Attached files
file | filename |
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EX-32 - EXHIBIT 32 - First Clover Leaf Financial Corp. | ex32.htm |
EX-31.1 - EXHIBIT 31.1 - First Clover Leaf Financial Corp. | ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - First Clover Leaf Financial Corp. | ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______________ to ____________
Commission file number 000-50820
FIRST CLOVER LEAF FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Maryland
|
20-4797391
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
6814 Goshen Road, Edwardsville, IL
|
62025
|
(Address of principal executive office)
|
(Zip Code)
|
Registrant's telephone number, including area code (618) 656-6122
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o. No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
|
Accelerated filer o
|
Non-accelerated filero (do not check if smaller reporting company)
|
Smaller reporting company x
|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o. No x.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
|
Outstanding May 12, 2011
|
Common Stock, par value $.10 per share
|
7,870,921
|
FIRST CLOVER LEAF FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2011
INDEX
|
PAGE NO.
|
3
|
|
4
|
|
5
|
|
6
|
|
8
|
|
26
|
|
36
|
|
38
|
|
39
|
|
39
|
|
39
|
|
39
|
|
39
|
|
39
|
|
40
|
|
41
|
(Unaudited)
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Assets
|
||||||||
Cash and due from banks
|
$ | 10,902,121 | $ | 11,294,266 | ||||
Interest-earning deposits
|
10,880,843 | 12,773,854 | ||||||
Federal funds sold
|
31,640,351 | 42,184,927 | ||||||
Total cash and cash equivalents
|
53,423,315 | 66,253,047 | ||||||
Interest-earning time deposits
|
1,723,388 | 1,718,651 | ||||||
Securities available for sale
|
87,025,472 | 78,474,908 | ||||||
Federal Home Loan Bank stock
|
6,306,273 | 6,306,273 | ||||||
Loans, net of allowance for loan losses of $4,341,903 and $5,728,395
|
||||||||
at March 31, 2011 and December 31, 2010, respectively
|
390,176,486 | 387,567,638 | ||||||
Loans held for sale
|
1,111,650 | - | ||||||
Property and equipment, net
|
10,436,594 | 10,562,321 | ||||||
Goodwill
|
11,385,323 | 11,385,323 | ||||||
Core deposit intangible
|
1,042,650 | 1,120,000 | ||||||
Foreclosed assets
|
5,152,389 | 3,844,347 | ||||||
Mortgage servicing rights
|
576,654 | 601,325 | ||||||
Accrued interest receivable
|
2,051,184 | 1,866,511 | ||||||
Prepaid Federal Deposit Insurance Corporation insurance premiums
|
2,133,094 | 2,301,408 | ||||||
Other assets
|
3,286,205 | 2,968,232 | ||||||
Total assets
|
$ | 575,830,677 | $ | 574,969,984 | ||||
Liabilities and Stockholders' Equity
|
||||||||
Liabilities:
|
||||||||
Deposits:
|
||||||||
Non-interest-bearing
|
$ | 32,783,874 | $ | 34,172,434 | ||||
Interest-bearing
|
420,319,961 | 413,310,775 | ||||||
Total deposits
|
453,103,835 | 447,483,209 | ||||||
Federal Home Loan Bank advances
|
21,928,000 | 21,924,000 | ||||||
Securities sold under agreements to repurchase
|
16,377,112 | 21,457,075 | ||||||
Subordinated debentures
|
4,000,000 | 3,974,272 | ||||||
Accrued interest payable
|
496,909 | 561,687 | ||||||
Other liabilities
|
1,963,587 | 2,236,302 | ||||||
Total liabilities
|
497,869,443 | 497,636,545 | ||||||
Stockholders' Equity
|
||||||||
Preferred stock, $.10 par value, 10,000,000 shares authorized,
|
||||||||
no shares issued
|
- | - | ||||||
Common stock, $.10 par value, 20,000,000 shares authorized,
|
||||||||
7,881,521 and 7,887,702 shares issued and outstanding at
|
||||||||
March 31, 2011 and December 31, 2010, respectively
|
788,152 | 788,770 | ||||||
Additional paid-in capital
|
62,077,543 | 62,116,845 | ||||||
Retained earnings
|
14,823,361 | 14,384,059 | ||||||
Accumulated other comprehensive income
|
832,206 | 614,774 | ||||||
Unearned Employee Stock Ownership Plan shares
|
(560,028 | ) | (571,009 | ) | ||||
Total stockholders' equity
|
77,961,234 | 77,333,439 | ||||||
Total liabilities and stockholders' equity
|
$ | 575,830,677 | $ | 574,969,984 | ||||
See Notes to Consolidated Financial Statements.
|
||||||||
Consolidated Statements of Income
(Unaudited)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Interest and dividend income:
|
||||||||
Interest and fees on loans
|
$ | 5,400,031 | $ | 5,739,713 | ||||
Securities:
|
||||||||
Taxable interest income
|
434,431 | 647,413 | ||||||
Non-taxable interest income
|
163,612 | 154,275 | ||||||
Federal Home Loan Bank dividends
|
1,590 | - | ||||||
Interest-earning deposits, federal funds sold, and other
|
24,808 | 19,038 | ||||||
Total interest and dividend income
|
6,024,472 | 6,560,439 | ||||||
Interest expense:
|
||||||||
Deposits
|
1,614,632 | 2,040,167 | ||||||
Federal Home Loan Bank advances
|
125,730 | 342,429 | ||||||
Securities sold under agreements to repurchase
|
5,615 | 6,452 | ||||||
Subordinated debentures
|
48,189 | 73,701 | ||||||
Total interest expense
|
1,794,166 | 2,462,749 | ||||||
Net interest income
|
4,230,306 | 4,097,690 | ||||||
Provision for loan losses
|
300,000 | 423,000 | ||||||
Net interest income after provision for loan losses
|
3,930,306 | 3,674,690 | ||||||
Other income:
|
||||||||
Service fees on deposit accounts
|
93,750 | 83,621 | ||||||
Other service charges and fees
|
82,591 | 84,540 | ||||||
Loan servicing fees
|
47,007 | 49,063 | ||||||
Gain on sale or call of securities
|
796 | - | ||||||
Gain on sale of loans
|
30,764 | 66,761 | ||||||
Other
|
(4,770 | ) | 14,874 | |||||
250,138 | 298,859 | |||||||
Other expenses:
|
||||||||
Compensation and employee benefits
|
1,208,747 | 1,164,885 | ||||||
Occupancy expense
|
322,817 | 354,762 | ||||||
Data processing services
|
161,359 | 165,125 | ||||||
Director fees
|
35,100 | 50,650 | ||||||
Professional fees
|
129,463 | 36,998 | ||||||
Federal Deposit Insurance Corporation insurance premiums
|
179,705 | 195,083 | ||||||
Amortization of core deposit intangible
|
77,350 | 99,000 | ||||||
Amortization of mortgage servicing rights
|
38,260 | 26,133 | ||||||
Other
|
619,031 | 409,372 | ||||||
2,771,832 | 2,502,008 | |||||||
Income before income taxes
|
1,408,612 | 1,471,541 | ||||||
Income tax expense
|
502,731 | 511,029 | ||||||
Net income
|
$ | 905,881 | $ | 960,512 | ||||
Basic and diluted earnings per share (see Note 6)
|
$ | 0.12 | $ | 0.12 | ||||
Dividends per share
|
$ | 0.06 | $ | 0.06 | ||||
See Notes to Consolidated Financial Statements.
|
||||||||
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Net income
|
$ | 905,881 | $ | 960,512 | ||||
Other comprehensive income:
|
||||||||
Unrealized gains (losses) on securities
|
||||||||
arising during the period, net of tax
|
217,945 | (77,488 | ) | |||||
Reclassification adjustment for realized
|
||||||||
gains included in income, net of tax
|
(513 | ) | - | |||||
Comprehensive income
|
$ | 1,123,313 | $ | 883,024 | ||||
See Notes to Consolidated Financial Statements.
|
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Cash Flows from Operating Activities
|
||||||||
Net income
|
$ | 905,881 | $ | 960,512 | ||||
Adjustments to reconcile net income to net cash provided
|
||||||||
by (used in) operating activities:
|
||||||||
Amortization (accretion) of:
|
||||||||
Deferred loan origination costs, net
|
3,275 | 7,616 | ||||||
Premiums and discounts on securities
|
(119,355 | ) | (186,262 | ) | ||||
Core deposit intangible
|
77,350 | 99,000 | ||||||
Mortgage servicing rights
|
38,260 | 26,133 | ||||||
Amortization of fair value adjustments on:
|
||||||||
Loans
|
(13,600 | ) | (14,200 | ) | ||||
Time deposits
|
(8,000 | ) | (15,000 | ) | ||||
Federal Home Loan Bank advances
|
4,000 | (5,000 | ) | |||||
Subordinated debt
|
25,728 | 11,016 | ||||||
Investment securities
|
(17,133 | ) | (12,750 | ) | ||||
Property and equipment
|
4,018 | 4,018 | ||||||
Provision for loan losses
|
300,000 | 423,000 | ||||||
Depreciation
|
140,871 | 157,322 | ||||||
ESOP expense
|
15,218 | 14,506 | ||||||
Gain on sale or call of securities available for sale
|
(796 | ) | - | |||||
Gain on sale of loans
|
(30,764 | ) | (66,761 | ) | ||||
Loss on sale of property and equipment
|
- | 2,196 | ||||||
Loss (gain) on sale of foreclosed assets
|
20,778 | (14,400 | ) | |||||
Proceeds from sales of loans held for sale
|
1,665,012 | 3,103,317 | ||||||
Originations of loans held for sale
|
(2,745,898 | ) | (2,281,656 | ) | ||||
Change in assets and liabilities:
|
||||||||
Decrease in prepaid Federal Deposit Insurance Corporation
|
||||||||
insurance premiums
|
168,314 | 170,443 | ||||||
Decrease (increase) in accrued interest receivable
|
(184,673 | ) | 126,370 | |||||
Increase in mortgage servicing rights
|
(13,589 | ) | (29,151 | ) | ||||
Increase in other assets
|
(317,973 | ) | (82,148 | ) | ||||
Decrease in accrued interest payable
|
(64,778 | ) | (307,060 | ) | ||||
Increase (decrease) in other liabilities
|
(400,412 | ) | 577,950 | |||||
Net cash flows provided by (used in) operating activities
|
(548,266 | ) | 2,669,011 | |||||
Cash Flows from Investing Activities
|
||||||||
Purchase of interest-earning time deposits
|
(4,737 | ) | - | |||||
Available for sale securities:
|
||||||||
Purchases
|
(41,578,680 | ) | (109,605,000 | ) | ||||
Proceeds from calls, maturities, and paydowns
|
33,510,529 | 99,883,743 | ||||||
Decrease (increase) in loans
|
(5,123,843 | ) | 2,787,089 | |||||
Purchase of property and equipment
|
(19,162 | ) | (16,697 | ) | ||||
Proceeds from the sale of foreclosed assets
|
896,500 | 275,798 | ||||||
Net cash flows used in investing activities
|
(12,319,393 | ) | (6,675,067 | ) | ||||
(Continued)
|
||||||||
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Cash Flows from Financing Activities
|
||||||||
Net increase in deposit accounts
|
$ | 5,628,626 | $ | 723,620 | ||||
Net increase (decrease) in securities sold under agreements to
|
||||||||
repurchase
|
(5,079,963 | ) | 5,854,131 | |||||
Repayments of Federal Home Loan Bank advances
|
- | (1,500,000 | ) | |||||
Repurchase of common stock
|
(44,157 | ) | (60,567 | ) | ||||
Cash dividends paid
|
(466,579 | ) | (469,962 | ) | ||||
Net cash flows provided by financing activities
|
37,927 | 4,547,222 | ||||||
Net increase (decrease) in cash and cash equivalents
|
(12,829,732 | ) | 541,166 | |||||
Cash and cash equivalents:
|
||||||||
Beginning
|
66,253,047 | 47,996,754 | ||||||
Ending
|
$ | 53,423,315 | $ | 48,537,920 | ||||
Supplemental Schedule of Noncash Investing Activities
|
||||||||
Assets acquired in settlement of loans
|
$ | 2,225,320 | $ | 1,221,677 | ||||
Supplemental Disclosures of Cash Flow Information
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 1,837,216 | $ | 2,778,793 | ||||
Income taxes, net of refunds
|
880,000 | - | ||||||
See Notes to Consolidated Financial Statements.
|
||||||||
Note 1. Summary of Significant Accounting Policies
The information contained in the accompanying consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations for the interim periods. All such adjustments are of a normal recurring nature. Any differences appearing between the numbers presented in the financial statements and management’s discussion and analysis are due to rounding. The results of operations for the interim periods are not necessarily indicative of the results which may be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements of First Clover Leaf Financial Corp. (the “Company” or “First Clover Leaf”) for the year ended December 31, 2010 contained in the 2010 Annual Report to Stockholders that is filed as Exhibit 13 to the Company’s Annual Report on Form 10-K. Accordingly, footnote disclosures which would substantially duplicate the disclosures in the audited consolidated financial statements have been omitted.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
The Company is a Maryland corporation that was incorporated in March 2006 as the successor corporation to First Federal Financial Services, Inc., in connection with the July 2006 “second-step” conversion of First Federal Financial Services, MHC and the simultaneous acquisition of Clover Leaf Financial Corp. and its wholly owned savings bank subsidiary, Clover Leaf Bank. The accompanying interim consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, First Clover Leaf Bank (the “Bank”) and its wholly owned subsidiary, Clover Leaf Financial Services. First Clover Leaf’s common stock is traded on the NASDAQ Capital Market under the symbol “FCLF.”
Recent accounting pronouncements: The following accounting standards were recently issued relating to the financial services industry:
In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”). The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The new authoritative guidance amends only the disclosure requirements for loans and leases and the Allowance. The Company adopted the period end disclosure provisions of this new authoritative guidance in the reporting period ending December 31, 2010. Adoption of the new guidance did not have an impact on the Company’s statements of income and financial condition. The Company adopted the disclosure provisions of the new authoritative guidance about activity that occurs during a reporting period on January 1, 2011; the adoption did not have an impact on the Company’s statements of income and financial condition. The disclosures related to loans modified in a troubled debt restructuring will be effective for the reporting periods after June 15, 2011 and will have no impact on the Company’s statements of income and financial condition.
Note 1. Summary of Significant Accounting Policies (Continued)
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The provisions of ASU 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, including factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties. The provisions of ASU 2011-02 are effective for the interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company is currently evaluating the provisions of ASU 2011-02 for their effect on the Company’s financial statements.
Reclassifications: Certain reclassifications have been made to the balances, with no effect on net income or total stockholders’ equity, for the three months ended March 31, 2010, to be consistent with the classifications adopted for the three months ended March 31, 2011.
Note 2. Securities
The amortized cost and fair values of securities available for sale, with gross unrealized gains and losses, are summarized as follows:
March 31, 2011
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
(Losses)
|
Value
|
|||||||||||||
Investment Securities:
|
||||||||||||||||
U.S. government agency obligations
|
$ | 44,269,927 | $ | 752,536 | $ | (38,883 | ) | $ | 44,983,580 | |||||||
Corporate bonds
|
2,096,600 | 38,017 | (22,820 | ) | 2,111,797 | |||||||||||
State and municipal securities
|
19,255,161 | 488,415 | (149,755 | ) | 19,593,821 | |||||||||||
Other securities
|
3,501 | - | - | 3,501 | ||||||||||||
Mortgage-backed securities
|
20,079,210 | 367,476 | (113,913 | ) | 20,332,773 | |||||||||||
Total Investment Securities available for sale
|
$ | 85,704,399 | $ | 1,646,444 | $ | (325,371 | ) | $ | 87,025,472 | |||||||
December 31, 2010
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
(Losses)
|
Value
|
|||||||||||||
Investment Securities:
|
||||||||||||||||
U.S. government agency obligations
|
$ | 41,856,949 | $ | 846,029 | $ | (12,585 | ) | $ | 42,690,393 | |||||||
Corporate bonds
|
2,096,569 | 43,509 | (82,439 | ) | 2,057,639 | |||||||||||
State and municipal securities
|
17,803,252 | 358,089 | (387,070 | ) | 17,774,271 | |||||||||||
Other securities
|
3,501 | - | - | 3,501 | ||||||||||||
Mortgage-backed securities
|
15,738,693 | 362,007 | (151,596 | ) | 15,949,104 | |||||||||||
Total Investment Securities available for sale
|
$ | 77,498,964 | $ | 1,609,634 | $ | (633,690 | ) | $ | 78,474,908 |
Note 2. Securities (Continued)
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2011 and December 31, 2010, are summarized as follows:
March 31, 2011
|
||||||||||||||||||||||||
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
Securities available for sale:
|
||||||||||||||||||||||||
U.S. government agency
|
||||||||||||||||||||||||
obligations
|
$ | 5,010,990 | $ | 38,883 | $ | - | $ | - | $ | 5,010,990 | $ | 38,883 | ||||||||||||
Corporate bonds
|
- | - | 677,180 | 22,820 | $ | 677,180 | $ | 22,820 | ||||||||||||||||
State and municipal securities
|
5,059,019 | 149,755 | - | - | $ | 5,059,019 | $ | 149,755 | ||||||||||||||||
Mortgage-backed securities
|
8,130,901 | 113,913 | - | - | $ | 8,130,901 | $ | 113,913 | ||||||||||||||||
$ | 18,200,910 | $ | 302,551 | $ | 677,180 | $ | 22,820 | $ | 18,878,090 | $ | 325,371 | |||||||||||||
December 31, 2010
|
||||||||||||||||||||||||
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
Securities available for sale:
|
||||||||||||||||||||||||
U.S. government agency
|
||||||||||||||||||||||||
obligations
|
$ | 2,486,130 | $ | 12,585 | $ | - | $ | - | $ | 2,486,130 | $ | 12,585 | ||||||||||||
Corporate bonds
|
- | - | 617,561 | 82,439 | 617,561 | 82,439 | ||||||||||||||||||
State and municipal securities
|
8,028,070 | 387,070 | - | - | 8,028,070 | 387,070 | ||||||||||||||||||
Mortgage-backed securities
|
8,437,418 | 151,596 | - | - | 8,437,418 | 151,596 | ||||||||||||||||||
$ | 18,951,618 | $ | 551,251 | $ | 617,561 | $ | 82,439 | $ | 19,569,179 | $ | 633,690 |
Management evaluates the investment portfolio on at least a quarterly basis to determine if investments have suffered an other-than-temporary decline in value. In addition, management monitors market trends, investment grades, bond defaults and other circumstances to identify trends and circumstances that might impact the carrying value of equity securities.
At March 31, 2011, the Company had 27 securities in an unrealized loss position which included: four U.S. government agency obligations, one corporate bond, 12 state and municipal securities, and ten mortgage-backed securities. The unrealized losses resulted from changes in market interest rates and liquidity, not from changes in the probability of contractual cash flows. The Company does not intend to sell the securities, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of amortized cost. Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2011.
Note 2. Securities (Continued)
The amortized cost and fair value at March 31, 2011, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Other securities have no stated maturity. Therefore, stated maturities are not disclosed for these categories.
Available for Sale
|
||||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Due in one year or less
|
$ | 19,276,406 | $ | 19,419,257 | ||||
Due after one year through five years
|
29,590,353 | 30,472,842 | ||||||
Due after five years through ten years
|
7,575,410 | 7,656,742 | ||||||
Due after ten years
|
9,179,519 | 9,140,357 | ||||||
Mortgage-backed securities
|
20,079,210 | 20,332,773 | ||||||
Other securities
|
3,501 | 3,501 | ||||||
$ | 85,704,399 | $ | 87,025,472 | |||||
Securities with a carrying amount of approximately $62,802,000 and $74,023,000 were pledged to secure deposits as required or permitted by law at March 31, 2011 and December 31, 2010, respectively.
Note 3. Loans
The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:
At March 31,
|
At December 31,
|
|||||||||||||||
2011
|
2010
|
|||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
Real estate loans:
|
||||||||||||||||
One-to-four-family
|
$ | 100,157,148 | 24.9 | % | $ | 99,186,894 | 24.6 | % | ||||||||
Multi-family
|
31,030,082 | 7.7 | 26,543,285 | 6.6 | ||||||||||||
Commercial
|
156,692,867 | 39.0 | 160,798,616 | 39.9 | ||||||||||||
Construction and land
|
54,808,389 | 13.6 | 53,646,900 | 13.3 | ||||||||||||
342,688,486 | 85.2 | 340,175,695 | 84.4 | |||||||||||||
Commercial business
|
49,404,946 | 12.3 | 51,737,884 | 12.8 | ||||||||||||
Consumer:
|
||||||||||||||||
Home equity
|
8,424,604 | 2.1 | 9,170,067 | 2.3 | ||||||||||||
Other
|
1,546,514 | 0.4 | 1,745,125 | 0.5 | ||||||||||||
9,971,118 | 2.5 | 10,915,192 | 2.8 | |||||||||||||
Total gross loans
|
402,064,550 | 100.0 | % | 402,828,771 | 100.0 | % | ||||||||||
Less undisbursed portion of construction loans
|
(7,606,143 | ) | (9,589,505 | ) | ||||||||||||
Less deferred loan origination costs (fees), net
|
59,982 | 56,767 | ||||||||||||||
Less allowance for loan losses
|
(4,341,903 | ) | (5,728,395 | ) | ||||||||||||
Loans, net
|
$ | 390,176,486 | $ | 387,567,638 | ||||||||||||
Note 3. Loans (Continued)
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and presents these policies to the Board at least annually. A reporting system supplements the review process by providing management with reports related to loan production, loan quality, loan delinquencies and non-performing and potential problem loans.
Additional information regarding our accounting policies for the individual loan categories is contained in our 2010 Annual Report to Stockholders that is filed as an exhibit to the Company’s Annual Report on Form 10-K.
The loan portfolio includes a concentration of loans in commercial real estate amounting to approximately $156,693,000 and $160,799,000 as of March 31, 2011 and December 31, 2010, respectively. The loans are expected to be repaid from cash flows or from proceeds from the sale of selected assets of the borrowers. The concentration of credit within 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.
On rare occasions, the Company originates loans secured by single-family dwellings with high loan to value ratios exceeding 90%. The Company does not consider the level of such loans to be a significant concentration of credit as of March 31, 2011 or December 31, 2010.
Note 3. Loans (Continued)
The following tables present our past-due loans, segregated by class, as of March 31, 2011 and December 31, 2010.
March 31, 2011
|
||||||||||||||||||||||||||||
Loans
30-59 Days Past
Due
|
Loans
60-89 Days Past
Due
|
Loans
90 or More Days Past
Due
|
Total
Past Due Loans
|
Current
Loans
|
Total
|
Accruing Loans
90 or More Days
Past Due
|
||||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||
One-to-four family
|
$ | 1,321,235 | $ | 34,281 | $ | 606,949 | $ | 1,962,465 | $ | 98,194,683 | $ | 100,157,148 | $ | 8,716 | ||||||||||||||
Multi-family
|
224,116 | - | 316,085 | 540,201 | 30,489,881 | 31,030,082 | - | |||||||||||||||||||||
Commercial
|
721,911 | 71,944 | 391,497 | 1,185,352 | 155,507,515 | 156,692,867 | 243,737 | |||||||||||||||||||||
Construction and land
|
4,270,385 | 55,121 | 3,535,775 | 7,861,281 | 46,947,108 | 54,808,389 | - | |||||||||||||||||||||
6,537,647 | 161,346 | 4,850,306 | 11,549,299 | 331,139,187 | 342,688,486 | 252,453 | ||||||||||||||||||||||
Commercial business
|
273,806 | 36,110 | 514,021 | 823,937 | 48,581,009 | 49,404,946 | 482,745 | |||||||||||||||||||||
Consumer
|
||||||||||||||||||||||||||||
Home equity
|
- | - | 54,915 | 54,915 | 8,369,689 | 8,424,604 | 54,915 | |||||||||||||||||||||
Other
|
- | - | 12,127 | 12,127 | 1,534,387 | 1,546,514 | 286 | |||||||||||||||||||||
- | - | 67,042 | 67,042 | 9,904,076 | 9,971,118 | 55,201 | ||||||||||||||||||||||
Total
|
$ | 6,811,453 | $ | 197,456 | $ | 5,431,369 | $ | 12,440,278 | $ | 389,624,272 | $ | 402,064,550 | $ | 790,399 | ||||||||||||||
December 31, 2010
|
||||||||||||||||||||||||||||
Loans
30-59 Days Past
Due
|
Loans
60-89 Days Past
Due
|
Loans
90 or More Days Past
Due
|
Total
Past Due Loans
|
Current
Loans
|
Total
|
Accruing Loans
90 or More Days
Past Due
|
||||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||
One-to-four family
|
$ | 2,090,585 | $ | 295,620 | $ | 818,215 | $ | 3,204,420 | $ | 95,982,474 | $ | 99,186,894 | $ | 80,886 | ||||||||||||||
Multi-family
|
1,010,870 | - | 2,434,837 | 3,445,707 | 23,097,578 | 26,543,285 | - | |||||||||||||||||||||
Commercial
|
- | 162,159 | 1,240,250 | 1,402,409 | 159,396,207 | 160,798,616 | - | |||||||||||||||||||||
Construction and land
|
- | - | 4,927,268 | 4,927,268 | 48,719,632 | 53,646,900 | - | |||||||||||||||||||||
3,101,455 | 457,779 | 9,420,570 | 12,979,804 | 327,195,891 | 340,175,695 | 80,886 | ||||||||||||||||||||||
Commercial business
|
30,639 | - | 43,118 | 73,757 | 51,664,127 | 51,737,884 | 11,842 | |||||||||||||||||||||
Consumer:
|
||||||||||||||||||||||||||||
Home equity
|
119,671 | 96,029 | 367,304 | 583,004 | 8,587,063 | 9,170,067 | - | |||||||||||||||||||||
Other
|
- | 297 | - | 297 | 1,744,828 | 1,745,125 | - | |||||||||||||||||||||
119,671 | 96,326 | 367,304 | 583,301 | 10,331,891 | 10,915,192 | - | ||||||||||||||||||||||
$ | 3,251,765 | $ | 554,105 | $ | 9,830,992 | $ | 13,636,862 | $ | 389,191,909 | $ | 402,828,771 | $ | 92,728 | |||||||||||||||
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 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. However, exceptions may occur when a loan is in process of renewal, but it has not yet been completed. In addition, we may 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 collectability of the loan.
Note 3. Loans (Continued)
Non-accrual loans, segregated by class, are as follows:
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Real estate loans:
|
||||||||
One-to-four family
|
$ | 1,750,110 | $ | 1,855,789 | ||||
Multi-family
|
1,226,772 | 2,434,837 | ||||||
Commercial
|
266,781 | 1,289,711 | ||||||
Construction and land
|
4,776,407 | 6,177,386 | ||||||
8,020,070 | 11,757,723 | |||||||
Commercial business
|
106,551 | 109,114 | ||||||
Consumer
|
||||||||
Home equity
|
48,818 | 382,343 | ||||||
Other
|
11,841 | - | ||||||
60,659 | 382,343 | |||||||
Total non-accrual loans
|
$ | 8,187,280 | $ | 12,249,180 | ||||
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses is evaluated on at least a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans 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 and prevailing economic conditions. The allowance is prepared in accordance with ASC Topic 310 and ASC Topic 450. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The amount of the provision reflects not only the necessary increases in the allowance for loan losses related to loans newly categorized as special mention, substandard, or doubtful, but it also reflects actions taken related to other loans including, but not limited to, any necessary increases or decreases in required allowances for specific loans or loan pools.
The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention and also considered to be impaired. For such loans, an allowance is established when the fair value of the collateral, less estimated costs to sell, is lower than the carrying value of that loan for collateral dependent loans. Impaired loans may also be valued based on a discounted cash flow analysis. The general component covers non-impaired loans and is based on historical loss experience, and adjustments for general economic conditions and other qualitative risk factors that impact the Company, when such adjustments are deemed necessary.
The Bank separates its various credits into risk categories for the purposes of estimating credit losses. Risk categories are determined using a variety of financial indicators applied consistently to all credits within our portfolio. The potential loss factor that is applied to each of the risk categories is based on historical losses sustained within these categories, weighted with generally accepted regulatory and industry averages giving consideration to current economic conditions. For all loans that are classified in the Pass category, which is the majority of the Company’s loans, the Bank assigns a potential loss factor based on the most recent 3 years of loss history.
Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.
Note 3. Loans (Continued)
A summary analysis of the allowance for loan losses follows:
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Balance, beginning
|
$ | 5,728,395 | $ | 6,316,829 | ||||
Charge-offs
|
(1,773,681 | ) | (435,894 | ) | ||||
Recoveries
|
87,189 | 69,388 | ||||||
Provisions
|
300,000 | 423,000 | ||||||
Balance, ending
|
$ | 4,341,903 | $ | 6,373,323 | ||||
The following table provides additional detail of the allowance for loan losses, by portfolio segment, for the three months ended March 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Real Estate Loans
|
Commercial
Business
|
Consumer
|
Total
|
|||||||||||||
Allowance for Loan Losses:
|
||||||||||||||||
Beginning balance
|
$ | 4,743,259 | $ | 867,685 | $ | 117,451 | $ | 5,728,395 | ||||||||
Charge-offs
|
(1,773,681 | ) | - | - | (1,773,681 | ) | ||||||||||
Recoveries
|
76,642 | 10,547 | - | 87,189 | ||||||||||||
Provisions
|
570,157 | (236,455 | ) | (33,702 | ) | 300,000 | ||||||||||
Ending balance
|
$ | 3,616,377 | $ | 641,777 | $ | 83,749 | $ | 4,341,903 | ||||||||
Period-end amount allocated to:
|
||||||||||||||||
Loans individually evaluated for impairment
|
$ | 546,195 | $ | 66,756 | $ | 11,841 | $ | 624,792 | ||||||||
Loans collectively evaluated for impairment
|
3,070,182 | 575,021 | 71,908 | 3,717,111 | ||||||||||||
Ending balance
|
$ | 3,616,377 | $ | 641,777 | $ | 83,749 | $ | 4,341,903 | ||||||||
Loans:
|
||||||||||||||||
Loans individually evaluated for impairment
|
$ | 15,069,477 | $ | 709,851 | $ | 530,063 | $ | 16,309,391 | ||||||||
Loans collectively evaluated for impairment
|
327,619,009 | 48,695,095 | 9,441,055 | 385,755,159 | ||||||||||||
Ending balance
|
$ | 342,688,486 | $ | 49,404,946 | $ | 9,971,118 | $ | 402,064,550 | ||||||||
Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements. The Company considers current financial information, historical payment experience, credit documentation, public information and current economic trends. Generally, all sizeable credits receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile. Credits classified as watch generally receive a review more frequently than annually. For special mention, substandard, and doubtful credit classifications, the frequency of review is increased to no less than quarterly in order to determine potential impact on credit loss estimates.
Note 3. Loans (Continued)
The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:
Pass – A pass asset is well protected by the current worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner. Pass assets also include certain assets considered watch, which are still protected by the worth and paying capacity of the borrower but deserve closer attention and a higher level of credit monitoring.
Special Mention – A special mention asset has potential weaknesses that deserve management’s close attention. The asset may also be subject to a weak or speculative market or to economic conditions, which may, in the future adversely affect the obligor. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.
Substandard – A substandard asset is an asset with a well-defined weakness that jeopardizes repayment, in whole or in part, of the debt. These credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These assets are characterized by the distinct possibility that the institution will sustain some loss of principal and/or interest if the deficiencies are not corrected. It is not necessary for a loan to have an identifiable loss potential in order to receive this rating.
Doubtful – An asset that has all the weaknesses inherent in the substandard classification, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely likely, but it is not identified at this point due to pending factors.
Loss – An asset, or portion thereof, classified as loss is considered uncollectible and of such little value that its continuance on the Company’s books as an asset is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. As such, it is not practical or desirable to defer the write-off. Therefore, there is no balance to report at March 31, 2011 or December 31, 2010.
Note 3. Loans (Continued)
The following tables present our credit quality indicators, segregated by class, as of March 31, 2011 and December 31, 2010.
March 31, 2011
|
||||||||||||||||||||
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
||||||||||||||||
Real estate loans:
|
||||||||||||||||||||
One-to-four family
|
$ | 96,535,905 | $ | 664,037 | $ | 2,404,619 | $ | 552,587 | $ | 100,157,148 | ||||||||||
Multi-family
|
25,573,955 | - | 5,392,906 | 63,221 | 31,030,082 | |||||||||||||||
Commercial
|
143,357,198 | 10,246,619 | 3,040,567 | 48,483 | 156,692,867 | |||||||||||||||
Construction and land
|
48,045,521 | 1,931,340 | 4,831,528 | - | 54,808,389 | |||||||||||||||
313,512,579 | 12,841,996 | 15,669,620 | 664,291 | 342,688,486 | ||||||||||||||||
Commercial business
|
45,916,327 | 2,778,768 | 709,851 | - | 49,404,946 | |||||||||||||||
Consumer
|
||||||||||||||||||||
Home equity
|
7,817,738 | 39,826 | 567,040 | - | 8,424,604 | |||||||||||||||
Other
|
1,534,673 | - | 11,841 | - | 1,546,514 | |||||||||||||||
9,352,411 | 39,826 | 578,881 | - | 9,971,118 | ||||||||||||||||
Total
|
$ | 368,781,317 | $ | 15,660,590 | $ | 16,958,352 | $ | 664,291 | $ | 402,064,550 | ||||||||||
December 31, 2010
|
||||||||||||||||||||
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total
|
||||||||||||||||
Real estate loans:
|
||||||||||||||||||||
One-to-four family
|
$ | 95,736,843 | $ | 771,951 | $ | 1,706,072 | $ | 972,028 | $ | 99,186,894 | ||||||||||
Multi-family
|
23,455,816 | - | 1,589,248 | 1,498,221 | 26,543,285 | |||||||||||||||
Commercial
|
142,382,980 | 11,718,507 | 5,407,417 | 1,289,712 | 160,798,616 | |||||||||||||||
Construction and land
|
46,809,444 | 605,162 | 5,830,405 | 401,889 | 53,646,900 | |||||||||||||||
308,385,083 | 13,095,620 | 14,533,142 | 4,161,850 | 340,175,695 | ||||||||||||||||
Commercial business
|
45,743,054 | 5,281,761 | 713,069 | - | 51,737,884 | |||||||||||||||
Consumer:
|
||||||||||||||||||||
Home equity
|
8,212,078 | 40,563 | 707,283 | 210,143 | 9,170,067 | |||||||||||||||
Other
|
1,745,125 | - | - | - | 1,745,125 | |||||||||||||||
9,957,203 | 40,563 | 707,283 | 210,143 | 10,915,192 | ||||||||||||||||
Total
|
$ | 364,085,340 | $ | 18,417,944 | $ | 15,953,494 | $ | 4,371,993 | $ | 402,828,771 | ||||||||||
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by the fair value of the collateral if the loan is collateral dependent. The Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
Note 3. Loans (Continued)
The following tables provide details of impaired loans, segregated by class, as of March 31, 2011 and December 31, 2010. At March 31, 2011 and December 31, 2010, we had loans of approximately $4,916,000 and $250,000, respectively that were classified as troubled debt restructurings which are included in our impaired loans. At March 31, 2011, all of these loans were accruing and were in compliance with their modified terms. The unpaid contractual balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loans.
March 31, 2011
|
||||||||||||||||||||
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment with
No Related
Allowance
|
Recorded
Investment with
Allowance
|
Total Recorded
Investment
|
Related
Allowance
|
||||||||||||||||
Real Estate Loans:
|
||||||||||||||||||||
One-to-four family
|
$ | 1,692,768 | $ | 1,201,172 | $ | 491,596 | $ | 1,692,768 | $ | 88,225 | ||||||||||
Multi-family
|
5,794,944 | 540,201 | 4,915,926 | 5,456,127 | 101,485 | |||||||||||||||
Commercial
|
3,089,054 | 2,892,808 | 196,246 | 3,089,054 | 112,073 | |||||||||||||||
Construction and land
|
6,140,633 | 4,229,942 | 601,586 | 4,831,528 | 244,412 | |||||||||||||||
16,717,399 | 8,864,123 | 6,205,354 | 15,069,477 | 546,195 | ||||||||||||||||
Commercial business
|
806,222 | 112,967 | 596,884 | 709,851 | 66,756 | |||||||||||||||
Consumer
|
||||||||||||||||||||
Home equity
|
518,222 | 518,222 | - | 518,222 | - | |||||||||||||||
Other
|
11,841 | - | 11,841 | 11,841 | 11,841 | |||||||||||||||
530,063 | 518,222 | 11,841 | 530,063 | 11,841 | ||||||||||||||||
Total
|
$ | 18,053,684 | $ | 9,495,312 | $ | 6,814,079 | $ | 16,309,391 | $ | 624,792 | ||||||||||
December 31, 2010
|
||||||||||||||||||||
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment with
No Related
Allowance
|
Recorded
Investment with
Allowance
|
Total Recorded
Investment
|
Related
Allowance
|
||||||||||||||||
Real Estate Loans:
|
||||||||||||||||||||
One-to-four family
|
$ | 2,134,451 | $ | 1,828,061 | $ | 34,420 | $ | 1,862,481 | $ | 10,000 | ||||||||||
Multi-family
|
3,331,813 | 1,589,249 | 1,498,221 | 3,087,470 | 371,940 | |||||||||||||||
Commercial
|
7,114,333 | 5,526,878 | 1,170,250 | 6,697,128 | 290,250 | |||||||||||||||
Construction and land
|
6,961,294 | 1,059,996 | 5,172,298 | 6,232,294 | 1,442,769 | |||||||||||||||
19,541,891 | 10,004,184 | 7,875,189 | 17,879,373 | 2,114,959 | ||||||||||||||||
Commercial business
|
809,440 | 598,715 | 114,354 | 713,069 | 12,766 | |||||||||||||||
Consumer:
|
||||||||||||||||||||
Home equity
|
479,954 | 479,954 | - | 479,954 | - | |||||||||||||||
Other
|
- | - | - | - | - | |||||||||||||||
479,954 | 479,954 | - | 479,954 | - | ||||||||||||||||
Total
|
$ | 20,831,285 | $ | 11,082,853 | $ | 7,989,543 | $ | 19,072,396 | $ | 2,127,725 | ||||||||||
Note 3. Loans (Continued)
The following table provides the average recorded investment of impaired loans, segregated by class, for the three months ended March 31, 2011. The interest income recognized column represents all interest income reported either on a cash or accrued basis after the loan became impaired. The cash basis income column represents only the interest income recognized on a cash basis after the loan was classified as impaired.
Three Months Ended March 31, 2011
|
||||||||||||
Average
Recorded
Investment
|
Interest Income
Recognized
|
Cash Basis
Income
Recognized
from Impaired
Loans
|
||||||||||
Real Estate Loans:
|
||||||||||||
One-to-four family
|
$ | 1,777,625 | $ | 3,260 | $ | - | ||||||
Multi-family
|
4,271,798 | 3,458 | - | |||||||||
Commercial
|
4,893,091 | 42,040 | 6,839 | |||||||||
Construction and land
|
5,531,911 | 3,876 | - | |||||||||
16,474,425 | 52,634 | 6,839 | ||||||||||
Commercial business
|
711,460 | 8,861 | - | |||||||||
Consumer
|
||||||||||||
Home equity
|
499,088 | - | - | |||||||||
Other
|
5,921 | - | - | |||||||||
505,009 | - | - | ||||||||||
Total
|
$ | 17,690,894 | $ | 61,495 | $ | 6,839 | ||||||
Note 4. Core Deposit Intangible
The gross carrying value and accumulated amortization of the core deposit intangible is presented below:
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Core deposit intangible
|
$ | 3,258,000 | $ | 3,258,000 | ||||
Less accumulated amortization
|
(2,215,350 | ) | (2,138,000 | ) | ||||
$ | 1,042,650 | $ | 1,120,000 |
Amortization expense on core deposit intangible for the three months ended March 31, 2011 and 2010 was $77,350 and $99,000, respectively.
Note 4. Core Deposit Intangible (Continued)
Estimated future amortization expense on core deposit intangible for the remaining nine months of 2011 and each of the five succeeding fiscal years is as follows:
Period
|
Amount
|
|||
Nine months ending December 31, 2011
|
$ | 226,650 | ||
Year ending December 31, 2012
|
281,000 | |||
Year ending December 31, 2013
|
264,000 | |||
Year ending December 31, 2014
|
75,000 | |||
Year ending December 31, 2015
|
58,000 | |||
Year ending December 31, 2016
|
58,000 |
Note 5. Goodwill
The Company reported goodwill from its acquisition of Clover Leaf Financial Corp. in 2006 in the amount of $9,402,608 and its acquisition of Partners Financial Holdings, Inc. in 2008 in the amount of $11,282,715, for a total of $20,685,323 in goodwill. In June 2009, we recorded an impairment charge of $9,300,000, reducing the amount of goodwill to $11,385,323. In accordance with ASC Topic 350, Intangibles - Goodwill and Other, goodwill and intangible assets with indefinite useful lives are no longer amortized; rather they are assessed, at least annually, for impairment. The Company tests goodwill for impairment on an annual basis as of September 30, or more often if events or circumstances indicate there may be impairment. Management has determined that the Company has only one reporting unit for purposes of evaluating goodwill.
As outlined in ASC Topic 350, the goodwill impairment analysis involves a two-step test. Step one includes two valuation methodologies; (i) the comparable transactions approach, and (ii) the control premium approach. The first valuation methodology, used to identify potential impairment, involves comparing the fair value of the reporting unit to its carrying value including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value exceeds fair value, there is an indication of impairment, and the second valuation methodology is performed to measure the amount of impairment. The second valuation methodology involves calculating an implied fair value of goodwill for the reporting unit, in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first valuation methodology, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the carrying value of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment charge is recorded against earnings for the excess.
Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future, and we may be required to record additional goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would result or, it if does, whether such charge would be material. However, any such future impairment loss would be limited to the remaining goodwill balance of $11,385,323 at March 31, 2011. Subsequent reversal of goodwill impairment losses is not permitted.
Note 6. Earnings per Share
Basic and diluted earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding. Employee stock ownership plan shares which are committed to be released are considered outstanding for basic and diluted earnings per share.
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Net earnings available to common stockholders
|
$ | 905,881 | $ | 960,512 | ||||
Basic potential common shares:
|
||||||||
Weighted average shares outstanding
|
7,886,123 | 7,953,937 | ||||||
Weighted average unallocated Employee Stock Ownership
|
||||||||
Plan shares
|
(110,523 | ) | (119,027 | ) | ||||
Basic weighted average shares outstanding
|
7,775,600 | 7,834,910 | ||||||
Dilutive potential common shares
|
- | - | ||||||
Diluted weighted average shares outstanding
|
7,775,600 | 7,834,910 | ||||||
Basic and diluted earnings per share
|
$ | 0.12 | $ | 0.12 |
Note 7. Employee Stock Ownership Plan
The Company has an employee stock ownership plan (ESOP) which covers substantially all employees who have attained the age of 21 and completed one year of service. In connection with its initial stock offering in 2004, the Company loaned funds to the ESOP for the purchase of its common stock at the initial public offering price. The loan is being repaid based on a variable interest rate over 20 years beginning December 31, 2004. All shares are held in a suspense account for allocation among the participants as the loan is repaid. Shares are released for allocation to participants based upon the ratio of the current year’s debt service to the sum of total principal and interest payments over the remaining life of the note. The purchase of shares by the ESOP was 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 average fair market value of the shares committed to be released. Compensation expense of $15,218 and $14,506 was recorded for the three months ended March 31, 2011, and 2010, respectively.
Dividends on unallocated ESOP shares, together with Company contributions, are used by the ESOP to repay principal and interest on the outstanding note.
The following table reflects the shares held by the plan at March 31, 2011 and December 31, 2010:
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Unallocated shares (fair value at March 31, 2011 and
|
||||||||
December 31, 2010 of $765,452 and $749,509, respectively)
|
108,421 | 110,547 | ||||||
Allocated shares
|
62,338 | 60,212 | ||||||
170,759 | 170,759 | |||||||
Note 8. Fair Value of Financial Instruments
FASB ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. Fair value is determined under the framework established by ASC Topic 820, Fair Value Measurement and Disclosures. ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following information presents estimated fair values of the Company’s financial instruments as of March 31, 2011 and December 31, 2010 and the methods and assumptions used to estimate those fair values.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values.
Interest-earning time deposits: Due to the short term nature of these deposits, generally three months or less, the carrying amounts of these deposits approximate fair values.
Securities available for sale: The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. For these investments, the pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. They also use model processes, such as the Option Adjusted Spread model to assess interest rate impact and develop prepayment scenarios. In the case of municipal securities, information on the Bloomberg terminal such as credit ratings, credit support, and call features are used to set the matrix values for the issues, which will be used to determine the yields from which the market values are calculated each month. Because they are not price quote valuations, the pricing methods are considered Level 2 inputs. At this time all of the Company’s securities fall within the Level 2 hierarchy for pricing. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company currently has no securities classified within Level 3.
Federal Home Loan Bank stock: The Company is required to maintain these equity securities as a member of the Federal Home Loan Bank of Chicago and in amounts as required by this institution. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable securities and their fair value is not readily available.
Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segmented by type such as real estate, commercial business, and consumer loans. Each loan segment is further segregated into fixed and adjustable rate interest terms and by performing and non-performing classifications. The fair value of fixed rate loans is estimated by discounting future cash flows using discount rates that reflect the Company’s current pricing for loans with similar characteristics, such as loan type, pricing and remaining maturity. Additional factors are applied to the loan portfolio by loan quality categories.
Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.
Note 8. Fair Value of Financial Instruments (Continued)
Deposit liabilities: The fair values disclosed for demand deposits (savings) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank advances, which are at a fixed rate, are estimated using discounted cash flow analyses based on current rates for similar advances.
Securities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value.
Subordinated debentures: The carrying amount of variable rate trust preferred debentures approximates its fair value.
Accrued interest payable: The carrying amount of accrued interest payable approximates its fair value.
The estimated fair values and related carrying or notional amounts of the Company's financial instruments are as follows:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
Financial assets:
|
||||||||||||||||
Cash and cash equivalents
|
$ | 53,423,315 | $ | 53,423,315 | $ | 66,253,047 | $ | 66,253,047 | ||||||||
Interest-earning time deposits
|
1,723,388 | 1,723,388 | 1,718,651 | 1,718,651 | ||||||||||||
Securities
|
87,025,472 | 87,025,472 | 78,474,908 | 78,474,908 | ||||||||||||
Federal Home Loan Bank stock
|
6,306,273 | 6,306,273 | 6,306,273 | 6,306,273 | ||||||||||||
Loans, net
|
391,288,136 | 388,869,775 | 387,567,638 | 384,965,267 | ||||||||||||
Accrued interest receivable
|
2,051,184 | 2,051,184 | 1,866,511 | 1,866,511 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Non-interest bearing deposits
|
32,783,874 | 32,783,874 | 34,172,434 | 34,172,434 | ||||||||||||
Interest bearing deposits
|
420,319,961 | 421,801,868 | 413,310,775 | 415,075,294 | ||||||||||||
Federal Home Loan Bank advances
|
21,928,000 | 21,975,587 | 21,924,000 | 22,021,145 | ||||||||||||
Securities sold under agreement
|
||||||||||||||||
to repurchase
|
16,377,112 | 16,377,112 | 21,457,075 | 21,457,075 | ||||||||||||
Subordinated debentures
|
4,000,000 | 4,000,000 | 3,974,272 | 3,974,272 | ||||||||||||
Accrued interest payable
|
496,909 | 496,909 | 561,687 | 561,687 |
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items.
Note 9. Fair Value Measurements
The Company determines the fair market values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included with Level 1 that are observable for the asset or liability either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived from or corroborated by market data by correlation or other means. Level 3 inputs are unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. During the three months ended March 31, 2011, there were no transfers between Level 1 and Level 2.
Assets and liabilities measured at fair value on a recurring basis segregated by fair value hierarchy level as of March 31, 2011 and December 31, 2010 are summarized below:
March 31, 2011
|
||||||||||||||||
Quoted Prices
in Active
Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
Assets:
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
Investment securities:
|
||||||||||||||||
U.S. government agency obligations
|
$ | - | $ | 44,983,580 | $ | - | $ | 44,983,580 | ||||||||
Corporate bonds
|
- | 2,111,797 | - | 2,111,797 | ||||||||||||
State and municipal securities
|
- | 19,593,821 | - | 19,593,821 | ||||||||||||
Other securities
|
- | 3,501 | - | 3,501 | ||||||||||||
Mortgage-backed securities
|
- | 20,332,773 | - | 20,332,773 | ||||||||||||
Total investment securities available
|
||||||||||||||||
for sale
|
$ | - | $ | 87,025,472 | $ | - | $ | 87,025,472 | ||||||||
December 31, 2010
|
||||||||||||||||
Quoted Prices
in Active
Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
Assets:
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
Investment securities:
|
||||||||||||||||
U.S. government agency obligations
|
$ | - | $ | 42,690,393 | $ | - | $ | 42,690,393 | ||||||||
Corporate bonds
|
- | 2,057,639 | - | 2,057,639 | ||||||||||||
State and municipal securities
|
- | 17,774,271 | - | 17,774,271 | ||||||||||||
Other securities
|
- | 3,501 | - | 3,501 | ||||||||||||
Mortgage-backed securities
|
- | 15,949,104 | - | 15,949,104 | ||||||||||||
Total investment securities available
|
||||||||||||||||
for sale
|
$ | - | $ | 78,474,908 | $ | - | $ | 78,474,908 |
Note 9. Fair Value Measurements (Continued)
Assets and liabilities measured at fair value on a nonrecurring basis by fair value hierarchy level as of March 31, 2011 and December 31, 2010 are summarized below:
March 31, 2011
|
||||||||||||||||
Quoted Prices
in Active
Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|
|||||||||||||
Assets:
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
Impaired loans
|
$ | - | $ | - | $ | 6,189,287 | $ | 6,189,287 | ||||||||
December 31, 2010
|
||||||||||||||||
Quoted Prices
in Active
Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
Assets:
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
Impaired loans
|
$ | - | $ | - | $ | 5,861,818 | $ | 5,861,818 | ||||||||
Impaired loans that are collateral dependent have been written down to the fair value of the collateral, less estimated costs to sell, through the establishment of a specific allowance or by recording charge-offs when the carrying value exceeds the fair value of the collateral. Valuation techniques consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within the Level 3 hierarchy. The calculated valuation amount does not necessarily represent the value of the loans if sold to a willing buyer. Management believes it is more likely than not that a workout solution or liquidation of the collateral is the best use of the asset and therefore has measured fair value based on the underlying collateral of the loans. If management were to sell the impaired loan portfolio to a third party instead of liquidating the collateral, the measurement of fair value could be significantly different.
Foreclosed assets are collateral dependent and are recorded at the lessor of the recorded investment in the receivable or the appraised value less costs to sell. For the periods ended March 31, 2011 and December 31, 2010, no foreclosed assets were written down to fair value after acquisition.
As noted in Note 5, an implied fair value of goodwill was measured for the reporting unit, in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. For the periods ended March 31, 2011 and December 31, 2010, there were no adjustments to the valuation of goodwill.
Note 10. Subsequent Events
Events occurring subsequent to March 31, 2011, have been evaluated as to their potential impact to the financial statements through the date of issuance of this report.
On April 26, 2011, the Board of Directors of the Company declared a cash dividend on the Company’s common stock of $0.06 per share for the quarter ended March 31, 2011. The dividend was payable to stockholders of record as of May 13, 2011 and will be paid on May 20, 2011.
25
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including, but not limited to changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution you not to place undue reliance on any such forward-looking statements, which only speak as of the date made. The Company wishes to advise you that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. Management makes significant estimates and has identified the allowance for loan losses and goodwill and other intangible assets as critical accounting policies.
Allowance for loan losses. 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. Subsequent recoveries, if any, are credited to the allowance.
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, and prevailing economic conditions. 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, prevailing economic conditions such as housing trends, inflation rates and unemployment rates, and geographic concentrations of loans within First Clover Leaf Bank’s immediate market area.
26
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our loan portfolio and the related allowance for loan losses. The Office of Thrift Supervision may require us to increase the allowance for loan losses based on its judgments of information available to it at the time of its examination, thereby adversely affecting our results of operations.
Goodwill and Other Intangible Assets. Historically, First Clover Leaf has grown through acquisitions accounted for under the purchase method of accounting in effect at the time of the acquisitions. Under the purchase method, First Clover Leaf was required to allocate the cost of an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition. The excess cost over the net assets acquired represents goodwill, which is not subject to periodic amortization.
Customer relationship intangibles are required to be amortized over their estimated useful lives. The method of amortization reflects the pattern in which the economic benefits of these intangible assets are estimated to be consumed or otherwise used up. Our customer relationship intangibles are being amortized over 7.6 and 9.7 years using the double declining balance method. Since First Clover Leaf’s acquired customer relationships are subject to routine customer attrition, the relationships are more likely to produce greater benefits in the near-term than in the long-term, which typically supports the use of an accelerated method of amortization for the related intangible assets. Management is required to evaluate the useful life of customer relationship intangibles to determine if events or circumstances warrant a change in the estimated life. Should management determine that the estimated life of any intangible asset is shorter than originally estimated, First Clover Leaf would adjust the amortization of that asset, which could increase future amortization expense.
Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill recorded by First Clover Leaf in connection with its acquisitions relates to the inherent value in the businesses acquired, and this value is dependent upon First Clover Leaf’s ability to provide quality, cost effective services in a competitive market place. The continued value of recorded goodwill is impacted by the value of our stock and continued profitability of the organization. In the event that the stock price experiences significant declines or the operations of the company lack profitability, an impairment of goodwill may need to be recognized. Any impairment recognized would adversely impact earnings in the period in which it is recognized.
First Clover Leaf utilizes a two step valuation approach to test for goodwill impairment. We estimate the fair value of our single reporting unit as of the measurement date utilizing two valuation methodologies including the comparable transactions approach, and the control premium approach which utilizes the Company’s stock price. We then compare the estimated fair value to the current carrying value of the reporting unit to determine if goodwill impairment had occurred as of the measurement date. At our annual impairment assessment date of September 30, 2010, our analysis indicated that no impairment existed. At March 31, 2011, no indications of impairment existed for which an interim assessment was considered necessary. Future events, such as adverse changes to First Clover Leaf’s business or changes in the economic market, could cause management to conclude that impairment indicators exist and require management to re-evaluate goodwill. Should such re-evaluation determine goodwill is impaired; the resulting impairment loss recognized could have a material, adverse impact on First Clover Leaf’s financial condition and results of operations. In accordance with current accounting guidance, management has determined that the Company has only one reporting unit for purposes of evaluating goodwill. See Item 1, Note 5 for additional information on goodwill impairment.
27
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
First Clover Leaf had net income of $906,000 for the three months ended March 31, 2011 compared to net income of $961,000 for the same period in 2010. The decrease was due to a decrease in non-interest income and an increase in other expenses partially offset by an increase in net interest income after provision for loan losses. Basic and diluted income per share was $0.12 for each of the three-month periods ended March 31, 2011 and 2010.
Financial Condition
Total Assets. Total assets increased to $575.8 million at March 31, 2011 from $575.0 million at December 31, 2010. Total cash and cash equivalents decreased to $53.4 million at March 31, 2011 from $66.3 million at December 31, 2010. The decrease in cash and cash equivalents was due primarily to a decrease in federal funds sold.
Securities available for sale increased to $87.0 million at March 31, 2011 from $78.5 million at December 31, 2010. The increase was due primarily to purchases of $41.6 million partially offset by calls, maturities and pay-downs of $33.5 million.
Net loans including loans held for sale amounted to $391.3 million at March 31, 2011, compared to $387.6 million at December 31, 2010. This increase was a result of new loan origination exceeding loan paydowns and maturities.
Foreclosed assets increased to $5.2 million at March 31, 2011 from $3.8 million at December 31, 2010. We transferred 13 loans into foreclosed assets during the three months ended March 31, 2011. During the same time period we received proceeds of $897,000 from the sale of six properties that had been classified as foreclosed assets.
Total Liabilities. Total liabilities increased slightly to $497.9 million at March 31, 2011 from $497.6 million at December 31, 2010. Deposits increased to $453.1 million at March 31, 2011 from $447.5 million at December 31, 2010. Non-interest bearing deposits decreased $1.4 million to $32.8 million at March 31, 2011 from $34.2 million at December 31, 2010. Interest bearing deposits increased $7.0 million totaling $420.3 million at March 31, 2011 compared to $413.3 million at December 31, 2010. Securities sold under agreements to repurchase decreased $5.1 million to $16.4 million at March 31, 2011 from $21.5 million at December 31, 2010. This decrease was due primarily to fluctuations in customer deposits.
Stockholders’ Equity. Stockholders’ equity increased to $78.0 million at March 31, 2011 from $77.3 million at December 31, 2010, principally as a result of $906,000 in net income and an increase in unrealized gains on securities of $217,000 partially offset by the payment of cash dividends of $467,000 and repurchases of common stock of $44,000 during the three months ended March 31, 2011.
28
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Asset Quality
The following tables set forth information with respect to the Company’s nonperforming and impaired loans at the dates indicated:
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Loans 90 days or more past due and still accruing
|
$ | 790,399 | $ | 92,728 | ||||
Non-accrual loans, including $7,551,222 and $11,793,138 classified as
|
||||||||
impaired as of March 31, 2011 and December 31, 2010, respectively
|
8,187,280 | 12,249,180 | ||||||
Other impaired loans
|
8,758,169 | 7,279,258 | ||||||
Total non-performing and impaired loans
|
$ | 17,735,848 | $ | 19,621,166 | ||||
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Non-performing assets and impaired loans to total assets
|
3.97 | % | 4.08 | % | ||||
Non-performing and impaired loans to total loans
|
4.53 | 5.06 | ||||||
Allowance for loan losses to non-performing and impaired loans
|
24.48 | 29.19 | ||||||
Allowance for loan losses to total loans
|
1.11 | 1.48 | ||||||
At March 31, 2011, the Company’s non-accrual loans decreased $4.0 million to $8.2 million from $12.2 million at December 31, 2010. At March 31, 2011, First Clover Leaf Bank had four relationships classified as non-accrual with balances in excess of $500,000. The largest non-accrual relationship is a $2.9 million development credit to a subdivision with excess inventory that is selling slowly due to the economic slowdown. The credit is secured by the residential property. A charge down of $930,000 was taken during the first quarter of 2011 for which management had a specific allocation in the allowance for loan losses at December 31, 2010. The Bank continues to work with the developer on a plan to increase lot sales. The second relationship is a $1.2 million credit to a residential real estate developer who is struggling with the economic downturn. The credit is currently secured by single family residences and some farm land. The Bank is working with the developer on possible restructuring alternatives. Currently the collateral is sufficient to cover the outstanding balance. The third non-accrual relationship is a $911,000 credit to a real estate investor. The loans are secured by residential real estate. The investor is experiencing cash flow difficulties due to higher vacancies and the need for property repairs. We believe the collateral on this loan is sufficient to cover the majority of the outstanding balance, and that adequate specific reserves have been set aside for the remaining outstanding balance. The fourth non-accrual relationship is a $602,000 credit to a real estate developer. The primary collateral consists of 28 vacant lots. The lots are continuing to sell in a manner that is allowing the borrower to continue to make principal payments.
In addition to the non-accrual loans in the previous paragraph, at March 31, 2011, our total other impaired loans amounted to $8.8 million compared to $7.3 million at December 31, 2010. There are five other impaired credits with balances in excess of $500,000 at March 31, 2011. The largest loan is a $4.2 million credit to a real estate investor. The majority of this property is residential real estate. The investor is experiencing cash flow difficulties due to higher vacancy rates and the need for property repairs. Currently the collateral is sufficient to cover the outstanding balance. The second loan is a $1.5 million credit to a hotel/condominium development. The property is located in a highly desired resort area. The Bank is a participant in this loan and is not the lead bank. Currently the collateral is sufficient to cover the outstanding balance. The third credit is a $1.0 million credit to an investor who holds real estate and financial institution stock. The collateral for this credit is stock in a financial institution and multifamily real estate. The investor paid this credit down by $500,000 since the third quarter of 2010. We believe the collateral on this loan is sufficient to cover the majority of the outstanding balance, and that adequate specific reserves have been set aside for the remaining outstanding balance. The fourth credit is a $744,000 commercial real estate credit on a banquet facility that is past due on payments and is not complying with the bank’s request for financial information. This credit has a partial SBA guarantee and the collateral is sufficient to cover the outstanding balance. The fifth credit is a $529,000 credit to a real estate investor. The collateral for this loan is a residential property with acreage. The Bank previously had a larger relationship with this investor, but we took possession of several of the properties, totaling $367,000 in the fourth quarter of 2010, and then took possession of several additional properties, totaling $167,000 in the first quarter of 2011.
29
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
At March 31, 2011, the Bank had $4.9 million of loans which were classified as Troubled Debt Restructurings. This is a $4.6 million increase over December 31, 2010. The primary reason for the increase was the restructure of a $4.2 million credit to a real estate investor. At March 31, 2011, all of these loans were accruing and were in compliance with their modified terms.
The allowance for loan losses to non-performing and impaired loans decreased to 24.48% at March 31, 2011 compared to 29.19% at December 31, 2010. The decrease in this ratio is due to a decrease in the loan loss reserve balance as $1.8 million in charge-offs was recorded during the first quarter of 2011 of which $1.6 million represented specific allocations at December 31, 2010. These charge-offs were primarily all a result of special reserve allocations for various non-accrual loans being written off.
At March 31, 2011, First Clover Leaf Bank had 20 properties classified as Real Estate Owned. The collateral on these properties consisted of a commercial building, a commercial mobile home-site, farmland, two residential lot developments and 15 single family residences. All of these properties were transferred into Real Estate Owned at the property’s fair value, less cost of disposal, at the date of foreclosure.
Results of Operations
General. Net income decreased to $906,000 for the three months ended March 31, 2011 compared to net income of $961,000 for the same period in 2010. The decrease was due to a decrease in non-interest income and an increase in other expenses partially offset by an increase in net interest income after provision for loan losses. Basic and diluted income per share was $0.12 for each of the three-month periods ended March 31, 2011 and 2010.
Yields on loans and securities continued to decline for the three months ended March 31, 2011 compared to the same period in 2010. Our commercial loans are more sensitive to changes in market interest rates because they often have shorter terms to maturity, and therefore, the interest rates adjust more frequently. The declining rate environment has also resulted in a significant number of the bonds in our securities portfolio with higher yields being called and being replaced with lower yielding bonds. While the overall yield on interest-earning assets declined to 4.59% for the period ended March 31, 2011 from 4.77% for the period ended March 31, 2010, the overall net interest rate spread and net interest margin increased primarily due to the decline in the rates paid on interest-bearing liabilities. However, our ability to lower rates paid on deposits is limited due to the already low deposit rates and the competitive environment in which we operate. In addition, a significant number of our interest-bearing deposits are time deposits, which are fixed-rate contracts until maturity that do not allow for immediate repricing as rates fluctuate.
Net interest income. Net interest income increased by $133,000 to $4.2 million for the three months ended March 31, 2011 from $4.1 million for the same period last year. Net average interest-earning assets, which represent our average total interest-earning assets less our average total interest-bearing liabilities, were $71.5 million for the three months ended March 31, 2011, compared to $83.0 million for the same period in 2010. The ratio of interest-earning assets to interest-bearing liabilities decreased to 115.52% for the three months ended March 31, 2011 from 117.48% for the same period in 2010. The net interest rate spread increased to 3.01% for the three months ended March 31, 2011, compared to 2.67% for the comparable period in 2010. The average rate earned on interest-earning assets decreased by 18 basis points for the three months ended March 31, 2011 to 4.59% from 4.77% for the same period in 2010, while the average rate paid on interest-bearing liabilities decreased by 52 basis points during these periods to 1.58% from 2.10%. The increase in the interest rate spread was attributable to the cost of funds declining faster than the yield on interest-earning assets.
30
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth the average balance sheets, average yields and cost of funds, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred loan fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and rates have been annualized.
Three Months Ended March 31,
|
Three Months Ended March 31,
|
|||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
Average
Outstanding
Balance
|
Interest (4)
|
Yield/
Rate
|
Average
Outstanding
Balance
|
Interest
(4)
|
Yield/
Rate
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
Interest-earning assets:
|
||||||||||||||||||||||||
Loans, gross
|
$ | 396,210 | $ | 5,400 | 5.53 | % | $ | 416,101 | $ | 5,740 | 5.59 | % | ||||||||||||
Securities
|
80,878 | 598 | 3.00 | 94,757 | 801 | 3.43 | ||||||||||||||||||
Federal Home Loan Bank stock
|
6,306 | 1 | 0.06 | 6,306 | - | - | ||||||||||||||||||
Interest-earning balances from depository institutions
|
48,778 | 25 | 0.21 | 41,001 | 19 | 0.19 | ||||||||||||||||||
Total interest-earning assets
|
532,172 | 6,024 | 4.59 | 558,165 | 6,560 | 4.77 | ||||||||||||||||||
Non-interest-earning assets
|
41,143 | 39,561 | ||||||||||||||||||||||
Total assets
|
$ | 573,315 | $ | 597,726 | ||||||||||||||||||||
Interest-bearing liabilities:
|
||||||||||||||||||||||||
Interest-bearing transaction
|
$ | 206,295 | 496 | 0.98 | $ | 179,105 | 564 | 1.28 | ||||||||||||||||
Savings deposits
|
20,878 | 37 | 0.72 | 18,857 | 39 | 0.84 | ||||||||||||||||||
Time deposits
|
187,104 | 1,081 | 2.34 | 200,336 | 1,437 | 2.91 | ||||||||||||||||||
Securities sold under agreements to repurchase
|
20,500 | 6 | 0.12 | 33,464 | 7 | 0.08 | ||||||||||||||||||
Federal Home Loan Bank advances
|
21,925 | 126 | 2.33 | 39,422 | 342 | 3.52 | ||||||||||||||||||
Subordinated debentures
|
3,978 | 48 | 4.89 | 3,934 | 74 | 7.63 | ||||||||||||||||||
Total interest-bearing liabilities
|
460,680 | 1,794 | 1.58 | 475,118 | 2,463 | 2.10 | ||||||||||||||||||
Non-interest-bearing liabilities
|
34,781 | 45,178 | ||||||||||||||||||||||
Total liabilities
|
495,461 | 520,296 | ||||||||||||||||||||||
Stockholders’ equity
|
77,854 | 77,430 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity
|
$ | 573,315 | $ | 597,726 | ||||||||||||||||||||
Net interest income
|
$ | 4,230 | $ | 4,097 | ||||||||||||||||||||
Net interest rate spread (1)
|
3.01 | % | 2.67 | % | ||||||||||||||||||||
Net interest-earning assets (2)
|
$ | 71,492 | $ | 83,047 | ||||||||||||||||||||
Net interest margin (3)
|
3.22 | % | 2.98 | % | ||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities
|
115.52 | % | 117.48 | % | ||||||||||||||||||||
(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|||||||||
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|||||||||
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
|
|||||||||
(4) Interest on loans includes loan fees collected in the amount of $61,599 and $36,669 for the three months ended March 31, 2011 and 2010, respectively.
|
31
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest and fee income. Interest and fee income on loans decreased to $5.4 million for the three months ended March 31, 2011 from $5.7 million for the comparable period in 2010 as a result of a lower average balance in the 2011 period. The average balance of loans was $396.2 million and $416.1 million for the three months ended March 31, 2011 and 2010, respectively. The average balance decreased primarily due to significant declines in new loan demand over the past year. The average yield on loans decreased to 5.53% for the three months ended March 31, 2011 from 5.59% for the comparable period in 2010.
Interest income on securities decreased to $598,000 for the three months ended March 31, 2011 compared to $801,000 for the same period in 2010. The decrease was due primarily to a lower average balance in addition to a decline in yield. The average balance of securities was $80.9 million and $94.8 million for the three months ended March 31, 2011 and 2010, respectively. Available for sale securities of $10.5 million were sold during the second and third quarters of 2010. The declining rate environment also resulted in a significant number of bonds in our securities portfolio with higher yields being called and replaced with lower yielding bonds. The average yield on securities decreased to 3.00% from 3.43% for the three months ended March 31, 2011 and 2010, respectively.
Interest on other interest-earning deposits increased to $25,000 for the three months ended March 31, 2011 from $19,000 for the comparable period in 2010. The increase was due primarily to a higher average balance. The average balance of other interest-earning deposits increased to $48.8 million from $41.0 million for the three months ended March 31, 2011 and 2010, respectively. The average yield on other interest-earning deposits increased slightly to 0.21% for the three months ended March 31, 2011 from 0.19% for the comparable period in 2010.
Interest expense. Interest expense on deposits decreased to $1.6 million for the three months ended March 31, 2011 from $2.0 million for the comparable period in 2010. The decrease was due primarily to a decline in rate and a lower average balance in time deposits partially offset by a higher average balance in interest-bearing transaction accounts. The average balance of interest-bearing deposits, comprised of interest bearing transactions, savings deposits, and time deposits, was $414.3 million and $398.3 million for the three months ended March 31, 2011 and 2010, respectively. The rate for time deposits decreased to 2.34% from 2.91% for the three months ended March 31, 2011 and 2010, respectively. The rate for interest-bearing transaction accounts decreased to 0.98% from 1.28% for the three months ended March 31, 2011 and 2010, respectively. The rate for savings deposits decreased to 0.72% from 0.84% for the three months ended March 31, 2011 and 2010, respectively.
Interest expense on Federal Home Loan Bank advances decreased to $126,000 from $342,000 for the three months ended March 31, 2011 and 2010, respectively due primarily to a lower average balance in addition to a decline in rate. The average balance of Federal Home Loan Bank advances was $21.9 million and $39.4 million for the three months ended March 31, 2011 and 2010, respectively. The average rate on Federal Home Loan Bank advances decreased to 2.33% for the three months ended March 31, 2011 compared to 3.52% for the comparable period in 2010. The rate decline was primarily a result of a restructuring of the advances during the fourth quarter of 2010.
Interest expense on subordinated debentures decreased to $48,000 from $74,000 for the three months ended March 31, 2011 and 2010, respectively. In accordance with the terms of our subordinated debentures, in June 2010 the rate converted from a fixed rate to a variable rate that adjusts quarterly.
Provision for loan losses. Provision for loan losses decreased for the three month period ended March 31, 2011 to $300,000 from $423,000 for the comparable period in 2010. Provision for loan losses is based upon management’s consideration of current economic conditions, the Company’s loan portfolio composition and historical loss experience coupled with current market valuations on collateral, and management’s estimate of probable losses in the portfolio as well as the level of non-performing and impaired loans. Management also reviews individual loans for which full collectibility may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in the Company’s provision for loan losses. There may be other factors that may warrant our consideration in maintaining an allowance at a level sufficient to provide for probable losses. The Company is subject to periodic examination by the Office of Thrift Supervision, which may require the Company to record increases in the allowance based on its evaluation of available information. There can be no assurance that the Office of Thrift Supervision will not require further increases to the allowance.
32
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Non-interest income. Non-interest income decreased to $250,000 for the three months ended March 31, 2011 from $299,000 for the comparable period in 2010 primarily due to reduced gain on sale of loans for the three months ended March 31, 2011. Additionally, other non-interest income decreased primarily due to a loss of $21,000 on sale of foreclosed property in 2011 compared to a $14,000 gain in 2010.
Non-interest expense. Non-interest expense increased to $2.8 million for the three months ended March 30, 2011 from $2.5 million for the same period in 2010. The increase was due primarily to an increase in professional fees and an increase in real estate owned expense, which is included in the other category, recorded for the three months ended March 31, 2011 compared to the same period in 2010.
Professional fees increased to $129,000 for the three months ended March 31, 2011 compared to $37,000 for the comparable period in 2010. This increase was due primarily to the reversal of $150,000 during the three months ended March 31, 2010 of accrued expenses in connection with the consulting agreement entered into with the former CEO of Partners Bank which was based on certain contingencies that ultimately were not attained.
Real estate owned expense increased to $187,000 for the three months ended March 31, 2011 compared to $50,000 for the comparable period in 2010. This increase was due primarily to additional expenses related to the increased number of foreclosed properties for the three months ended March 31, 2011 compared to the comparable period in 2010.
Income taxes. Income taxes decreased to $503,000 for the three months ended March 31, 2011 from $511,000 for the comparable period in 2010. The primary reason for the change in income taxes was the lower level of pre-tax income for the 2011 period offset by the increase in the Illinois tax rates in 2011.
Liquidity and Capital Resources
We maintain liquid assets at levels considered adequate to meet liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.
Our primary sources of liquidity are deposits, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At March 31, 2011 and December 31, 2010, $53.4 million and $66.3 million, respectively, were invested in cash and cash equivalents. The primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, increases in deposit and securities sold under agreements to repurchase accounts, and advances from the Federal Home Loan Bank of Chicago.
33
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows included with the Consolidated Financial Statements.
Our primary investing activities are the origination of loans and the purchase of investment securities. During the three months ended March 31, 2011 loan origination exceeded principal collections on loans by $5.1 million compared to principal collections on loans exceeding originations by $2.8 million for the three months ended March 31, 2010. Cash received from calls, maturities, and paydowns of available-for-sale investment securities totaled $33.5 million and $99.9 million for the three months ended March 31, 2011 and 2010, respectively. We purchased $41.6 million and $109.6 million in available-for-sale investment securities during the three months ended March 31, 2011 and 2010, respectively. We received proceeds of $897,000 from the sale of foreclosed assets for the three months ended March 31, 2011 compared to $276,000 during the same period in 2010.
Deposit flows are generally affected by interest rates as designated by management, the interest rates and products offered by local competitors, and other factors. Net deposits increased by $5.6 million for the three months ended March 31, 2011. During the comparable period in 2010 the net increase in deposits was $724,000. Securities sold under agreements to repurchase had a net decrease of $5.1 million and a net increase of $5.9 million for the three months ended March 31, 2011 and 2010, respectively. There were no repayments of Federal Home Loan Bank advances for the three months ended March 31, 2011 compared to $1.5 million for the three months ended March 31, 2010.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago, which provides an additional source of funds. At March 31, 2011, we had $21.9 million of advances from the Federal Home Loan Bank of Chicago and additional available credit of approximately $36.1 million.
The Bank is required to maintain certain minimum capital requirements under Office of Thrift Supervision regulations. Failure by a savings institution to meet minimum capital requirements can result in certain mandatory and possible discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Bank’s financial statements. The Bank was considered “well-capitalized” at March 31, 2011. Under the capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
The Bank’s actual and required capital amounts and ratios at March 31, 2011 were as follows:
To be Well Capitalized
|
||||||||||||||||||||||||
For Capital
|
Under Prompt Corrective
|
|||||||||||||||||||||||
Actual
|
Adequacy Purposes
|
Action Provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Dollars in Thousands)
|
||||||||||||||||||||||||
Stockholders' equity
|
$ | 73,843 | ||||||||||||||||||||||
Goodwill and core deposit intangible
|
(12,428 | ) | ||||||||||||||||||||||
Disallowed servicing assets
|
(577 | ) | ||||||||||||||||||||||
Unrealized gain on securities AFS, net
|
(832 | ) | ||||||||||||||||||||||
Tangible capital to adjusted total assets
|
$ | 60,006 | 10.8 | % | $ | 8,333 | 1.5 | % | N/A | - | ||||||||||||||
Allowance as limited by regulatory guidance
|
3,717 | |||||||||||||||||||||||
Deduction for low-level recourse
|
(1,607 | ) | ||||||||||||||||||||||
Total capital to risk-weighted assets
|
$ | 62,116 | 16.8 | % | $ | 29,641 | 8.0 | % | $ | 37,052 | 10.0 | % | ||||||||||||
|
||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets
|
$ | 60,006 | 16.2 | % | N/A | - | $ | 22,231 | 6.0 | % | ||||||||||||||
Tier 1 capital to total assets
|
$ | 60,006 | 10.8 | % | $ | 22,222 | 4.0 | % | $ | 27,777 | 5.0 | % |
34
FIRST CLOVER LEAF FINANCIAL CORP.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company is a party to credit-related financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
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. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Unfunded commitments under construction lines of credit for residential and multi-family properties are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
A summary of the notional or contractual amounts of financial instruments, with off-balance-sheet risk at March 31, 2011 follows:
Range of Rates
|
||||||||||||||||
Variable Rate
|
Fixed Rate
|
Total
|
on Fixed Rate
|
|||||||||||||
Commitments
|
Commitments
|
Commitments
|
Commitments
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Commitments to extend credit
|
$ | 41,792 | $ | 7,819 | $ | 49,611 | 3.50% - 18.00 | % | ||||||||
Standby letters of credit
|
$ | 1,633 | $ | 2,501 | $ | 4,134 | 5.13% - 9.25 | % |
Loans sold to the Federal Home Loan Bank (“FHLB”) of Chicago under the Mortgage Partnership Finance (“MPF”) program are sold with recourse. The Bank has an agreement to sell residential loans of up to $71.0 million to the FHLB of Chicago. Approximately $65.7 million have been sold. As a part of the agreement, the Bank has a maximum credit enhancement of $1.6 million at March 31, 2011. Based upon a favorable payment history, the Bank does not anticipate recognizing any losses on these residential loans. The Company intends to continue originating mortgage loans and selling them while retaining the servicing. In addition to the FHLB of Chicago MPF program, the Company currently has a relationship to sell loans to Fannie Mae.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The majority of First Clover Leaf Bank’s assets and liabilities are monetary in nature. Consequently, the most significant form of market risk is interest rate risk. First Clover Leaf’s assets, consisting primarily of loans, have longer maturities than its liabilities, consisting primarily of deposits. As a result, a principal part of First Clover Leaf’s business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, the Board of Directors has established an Asset/Liability Management Committee which is responsible for evaluating the interest rate risk inherent in assets and liabilities, for determining the level of risk that is appropriate given First Clover Leaf’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis, and the Asset/Liability Management Committee meets as needed to review the asset/liability policies and interest rate risk position.
During the relatively low interest rate environment that has existed in recent years, we have implemented the following strategies to manage interest rate risk: (i) maintaining a high equity-to-assets ratio; and (ii) offering a variety of adjustable rate loan products, including adjustable rate one- to four-family, multifamily and non-residential mortgage loans, short-term consumer loans, and a variety of adjustable-rate commercial loans. By maintaining a high equity-to-assets ratio and by investing in adjustable-rate and short-term assets, we are better positioned to react to increases in market interest rates. However, maintaining high equity balances reduces the return-on-equity ratio, and investments in shorter-term assets generally bear lower yields than longer-term investments.
The Office of Thrift Supervision requires the computation of amounts by which the net present value of an institution’s cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. The Office of Thrift Supervision provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of net portfolio value. The Office of Thrift Supervision simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the Office of Thrift Supervision model estimated the economic value of each type of asset, liability and off-balance-sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current low level of market interest rates, First Clover Leaf did not receive a NPV calculation for an interest rate decrease of greater than 100 basis points for December 2010. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
36
FIRST CLOVER LEAF FINANCIAL CORP.
Item 3. Quantitative and Qualitative Disclosures about Market Risk (Continued)
The table below sets forth, as of December 31, 2010, the estimated changes in the NPV that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
December 31, 2010
|
||||||||||||||||||||||
NPV
|
Net Portfolio Value as a Percentage of
Present Value of Assets
|
|||||||||||||||||||||
Estimated
|
Estimated Increase
(Decrease) in NPV
|
|||||||||||||||||||||
Change in Interest Rates
|
NPV |
Amount
|
Percent
|
NPV Ratio
|
Change
|
|||||||||||||||||
+300 | bp | $ | 69,537 | $ | (12,789 | ) | (16 | ) % | 12.26 | % | (179 | ) bp | ||||||||||
+200 | bp | 74,569 | (7,757 | ) | (9 | ) | 12.99 | (106 | ) bp | |||||||||||||
+100 | bp | 78,978 | (3,348 | ) | (4 | ) | 13.61 | (44 | ) bp | |||||||||||||
+50 | bp | 80,653 | (1,673 | ) | (2 | ) | 13.83 | (22 | ) bp | |||||||||||||
0 | bp | 82,326 | — | — | 14.05 | 0 | bp | |||||||||||||||
-50 | bp | 83,121 | 795 | 1 | 14.14 | 9 | bp | |||||||||||||||
-100 | bp | 84,741 | 2,415 | 3 | 14.36 | 32 | bp |
The table above indicates that at December 31, 2010, in the event of a 100 basis point decrease in interest rates, we would experience a 3% increase in the net portfolio value. In the event of a 300 basis point increase in interest rates, we would experience a 16% decrease in the net portfolio value. Management does not believe that the Company’s primary market risk exposures at March 31, 2011, and how those exposures were managed during the three months ended March 31, 2011 have changed materially when compared to the immediately preceding quarter ended December 31, 2010. However, the Company’s primary market risk exposure has not yet been quantified at March 31, 2011 as the Office of Thrift Supervision Net Portfolio Value Model is not yet available and the complexity of the model makes it difficult to accurately predict results.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of the interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of the interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic SEC reports.
In addition, there have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - Other Information
Item 1 - Legal Proceedings.
There are no material legal proceedings to which the Company or its subsidiaries is a party or of which any of its property is subject. From time to time, the Company is a party to various legal proceedings incident to its business.
Item 1A – Risk Factors.
Other than the information contained in this Quarterly Report on Form 10-Q, there are no material updates or additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2010, as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds.
(a)
|
No equity securities were sold during the quarter that were not registered under the Securities Exchange Act.
|
(b)
|
Not applicable.
|
(c)
|
The following table presents for the periods indicated a summary of the purchases made by or on behalf of the Company of shares of its common stock.
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid per
Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
|
Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or
Programs(1)
|
||||||||||||
January 1 - 31, 2011
|
831 | $ | 6.81 | 831 | 24,169 | |||||||||||
February 1 - 28, 2011
|
- | $ | - | - | 24,169 | |||||||||||
March 1 - 31, 2011
|
5,350 | $ | 7.20 | 5,350 | 18,819 | |||||||||||
Total
|
6,181 | 6,181 |
(1)
|
The Company’s board of directors approved a stock repurchase program on November 12, 2008 for the repurchase of up to 924,480 shares of common stock, on December 11, 2008, they increased the number of shares that may be repurchased pursuant to that plan by an additional 382,641 shares, on April 27, 2010, August 24, 2010, and November 23, 2010 they authorized additional increases to that plan of 25,000 shares each. The plan has no expiration date.
|
Item 3 - Defaults upon Senior Securities.
Not applicable.
Item 4 – [Reserved].
Item 5 - Other Information.
None
Item 6 – Exhibits.
(a) Exhibits.
|
31.1:
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2:
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32:
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST CLOVER LEAF FINANCIAL CORP.
|
|||
(Registrant)
|
|||
DATE: May 16, 2011
|
BY:
|
/s/ Dennis M. Terry
|
|
Dennis M. Terry,
|
|||
President and Chief Executive Officer
|
|||
BY:
|
/s/ Darlene F. McDonald
|
||
Darlene F. McDonald,
|
|||
Senior Vice-President and Chief Financial Officer
|
41