... -- --
Commercial business ............................... -- (4)
Consumer .......................................... (105) (127)
----- -----
(105) (131)
Recoveries:
Commercial business ............................... 4 --
Consumer .......................................... 52 64
----- -----
56 64
----- -----
Net charge-offs ..................................... (49) (67)
Additions charged to operations ..................... 93 88
----- -----
Balance at end of period ............................ $ 690 $ 646
===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period ....... .07% 0.11%
===== =====
Ratio of net charge-offs during the period to
average non-performing assets ...................... 2.84% 4.31%
===== =====
10
The allowance for loan losses is a valuation account that reflects our
evaluation of the credit losses inherent in our loan portfolio. We maintain the
allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely.
Our evaluation of risk in maintaining the allowance for loan losses
includes the review of all loans on which the collectibility of principal may
not be reasonably assured. We consider the following factors as part of this
evaluation: our historical loan loss experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, peer group information and
prevailing economic conditions. There may be other factors that may warrant our
consideration in maintaining an allowance at a level sufficient to provide for
probable losses. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available or as future events change. Although we believe that we have
established and maintained the allowance for loan losses at adequate levels,
future additions may be necessary if economic and other conditions in the future
differ substantially from the current operating environment.
In addition, the Illinois Office of Banks and Real Estate and the Federal
Deposit Insurance Corporation, as an integral part of their examination process,
periodically review our loan portfolio and the related allowance for loan
losses. The Illinois Office of Banks and Real Estate and the Federal Deposit
Insurance Corporation may require us to increase the allowance for loan losses
based on their judgments of information available to them at the time of their
examination, thereby adversely affecting our results of operations.
Allocation of the Allowance for Loan Losses. The following table presents
our allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the periods indicated.
Years Ended December 31,
-----------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss By To Total Loan Loss By To Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family $ 253 $ 34,300 50.26% $ 244 $ 33,773 53.53%
Commercial ........ 279 22,797 33.40 212 13,971 22.14
Construction and
land ........... -- 761 1.12 -- 1,193 1.89
Commercial business .... 44 5,759 8.43 36 7,732 12.25
Consumer ............... 114 4,631 6.79 154 6,427 10.19
--------- -------- ------- --------- -------- -------
Total ............. $ 690 $ 68,248 100.00% $ 646 $ 63,096 100.00%
========= ======== ======= ========= ======== =======
Management evaluates the total balance of the allowance for loan losses
based on several factors that are not loan specific but are reflective of the
losses inherent in the loan portfolio, including management's periodic review of
loan collectibility in light of historical experience, the nature and volume of
the loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, prevailing economic
conditions such as housing trends, inflation rates and unemployment rates,
geographic concentrations of loans within Clover Leaf Bank's immediate market
area, and both peer financial institution historic loan loss experience and
allowance for loan loss levels.
Investment Activities
Clover Leaf Bank is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Government obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the Federal Home Loan Bank of Chicago, certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal funds.
Within certain regulatory limits, Clover Leaf Bank may
11
also invest a portion of its assets in commercial paper and corporate debt
securities. We are also required to invest in Federal Home Loan Bank stock. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that securities be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."
Debt and equity securities held for current resale are classified as
"trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities are included in earnings. Clover
Leaf Bank does not currently use or maintain a trading account. Debt and equity
securities not classified as either "held to maturity" or "trading securities"
are classified as "available for sale." These securities are reported at fair
value, and unrealized gains and losses on the securities are excluded from
earnings and reported, net of deferred taxes, as a separate component of equity.
Clover Leaf Bank has classified all of its securities as available for sale.
All of our securities carry market risk insofar as increases in market
interest rates may cause a decrease in their market value. Many also carry
prepayment risk insofar as they may be called prior to maturity in times of low
market interest rates, so that we may have to invest the funds at a lower
interest rate. Investments in securities are made based on certain
considerations, which include the interest rate, tax considerations, yield,
settlement date and maturity of the security, our liquidity position, and
anticipated cash needs and sources. The effect that the proposed security would
have on our credit and interest rate risk and risk-based capital is also
considered. We purchase securities to provide necessary liquidity for day-to-day
operations, and when investable funds exceed loan demand.
Generally, the investment policy of Clover Leaf Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon our liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Our investment policy does not permit engaging directly in hedging
activities or purchasing high-risk mortgage derivative products.
Our debt securities are mainly composed of securities issued by the U.S.
Government and government agencies (primarily Federal Home Loan Bank, Fannie Mae
and Freddie Mac), although from time to time we make other investments as
permitted by applicable laws and regulations.
The following table sets forth information relating to the amortized cost
and fair value of our securities, all of which are classified as available for
sale. For further information, see Notes 1 and 3 of the Notes to Consolidated
Financial Statements.
December 31,
-----------------------------------------
2002 2001
------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(In Thousands)
Federal agencies ................... $ 9,352 $ 9,426 $ 8,352 $ 8,532
State and municipal ................ 844 852 862 874
Mortgage-backed securities ......... 2,601 2,613 4,311 4,365
Corporate .......................... 509 557 512 535
------- ------- ------- -------
Total ......................... $13,306 $13,448 $14,037 $14,306
======= ======= ======= =======
12
The following table sets forth the scheduled maturities, amortized cost and
weighted average yields for our securities at December 31, 2002. Due to the
current interest rate environment, the Company has experienced significant calls
on securities. Therefore, the following schedule reflects maturity by call date
if that date is different than the stated maturity date.
Due in one year or Due after one year Due after five years
less through five years through ten years Due after tne years Total
------------------- ------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Rate Cost Rate Cost Rate Cost Rate Cost Rate
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
U. S. Government
agency securities .. $ 4,001 4.80% $ 3,394 6.00% $ 1,956 2.44% $ -- --% $ 9,352 4.74%
Obligations of
states and political
subdivisions ....... 270 4.53 574 5.14 -- -- -- -- 844 4.94
Mortgage-backed
securities ......... -- -- -- -- 731 7.47 1,870 4.62 2,601 5.42
Corporate ............ -- -- 509 6.88 -- -- -- -- 509 6.88
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total .............. $ 4,271 4.78% $ 4,477 5.98% $ 2,687 3.81% $ 1,870 4.62% $ 13,306 4.96%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
Sources of Funds
General. 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. 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.
Deposits. Residents of our primary market area are our main source of
deposits. Deposit account terms vary, with the principal differences being the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate. We do not use brokers to obtain deposits. Our deposit
products include demand and NOW, money market, savings, and term certificate
accounts. In recent years, and in connection with our emphasis on the
origination of commercial business loans, we have promoted money market accounts
with adjustable interest rates. Interest rates paid, maturity terms, service
fees and withdrawal penalties are established by Clover Leaf Bank on a periodic
basis. Management determines the rates and terms based on rates paid by our
competitors, our needs for funds or liquidity, growth goals and federal and
state regulations.
13
Deposit Accounts by Type. The following table sets forth the dollar
amount of our deposits in the various types of deposit programs as of the dates
indicated.
Years Ended December 31,
-------------------------------------
2002 2001
----------------- -----------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
Transactions and savings deposits:
Demand accounts ...................... $ 7,153 9.87% $13,061 16.14%
Savings accounts ..................... 3,998 5.52 3,983 4.92
NOW accounts ......................... 2,844 3.92 2,804 3.46
Money market accounts ................ 17,329 23.90 13,893 17.17
------- ------- ------- -------
Total non-certificates ............. 31,324 43.21 33,741 41.69
------- ------- ------- -------
Certificates of deposit:
0.00 - 3.99% ......................... 18,024 24.86 8,177 10.10
4.00 - 5.99% ......................... 18,169 25.07 18,570 22.94
6.00 - 7.99% ......................... -- -- 14,993 18.53
------- ------- ------- -------
Total certificates of deposit ...... 36,193 49.93 41,740 51.57
------- ------- ------- -------
Individual retirement accounts:
0.00 - 3.99% ......................... 1,320 1.82 674 0.83
4.00 - 5.99% ......................... 3,650 5.04 2,297 2.84
6.00 - 7.99% ......................... -- -- 2,481 3.07
------- ------- ------- -------
Total individual retirement accounts 4,970 6.86 5,452 6.74
------- ------- -------
Total time deposits ................ $41,163 56.79 $47,192 58.31
======= ======= ======= =======
Total deposits ....................... $72,487 100.00% $80,933 100.00%
======= ======= ======= =======
Time Deposit Rates and Maturities. The following table indicates interest
rate and maturity information for our time deposits as of December 31, 2002.
Maturity
-------------------------------------
Over Over
One Year 1 to 2 2 to 3 Over
Interest Rate or Less Years Years 3 years Total
------------------------------ ------- ------- ------- ------- -------
(In Thousands)
0.00-3.99% ................... $11,756 $ 5,844 $ 1,744 $ -- $19,344
4.00-5.99% ................... 14,906 -- 570 6,343 21,819
------- ------- ------- ------- -------
Total time deposits .......... $26,662 $ 5,844 $ 2,314 $ 6,343 $41,163
======= ======= ======= ======= =======
Time Deposit Balances and Maturities. The following table indicates balance
and maturity information for our time deposits as of December 31, 2002.
Maturity
----------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------- ------- ---------- -------
(In Thousands)
Time deposits less than $100,000 ... $ 8,203 $ 6,736 $ 8,843 $12,459 $36,241
Time deposits of $100,000 or more .. 1,057 713 1,110 2,042 4,922
------- ------- ------- ------- -------
Total time deposits ................ $ 9,260 $ 7,449 $ 9,953 $14,501 $41,163
======= ======= ======= ======= =======
Borrowings. Clover Leaf Bank may obtain advances from the Federal Home Loan
Bank of Chicago upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans and mortgage-
14
backed securities, provided certain standards related to creditworthiness have
been met. These advances are made pursuant to several credit programs, each of
which has its own interest rate and range of maturities. Federal Home Loan Bank
advances are generally available to meet seasonal and other deposit withdrawals
and to permit increased lending.
The following table sets forth the maximum month-end balance and average
balance of Federal Home Loan Bank advances for the periods indicated. Other than
Federal Home Loan Bank advances, we had no other borrowings during the periods
indicated.
Years Ended December 31,
------------------------
2002 2001
------ ------
(In Thousands)
Maximum Balance:
FHLB advances........................ $9,000 $3,000
Average Balance:
FHLB advances........................ $5,675 $1,849
The following table sets forth total borrowings and the weighted average
interest rate paid on such borrowings at the dates indicated.
Years Ended December 31,
------------------------
2002 2001
------ ------
(Dollars in Thousands)
FHLB advances........................... $9,000 $1,500
Weighted average interest rate of FHLB
advances................................ 2.83% 5.65%
REGULATION
The following summarizes certain laws and regulations that are considered
material to Clover Leaf Financial and Clover Leaf Bank. However, this summary
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations. Any change in this regulation, whether by the
Federal Deposit Insurance Corporation, the Illinois Office of Banks and Real
Estate, the Board of Governors of the Federal Reserve System, the Illinois
General Assembly or Congress, could have a material adverse impact on Clover
Leaf Financial and Clover Leaf Bank.
Clover Leaf Financial
Holding Company Acquisitions. Clover Leaf Financial is a bank holding
company within the meaning of the Bank Holding Company Act and is registered
with and regulated by the Federal Reserve Board. Federal law generally prohibits
a company, without prior Federal Reserve approval, from acquiring the ownership
or control of any bank. In accordance with Federal Reserve Board policy, Clover
Leaf Financial is expected to act as a source of financial strength to Clover
Leaf Bank and to commit resources to support Clover Leaf Bank in circumstances
where Clover Leaf Financial might not do so absent such policy. Under the Bank
Holding Company Act, Clover Leaf Financial is subject to periodic examination by
the Federal Reserve Board and will be required to file periodic reports of its
operations and such additional information as the Federal Reserve Board may
require. Clover Leaf Financial also is subject to regulation by, the
Commissioner under the Illinois Bank Holding Company Act.
Bank Holding Company Act Activities and Other Limitations. A bank holding
company is a legal entity separate and distinct from its subsidiary bank.
Normally, the major source of a holding company's revenue is dividends from its
subsidiary bank. The right of a bank holding company to participate as a
stockholder in any distribution of assets of its subsidiary bank upon its
liquidation or reorganization is subject to the prior claims of creditors of the
subsidiary bank. The subsidiary bank is subject to claims by creditors for
long-term and short-term
15
debt obligations, including obligations for federal funds purchased and
securities sold under repurchase agreements, as well as deposit liabilities.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions, from acquiring more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than banking
or managing or controlling banks. Under the Bank Holding Company Act, the
Federal Reserve Board is authorized to approve the ownership of shares by a bank
holding company in any company, the activities of which the Federal Reserve
Board has determined to be so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. The Federal Reserve Board
has by regulation determined that certain activities are closely related to
banking within the meaning of the Bank Holding Company Act. These activities
include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services. The Federal Reserve
Board also has determined that certain other activities, including real estate
brokerage and syndication, land development and property management, are not
closely related to banking and a proper incident thereto. In making such
determinations, the Federal Reserve Board is required to weigh the expected
benefit to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
A bank holding company that is registered as a "financial holding company"
is also permitted to engage in activities that are financial in nature or
incidental to such financial activities. Activities that are considered
financial in nature include: securities underwriting, dealing and market making;
insurance underwriting; and merchant banking. Clover Leaf Financial has not
elected to qualify as a financial holding company, although it may seek to do so
in the future. Bank holding companies may qualify to become a financial holding
company if:
o each of its depository institution subsidiaries is "well capitalized";
o each of its depository institution subsidiaries is "well managed";
o each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most recent
examination; and
o the bank holding company has filed a certification with the Federal
Reserve Board that it elects to become a financial holding company.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into law
the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to
address corporate and accounting irregularities. In addition to the
establishment of a new accounting oversight board which will enforce auditing,
quality control and independence standards and will be funded by fees from all
publicly traded companies, the Act restricts accounting companies from providing
both auditing and consulting services. To ensure auditor independence, any
non-audit services being provided to an audit client will require preapproval by
the company's audit committee members. In addition, the audit partners must be
rotated. The Act requires chief executive officers and chief financial officers,
or their equivalent, to certify to the accuracy of periodic reports filed with
the SEC, subject to civil and criminal penalties if they knowingly or willfully
violate this certification requirement. In addition, under the Act, counsel will
be required to report evidence of a material violation of the securities laws or
a breach of fiduciary duty by a company to its chief executive officer or its
chief legal officer, and, if such officer does not appropriately respond, to
report such evidence to the audit committee or other similar committee of the
board of directors or the board itself.
The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change. The period during which certain types of
law suits can be instituted against a company or its officers has
16
been extended, and bonuses issued to top executives prior to restatement of a
company's financial statements are now subject to disgorgement if such
restatement was due to corporate misconduct. Executives are also prohibited from
insider trading during retirement plan "blackout" periods, and loans to company
executives are restricted. In addition, civil and criminal penalties have been
enhanced.
The Act also increases the oversight of, and codifies certain requirements
relating to, audit committees of public companies and how they interact with the
company's "registered public accounting firm" (RPAF). Audit Committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer. In addition, companies must disclose whether
at least one member of the committee is a "financial expert" (as such term will
be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited
from performing statutorily mandated audit services for a company if such
company's chief executive officer, chief financial officer, comptroller, chief
accounting officer or any person serving in equivalent positions has been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent public or certified accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's materially misleading. In accordance with the Act, the SEC proposed
rules requiring inclusion of an internal control report and assessment by
management in the annual report to shareholders. The Act requires the RPAF that
issues the audit report to attest to and report on management's assessment of
the company's internal controls. In addition, the Act requires that each
financial report required to be prepared in accordance with (or reconciled to)
generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines for bank holding companies (on a consolidated basis)
substantially similar to those of the FDIC for Clover Leaf Bank. Clover Leaf
Financial's pro forma Tier 1 and total capital significantly exceed the Federal
Reserve Board's capital adequacy requirements.
Restrictions On Transactions With Affiliates. Transactions between a bank
and its "affiliates" are subject to quantitative and qualitative restrictions
under Sections 23A and 23B of the Federal Reserve Act and FDIC regulations.
Affiliates of a bank include, among other entities, the bank's holding company
and companies that are controlled by or under common control with the bank.
In general, the extent to which a bank or its subsidiaries may engage in
certain "covered transactions" with affiliates is limited to an amount equal to
10% of the institution's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a bank and its subsidiaries may engage in covered transactions and
certain other transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the bank or its subsidiary,
as those prevailing at the time for comparable transactions with nonaffiliated
companies. A "covered transaction" is defined to include a loan or extension of
credit to an affiliate; a purchase of investment securities issued by an
affiliate; the purchase of assets from an affiliate, with certain exceptions;
the acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a bank, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the bank's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a bank to
all insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.
17
Federal Securities Laws. Clover Leaf Financial's common stock is registered
with the SEC under Section 12(g) of the Securities Exchange Act of 1934. Clover
Leaf Financial is subject to the proxy and tender offer rules, insider trading
reporting requirements and restrictions, and certain other requirements under
the Exchange Act.
Clover Leaf Bank
General. Clover Leaf Bank is an Illinois-chartered commercial bank, the
deposit accounts of which are insured by the Bank Insurance Fund of the FDIC. As
an FDIC insured, Illinois-chartered commercial bank, Clover Leaf Bank is subject
to the examination, supervision, reporting and enforcement requirements of the
Illinois Office of Banks and Real Estate, as the chartering authority for
Illinois banks, and the FDIC, as administrator of the Bank Insurance Fund, and
to the statutes and regulations administered by the Illinois Office of Banks and
Real Estate and the FDIC governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities and
general investment authority. Clover Leaf Bank is required to file reports with
the Illinois Office of Banks and Real Estate and the FDIC concerning its
activities and financial condition, and will be required to obtain regulatory
approvals prior to entering into certain transactions, including mergers with,
or acquisitions of, other financial institutions.
The Illinois Office of Banks and Real Estate and the FDIC have extensive
enforcement authority over Illinois-chartered commercial banks, such as Clover
Leaf Bank. This enforcement authority includes, among other things, the ability
to issue cease-and-desist or removal orders, to assess civil money penalties and
to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe and unsound
practices.
Insurance of Deposit Accounts. The Federal Deposit Insurance Corporation
has adopted a risk-based system for assessing deposit insurance premiums. The
Federal Deposit Insurance Corporation assigns an institution to one of three
capital categories based on the institution's financial information, as of the
reporting period ending seven months before the assessment period, and one of
three supervisory subcategories within each capital group. The three capital
categories are well capitalized, adequately capitalized and undercapitalized.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the Federal Deposit Insurance Corporation by
the institution's primary federal regulator and information which the Federal
Deposit Insurance Corporation determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. The Federal Deposit Insurance Corporation is
authorized to raise the assessment rates. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise
insurance premiums in the future. If this type of action is taken by the Federal
Deposit Insurance Corporation, it could have an adverse effect on the earnings
of Clover Leaf Bank.
Capital Requirements. The FDIC has capital adequacy regulations and
policies regarding the capital adequacy of state-chartered commercial banks
that, like Clover Leaf Bank, are not members of the Federal Reserve System. The
FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage capital
requirement for the most highly-rated state-chartered, non-member banks, with
additional capital of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier 1 leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, are considered
strong banking organizations, rated composite 1 under the Uniform Financial
Institutions Rating System. Leverage or core capital is defined as the sum of
common stock, capital surplus, retained earnings, noncumulative perpetual
preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain qualifying
supervisory goodwill, and certain purchased mortgage servicing rights and
purchased credit and relationships.
The FDIC also requires that banks meet a risk-based capital standard. Under
the risk-based capital standard, total capital, which is defined as Tier 1
capital and supplementary (Tier 2 capital), must equal at least 8%
18
of risk-weighted assets. In determining the amount of risk-weighted assets, all
assets, plus certain off balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset.
The components of Tier 1 capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At December 31, 2002,
Clover Leaf Bank met each of its capital requirements.
A bank which has less than the minimum leverage capital requirement must,
within 60 days from the date it fails to comply with this requirement, submit to
its FDIC regional director for review and approval a reasonable plan describing
the means and timing by which the bank will achieve its minimum leverage capital
requirement. A bank that fails to file such a plan with the FDIC is deemed to be
operating in an unsafe and unsound manner and may be subject to a
cease-and-desist order from the FDIC. FDIC regulations also provide that any
insured depository institution with a ratio of Tier 1 capital to total assets
that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition and is subject to potential termination of deposit insurance. However,
such an institution will not be subject to an enforcement proceeding solely on
account of its capital ratios if it has entered into and is in compliance with a
written agreement with the FDIC to increase its Tier 1 leverage capital ratio
and to take such other action as may be necessary to operate in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC of a capital directive, which is a final order issued to a
bank that fails to maintain minimum capital to restore its capital to the
minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.
At December 31, 2002, Clover Leaf Bank exceeded all of its regulatory
capital requirements, with leverage, Tier 1 risk-based and total risk-based
capital ratios of 11.37%, 16.64% and 17.76%, respectively.
Any bank that fails any of the capital requirements is subject to possible
enforcement actions by the FDIC. These actions could include a capital
directive, a cease and desist order, civil money penalties, the establishment of
restrictions on the institution's operations, termination of Federal deposit
insurance and the appointment of a conservator or receiver.
At December 31, 2002, Clover Leaf Bank was deemed a well-capitalized
institution for purposes of the above regulations and as such is not subject to
the above-mentioned restrictions.
Clover Leaf Bank would not be able to pay dividends on its capital stock if
its capital were reduced below the remaining balance of the liquidation account
established in connection with the conversion.
Safety and Soundness Guidelines. The FDIC and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial standards, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
FDIC and the other agencies also have established guidelines regarding asset
quality and earnings standards for insured institutions. Clover Leaf Bank
believes that it is in compliance with these guidelines and standards.
Community Reinvestment Act and Fair Lending Laws. Commercial banks, such as
Clover Leaf Bank, have a responsibility under the Community Reinvestment Act and
related regulations of the FDIC to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of Community Reinvestment Act could, at a
minimum, result in regulatory restrictions on its activities. Failure to comply
with the Fair Lending Laws could result in enforcement actions by the FDIC, as
well as the Department of Justice.
19
The USA PATRIOT Act. In response to the events of September 11th, the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed
into law on October 26, 2001. The USA PATRIOT Act gives the federal government
new powers to address terrorist threats through enhanced domestic security
measures, expanded surveillance powers, increased information sharing, and
broadened anti-money laundering requirements. By way of amendments to the Bank
Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an
anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
o Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do
not have a physical presence in any country), and will be subject to
certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
Federal Home Loan Bank System. Clover Leaf Bank is a member of the Federal
Home Loan Bank of Chicago, which is one of 12 regional Federal Home Loan Banks
that administers the home financing credit function of savings institutions.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the Federal Home Loan Bank.
At December 31, 2002, Clover Leaf Bank had $9.0 million of Federal Home Loan
Bank advances. See the Notes to the Consolidated Financial Statements.
As a member, Clover Leaf Bank is required to purchase and maintain stock in
the Federal Home Loan Bank of Chicago in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans or similar obligations at the
beginning of each year. At December 31, 2002, Clover Leaf Bank had $3.4 million
in Federal Home Loan Bank stock, which was in compliance with this requirement.
20
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid in the past and could do so in the future. These contributions
also could have an adverse effect on the value of Federal Home Loan Bank stock
in the future. The average dividend yield on Clover Leaf Bank's Federal Home
Loan Bank stock was 5.20% in 2002 and 6.14% in 2001.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. As of
November 3, 1999, no reserves were required to be maintained on the first $5.0
million of transaction accounts, reserves of 3% were required to be maintained
against the next $44.3 million of net transaction accounts, and a reserve of
$1.3 million plus 10% against net transaction accounts above this amount. The
above dollar amounts and percentages are subject to periodic adjustment by the
Federal Reserve Board. Because required reserves must be maintained in the form
of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce an institution's earning assets
and constrain its ability to lend.
TAXATION
Federal Taxation
For federal income tax purposes, Clover Leaf Financial and Clover Leaf Bank
file a consolidated federal income tax return on a calendar year basis using the
accrual method of accounting.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Clover Leaf Financial
accounts for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred tax liabilities and assets are adjusted to reflect changes in
the tax laws.
Clover Leaf Financial is not currently subject to the alternative minimum
tax. Clover Leaf Financial may be subject to the corporate alternative minimum
tax in the future, to the extent it exceeds Clover Leaf Financial's regular
income tax for the year if its annual gross receipts for a three-year
consecutive period exceed $7 million. The alternative minimum tax will be
imposed at the rate of 20% of a specially computed tax base. Included in this
base are a number of preference items, including interest on certain tax-exempt
bonds issued after August 7, 1986, and an "adjusted current earnings"
computation which is similar to a tax earnings and profits computation. In
addition, for purposes of the alternative minimum tax, the amount of alternative
minimum taxable income that may be offset by net operating losses is limited to
90% of alternative minimum taxable income.
Clover Leaf Bank's income tax returns have not been audited by the Internal
Revenue Service for the past five years.
State Taxation
Illinois State Taxation. Clover Leaf Financial is required to file Illinois
income tax returns and pay tax at an effective tax rate of 7.18% of Illinois
taxable income. For these purposes, Illinois taxable income generally means
federal taxable income subject to certain modifications, the primary one of
which is the exclusion of interest income on United States obligations.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, Clover Leaf Financial is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
21
ITEM 2. Properties
At December 31, 2002, Clover Leaf Financial conducted its business from our
main office at 200 East Park Street, Edwardsville, Illinois. The following table
sets forth certain information with respect to the offices of Clover Leaf Bank
at December 31, 2002.
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration
200 East Park Street Owned 1976 N/A
Edwardsville, Illinois 62025
2143 South State Route 157 Owned 1999 N/A
Edwardsville, Illinois 62025
ITEM 3. Legal Proceedings
Clover Leaf Bank is involved, from time to time, as plaintiff or defendant
in various legal actions arising in the normal course of its business. Other
than litigation previously disclosed, at December 31, 2002, Clover Leaf
Financial and Clover Leaf Bank were not involved in any material legal
proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Stockholder Matters
The section entitled "Market for Common Stock" section of Clover Leaf
Financial's Annual Report to Stockholders is incorporated herein by reference.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Clover Leaf Financial's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. Financial Statements
The financial statements of Clover Leaf Financial's Annual Report to
Stockholders are incorporated herein by reference.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
The "Proposal I--Election of Directors" section of the Company's definitive
Proxy Statement for the Company's 2003 Annual Meeting of Stockholders (the "2003
Proxy Statement") is incorporated herein by reference.
ITEM 10. Executive Compensation
The "Proposal I--Election of Directors" section of the Company's 2003 Proxy
Statement is incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The "Proposal I--Election of Directors" section of the Company's 2003 Proxy
Statement is incorporated herein by reference.
The Company does not have any equity compensation plan that was not
approved by stockholders, other than its employee stock ownership plan.
ITEM 12. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the Company's
2003 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-KSB are as follows:
(A) Independent Auditors' Report
(B) Consolidated Balance Sheets
(C) Consolidated Statements of Income
(D) Consolidated Statements of Changes in Stockholders' Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
23
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Certificate of Incorporation of Clover Leaf Financial Corp.*
3.2 Bylaws of Clover Leaf Financial Corp.*
4 Form of Common Stock Certificate of Clover Leaf Financial Corp.*
10.1 Form of Employment Agreement for Dennis M. Terry*
10.2 Form of Employee Stock Ownership Plan*
10.3 Form of Severance Agreement*
10.4 Director Emeritus Plan*
10.5 Form of Director's Deferred Compensation Agreement*
10.6 Officer's Deferred Bonus Compensation Agreement*
13 Portions of 2002 Annual Report to Stockholders
21 Subsidiaries of the Registrant*
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
----------
* Incorporated by reference to the Registration Statement on Form SB-2 of
Clover Leaf Financial Corp. (Registration No. 333-69762) initially filed
with the Securities and Exchange Commission on September 21, 2001.
ITEM 14. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
24
Signatures
Pursuant to the requirements of Section 13 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.
Date: March 28, 2003 By: /s/ Dennis M. Terry
-------------------------------------
Dennis M. Terry
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Dennis M. Terry President, Chief Executive March 28, 2003
----------------------- Officer and Director (Principal
Dennis M. Terry Executive Officer)
/s/ Darlene F. McDonald Senior Vice President and March 28, 2003
----------------------- Treasurer (Principal Financial
Darlene F. McDonald and Accounting Officer)
/s/ Joseph J. Gugger Director March 28, 2003
-----------------------
Joseph J. Gugger
Director ________, 2003
-----------------------
Kenneth P. Highlander
/s/ Gary D. Niebur Director March 28, 2003
-----------------------
Gary D. Niebur
Director ________, 2003
-----------------------
Robert W. Schwartz
Director ________, 2003
-----------------------
Dennis Ulrich
/s/ Philip H. Weber Director March 28, 2003
-----------------------
Philip H. Weber
25
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dennis M. Terry, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of Clover Leaf Financial
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003 /s/ Dennis M. Terry
--------------------- -------------------------------------
Date Dennis M. Terry
President and Chief Executive Officer
26
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Darlene F. McDonald, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-KSB of Clover Leaf Financial
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003 /s/ Darlene F. McDonald
--------------------- -------------------------------------------------
Date Darlene F. McDonald
Senior Vice President and Chief Financial Officer
27
EXHIBIT 13
PORTIONS OF 2002 ANNUAL REPORT TO STOCKHOLDERS
2002 ANNUAL REPORT TO STOCKHOLDERS
CLOVER LEAF FINANCIAL CORP.
TABLE OF CONTENTS
Page
Message to Our Stockholders................................................................. 1
Selected Consolidated Financial Information and Other Data.................................. 2
Management's Discussion and Analysis of Financial Condition and Results of Operations....... 3
Common Stock and Related Matters............................................................ 10
Index to Consolidated Financial Statements.................................................. 11
Independent Auditor's Report................................................................ 12
Consolidated Balance Sheets................................................................. 13
Consolidated Statements of Income........................................................... 14
Consolidated Statements of Changes in Stockholders' Equity.................................. 15
Consolidated Statements of Cash Flows....................................................... 16
Notes to Consolidated Financial Statements.................................................. 17
Stockholder Information.....................................................................
[LETTERHEAD OF CLOVER LEAF FINANCIAL CORP.]
April 20, 2003
To our Valued Stockholders:
On behalf of our Board of Directors, Management and Staff, we are pleased
to present this 2002 annual report of Clover Leaf Financial Corp., the holding
company for Clover Leaf Bank.
During 2002 we undertook and implemented several significant changes, all
of which were designed to dramatically enhance customer service.
During the second quarter we unveiled our Internet banking site,
www.cloverleafbank.com. This is a state-of-the-art Internet banking site that
offers customers the opportunity to conduct their banking from the comfort, and
convenience, of their home or office. For the consumer customer it offers "real
time" account information and access, money transfer capabilities and the
increasingly popular "Bill-Pay" feature. For the commercial customer it offers
all of those features plus a complete line of cash management products.
During the third quarter we began negotiations to acquire a 4.5-acre site
at the intersection of Goshen Road and Old Troy Road. The negotiations resulted
in the purchase of land during January 2003. This will be the home to Clover
Leaf's third location in the Edwardsville - Glen Carbon area. We are very
excited about this site, given its location in the heart of the residential
growth corridor. We anticipate construction to commence sometime in 2004.
Finally, in the fourth quarter we converted our charter to a
state-chartered commercial bank. This represents a significant change in the
products and services we can offer.
We feel these changes, along with others implemented recently, put Clover
Leaf Bank in a strong position to move forward and continue the profitable
growth pattern we have enjoyed of late, while continuing to offer a competitive
product line that is delivered by a well-trained professional staff that is
dedicated to customer service.
Thank you for your continued support.
Sincerely,
Philip H. Weber Dennis M. Terry
Chairman of the Board President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following information is derived from the audited consolidated
financial statements of Clover Leaf Financial Corp. or, prior to December 27,
2001, Clover Leaf Bank. For additional information about Clover Leaf Financial
Corp. and Clover Leaf Bank's conversion to stock form, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Clover Leaf Financial
Corp. and related notes included elsewhere in this Annual Report.
At December 31,
-----------------------
2002 2001
------- -------
(In Thousands)
Selected Financial Condition Data:
Total assets ................................... $95,516 $96,101
Loans, net ..................................... 67,544 62,435
Interest-bearing deposits (asset) .............. 5,688 10,279
Securities ..................................... 13,448 14,306
Deposits ....................................... 72,487 80,933
Borrowed funds ................................. 9,000 1,500
Stockholders' equity ........................... 12,718 12,510
For the Years
Ended December 31,
------------------
2002 2001
------- -------
(In Thousands)
Selected Operations Data:
Total interest income ................................... $ 5,345 $ 5,785
Total interest expense .................................. 2,524 3,851
------- -------
Net interest income ..................................... 2,821 1,934
Provision for loan losses ............................... 93 88
------- -------
Net interest income after provision for loan losses ..... 2,728 1,846
Non-interest income ..................................... 461 240
Non-interest expense .................................... 2,462 2,042
------- -------
Net income before income taxes .......................... 727 44
Income tax expense (benefit) ............................ 232 (25)
------- -------
Net income .............................................. $ 495 $ 69
======= =======
2
At or For the Years
Ended December 31,
-------------------
2002 2001
------- ------
Selected Financial Ratios and Other Data (1):
Performance Ratios:
Return on average assets (2) ............................. 0.55% 0.08%
Return on average equity (3) ............................. 3.95 1.09
Interest rate spread (4) ................................. 2.65 1.86
Net interest margin (5) .................................. 3.28 2.36
Ratio of non-interest expense to average total assets .... 2.72 2.35
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................... 121.42 110.69
Efficiency ratio (6) ..................................... 75.00 93.93
Dividend payout ratio .................................... -- N/A
Per Share Data:
Basic and diluted earnings per share ..................... 0.76 N/A
Book value per share ..................................... 19.23 N/A
Dividends per share ...................................... -- N/A
Asset Quality Ratios:
Non-performing loans to total gross loans at end of period 2.55 2.49
Non-performing loans to total assets at end of period .... 1.80 1.62
Allowance for loan losses to non-performing loans ........ 40.02 41.57
Allowance for loan losses to gross loans receivable ...... 1.01 1.02
Capital Ratios:
Equity to total assets at end of period .................. 13.31 13.02
Average equity to average assets ......................... 13.89 7.27
Other Data:
Number of offices ........................................ 2 2
----------
(1) Dividend payout ratio and per share data for the year ended December 31,
2001 is not considered meaningful since Clover Leaf Bank completed its
conversion to stock form on December 27, 2001.
(2) Ratio of net income to average total assets. (3) Ratio of net income to
average equity.
(4) The difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(5) Net interest income divided by average interest-earning assets.
(6) Non-interest expense divided by the sum of net interest income and
non-interest income.
3
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This document contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
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 our
operations, pricing products and services.
General
The principal business of Clover Leaf Financial Corp. and Clover Leaf Bank
consists of attracting deposits from the general public and using these funds to
originate mortgage loans secured by one- to four-family residences or commercial
properties and to invest in investment securities. To a lesser extent, the
Company engages in various forms of consumer and commercial lending. Our net
income depends primarily on net interest income. Net interest income is the
difference between the interest income we earn on our interest-earning assets,
consisting primarily of loans, investment securities and interest-bearing
deposits with other financial institutions, and the interest we pay on our
interest-bearing liabilities, primarily savings accounts and time deposits. Our
profitability is also affected by provisions for loan losses, non-interest
income and non-interest expense. Non-interest income consists primarily of
service charges on deposit accounts, loan servicing fees, other service charges
and fees and net gains on sales of assets. Non-interest expense consists
primarily of salaries and employee benefits, occupancy, equipment, data
processing and professional fees. Our results of operations also may be affected
significantly by general and local economic and competitive conditions,
particularly those that affect market interest rates, governmental policies and
actions of regulatory authorities.
Management of Market Risk
As with other financial institutions, our most significant form of market
risk is interest rate risk. We have interest rate risk because our
interest-bearing liabilities mature or reprice more quickly than the average
maturity or repricing of our interest-earning assets. As explained below, in a
period of rising interest rates we would not be in a favorable position to
reinvest our assets into higher-yielding assets. We analyze our interest rate
sensitivity by monitoring our interest rate sensitivity "gap." Our interest rate
sensitivity gap is the difference between the amount of our interest-earning
assets maturing or repricing within a specific time period and the amount of our
interest bearing-liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest rate sensitive assets
maturing or repricing during a period exceeds the amount of interest rate
sensitive liabilities maturing or repricing during the same period. At December
31, 2002, our cumulative one-year interest rate gap, the difference between the
amount of interest-earning assets and interest-bearing liabilities maturing or
repricing within one year, expressed as a percentage of total assets, was
positive 1.75%.
The following table sets forth our interest-earning assets and our
interest-bearing liabilities at December 31, 2002, which are anticipated to
reprice or mature in each of the future time periods shown based upon the
following assumptions. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at December
31, 2002, on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and as a result of contractual rate adjustments on adjustable-rate
loans.
4
Amounts Maturing on Repricing at December 31, 2002
--------------------------------------------------
Less than
Floating 3 Months 3-12 Months 1-3 Years
-------- --------- ----------- ---------
(Dollars in Thousands)
Interest-earning assets (1):
Cash and due from other financial
institutions ....................... $ -- $ -- $ 5,688 $ --
Investment securities ................. -- 4,866 892 --
Mortgage backed securities ............ -- 1,352 127 141
Total loans (2) ....................... 13,300 5,950 11,998 13,461
-------- -------- -------- --------
Total interest-earning assets .... $ 13,300 $ 12,168 $ 18,705 $ 13,602
-------- -------- -------- --------
Interest-bearing liabilities:
Checking .............................. 879 -- -- 1,836
Money market deposits and savings (3) . 7,047 -- -- 14,309
Time deposits ......................... -- 9,260 17,530 8,130
Borrowed funds ........................ -- -- 7,500 1,000
Federal funds purchased and repurchase
agreements ......................... -- -- 284 --
-------- -------- --------
Total interest-bearing liabilities $ 7,926 $ 9,260 $ 25,314 $ 25,275
-------- -------- -------- --------
Interest sensitivity gap (4) ............ $ 5,374 $ 2,908 $ (6,609) $(11,673)
======== ======== ======== ========
Cumulative interest sensitivity gap ..... $ 5,374 $ 8,282 $ 1,673 $(10,000)
======== ======== ======== ========
Cumulative interest sensitivity gap as a
percentage of total assets ............ 5.63% 8.67% 1.75% (10.47)%
Amounts Maturing on Repricing at December 31, 2002
--------------------------------------------------
Over
3-5 Years 5-15 Years 15 Years Total
--------- ---------- -------- --------
(Dollars in Thousands)
Interest-earning assets (1):
Cash and due from other financial
institutions ....................... $ -- $ -- $ -- $ 5,688
Investment securities ................. 881 4,038 158 10,835
Mortgage backed securities ............ 160 642 191 2,613
Total loans (2) ....................... 5,650 13,183 4,706 68,248
-------- -------- -------- --------
Total interest-earning assets .... $ 6,691 $ 17,863 $ 5,041 $ 87,370
-------- -------- -------- --------
Interest-bearing liabilities:
Checking .............................. -- -- -- 2,715
Money market deposits and savings (3) . -- -- -- 21,356
Time deposits ......................... 6,343 -- -- 41,263
Borrowed funds ........................ 500 -- -- 9,000
Federal funds purchased and repurchase
agreements ......................... -- -- -- 284
-------- -------- -------- --------
Total interest-bearing liabilities $ 6,843 $ -- $ -- $ 74,618
-------- -------- -------- --------
Interest sensitivity gap (4) ............ $ (152) $ 17,863 $ 5,055 $ 12,766
======== ======== ======== ========
Cumulative interest sensitivity gap ..... $(10,152) $ 7,711 $ 12,766 $ 25,532
======== ======== ======== ========
Cumulative interest sensitivity gap as a
percentage of total assets ............ (10.63)% 8.07% 13.37% 26.73%
----------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of scheduled rate
adjustments and contractual maturities.
(2) For the purposes of the gap analysis, the allowance for losses and deferred
loan fees and discounts have been excluded.
(3) Includes borrowers' escrow payments.
(4) Interest sensitivity gap represents the difference between interest-earning
assets and interest-bearing liabilities.
5
Certain shortcomings are inherent in the method of analysis presented in
the gap table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features that restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Average Balance Sheets
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense, on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. Non-accruing loans have been included in the table as loans carrying
a zero yield.
Years Ended December 31,
------------------------------------------------------------------------------
2002 2001
--------------------------------------- ------------------------------------
Average Average Interest
Outstanding Interest Outstanding Earned/
Balance Earned/Paid Yield/Rate Balance Paid Yield/Rate
----------- ----------- ---------- ----------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans, gross............................. $ 65,356 $ 4,449 6.81% $ 60,518 $ 4,601 7.60%
Interest bearing balances from depository
institutions........................... 2,555 40 1.57 4,134 167 4.04
Securities............................... 9,088 454 5.00 13,029 789 6.06
FHLB stock............................... 3,751 195 5.20 1,727 106 6.14
Mortgage-backed securities............... 5,203 207 3.98 2,604 122 4.69
--------- --------- --------- ---------
Total interest-earning assets........... 85,953 5,345 6.22 82,012 5,785 7.05
--------- ---------
Other assets............................. 4,318 4,762
--------- ---------
Total assets............................ $ 90,271 $ 86,774
========= =========
Interest-bearing liabilities:
Savings deposits......................... $ 22,831 446 1.95 $ 18,357 577 3.14
Time deposits............................ 41,936 1,890 4.51 53,687 3,162 5.89
Federal funds purchased and
securities sold
under agreement to repurchase.......... 345 5 1.45 198 3 1.52
Borrowed funds........................... 5,675 183 3.22 1,849 109 5.90
--------- --------- --------- ---------
Total interest-bearing liabilities...... 70,787 2,524 3.57 74,091 3,851 5.20
--------- ---------
Other liabilities....................... 6,947 6,371
--------- ---------
Total liabilities....................... 77,734 80,462
Equity................................... 12,537 6,312
--------- ---------
Total liabilities and equity............ $ 90,271 $ 86,774
========= =========
Net interest income....................... $ 2,821 $ 1,934
========= =========
Net interest rate spread.................. 2.65% 1.86%
========= =========
Net interest margin....................... 3.28% 2.36%
========= =========
Average interest-earning assets to average
interest-bearing liabilities........... 1.21x 1.11x
========== ==========
6
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate), (ii) changes in rate (i.e., changes
in rate multiplied by old volume) and (iii) changes attributable to both rate
and volume, which cannot be segregated.
Years Ended December 31,
2002 vs. 2001
------------------------------------------
Increase/(Decrease) Due to
----------------------------- Total
Rate/ Increase
Volume Rate Volume (Decrease)
------- ------- ------- --------
(In Thousands)
Interest-earning assets:
Loans ............................ $ 365 $ (488) $ (29) $ (152)
Interest bearing balances from
depository institutions ........ (64) (102) 39 (127)
Securities ....................... (239) (138) 42 (335)
FHLB stock ....................... 124 (16) (19) 89
Mortgage-backed securities ....... 122 (18) (19) 85
------- ------- ------- -------
Total interest-earning assets .. 308 (762) 14 (440)
------- ------- ------- -------
Interest-bearing liabilities:
Savings deposits ................. 141 (216) (56) (131)
Time deposits .................... (692) (742) 162 (1,272)
Federal funds purchased and
securities sold under agreement
to repurchase .................. 2 -- -- 2
Borrowed funds ................... 224 (49) (101) 74
------- ------- ------- -------
Total interest-bearing liabilities (325) (1,007) 5 (1,327)
------- ------- ------- -------
Net interest income ............... $ 633 $ 245 $ 9 $ 887
======= ======= ======= =======
Comparison of Financial Condition at December 31, 2002 and December 31, 2001
Total assets as of December 31, 2002 were $95.3 million, a decrease of
$800,000, or 0.8%, from assets of $96.1 million at December 31, 2001. The
decrease in assets resulted primarily from stock offering subscription funds
held by Clover Leaf Bank at December 31, 2001 that had been returned to but not
yet cashed by subscribers. This decrease was primarily offset by an increase in
net loans. Net loans as of December 31, 2002 were $67.5 million, an increase of
$5.1 million, or 8.2%, from net loan balances of $62.4 million at December 31,
2001. The commercial real estate loan portfolio increased $8.8 million, or
62.9%, compared to 2001 fiscal year-end, while automobile loans decreased $1.7
million, or 54.6% and commercial business loans decreased $2.0 million, or
25.5%. During the past year, Clover Leaf Bank has increased its focus on
commercial lending, and has begun to sell residential loans on the secondary
market, while retaining servicing rights for the sold loans. In addition, we
reduced our indirect automobile loan portfolio and some commercial loans which
carried an above average credit risk. Securities, including Federal Home Loan
Bank stock, decreased $470,000, or 2.7% to $16.9 million at December 31, 2002
from $17.3 million at December 31, 2001. Cash and cash equivalents decreased
$4.7 million, or 36.6% to $8.1 million at December 31, 2002 from $12.8 million
at December 31, 2001. This decrease in cash resulted primarily from the
subscription funds held by Clover Leaf Bank at December 31, 2001, as part of the
stock offering as discussed above, offset by cash used in or provided by
operating, financing and investing activities
Non-performing loans increased $170,000 to $1.7 million at December 31,
2002 from $1.6 million at December 31, 2001. The non-performing loans to total
loans ratio at December 31, 2002 was 2.55% compared to 2.49% at December 31,
2001.
7
Deposits as of December 31, 2002 were $72.5 million, a decrease of $8.4
million, or 10.4%, from December 31, 2001. The decline in deposits resulted
primarily from stock offering subscription funds of approximately $6.6 million
held by Clover Leaf Bank at December 31, 2001 that had been returned to but not
yet cashed by subscribers. The remaining decline in deposits is attributable to
decreased activity in time deposits during a period of declining interest rates.
Borrowings as of December 31, 2002 were $9.0 million, an increase of $7.5
million, or 500.0% from December 31, 2001. Federal Home Loan Bank ("FHLB")
advances were used partially to fund loan growth during a time of deposit
run-off.
Total stockholders' equity as of December 31, 2002 was $12.7 million, an
increase of $207,000 or 1.7% from $12.5 million at December 31, 2001. The
increase in equity from December 31, 2001 to December 31, 2002 was primarily the
result of the addition of earnings of $495,000, offset by the purchase of 10,700
shares of stock to fund Clover Leaf Bank's employee stock ownership plan and a
decrease in the unrealized gain on investment securities available for sale. At
December 31, 2002 there were 661,250 shares of common stock outstanding, at a
book value per share of $19.23.
Comparison of Operating Results for the Years Ended December 31, 2002 and 2001
Net interest income after provision for loan losses for the year ended
December 31, 2002 was $2.7 million, compared to $1.8 million for the year ended
December 31, 2001, an increase of $883,000, or 47.8%. The net interest margin
for the year was 3.28%, compared to a net interest margin of 2.36% for the year
ended December 31, 2001.
Interest income declined $440,000, or 7.6%, compared to the prior year. The
decrease was primarily due to lower average yields on interest earning assets,
partially offset by higher average balances in loans, FHLB stock and
mortgage-backed securities. Average interest-earning assets for the year ended
December 31, 2002 were $86.0 million, an increase of $4.0 million, or 4.8%, over
average interest-earning assets of $82.0 million for the year ended December 31,
2001. Average loan balances increased $4.8 million, or 8.0% to $65.3 million for
the period ended December 31, 2002 compared to $60.5 million for the same period
in the prior year. Average security balances increased $682,000, or 3.9% to
$18.0 million for the period ended December 31, 2002 compared to $17.4 million
for the same period in the prior year. The average loan yield declined 80 basis
points to 6.81% at December 31, 2002 from 7.60% in the prior year. The shift in
the mix of the loan portfolio to a higher concentration of commercial loans is
beneficial to our overall yield, however many of those loans adjust with the
prime rate, and therefore experienced a decline in yield. The average security
yield declined 112 basis points to 4.74% at December 31, 2002 from 5.86% in the
prior year.
Interest expense for the year ended December 31, 2002 decreased to $2.5
million, a decline of $1.3 million or 34.5%, compared to the same period last
year. The decrease was primarily due to lower rates paid on interest-bearing
liabilities, as well as to lower balances of time deposits offset by an increase
in savings deposits and borrowed funds. The average interest paid on
certificates of deposit fell by 138 basis points to 4.51% for the year ended
December 31, 2002, from 5.89% for the prior-year period.
The increase in net interest income is due, in large part, to the relative
changes in the yield and cost of our assets and liabilities as a result of
decreasing market interest rates in calendar 2001 and 2002. This decrease in
market interest rates has reduced the cost of interest-bearing liabilities
faster and to a greater extent than the rates on interest-earning assets such as
loans and securities.
Non-interest income for the year ended December 31, 2002 was $461,000
compared to $240,000 for the year ended December 31, 2001, an increase of
$221,000, or 92.1%. This increase was primarily attributable to the gain on sale
of assets of $110,000, and the gain on sale of loans of $63,000. During the
fourth quarter of 2002, we sold a tract of land that was adjacent to a current
branch building. This land was being held for possible expansion of the branch
building. Our future expansion plans no longer required this property. Clover
Leaf Financial also recorded a gain on the sale of NYCE Stock, which was
classified as another asset for balance sheet purposes, of $42,000 for the
current year compared to no such gains for the prior year.
8
Non-interest expense for the year ended December 31, 2002 was $2.5 million,
or $420,000 more than expenses for the year ended December 31, 2001. The
increase was primarily attributable to increases in compensation expenses,
occupancy, and legal and collection expenses. Salary expense increased $213,000,
or 20.7%, as a result of staff additions and annual merit and bonus increases.
Occupancy and equipment expense increased $56,000, or 20.3%, due to increases in
real estate property taxes and a change in the accrual method for such taxes.
Professional fees increased $53,000, or 64.6%, as a result of the filing and
accounting regulations related to being a public company, as well as expenses
incurred with the current pending litigation, discussed above. Other expenses
increased $101,000, or 29.7%, due in part to expenses incurred related to
collection efforts on our non-performing consumer loan portfolio. The remaining
increase is a result of slight increases in several expense categories, of which
none are due to significant events.
Liquidity and Capital Resources
At December 31, 2002, Clover Leaf Bank had loan commitments and unused
lines of credit of $8.2 million. Clover Leaf Bank believes it has adequate
resources to fund loan commitments as they arise. If Clover Leaf Bank requires
funds beyond its internal funding capabilities, advances from the FHLB of
Chicago are available. At December 31, 2002, approximately $27.6 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.
Clover Leaf Financial does not engage in any significant business activity
other than owning all of the common stock of Clover Leaf Bank. Clover Leaf
Financial's primary source of funds is income from its investments and principal
and interest payments received on the employee stock ownership plan loan. Future
dividends from Clover Leaf Bank will also be a source of funds for Clover Leaf
Financial; however, as a stock-chartered savings bank, Clover Leaf Bank is
subject to regulatory limitations on its ability to pay cash dividends.
Recent Accounting Pronouncements
In June 2001, Statement on Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," was issued to address financial
reporting and obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities and to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development or normal
operations of a long-lived asset, except for certain obligations of lessees.
Statement No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Clover Leaf Financial does not believe the
adoption of this Statement will have a material effect on the consolidated
financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of Clover Leaf
Financial have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the value of money over time due to
inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
COMMON STOCK AND RELATED MATTERS
Clover Leaf Financial's common stock is quoted on the Over-the-Counter
Bulletin Board under the symbol "CLOV." As of February 28, 2003, Clover Leaf
Financial had one registered market maker, 175 stockholders of record (excluding
the number of persons or entities holding stock in street name through various
brokerage firms), and 641,250 shares outstanding.
9
The following table sets forth market price and dividend information
for the common stock since the completion of Clover Leaf Bank's mutual-to-stock
conversion on December 27, 2001.
Fiscal Year Ended Cash Dividends
December 31, 2002 High Low Declared
-------------------- ------------ ------------ ----------------------
Fourth quarter $ 17.50 $ 14.50 $ -
Third quarter 14.90 14.49 -
Second quarter 15.10 13.50 -
First quarter 14.60 12.85 -
Fiscal Year Ended Cash Dividends
December 31, 2001 High Low Declared
-------------------- ------------ ------------ ----------------------
Fourth quarter $ 14.60 $ 11.00 $ -
Payment of dividends on Clover Leaf Financial's common stock is subject to
determination and declaration by the Board of Directors and will depend upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, Clover Leaf Financial's results of operations and
financial condition, tax considerations and general economic conditions. No
assurance can be given that dividends will be declared or, if declared, what the
amount of dividends will be, or whether such dividends, once declared, will
continue.
Under the Illinois Banking Act, a state-chartered commercial bank may pay
dividends from net profits so long as at least 10% of net profits since the date
of the declaration of the last preceding dividend are carried to surplus.
At December 31, 2002, Clover Leaf Bank was deemed a well-capitalized
institution for purposes of the above regulations and as such is not subject to
the above-mentioned restrictions.
In addition to the foregoing, earnings of Clover Leaf Bank appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then-current tax rate by Clover Leaf Bank on the amount
of earnings removed from the reserves for such distributions. Clover Leaf
Financial intends to make full use of this favorable tax treatment and does not
contemplate any distribution by Clover Leaf Bank in a manner that would create
federal tax liability.
10
11
CLOVER LEAF FINANCIAL CORP.
AND SUBSIDIARY
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 12
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 13
Consolidated statements of income 14
Consolidated statements of changes in stockholders' equity 15
Consolidated statements of cash flows 16
Notes to consolidated financial statements 17 - 33
--------------------------------------------------------------------------------
11
[McGladrey & Pullen LOGO]
Certified Public Accountants
Independent Auditor's Report
Board of Directors
Clover Leaf Financial Corp.
Edwardsville, Illinois
We have audited the accompanying consolidated balance sheets of Clover Leaf
Financial Corp. and Subsidiary, as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Clover Leaf
Financial Corp. as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
February 21, 2003
McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms.
12
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
---------------------------------------------------------------------------------------------
ASSETS
Cash and due from other financial institutions $ 2,428,958 $ 2,513,396
Interest-bearing deposits in other financial institutions 5,688,163 10,279,271
Total cash and cash equivalents 8,117,121 12,792,667
----------------------------
Securities available-for-sale 13,448,482 14,306,020
Federal Home Loan Bank (FHLB) stock 3,409,000 3,021,400
Loans, net of allowance for loan losses
of $689,592 in 2002 and $646,010 in 2001 67,543,753 62,435,499
Premises and equipment, net 1,906,252 2,600,523
Accrued interest receivable 540,502 532,041
Other assets 551,133 413,038
----------------------------
Total assets $ 95,516,243 $ 96,101,188
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 7,152,821 $ 13,060,619
Interest bearing 65,334,485 67,871,755
----------------------------
Total deposits 72,487,306 80,932,374
Federal Home Loan Bank advances 9,000,000 1,500,000
Other borrowings 284,000 354,000
Accrued interest payable 217,603 314,605
Other liabilities 809,120 490,144
----------------------------
Total liabilities 82,798,029 83,591,123
----------------------------
Stockholders' Equity
Preferred Stock, $.10 par value, 250,000 shares authorized,
none issued -- --
Common Stock, $.10 par value, 2,000,000 shares authorized,
661,250 shared issued and outstanding 66,125 66,125
Surplus 6,066,259 6,133,760
Retained earnings - substantially restricted 6,653,011 6,157,791
Accumulated other comprehensive income 93,905 177,589
Unearned Employee Stock Ownership Plan shares (161,086) (25,200)
----------------------------
Total stockholders' equity 12,718,214 12,510,065
----------------------------
Total liabilities and stockholders' equity $ 95,516,243 $ 96,101,188
============================
See Notes to Consolidated Financial Statements.
13
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002 and 2001
2002 2001
--------------------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $ 4,449,037 $ 4,600,462
Taxable securities 615,764 867,649
Non-taxable securities 45,090 43,946
FHLB dividends 195,587 106,467
Interest-bearing deposits in other financial institutions and other 39,756 166,730
-------------------------
Total interest income 5,345,234 5,785,254
-------------------------
Interest expense:
Deposits 2,337,101 3,739,491
Federal Home Loan Bank advances 182,791 108,960
Other borrowings 4,608 3,371
-------------------------
Total interest expense 2,524,500 3,851,822
-------------------------
Net interest income 2,820,734 1,933,432
Provision for loan losses 93,000 88,148
-------------------------
Net interest income after provision for loan losses 2,727,734 1,845,284
-------------------------
Other income:
Service charges on deposits accounts 85,786 73,385
Other service charges and fees 61,932 68,694
Loan servicing fees 20,853 11,021
Gain on loans held for sale 125,753 62,938
Gain on sale of premises and equipment 110,735 --
Gain on sale of securities 6,682 10,552
Other 49,713 12,993
-------------------------
461,454 239,583
-------------------------
Other expense:
Salaries and employee benefits 1,240,589 1,028,111
Occupancy 229,629 153,755
Data processing 211,484 216,163
Equipment 102,589 122,178
Directors fees 100,515 99,595
Professional fees 135,213 82,476
Other 441,713 338,900
-------------------------
2,461,732 2,041,178
-------------------------
Net income before income taxes (benefit) 727,456 43,689
Income taxes (benefit) 232,236 (25,467)
-------------------------
Net income $ 495,220 $ 69,156
=========================
Basic and diluted earnings per share $ 0.76 $ 0.10
=========================
See Notes to Consolidated Financial Statements.
14
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income
---------------------------------------------------
Balance at December 31, 2000 $ -- $ -- $6,088,635 $ 9,685
Comprehensive income
Net income -- -- 69,156 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available-for-sale
arising during the year, net of tax of $ 90,579 -- -- -- --
Reclassification adjustment, net of taxes of $ (4,084) -- -- -- --
Other comprehensive income, net of taxes of $ 86,495 -- -- -- 167,904
Comprehensive income
Issuance of common stock 66,125 6,133,760 -- --
Loan to ESOP for purchase of shares -- -- -- --
---------------------------------------------------
Balance at December 31, 2001 66,125 6,133,760 6,157,791 177,589
Comprehensive income
Net income -- -- 495,220 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available-for-sale
arising during the year, net of tax of $(40,523) -- -- -- --
Reclassification adjustment, net of taxes of $ (2,586) -- -- -- --
Other comprehensive (loss), net of taxes of $(43,109) -- -- -- (83,684)
Comprehensive income
Costs related to issuance of common stock -- (67,968) -- --
Loan to ESOP for purchase of shares -- -- -- --
Allocation of ESOP shares -- 467 -- --
---------------------------------------------------
Balance at December 31, 2002 $ 66,125 $6,066,259 $6,653,011 $ 93,905
===================================================
Unearned
Employee
Stock Total
Ownership Stockholders'
Plan Shares Equity
---------------------------
Balance at December 31, 2000 $ -- $ 6,098,320
Comprehensive income
Net income -- 69,156
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available-for-sale
arising during the year, net of tax of $ 90,579 -- 174,372
Reclassification adjustment, net of taxes of $ (4,084) -- (6,468)
------------
Other comprehensive income, net of taxes of $ 86,495 -- 167,904
------------
Comprehensive income 237,060
------------
Issuance of common stock -- 6,199,885
Loan to ESOP for purchase of shares (25,200) (25,200)
---------------------------
Balance at December 31, 2001 (25,200) 12,510,065
Comprehensive income
Net income -- 495,220
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available-for-sale
arising during the year, net of tax of $(40,523) -- (79,588)
Reclassification adjustment, net of taxes of $ (2,586) -- (4,096)
------------
Other comprehensive (loss), net of taxes of $(43,109) -- (83,684)
------------
Comprehensive income 411,536
------------
Costs related to issuance of common stock -- (67,968)
Loan to ESOP for purchase of shares (140,775) (140,775)
Allocation of ESOP shares 4,889 5,356
---------------------------
Balance at December 31, 2002 $(161,086) $12,718,214
===========================
See Notes to Consolidated Financial Statements.
15
CLOVER LEAF FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 and 2001
2002 2001
---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 495,220 $ 69,156
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 136,011 162,026
Provision for loan losses 93,000 88,148
Net amortization/accretion on securities 63,764 35,865
Deferred tax provision 36,211 (19,854)
Allocation of ESOP shares 5,356 --
Gain on sale of securities (6,682) (10,552)
Federal Home Loan Bank stock dividend (187,600) (69,900)
Gain on sale of premises and equipment (110,735) --
Gain on loans held for sale (125,753) (62,938)
Proceeds from sales of loans held for sale 8,203,944 3,091,941
Originations of loans held for sale (8,078,191) (3,029,003)
(Increase) decrease in accrued interest receivable (8,461) 30,378
(Increase) decrease in other assets (131,197) 85,333
(Decrease) increase in accrued interest payable (97,002) 202,680
Increase (decrease) in other liabilities 318,976 (31,819)
-----------------------------
Net cash provided by operating activities 606,861 541,461
-----------------------------
Cash Flows from Investing Activities
Purchase of securities available-for-sale (8,345,424) (7,907,142)
Proceeds of calls, maturities and paydowns of securities available-for-sale 9,019,087 9,214,032
Purchase of Federal Home Loan Bank stock (1,500,000) (2,500,000)
Sale of Federal Home Loan Bank stock 1,300,000 --
Proceeds from sale of premises and equipment 735,735 --
Increase in loans, net (5,201,254) (5,664,619)
Purchase of premises and equipment (66,740) (10,187)
-----------------------------
Net cash used in investing activities (4,058,596) (6,867,916)
-----------------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits (8,445,068) 4,896,732
Proceeds from Federal Home Loan Bank advances 7,500,000 --
Repayments of Federal Home Loan Bank advances -- (1,500,000)
Increase (decrease) in other borrowings (70,000) 337,000
Proceeds from stock conversion -- 6,612,500
Loans to ESOP for purchase of shares (140,775) (25,200)
Costs associated with issuance of stock (67,968) (412,615)
-----------------------------
Net cash provided by (used in) financing activities (1,223,811) 9,908,417
-----------------------------
Net increase (decrease) in cash and cash equivalents (4,675,546) 3,581,962
Cash and cash equivalents:
Beginning 12,792,667 9,210,705
-----------------------------
Ending $ 8,117,121 $ 12,792,667
=============================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 2,621,502 $ 3,649,142
Income taxes, net of (refunds) 66,501 (98,080)
See Notes to Consolidated Financial Statements.
16
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Clover Leaf Financial Corp. (the Company) and its wholly-owned subsidiary,
Clover Leaf Bank (the Bank). These entities are collectively referred to herein
as the Company. All significant intercompany accounts and transactions have been
eliminated in consolidation. Based on the Company's approach to decision making,
it has decided that its business is comprised of a single business segment.
Clover Leaf Financial Corp. was formed on December 27, 2001 and purchased all of
the outstanding shares of Clover Leaf Bank, SB with the proceeds of a stock
offering completed on December 27, 2001. Simultaneous to the stock offering, the
Bank converted from a state-chartered mutual savings association to a
state-chartered capital stock savings bank. Effective December 27, 2002, the
Bank converted from a savings bank to a commercial bank.
The Company issued 661,250 shares of common stock following the stock offering.
Net proceeds to the Company were $6,612,500 of which $3,719,931 was paid to the
Bank in exchange for all of the common stock of the Bank. Expenses related to
the offering totaled $480,583. The Company has loaned $165,975 to the Bank to
purchase 12,700 shares of stock on the open market in order to establish an
Employee Stock Ownership Plan. The Company trades on the OTC Bulletin Board
under the symbol "CLOV."
Clover Leaf Bank provides residential, commercial and installment loans,
deposits and other customer services to individuals and corporate customers
primarily in Madison County, Illinois. Clover Leaf Financial Services, Inc., (a
wholly owned subsidiary of the Bank) provides life and disability insurance to
loan customers of the Bank.
Basis of presentation:
In preparing the accompanying consolidated financial statements, management is
required to make estimates and assumptions that affect the amounts reported in
the financial statements. Significant estimates which are particularly
susceptible to change in a short period of time include the determination of the
market value of investment securities and the allowance for loan losses. Actual
results could differ significantly from those estimates.
Comprehensive income:
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for
sale, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive
income.
17
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Securities available-for-sale:
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. The difference between fair value
and amortized cost (cost adjusted for amortization of premiums and accretion of
discounts, computed by the interest method of accrual over their contractual
lives) results in an unrealized gain or loss. Unrealized gains or losses are
reported as accumulated other comprehensive income (loss) in equity, net of the
related deferred tax effect. Realized gains or losses, determined using the
specific identification method, are included in earnings.
Federal Home Loan Bank stock:
The Company, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"),
is required to maintain an investment in common stock of the FHLB in an amount
equal to 1% of its outstanding home loans. No ready market exists for the FHLB
stock, and it has no quoted market value. For disclosure purposes, such stock is
assumed to have a market value which is equal to cost. Dividends received on
such stock are reflected as interest income in the consolidated statements of
income.
Loans:
Loans are stated at unpaid principal balances, less the allowance for loan
losses, deferred fees and costs. Interest income is credited to income as earned
using the simple interest method applied to the daily principal balance
outstanding and includes the amortization of net deferred loan fees and costs
over the loan term.
The accrual of interest on any loan is discontinued when, in the opinion of
management, there is reasonable doubt as to the collectibility of interest or
principal. When the accrual of interest is discontinued, all unpaid accrued
interest is reversed against income. Interest income on these loans is
subsequently recognized to the extent interest payments are received and
principal is considered to be fully collectible.
A loan is impaired when it is probable the Company will be unable to collect all
contractual principal and interest payments in accordance with the terms of the
loan. All installment and real estate loans are considered to be small balance
homogenous loan pools for the purpose of evaluating impairment. Commercial loans
are specifically evaluated for impairment. For collateralized impaired loans,
loan balances in excess of net realizable value are deemed impaired. The amount
of impairment, if any, and any subsequent changes are included in the allowance
for loan losses.
18
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Allowance for loan losses:
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible, based on an evaluation
of the collectibility of loans and prior loan loss experience. This evaluation
takes into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers' ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses, and may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their
examination.
Premises and equipment:
Land is carried at cost. Other premises and equipment are recorded at cost and
are depreciated on the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the respective assets.
Income taxes:
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future. The deferred tax
assets and liabilities are computed based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Cash and cash flows:
For the purpose of reporting cash flows, cash and cash equivalents include cash
on hand and due from other financial institutions (including cash items in
process of clearing) and interest bearing deposits in other financial
institutions. Cash flows from loans, deposits and other borrowings are reported
net.
Earnings per share:
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Shares acquired by the Employee Stock Ownership Plan (ESOP) are held in
trust but are not considered in the weighted average shares outstanding until
the shares are committed for allocation or vested to an employee's individual
account. The Company has not issued any stock options or other potentially
dilutive shares, therefore, diluted earnings are the same as basic earnings per
share.
19
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following reflects earnings per share calculations for basic and diluted
methods:
December 31,
-------------------------
2002 2001
-------------------------
Net income available to common shareholders $ 495,220 $ 69,156
=========================
Basic potential common shares:
Weighted average shares outstanding 661,250 661,250
Weighted average unallocated ESOP shares (12,345) (2,000)
-------------------------
Basic average shares outstanding 648,905 659,250
-------------------------
Diluted potential common shares -- --
-------------------------
Diluted average shares outstanding 648,905 659,250
-------------------------
Basic earnings per share $ 0.76 $ 0.10
=========================
Diluted earnings per share $ 0.76 $ 0.10
=========================
Reclassifications:
Certain amounts in 2001 have been reclassified to conform with the 2002
presentation with no effect on stockholders' equity or net income.
Emerging accounting standards:
In June 2001, Statement on Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations," was issued to address financial reporting and
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities and to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal operations of a
long-lived asset, except for certain obligations of lessees. Statement No. 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company does not believe the adoption of this Statement will
have a material effect on the consolidated financial statements.
20
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2. Cash and Due from Banks
The Company is required to maintain reserve balances in cash or on deposit with
the Federal Reserve Bank. The total of those reserve balances were approximately
$241,000 and $132,000, respectively, at December 31, 2002 and 2001.
The nature of the Company's business requires that it maintain amounts due from
banks which, at times, may exceed federally insured limits. The Company does not
anticipate experiencing any losses in such accounts.
Note 3. Securities
Amortized costs and fair values of securities available-for-sale are summarized
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------
2002
---------------------------------------------------
U.S. Agencies $ 9,351,527 $ 90,687 $ 16,130 $ 9,426,084
State and municipal securities 844,115 8,047 -- 852,162
Corporate securities 509,425 47,575 -- 557,000
Mortgage backed securities 2,601,134 28,329 16,227 2,613,236
---------------------------------------------------
$13,306,201 $ 174,638 $ 32,357 $13,448,482
===================================================
2001
---------------------------------------------------
U.S. Agencies $ 8,351,945 $ 181,563 $ 1,233 $ 8,532,275
State and municipal securities 862,514 11,300 100 873,714
Corporate securities 511,917 23,500 -- 535,417
Mortgage backed securities 4,310,570 54,044 -- 4,364,614
---------------------------------------------------
$14,036,946 $ 270,407 $ 1,333 $14,306,020
===================================================
Unexpected calls of securities during 2002 and 2001 resulted in gross gains of
$6,682 and $10,552, respectively. The tax expense applicable to these gross
realized gains amounted to $2,586 and $4,084, respectively.
21
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following is a summary of maturities of securities available-for-sale as of
December 31, 2002. Maturities may differ from contractual maturities in
mortgage-backed securities because the mortgages underlying the securities may
be called or repaid without any penalties. Therefore, these securities are not
included in the maturity categories in the following maturity summary:
Amortized Fair
Cost Value
Amounts maturing in: ----------------------------
One year or less $ 270,000 $ 270,290
After one year through five years 3,059,423 3,138,525
After five years through ten years 7,375,644 7,426,431
Mortgage backed securities 2,601,134 2,613,236
----------------------------
$13,306,201 $13,448,482
============================
Securities with a carrying amount of approximately $3,360,000 and $4,617,000
were pledged to secure deposits as required or permitted by law at December 31,
2002 and 2001, respectively.
Note 4. Loans
Major classifications of loans follow:
December 31,
-----------------------------
2002 2001
-----------------------------
Real estate loans:
One- to four-family $34,300,392 $33,772,558
Commercial 22,797,123 13,971,060
Construction and land 760,520 1,193,347
-----------------------------
Total real estate loans 57,858,035 48,936,965
-----------------------------
Other loans:
Consumer:
Deposit account -- 79,978
Automobile 1,424,641 3,136,050
Home equity 1,611,011 1,639,095
Other 1,595,454 1,571,845
-----------------------------
Total consumer loans 4,631,106 6,426,968
-----------------------------
Commercial business 5,758,958 7,732,378
-----------------------------
Total gross loans 68,248,099 63,096,311
Less:
Deferred fees and discounts 14,754 14,802
Allowance for losses 689,592 646,010
-----------------------------
Total loans receivable, net $67,543,753 $62,435,499
=============================
22
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
An analysis of the activity in the allowance for loan losses is as follows:
Year Ended
December 31,
----------------------------
2002 2001
----------------------------
Balance, beginning of year $ 646,010 $ 625,513
Provision for loan losses 93,000 88,148
Loans charged off (104,500) (131,776)
Recoveries 55,082 64,125
----------------------------
Balance, end of year $ 689,592 $ 646,010
============================
The amount of loans serviced by the Company for the benefit of others is not
included in the accompanying consolidated balance sheets. The unpaid principal
balance of these loans was approximately $10,299,000 and $5,893,000 at December
31, 2002 and 2001, respectively.
Related parties include executive officers, directors, and their affiliates.
Loans to related parties at December 31, 2002 and 2001 were approximately
$2,164,000 and $2,463,000, respectively. During the year ended December 31,
2002, total principal additions were approximately $414,000 and total principal
payments were approximately $713,000.
The loan portfolio includes a concentration of loans in commercial real estate
amounting to $22,797,123 and $13,971,060 as of December 31, 2002 and 2001,
respectively. The loans are expected to be repaid from cash flows or from
proceeds from the sale of selected assets of the borrowers. Credit losses
arising from lending transactions with commercial real estate compare favorably
with the Company's credit loss experience on its loan portfolio as a whole. The
concentration of credit with commercial real estate is taken into consideration
by management in determining the allowance for loan losses. The Company's
opinion as to the ultimate collectibility of these loans is subject to estimates
regarding future cash flows from operations and the value of the property, real
and personal, pledged as collateral. These estimates are affected by changing
economic conditions and the economic prospects of borrowers.
The Company utilizes their data processing system to identify loan payments not
made by their contractual due date and calculate the number of days each loan
exceeds the contractual due dates. The accrual of interest on any loan is
discontinued when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal.
23
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following table presents data on impaired and non-accrual loans:
December 31,
-----------------------
2002 2001
-----------------------
Impaired loans for which there is a related allowance for
loan losses $ 219,617 $ 233,101
Impaired loans for which there is no related allowance for
loan losses 346,895 761,899
-----------------------
Total impaired loans $ 566,512 $ 995,000
=======================
Allowance for loan losses for impaired loans included in
the allowance for loan losses $ 25,000 $ 44,000
=======================
Average recorded investment in impaired loans $ 683,143 $ 995,000
=======================
Cash basis income recognized from impaired loans $ 20,797 $ 39,927
=======================
Loans contractually past due 90 days or more and
still accruing interest $ 194,969 $ 114,818
=======================
Loans no longer accruing interest, including impaired loans $1,529,038 $1,438,383
=======================
Interest forgone on non-accrual loans in current year $ 118,573 $ 80,306
=======================
Note 5. Premises and Equipment
Premises and equipment consist of:
December 31,
--------------------------------
2002 2001
--------------------------------
Land and land improvements $ 459,470 $ 1,084,470
Buildings and improvements 2,024,449 1,977,005
Furniture and fixtures 785,289 765,992
--------------------------------
3,269,208 3,827,467
Accumulated depreciation (1,362,956) (1,226,944)
--------------------------------
$ 1,906,252 $ 2,600,523
================================
24
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 6. Deposits
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $4,922,000 and $7,445,000 at December 31, 2002 and
2001, respectively.
Scheduled maturities of time deposits at December 31, 2002 are as follows:
2003 $26,661,889
2004 5,842,954
2005 2,314,797
2006 1,212,207
2007 5,129,207
Thereafter 2,000
-----------
$41,163,054
===========
Note 7. Federal Home Loan Bank Advances
FHLB advances at year-end were:
2002 2001
-------------------------
2.35% advance, due July 2003, fixed rate $6,500,000 $ --
1.76% advance, due October 2003, fixed rate 1,000,000 --
5.49% advance, due February 2004, fixed rate 1,000,000 1,000,000
5.96% advance, due February 2009, fixed rate 500,000 500,000
-------------------------
$9,000,000 $1,500,000
=========================
At December 31, 2002 and 2001, in addition to FHLB stock, the Company had a
blanket lien on eligible residential real estate loans which were pledged to the
FHLB to secure advances outstanding.
Note 8. Other Borrowings
Other borrowings consist of securities sold under agreements to repurchase of
$284,000 and $354,000 at December 31, 2002 and 2001, respectively.
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The Bank may be required to
provide additional collateral based on the fair value of the underlying
securities.
25
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 9. Income Taxes (Benefit)
Income taxes (benefit) consisted of:
Year Ended
December 31,
-----------------------
2002 2001
-----------------------
Federal:
Current $ 196,025 $ (5,613)
Deferred 36,211 (19,854)
-----------------------
$ 232,236 $ (25,467)
=======================
The provision for federal income taxes differs from that computed by applying
the maximum federal statutory rate of 35% as follows:
Year Ended
December 31,
------------------------
2002 2001
------------------------
Tax expense (benefit) at statutory rate $ 254,610 $ 15,291
Tax exempt interest (18,627) (17,244)
Nondeductible expenses 3,558 2,857
Other (7,305) (26,371)
------------------------
$ 232,236 $ (25,467)
========================
The net deferred tax assets in the accompanying balance sheets include the
following components:
December 31,
--------------------
2002 2001
--------------------
Assets:
Allowance for loan losses $258,353 $232,969
Deferred compensation 132,247 152,276
Premises and equipment 32,989 17,063
Illinois net operating loss 82,178 100,163
Other 32,736 18,539
--------------------
Total deferred tax assets 538,503 521,010
Valuation allowance 109,340 128,238
--------------------
Net deferred tax assets 429,163 392,772
--------------------
Liabilities:
Unrealized gain on securities available for sale 48,376 91,485
FHLB stock dividend 145,755 73,153
--------------------
Total deferred tax liabilities 194,131 164,638
--------------------
$235,032 $228,134
====================
As of December 31, 2002, the Company had net operating loss carryovers for state
tax purposes totaling approximately $1,748,000 that are eligible to be used
through 2015.
26
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 10. Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on a Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, a Company
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. A Company's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require a Company to maintain minimum amounts and ratios of total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined). Management
believes, as of December 31, 2002, that the Company and the Bank meet all
capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Federal
regulatory agencies categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a Bank must maintain minimum Total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
As of December 31, 2002:
Total Capital (to Risk
Weighted Assets)
Clover Leaf Financial Corp. $13,308,545 21.58% $4,932,640 8.0% N/A
Clover Leaf Bank $10,950,958 17.76% $4,932,640 8.0% $6,165,800 10.0%
Tier I Capital (to Risk
Weighted Assets)
Clover Leaf Financial Corp. $12,618,953 20.47% $2,466,320 4.0% N/A
Clover Leaf Bank $10,261,366 16.64% $2,466,320 4.0% $3,699,480 6.0%
Tier I Capital (to
Average Assets)
Clover Leaf Financial Corp. $12,618,953 13.98% $3,610,841 4.0% N/A
Clover Leaf Bank $10,261,366 11.37% $3,610,841 4.0% $4,513,552 5.0%
27
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
As of December 31, 2001:
Total Capital (to Risk
Weighted Assets)
Clover Leaf Financial Corp. $12,978,486 22.91% $4,532,800 N/A
Clover Leaf Bank $10,498,533 18.53% $4,533,000 8.0% $5,666,000 10.0%
Tier I Capital (to Risk
Weighted Assets)
Clover Leaf Financial Corp. $12,332,476 21.77% $2,266,400 N/A
Clover Leaf Bank $ 9,852,523 17.39% $2,266,000 4.0% $3,400,000 6.0%
Tier I Capital (to
Average Assets)
Clover Leaf Financial Corp. $12,332,476 13.77% $3,582,320 N/A
Clover Leaf Bank $ 9,852,523 11.00% $3,582,000 4.0% $4,478,000 5.0%
Note 11. Commitments, Contingency and Credit Risk
The Company and the Bank are a party to legal actions which are in the normal
course of business activities. In the opinion of management, the ultimate
resolution of these matters is not expected to have a material effect on the
financial position or the results of operations of the Company. The Bank is the
defendant in a lawsuit filed by the Bank's former president. The suit alleges
that his termination violates Federal "whistle blower" status. The case is in
discovery. Management believes the outcome of the case will not have a material
effect on the consolidated financial statements.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in addition to the amounts recognized in the
statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
28
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A summary of the notional or contractual amounts of financial instruments,
primarily variable rate, with off-balance-sheet risk follows:
Year Ended
December 31,
---------------------------
2002 2001
---------------------------
Commitments to extend credit $8,160,000 $6,295,000
Standby letters of credit 27,000 531,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Company upon extension of credit, varies
and is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities of
customers. The Company's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit. Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and, generally, have terms of one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The Bank holds collateral, which may include
accounts receivables, inventory, property and equipment, income producing
properties, supporting those commitments if deemed necessary. In the event, the
customer does not perform in accordance with the terms of the agreement with the
third party, the Bank would be required to fund the commitment. The maximum
potential amount of future payments the Bank could be required to make is
represented by the contractual amount shown in the summary above. If the
commitment is funded, the Bank would be entitled to seek recovery from the
customer. At December 31, 2002 and 2001, no amounts have been recorded as
liabilities for the Bank's potential obligations under these guarantees.
The Company does not engage in the use of interest rate swaps, futures,
forwards, or option contracts.
Note 12. Retirement Plan
The Bank participates in a multiemployer, defined benefit retirement plan which
covers substantially all employees. Since this is a multiemployer plan, the
plan's administrators are unable to determine the actuarial present value of
benefits attributable to the Bank's participants in the plan.
Total pension expense for the years ended December 31, 2002 and 2001 was $70,006
and $54,000, respectively.
29
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 13. Liquidation Account
At the time of conversion to a stock corporation, the Bank established a
liquidation account for the benefit of eligible savings account holders who
continue to maintain their savings accounts with the Bank after conversion. In
the event of a complete liquidation of the Bank (and only in such event),
eligible savings account holders who continue to maintain their accounts with
the Bank shall be entitled to receive a distribution from the liquidation
account after payment to all creditors but before any liquidation distribution
with respect to common stock. The initial liquidation account was established at
approximately $6.2 million. This account is proportionately reduced for any
subsequent reduction in the eligible holders' deposit accounts. The creation and
maintenance of the liquidation account will not restrict the use or application
of any of the capital accounts of the Bank, except that the Bank may not declare
or pay a cash dividend on, or purchase any of, its capital stock, if the effect
of such dividends or repurchase would be to cause the Bank's net worth to be
reduced below the aggregate amount then required for the liquidation account, or
the amount required by federal or state law. Due to various natural events, such
as death, relocation and general attrition of accounts, the balance in the
liquidation account has been reduced to $2.8 at December 31, 2002.
Note 14. Employee Stock Ownership Plan
The Company has an employee stock ownership plan which covers substantially all
employees who have attained the age of 21 and completed one year of service. In
connection with the conversion to a stock corporation, the Company loaned funds
to the ESOP for the purchase of shares of the Company's common stock on the open
market of $12.60 per share using funds loaned by the Company. During 2002, the
Company purchased 10,700 shares at an average price of $13.15. The Company loan
is being repaid with level principal payments over 20 years beginning March 7,
2003. All shares are held in a suspense account for allocation among the
participants as the loan is repaid. Shares released from the suspense account
are allocated among the participants based upon their pro rata annual
compensation. The purchases of the shares by the ESOP were recorded by the
Company as unearned ESOP shares in a contra equity account. As ESOP shares are
committed to be released to compensate employees, the contra equity account is
reduced and the Company recognizes compensation expense equal to the fair market
value of the shares committed to be released. Compensation expense of $5,356 was
incurred in 2002. No compensation expense related to the ESOP was incurred in
2001. The following table reflects the shares held by the plan at December 31,
2002 and 2001:
December 31,
---------------
2002 2001
---------------
Unallocated shares (fair value at December 31, 2002 and 2001
of $193,889 and $25,200, respectively) 12,326 2,000
Allocated shares 374 --
---------------
Committed to be released 12,700 2,000
===============
30
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 15. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Approximate carrying values and estimated fair values at December 31, 2002 and
2001 is summarized as follows:
2001 2002
----------------------------------------------------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------
Assets:
Cash and due from other
financial institutions $ 2,428,958 $ 2,428,958 $ 2,513,396 $ 2,513,396
Interest-bearing deposits in
other financial institutions 5,688,163 5,688,163 10,279,271 10,279,271
Securities available for sale 13,448,482 13,448,482 14,306,020 14,306,020
FHLB stock 3,409,000 3,409,000 3,021,400 3,021,400
Loans 67,543,753 66,855,092 62,435,499 61,447,647
Accrued interest receivable 540,502 540,502 532,041 532,041
Liabilities:
Noninterest bearing deposits 7,152,821 7,152,821 13,060,619 13,060,619
Interest bearing deposits 65,334,485 65,647,488 67,871,755 68,741,399
FHLB advances 9,000,000 9,084,816 1,500,000 1,520,490
Other borrowings 284,000 284,000 354,000 354,000
Accrued interest payable 217,603 217,603 314,605 314,605
The carrying value of cash and cash equivalents, transaction accounts, savings,
other borrowings and accrued interest receivable and payable are considered
reasonable estimates of those instruments fair values.
The fair value of investment securities and mortgage-backed securities is based
on quoted market prices and prices obtained from independent pricing services.
FHLB stock and other investments, included in investment securities, for which
current market values are not readily available are believed to have carrying
values which approximate market values. The fair value of loans, FHLB advances
and certificates of deposit, are estimated based on present values using
published rates currently available that are applicable to each category of such
financial instrument.
No adjustment was made to the interest rates for changes in credit of performing
loans for there are no known credit concerns. Management segregates loans in
appropriate risk categories. Management believes that the risk factor embedded
in the interest rates along with the general reserves applicable to the
performing loan portfolio results in a fair valuation of such loans.
31
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Bank does not have unrecognized financial instruments, other than those
discussed in Note 11, which are subject to fair value disclosure. The difference
between the fair value and the face value for the instruments disclosed in Note
11 was not considered material.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2002 and 2001. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
Note 16. Condensed Parent Company Only Financial Statements
December 31,
----------------------------
Balance Sheets 2002 2001
----------------------------
Assets:
Cash and cash equivalents $ 2,056,088 $ 2,479,954
Equity in net assets of Clover Leaf Bank 10,360,626 10,030,111
Other assets 301,500 25,200
$ 12,718,214 $ 12,535,265
Liabilities and stockholders' equity:
Other liabilities $ -- $ 25,200
Common stock 66,125 66,125
Surplus 6,066,259 6,133,760
Retained earnings 6,653,011 6,157,791
Accumulated comprehensive income 93,905 177,589
Unearned ESOP shares (161,086) (25,200)
$ 12,718,214 $ 12,535,265
Years Ended December 31,
----------------------------
Statements of income 2002 2001
----------------------------
Dividends from subsidiary $ -- $ --
Interest income 7,454 --
Operating income 7,454 --
Equity in undistributed earnings of Clover Leaf Bank 549,618 69,156
Other noninterest income -- --
Total other income 549,618 69,156
Other expenses 89,877 --
Income before income tax benefit 467,195 69,156
Income tax benefit 28,025 --
Net income $ 495,220 $ 69,156
32
CLOVER LEAF FINANCIAL cORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Years Ended December 31,
--------------------------
Statements of cash flows 2002 2001
--------------------------
Operating activities:
Net income $ 495,220 $ 69,156
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of Clover Leaf Bank (549,618) (69,156)
(Decrease) increase in other liabilities (25,200) 25,200
Increase in other assets (135,525) --
--------------------------
Net cash provided by operating activities (215,123) 25,200
--------------------------
Financing activities:
Loans to ESOP for purchase of shares (140,775) (25,200)
Costs associated with issuance of stock (67,968) (412,615)
Proceeds from stock conversion -- 6,612,500
Purchase Bank stock in conversion -- (3,719,931)
--------------------------
Net cash used in financing activities (208,743) 2,454,754
--------------------------
Increase (decrease) in cash and cash equivalents (423,866) 2,479,954
Cash and cash equivalents:
Beginning of period 2,479,954 --
--------------------------
End of period $ 2,056,088 $ 2,479,954
==========================
33
STOCKHOLDER INFORMATION
Annual Meeting Transfer Agent
The Annual Meeting of Stockholders Registrar and Transfer Company 10
will be held at 1:00 p.m. on May 27, Commerce Drive Cranford, New Jersey
2003 at Clover Leaf Bank, 2143 S. 07016
Route 157, Edwardsville, Illinois.
If you have any questions concerning
Stock Listing your stockholder account, please call
our transfer agent, noted above, at
The Company's Common Stock trades (800) 368-5948. This is the number to
over-the-counter on the OTC Bulletin call if you require a change of
Board under the symbol "CLOV.OB" address, records or information about
lost certificates.
Special Counsel
Annual Report on Form 10-KSB
Luse Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400 A copy of the Company's Form 10-KSB
Washington, D.C. 20015 for the fiscal year ended December 31,
2002, will be furnished without charge
Independent Auditors to stockholders as of April 15, 2003,
upon written request to the Secretary,
McGladrey & Pullen, LLP Clover Leaf Financial Corp., 200 East
1806 Fox Drive Park Street, Edwardsville, Illinois
Champaign, Illinois 61820 62025.
DIRECTORS AND OFFICERS
Directors Officers
Philip H. Weber Dennis M. Terry
Chairman of the Board President and
Chief Executive Officer
Robert W. Schwartz
Vice Chairman of the Board Lisa R. Fowler
Senior Vice President
Joseph J. Gugger
Darlene F. McDonald
Kenneth P. Highlander Senior Vice President,
Treasurer and Secretary
Gary D. Niebur
Dennis M. Terry
Dennis Ulrich
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Dennis M. Terry, President and Chief Executive Officer, and Darlene F. McDonald,
Senior Vice President and Chief Financial Officer of Clover Leaf Financial Corp.
(the "Company"), each certify in his or her capacity as an officer of the
Company that he or she has reviewed the Annual Report of the Company on Form
10-KSB for the year ended December 31, 2002 and that to the best of his or her
knowledge:
1. the report fully complies with the requirements of Sections 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
March 28, 2003 /s/ Dennis M. Terry
--------------------- -----------------------------------
Date Dennis M. Terry
President and Chief Executive Officer
March 28, 2003 /s/ Darlene F. McDonald
--------------------- -----------------------------------
Date Darlene F. McDonald
Senior Vice President and Chief Financial Officer