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 September 30, 2014

 

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 offices)		(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 ¨.

 

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 x No ¨.

 

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. (Check one):

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (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 ¨ 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 November 1, 2014
Common Stock, par value $.10 per share		7,007,283

 

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

 

INDEX

 

			PAGE NO.
PART I - Financial Information
Item 1.	Financial Statements (Unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Comprehensive Income			5
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		52
Item 4.	Controls and Procedures		53
PART II - Other Information
Item 1.  Legal Proceedings			54
Item 1A.  Risk Factors			54
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3.  Defaults Upon Senior Securities			54
Item 4.  Mine Safety Disclosures			54
Item 5.  Other Information			54
Item 6.  Exhibits			54
Signatures			55

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2014				2013
		(Unaudited)
ASSETS
Cash and due from banks		$	17,260,586			$	14,363,461
Interest-earning deposits			8,278,206				8,681,426
Federal funds sold			50,754,837				61,648,938
Total cash and cash equivalents			76,293,629				84,693,825
Interest-earning time deposits			1,773,035				1,766,493
Securities available for sale			109,301,326				117,776,982
Federal Home Loan Bank stock			2,887,763				2,887,763
Federal Reserve Bank stock			1,689,493				-
Loans, net of allowance for loan losses of $5,790,519 and $5,590,668 at September 30, 2014 and December 31, 2013, respectively			392,199,774				372,568,962
Loans held for sale			299,200				-
Property and equipment, net			10,444,009				9,873,198
Goodwill			11,385,323				11,385,323
Bank-owned life insurance			14,759,024				8,497,895
Core deposit intangible			210,505				271,000
Foreclosed assets			4,281,600				5,577,481
Mortgage servicing rights			944,390				918,247
Accrued interest receivable			1,907,235				1,551,258
Other assets			3,140,969				4,276,015
Total assets		$	631,517,275			$	622,044,442
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	55,507,117			$	55,263,604
Interest-bearing			470,939,453				447,276,088
Total deposits			526,446,570				502,539,692
Federal Home Loan Bank advances			8,985,810				13,980,005
Securities sold under agreements to repurchase			14,259,453				26,766,169
Subordinated debentures			4,000,000				4,000,000
Accrued interest payable			182,327				199,764
Other liabilities			1,451,539				1,463,182
Total liabilities			555,325,699				548,948,812
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, 7,007,283 shares issued and outstanding at September 30, 2014 and December 31, 2013			700,728				700,728
Additional paid-in capital			55,818,936				55,818,936
Retained earnings			19,822,132				18,268,454
Accumulated other comprehensive loss			(150,220	)			(1,692,488	)
Total stockholders' equity			76,191,576				73,095,630
Total liabilities and stockholders' equity		$	631,517,275			$	622,044,442

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Interest and dividend income:
Interest and fees on loans		$	4,274,076			$	4,335,351			$	12,409,621			$	13,394,935
Securities:
Taxable interest income			304,935				254,935				950,432				733,175
Nontaxable interest income			297,193				272,481				843,282				737,016
Federal Reserve Bank dividends			12,793				-				12,793				-
Interest-earning deposits, federal funds sold, and other			41,225				53,262				154,103				124,465
Total interest and dividend income			4,930,222				4,916,029				14,370,231				14,989,591
Interest expense:
Deposits			551,766				658,457				1,623,544				2,169,005
Federal Home Loan Bank advances			73,012				122,860				222,504				366,791
Securities sold under agreements to repurchase			1,115				2,310				4,792				11,170
Subordinated debentures			21,692				22,765				64,914				66,172
Total  interest expense			647,585				806,392				1,915,754				2,613,138
Net interest income			4,282,637				4,109,637				12,454,477				12,376,453
Provision (credit) for loan losses			(250,000	)			35,000				(250,000	)			485,000
Net interest income after provision (credit) for loan losses			4,532,637				4,074,637				12,704,477				11,891,453
Non-interest income:
Service fees on deposit accounts			129,465				98,365				335,194				275,827
Other service charges and fees			112,159				90,549				306,380				274,085
Loan servicing fees			69,054				70,349				209,563				212,891
Gain on sale of securities			88,089				-				88,089				359,138
Gain on sale of loans			205,616				57,023				418,316				489,833
Gain (loss) on sale of assets, net			474				-				(74,565	)			-
Gain (loss) on sale of foreclosed assets			40,521				(31,503	)			(156,678	)			4,264
Other			182,360				132,284				450,901				370,093
			827,738				417,067				1,577,200				1,986,131
Non-interest expense:
Compensation and employee benefits			1,807,984				1,516,487				5,399,016				4,622,498
Occupancy expense			419,850				342,778				1,247,561				1,002,123
Data processing services			195,056				182,966				575,896				555,854
Director fees			47,500				55,384				133,150				134,717
Professional fees			170,757				105,141				470,787				316,823
FDIC insurance premiums			120,000				131,100				357,102				377,100
Foreclosed asset related expenses			62,609				283,019				320,026				708,258
Amortization of core deposit intangible			14,505				66,001				60,495				197,999
Amortization of mortgage servicing rights			37,937				27,514				76,327				112,606
Other			611,429				570,557				1,818,318				1,589,128
			3,487,627				3,280,947				10,458,678				9,617,106
Income before income taxes			1,872,748				1,210,757				3,822,999				4,260,478
Income tax expense			544,721				350,627				1,008,010				1,338,912
Net income		$	1,328,027			$	860,130			$	2,814,989			$	2,921,566
Basic and diluted earnings per share		$	0.19			$	0.12			$	0.40			$	0.40
Dividends per share		$	0.06			$	0.06			$	0.18			$	0.18

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Net income		$	1,328,027			$	860,130			$	2,814,989			$	2,921,566
Other comprehensive income:
Unrealized gains (losses) on securities available for sale arising during the period			(90,103	)			(365,448	)			2,536,136				(3,557,360	)
Reclassification adjustment for realized gains included in income			(88,089	)			-				(88,089	)			(359,138	)
Tax effect			65,931				135,286				(905,779	)			1,449,175
Net of tax			(112,261	)			(230,162	)			1,542,268				(2,467,323	)
Comprehensive income		$	1,215,766			$	629,968			$	4,357,257			$	454,243

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended
		September 30,
		2014				2013
Cash flows from operating activities
Net income		$	2,814,989			$	2,921,566
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of:
Deferred loan origination costs, net			(35,004	)			(90,160	)
Premiums and discounts on securities			747,471				739,498
Core deposit intangible			60,495				197,999
Mortgage servicing rights			76,327				112,606
Fair value adjustments			(69,519	)			(43,890	)
Provision (credit) for loan losses			(250,000	)			485,000
Depreciation			441,894				415,292
Gain on sale of securities			(88,089	)			(359,138	)
Gain on sale of loans			(418,316	)			(489,833	)
Loss on sale of assets			74,565				-
Loss (gain) on sale of foreclosed assets			156,678				(4,264	)
Write-down on foreclosed assets			39,723				359,907
Earnings on bank-owned life insurance			(261,129	)			(182,345	)
Increase in mortgage servicing rights			(102,470	)			(185,450	)
Proceeds from sales of loans held for sale			12,473,599				23,676,132
Originations of loans held for sale			(12,354,483	)			(21,359,299	)
Change in assets and liabilities:
Accrued interest receivable and other assets			(126,710	)			(542,379	)
Accrued interest payable			(17,437	)			(62,329	)
Other liabilities			(11,643	)			1,335,784
Net cash provided by operating activities			3,150,941				6,924,697
(Continued)

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

		Nine Months Ended
		September 30,
		2014				2013
Cash flows from investing activities
Purchase of interest-earning time deposits		$	(6,542	)		$	(14,354	)
Available for sale securities:
Purchases			(21,107,286	)			(54,478,812	)
Proceeds from calls, maturities, and principal repayments			28,664,125				19,656,180
Proceeds from sales			2,759,787				9,025,930
Purchase of Federal Reserve Bank stock			(1,689,493	)			-
Decrease (increase) in loans			(19,215,487	)			24,507,844
Purchase of property and equipment			(1,341,628	)			(180,105	)
Proceeds from the sale of property and equipment			242,304				-
Proceeds from the sale of foreclosed assets			1,004,232				569,517
Purchase of bank-owned life insurance			(6,000,000	)			(3,000,000	)
Net cash used in investing activities			(16,689,988	)			(3,913,800	)
Cash flows from financing activities
Net increase in deposit accounts			23,906,878				61,675,370
Repayments of Federal Home Loan Bank advances			(5,000,000	)			-
Net decrease in securities sold under agreements to repurchase			(12,506,716	)			(10,957,434	)
Repurchase of common stock			-				(3,888,712	)
Cash dividends paid			(1,261,311	)			(1,319,086	)
Net cash provided by financing activities			5,138,851				45,510,138
Net increase (decrease) in cash and cash equivalents			(8,400,196	)			48,521,035
Cash and cash equivalents:
Beginning			84,693,825				71,414,598
Ending		$	76,293,629			$	119,935,633
Supplemental schedule of noncash investing and financing activities
Assets acquired in settlement of loans		$	287,982			$	944,204
Loans made to finance sales of foreclosed assets			383,230				531,278
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	1,927,386			$	2,664,217
Income taxes, net of refunds			815,000				2,038,004

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

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 year or for any other period. 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, 2013 contained in the 2013 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 the Bank’s wholly owned inactive subsidiary, Clover Leaf Financial Services, Inc. On July 25, 2014, the inactive subsidiary was dissolved in connection with the Bank’s conversion from a thrift charter to a national bank charter effective August 15, 2014. 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 May 2014, the Financial Accounting Standard Board (the “FASB”) issued an update creating FASB Topic 606, Revenue from Contracts with Customers.  The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance provides steps to follow to achieve the core principle.  An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.  We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

In January 2014, the FASB amended existing guidance clarifying that if an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not expect this amendment to have a material impact on the consolidated financial statements.

 

In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position. Or, if the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments are effective for interim and annual reporting periods beginning after December 15, 2013. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition.

 

Reclassifications: Certain reclassifications have been made to conform to the current year presentation. These reclassifications had no impact on the Company’s net income or total stockholders’ equity.

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE

 

The amortized cost and fair values of securities with gross unrealized gains and losses as of the dates indicated are summarized as follows:

 

		September 30, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				(Losses)				Value
U.S. government agency obligations		$	29,786,402			$	19,271			$	(675,571	)		$	29,130,102
State and municipal securities			46,086,351				1,021,241				(351,145	)			46,756,447
Other securities(1)			248,501				-				-				248,501
Mortgage-backed: residential			33,418,517				161,406				(413,647	)			33,166,276
		$	109,539,771			$	1,201,918			$	(1,440,363	)		$	109,301,326
		December 31, 2013
U.S. government agency obligations		$	41,982,901			$	34,010			$	(1,101,316	)		$	40,915,595
U.S. treasury securities			5,000,000				-				-				5,000,000
State and municipal securities			39,827,427				439,363				(1,521,921	)			38,744,869
Other securities(1)			248,501				-				-				248,501
Mortgage-backed: residential			33,404,645				234,517				(771,145	)			32,868,017
		$	120,463,474			$	707,890			$	(3,394,382	)		$	117,776,982

 

⁽¹⁾ Includes a Certificate of Deposit in the amount of $245,000

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE (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 September 30, 2014 and December 31, 2013, are summarized as follows:

 

		September 30, 2014
		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. government agency obligations		$	4,474,694			$	(30,506	)		$	15,390,885			$	(645,065	)		$	19,865,579			$	(675,571	)
State and municipal securities			1,071,984				(7,374	)			13,410,895				(343,771	)			14,482,879				(351,145	)
Mortgage-backed: residential			7,743,589				(46,736	)			17,863,388				(366,911	)			25,606,977				(413,647	)
		$	13,290,267			$	(84,616	)		$	46,665,168			$	(1,355,747	)		$	59,955,435			$	(1,440,363	)

 

		December 31, 2013
		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. government agency obligations		$	32,313,881			$	(962,837	)		$	1,364,739			$	(138,479	)		$	33,678,620			$	(1,101,316	)
State and municipal securities			20,013,766				(1,112,126	)			3,322,850				(409,795	)			23,336,616				(1,521,921	)
Mortgage-backed: residential			16,485,580				(531,722	)			5,443,669				(239,423	)			21,929,249				(771,145	)
		$	68,813,227			$	(2,606,685	)		$	10,131,258			$	(787,697	)		$	78,944,485			$	(3,394,382	)

 

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 September 30, 2014, the Company had 73 securities in an unrealized loss position which included: 13 agency securities, 35 state and municipal securities, and 25 mortgage-backed securities. This is a decrease from 97 securities at December 31, 2013. The unrealized losses resulted from changes in market interest rates and liquidity, as opposed to 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 the 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 September 30, 2014.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

 

The amortized cost and fair value at September 30, 2014, 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. Additionally, an item in our “other securities” category has no stated maturity. Therefore, stated maturities are not disclosed for these items.

 

		Amortized				Fair
		Cost				Value
Due in one year or less		$	7,220,236			$	7,247,004
Due after one year through five years			15,535,028				15,505,849
Due after five years through ten years			36,520,104				36,336,355
Due after ten years			16,842,385				17,042,341
Other securities - non-maturing			3,501				3,501
Mortgage-backed: residential			33,418,517				33,166,276
		$	109,539,771			$	109,301,326

 

Securities with a carrying amount of approximately $71,641,000 and $88,180,000 were pledged to secure deposits as required or permitted by law at September 30, 2014 and December 31, 2013, respectively.

 

At September 30, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. The Company received proceeds of $2,759,787 from the sale of securities during the three and nine months ended September 30, 2014, resulting in gross realized gains of $90,838 and gross realized losses of $2,749. There were no sales of securities during the three months ended September 30, 2013. The Company received proceeds of $9,025,930 from the sale of securities during the nine months ending September 30, 2013 resulting in gross realized gains of $373,489 and gross realized losses of $14,351.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS

 

The components of loans are as follows:

 

		At September 30,								At December 31,
		2014								2013
		Amount				Percent				Amount				Percent
Real estate loans:
One-to-four family		$	118,018,468				29.6	%		$	118,884,453				31.4	%
Multi-family			37,203,901				9.4				40,262,269				10.7
Commercial			125,299,492				31.5				120,839,112				32.0
Construction and land			29,521,120				7.4				12,848,111				3.4
			310,042,981				77.9				292,833,945				77.5
Commercial business			73,887,739				18.6				71,940,431				19.0
Consumer:
Home equity			12,478,053				3.1				11,712,701				3.1
Automobile and other			1,399,498				0.4				1,525,594				0.4
			13,877,551				3.5				13,238,295				3.5
Total gross loans			397,808,271				100.0	%			378,012,671				100.0	%
Deferred loan origination costs, net			182,022								146,959
Allowance for loan losses			(5,790,519	)							(5,590,668	)
Loans, net		$	392,199,774							$	372,568,962

 

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 of directors 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 2013 Annual Report to Stockholders that is filed as Exhibit 13 to the Company’s Annual Report on Form 10-K.

 

On occasion, the Company originates loans secured by single-family dwellings with loan to value ratios exceeding 90%. As of September 30, 2014 and December 31, 2013, these loans represented 2.32% and 1.07%, respectively, of our combined one-to-four family and home equity portfolios. The Company does not consider the level of such loans to be a significant concentration of credit as of September 30, 2014 or December 31, 2013.

 

The recorded investment in loans does not include accrued interest and loan origination fees due to immateriality. The allowance for loan losses does not include a component for undisbursed loan commitments; rather this amount is included in other liabilities.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

The following tables present our past-due loans, segregated by class, as of September 30, 2014 and December 31, 2013:

 

September 30, 2014
		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		$	-			$	302,334			$	331,715			$	634,049			$	117,384,419			$	118,018,468			$	-
Multi-family			-				-				-				-				37,203,901				37,203,901				-
Commercial			819,357				-				34,805				854,162				124,445,330				125,299,492				-
Construction and land			-				-				-				-				29,521,120				29,521,120				-
			819,357				302,334				366,520				1,488,211				308,554,770				310,042,981				-
Commercial business			44,623				6,206				-				50,829				73,836,910				73,887,739				-
Consumer:
Home equity			-				346,382				38,924				385,306				12,092,747				12,478,053				-
Automobile and other			-				-				-				-				1,399,498				1,399,498				-
			-				346,382				38,924				385,306				13,492,245				13,877,551				-
Total		$	863,980			$	654,922			$	405,444			$	1,924,346			$	395,883,925			$	397,808,271			$	-
December 31, 2013
		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		$	631,656			$	116,090			$	673,677			$	1,421,423			$	117,463,030			$	118,884,453			$	-
Multi-family			-				-				-				-				40,262,269				40,262,269				-
Commercial			15,162				-				30,016				45,178				120,793,934				120,839,112				-
Construction and land			-				-				-				-				12,848,111				12,848,111				-
			646,818				116,090				703,693				1,466,601				291,367,344				292,833,945				-
Commercial business			4,719				-				-				4,719				71,935,712				71,940,431				-
Consumer:
Home equity			40,473				-				30,047				70,520				11,642,181				11,712,701				-
Automobile and other			-				-				-				-				1,525,594				1,525,594				-
			40,473				-				30,047				70,520				13,167,775				13,238,295				-
Total		$	692,010			$	116,090			$	733,740			$	1,541,840			$	376,470,831			$	378,012,671			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

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 applied to the outstanding principal balance.

 

Non-accrual loans, segregated by class, are as follows:

 

		September 30,				December 31,
		2014				2013
Real estate loans:
One-to-four family		$	626,082			$	1,671,324
Multi-family			1,371,080				2,100,064
Commercial			1,265,044				1,388,887
Construction and land			1,362,047				1,141,057
			4,624,253				6,301,332
Commercial business			675,454				-
Consumer:
Home equity			38,924				144,800
Total non-accrual loans		$	5,338,631			$	6,446,132

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

Three months ended September 30, 2014
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,225,852			$	-			$	465,270			$	(593,575	)		$	1,097,547
Multi-family			438,431				-				-				(31,035	)			407,396
Commercial			1,709,815				-				-				133,384				1,843,199
Construction and land			1,011,316				-				-				315,997				1,327,313
			4,385,414				-				465,270				(175,229	)			4,675,455
Commercial business			997,689				-				(600	)			(64,303	)			932,786
Consumer
Home equity			172,037				-				7,465				(5,168	)			174,334
Automobile and other			12,769				-				475				(5,300	)			7,944
			184,806				-				7,940				(10,468	)			182,278
Total		$	5,567,909			$	-			$	472,610			$	(250,000	)		$	5,790,519
Three months ended September 30, 2013
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,011,386			$	(199,030	)		$	418			$	122,716			$	935,490
Multi-family			559,998				-				-				92,785				652,783
Commercial			1,073,664				(49,499	)			204,091				210,213				1,438,469
Construction and land			1,512,094				-				57,000				(259,470	)			1,309,624
			4,157,142				(248,529	)			261,509				166,244				4,336,366
Commercial business			1,195,622				(10,328	)			15,997				(116,554	)			1,084,737
Consumer
Home equity			120,776				-				233				(7,720	)			113,289
Automobile and other			5,158				-				6,023				(6,970	)			4,211
			125,934				-				6,256				(14,690	)			117,500
Total		$	5,478,698			$	(258,857	)		$	283,762			$	35,000			$	5,538,603

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

Nine months ended September 30, 2014
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,424,663			$	(219,163	)		$	466,287			$	(574,240	)		$	1,097,547
Multi-family			661,358				-				-				(253,962	)			407,396
Commercial			1,454,455				(1,876	)			-				390,620				1,843,199
Construction and land			668,085				-				230,000				429,228				1,327,313
			4,208,561				(221,039	)			696,287				(8,354	)			4,675,455
Commercial business			1,219,080				-				8,116				(294,410	)			932,786
Consumer:
Home equity			116,478				(43,519	)			9,381				91,994				174,334
Automobile and other			46,549				-				625				(39,230	)			7,944
			163,027				(43,519	)			10,006				52,764				182,278
Total		$	5,590,668			$	(264,558	)		$	714,409			$	(250,000	)		$	5,790,519
Nine months ended September 30, 2013
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	847,285			$	(502,265	)		$	17,036			$	573,434			$	935,490
Multi-family			958,303				(482,478	)			-				176,958				652,783
Commercial			1,268,081				(216,750	)			204,681				182,457				1,438,469
Construction and land			1,413,002				-				214,268				(317,646	)			1,309,624
			4,486,671				(1,201,493	)			435,985				615,203				4,336,366
Commercial business			1,296,114				(135,114	)			23,967				(100,230	)			1,084,737
Consumer:
Home equity			151,625				(13,009	)			233				(25,560	)			113,289
Automobile and other			10,175				(7,574	)			6,023				(4,413	)			4,211
			161,800				(20,583	)			6,256				(29,973	)			117,500
Total		$	5,944,585			$	(1,357,190	)		$	466,208			$	485,000			$	5,538,603

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

The following tables separate the allocation of the allowance for loan losses and the loan balances between loans evaluated both individually and collectively as of September 30, 2014 and December 31, 2013:

 

September 30, 2014
		Period-end allowance allocated to loans:												Loans evaluated for impairment:
		Individually evaluated for impairment				Collectively evaluated for impairment				Ending Balance				Individually				Collectively				Ending Balance
Real estate loans:
One-to-four family		$	103,569			$	993,978			$	1,097,547			$	1,210,236			$	116,808,232			$	118,018,468
Multi-family			-				407,396				407,396				1,842,865				35,361,036				37,203,901
Commercial			149,971				1,693,228				1,843,199				2,304,185				122,995,307				125,299,492
Construction and land			107				1,327,206				1,327,313				1,574,294				27,946,826				29,521,120
			253,647				4,421,808				4,675,455				6,931,580				303,111,401				310,042,981
Commercial business			119,948				812,838				932,786				795,402				73,092,337				73,887,739
Consumer:
Home equity			-				174,334				174,334				56,386				12,421,667				12,478,053
Automobile and other			-				7,944				7,944				-				1,399,498				1,399,498
			-				182,278				182,278				56,386				13,821,165				13,877,551
Total		$	373,595			$	5,416,924			$	5,790,519			$	7,783,368			$	390,024,903			$	397,808,271
December 31, 2013
		Period-end allowance allocated to loans:												Loans evaluated for impairment:
		Individually evaluated for impairment				Collectively evaluated for impairment				Ending Balance				Individually				Collectively				Ending Balance
Real estate loans:
One-to-four family		$	160,881			$	1,263,782			$	1,424,663			$	1,720,101			$	117,164,352			$	118,884,453
Multi-family			-				661,358				661,358				2,100,064				38,162,205				40,262,269
Commercial			195,103				1,259,352				1,454,455				1,978,525				118,860,587				120,839,112
Construction and land			10,315				657,770				668,085				1,141,057				11,707,054				12,848,111
			366,299				3,842,262				4,208,561				6,939,747				285,894,198				292,833,945
Commercial business			131,774				1,087,306				1,219,080				131,774				71,808,657				71,940,431
Consumer:
Home equity			8,602				107,876				116,478				162,449				11,550,252				11,712,701
Automobile and other			-				46,549				46,549				-				1,525,594				1,525,594
			8,602				154,425				163,027				162,449				13,075,846				13,238,295
Total		$	506,675			$	5,083,993			$	5,590,668			$	7,233,970			$	370,778,701			$	378,012,671

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

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. The risk category of homogeneous loans, such as consumer loans and smaller balance loans, is evaluated when the loan becomes delinquent. 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.

 

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 for credits categorized as loss.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

The following tables present our credit quality indicators, segregated by class, as of September 30, 2014 and December 31, 2013:

 

September 30, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	116,575,339			$	280,990			$	998,297			$	163,842			$	118,018,468
Multi-family			33,110,684				2,722,138				1,371,079				-				37,203,901
Commercial			110,632,286				10,665,461				4,001,745				-				125,299,492
Construction and land			27,886,725				-				1,634,395				-				29,521,120
			288,205,034				13,668,589				8,005,516				163,842				310,042,981
Commercial business			72,168,789				923,548				795,402				-				73,887,739
Consumer:
Home equity			12,409,165				29,964				38,924				-				12,478,053
Automobile and other			1,399,498				-				-				-				1,399,498
			13,808,663				29,964				38,924				-				13,877,551
Total		$	374,182,486			$	14,622,101			$	8,839,842			$	163,842			$	397,808,271
December 31, 2013
		Pass				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	115,491,532			$	1,672,820			$	1,367,925			$	352,176			$	118,884,453
Multi-family			35,412,469				2,749,736				2,100,064				-				40,262,269
Commercial			110,571,786				5,902,447				4,334,863				30,016				120,839,112
Construction and land			11,583,780				-				1,264,331				-				12,848,111
			273,059,567				10,325,003				9,067,183				382,192				292,833,945
Commercial business			71,074,289				534,368				331,774				-				71,940,431
Consumer:
Home equity			11,518,523				31,730				132,401				30,047				11,712,701
Automobile and other			1,525,594				-				-				-				1,525,594
			13,044,117				31,730				132,401				30,047				13,238,295
Total		$	357,177,973			$	10,891,101			$	9,531,358			$	412,239			$	378,012,671

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

The following tables provide details of impaired loans, segregated by class, as of and for the periods indicated. 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.

 

		As of September 30, 2014												As of December 31, 2013
		Unpaid Contractual Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Unpaid Contractual Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated
With no related allowance recorded:
Real estate loans:
One-to-four family		$	597,011			$	500,252			$	-			$	1,082,196			$	899,959			$	-
Multi-family			2,477,263				1,842,865				-				2,734,462				2,100,064				-
Commercial			779,422				779,422				-				808,008				808,008				-
Construction and land			3,135,281				1,362,047				-				1,986,485				213,251				-
			6,988,977				4,484,586				-				6,611,151				4,021,282				-
Commercial business			675,454				675,454				-				-				-				-
Consumer:
Home equity			56,386				56,386				-				132,402				132,402				-
Subtotal		$	7,720,817			$	5,216,426			$	-			$	6,743,553			$	4,153,684			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	763,492			$	709,984			$	103,569			$	864,017			$	820,142			$	160,881
Multi-family			-				-				-				-				-				-
Commercial			1,716,998				1,524,763				149,971				1,360,876				1,170,517				195,103
Construction and land			212,247				212,247				107				927,806				927,806				10,315
			2,692,737				2,446,994				253,647				3,152,699				2,918,465				366,299
Commercial business			119,948				119,948				119,948				131,774				131,774				131,774
Consumer:
Home equity			-				-				-				30,047				30,047				8,602
Subtotal			2,812,685				2,566,942				373,595				3,314,520				3,080,286				506,675
Total		$	10,533,502			$	7,783,368			$	373,595			$	10,058,073			$	7,233,970			$	506,675

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

		For the three months ended September 30, 2014												For the three months ended September 30, 2013
		Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized				Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized
With no related allowance recorded:
Real estate loans:
One-to-four family		$	508,560			$	763			$	-			$	1,146,644			$	517			$	-
Multi-family			1,842,099				30				-				1,322,609				-				-
Commercial			909,202				-				-				1,730,282				10,134				-
Construction and land			1,001,091				-				-				1,450,938				-				-
			4,260,952				793				-				5,650,473				10,651				-
Commercial business			677,727				-				-				28,911				-				-
Consumer:
Home equity			114,922				264				-				126,655				315				-
Automobile and other			-				-				-				-				-				-
			114,922				264				-				126,655				315				-
Subtotal		$	5,053,601			$	1,057			$	-			$	5,806,039			$	10,966			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	677,011			$	5,945			$	-			$	1,197,003			$	-			$	-
Multi-family			-				-				-				1,106,998				-				-
Commercial			1,318,324				4,481				-				552,825				-				-
Construction and land			106,123				2,430				-				-				-				-
			2,101,458				12,856				-				2,856,826				-				-
Commercial business			121,912				2,465				-				342,867				2,318				-
Consumer:
Home equity			-				-				-				37,060				-				-
Automobile and other			-				-				-				-				-				-
			-				-				-				37,060				-				-
Subtotal			2,223,370				15,321				-				3,236,753				2,318				-
Total		$	7,276,971			$	16,378			$	-			$	9,042,792			$	13,284			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

		For the nine months ended September 30, 2014												For the nine months ended September 30, 2013
		Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized				Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized
With no related allowance recorded:
Real estate loans:
One-to-four family		$	742,155			$	1,726			$	-			$	1,040,242			$	517			$	-
Multi-family			1,499,240				30				-				773,675				-				-
Commercial			863,767				7,709				-				2,329,088				10,134				-
Construction and land			826,652				-				-				1,768,331				-				-
			3,931,814				9,465				-				5,911,336				10,651				-
Commercial business			338,864				-				-				15,096				-				-
Consumer:
Home equity			125,947				838				-				140,974				315				-
Automobile and other			-				-				-				1,137				-				-
			125,947				838				-				142,111				315				-
Subtotal		$	4,396,625			$	10,303			$	-			$	6,068,543			$	10,966			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	673,152			$	5,945			$	-			$	1,104,666			$	-			$	-
Multi-family			414,444				-				-				1,930,451				-				-
Commercial			1,285,412				7,667				-				569,846				-				-
Construction and land			285,013				2,430				-				-				-				-
			2,658,021				16,042				-				3,604,963				-				-
Commercial business			125,867				7,190				-				311,683				2,548				-
Consumer:
Home equity			7,512				-				-				32,347				-				-
Automobile and other			-				-				-				3,380				-				-
			7,512				-				-				35,727				-				-
Subtotal			2,791,400				23,232				-			$	3,952,373			$	2,548			$	-
Total		$	7,188,025			$	33,535			$	-			$	10,020,916			$	13,514			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

Troubled Debt Restructurings:

 

The Company had allocated $354,958 of specific reserves on $6,152,048 of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2014. The Company had $354,822 of allocations of specific reserves on $6,215,918 of loans to customers whose loan terms were modified in troubled debt restructurings as of December 31, 2013. The Company has committed to lend an immaterial amount as of September 30, 2014 to customers with outstanding loans that are classified as troubled debt restructurings. The Company had no commitments to lend additional amounts as of December 31, 2013 to customers with outstanding loans that are classified as troubled debt restructurings.

 

During the three and nine months ended September 30, 2014, three loans totaling $1,410,854 were modified as troubled debt restructurings. The modifications included payment and maturity changes not available in the market.

 

During the three months ended September 30, 2013, six loans totaling $1,019,972 were modified as troubled debt restructurings. During the nine months ended September 30, 2013, 11 loans totaling $1,243,886 were modified as troubled debt restructurings. The modifications included one or a combination of the following: payment and maturity changes not available in the market; and a reduction of the stated interest rate of the loan.

 

The following tables present loans, by class, modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2014 and 2013:

 

Three and nine months ended September 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family			2			$	517,725			$	512,242
Construction and land			1				893,129				893,129
Total			3			$	1,410,854			$	1,405,371

 

The troubled debt restructurings described above resulted in a net increase in the allowance for loan losses of $43,720 and $76,797 during the three and nine months ended September 30, 2014, respectively. There were no charge offs during the three and nine months ended September 30, 2014.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

Three months ended September 30, 2013
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family			1			$	49,678			$	49,000
Commercial			3				809,404				809,404
			4				859,082				858,404
Commercial business			1				142,112				142,112
Consumer:
Home equity			1				18,778				17,722
Total			6			$	1,019,972			$	1,018,238

 

Nine months ended September 30, 2013
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family			5			$	135,590			$	134,277
Commercial			3				809,404				809,404
			8				944,994				943,681
Commercial business			2				280,114				276,041
Consumer:
Home equity			1				18,778				17,722
Total			11			$	1,243,886			$	1,237,444

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 3 - LOANS (Continued)

 

The following tables present the troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2014 and 2013.

 

		Three and nine months ended September 30, 2014
		Number of Contracts				Recorded Investment (as of period end)
Real estate loans:
One-to-four family			4			$	95,804
Total			4			$	95,804

 

		Three and nine months ended September 30, 2013
		Number of Contracts				Recorded Investment (as of period end)
Real estate loans:
One-to-four family			1			$	53,152
Total			1			$	53,152

 

The troubled debt restructurings that subsequently defaulted, described above, resulted in a net decrease in the allowance for loan losses of $2,340 and resulted in charge-offs of $5,327 during the nine months ended September 30, 2014.

 

A loan is considered to be in payment default once it is 60 days contractually past due under the modified terms.

 

NOTE 4 - GOODWILL

 

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. During 2014, at our annual impairment assessment date of September 30, our analysis indicated that no impairment existed.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 5 – 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.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Net income		$	1,328,027			$	860,130			$	2,814,989			$	2,921,566
Basic potential common shares:
Basic weighted average shares outstanding			7,007,283				7,160,909				7,007,283				7,301,902
Dilutive potential common shares			-				-				-				-
Diluted weighted average shares outstanding			7,007,283				7,160,909				7,007,283				7,301,902
Basic and diluted earnings per share		$	0.19			$	0.12			$	0.40			$	0.40

 

NOTE 6 - 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 - 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 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 - 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.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

Securities:  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. During the nine months ended September 30, 2014, there were no transfers between Level 1 and Level 2. The valuation methodology was consistent for the nine months ended September 30, 2014 and the year ended December 31, 2013.

 

Foreclosed Assets:  Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Appraisals for both foreclosed assets and collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, a member of the loan department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a recurring basis segregated by fair value hierarchy level during the periods ended September 30, 2014 and December 31, 2013 are summarized below:

 

		Fair Value Measurements at September 30, 2014 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Securities:
U.S. government agency obligations		$	-			$	29,130,102			$	-			$	29,130,102
State and municipal securities			-				46,756,447				-				46,756,447
Other securities			-				248,501				-				248,501
Mortgage-backed: residential			-				33,166,276				-				33,166,276
Total securities available for sale		$	-			$	109,301,326			$	-			$	109,301,326
		Fair Value Measurements at December 31, 2013 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Securities:
U.S. government agency obligations		$	-			$	40,915,595			$	-			$	40,915,595
U.S. treasury securities			-				5,000,000				-				5,000,000
State and municipal securities			-				38,744,869				-				38,744,869
Other securities			-				248,501				-				248,501
Mortgage-backed: residential			-				32,868,017				-				32,868,017
Total securities available for sale		$	-			$	117,776,982			$	-			$	117,776,982

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a nonrecurring basis by fair value hierarchy level during the periods ended September 30, 2014 and December 31, 2013 are summarized below:

 

		Fair Value Measurements at September 30, 2014 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Foreclosed assets:
Real estate:
Construction and land		$	-			$	-			$	276,430			$	276,430
Total foreclosed assets		$	-			$	-			$	276,430			$	276,430
Impaired loans:
Real estate loans:
One-to-four family		$	-			$	-			$	606,415			$	606,415
Commercial			-				-				1,374,792				1,374,792
Construction and land			-				-				212,140				212,140
Total impaired loans		$	-			$	-			$	2,193,347			$	2,193,347

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

		Fair Value Measurements at December 31, 2013 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Foreclosed assets:
Real estate:
One-to-four family		$	-			$	-			$	103,500			$	103,500
Multi-family			-				-				118,100				118,100
Commercial			-				-				692,230				692,230
Construction and land			-				-				1,901,758				1,901,758
Total foreclosed assets		$	-			$	-			$	2,815,588			$	2,815,588
Impaired loans:
Real estate loans:
One-to-four family		$	-			$	-			$	659,261			$	659,261
Commercial			-				-				975,414				975,414
Construction and land			-				-				917,491				917,491
			-				-				2,552,166				2,552,166
Consumer:
Home Equity			-				-				21,445				21,445
			-				-				21,445				21,445
Total impaired loans		$	-			$	-			$	2,573,611			$	2,573,611
Mortgage Servicing Rights		$	-			$	918,247			$	-			$	918,247

 

Foreclosed assets are collateral dependent and are recorded at the lesser of the recorded investment in the receivable or the appraised value less costs to sell and may be revalued on a nonrecurring basis. Foreclosed assets measured at fair value less costs to sell on a nonrecurring basis at September 30, 2014, had a net carrying amount of $276,430 which was made up of the outstanding balance of $316,153 net of cumulative write-downs of $39,723 which occurred during the nine months ended September 30, 2014. At December 31, 2013, foreclosed assets had a carrying amount of $2,815,588, which was made up of the outstanding balance of $4,123,275, net of write-downs of $1,307,687.

 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2,566,942, with a valuation allowance of $373,595 at September 30, 2014, resulting in a net decrease in provision for loan losses of $33,646 for the nine months ended September 30, 2014. At December 31, 2013, impaired loans had a principal balance of $3,080,286 with a valuation allowance of $506,675.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2014:

 

Fair Value

Valuation Techniques

Unobservable Inputs

Range

Weighted Average

Foreclosed assets:

Real estate:

Construction and land

$

276,430

Sales Comparison

Adjustment for difference between comparable sales

4% to 34%

16.2

%

Impaired loans:

Real estate loans:

One-to-four family

$

606,415

Sales Comparison

Adjustment for difference between comparable sales

-23% to 19%

-2.5

%

Commercial

1,374,792

Income Approach

Investment Capitalization Rates

3% to 27%

11.5

%

Construction and land

212,140

Sales Comparison

Adjustment for difference between comparable sales

-19% to 11%

-8.3

%

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013:

 

Fair Value

Valuation Techniques

Unobservable Inputs

Range

Weighted Average

Foreclosed assets:

Real estate:

One-to-four family

$

103,500

Sales Comparison

Adjustment for difference between comparable sales

-2% to 20%

8.3

%

Multi-family

118,100

Sales Comparison

Adjustment for difference between comparable sales

2% to 26%

15.5

%

Commercial

692,230

Sales Comparison

Adjustment for difference between comparable sales

-2% to 0%

-1.9

%

Construction and land

1,901,758

Sales Comparison

Adjustment for difference between comparable sales

-21% to 36%

5.5

%

Impaired loans:

Real estate loans:

One-to-four family

$

659,261

Sales Comparison

Adjustment for difference between comparable sales

-11% to 27%

2.9

%

Commercial

975,414

Sales Comparison

Adjustment for difference between comparable sales

-28% to 16%

-9.2

%

Construction and land

917,491

Sales Comparison

Adjustment for difference between comparable sales

-14% to 36%

19.1

%

Consumer:

Home Equity

21,445

Sales Comparison

Adjustment for difference between comparable sales

-9% to -3%

-5.6

%

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 7 - 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 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 given the short-term nature and active market for U.S. currency and are classified as Level 1.

 

Interest-Earning Time Deposits:  Due to the short-term nature of these deposits, the carrying amounts of these deposits approximate fair values. However, since it is unusual to observe a quoted price in an active market during the outstanding term, these deposits are classified as Level 2.

 

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 (“FHLB”) 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.

 

Federal Reserve Bank Stock: The Company is required to maintain these equity securities as a member of the Federal Reserve Bank 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 either observable market prices or 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 resulting in a Level 3 classification. Impaired loans that have no specific reserve are classified as Level 3. Impaired loans that have been written down to the fair value of the corresponding collateral, less estimated costs to sell, are not included in this table as those amounts were presented previously. The fair value computed is not necessarily an exit price.

 

Loans Held for Sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value. Accrued interest receivable related to interest-earning time deposits and securities is classified as Level 2. Accrued interest receivable related to loans is classified as Level 3.

 

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified as Level 1. The carrying amounts for interest-bearing money market and savings accounts approximate their fair values at the reporting date and are classified as Level 1. 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 resulting in a Level 2 classification.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Federal Home Loan Bank Advances: The fair value of FHLB advances, which are at a fixed rate, are estimated using discounted cash flow analyses based on current rates for similar advances resulting in a Level 2 classification.

 

Securities Sold Under Agreements to Repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value resulting in a Level 2 classification.

 

Subordinated Debentures: This debenture is a floating rate instrument which re-prices quarterly. The fair value of variable rate trust preferred debentures approximate carrying value resulting in a Level 2 classification.

 

Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value. Accrued interest payable related to interest-bearing money market and savings accounts is classified as Level 1. All other accrued interest payable is classified as Level 2.

 

The following information presents estimated fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013 that have not been previously presented and the methods and assumptions used to estimate those fair values.

 

						Fair Value Measurements at September 30, 2014 Using:
						Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Carrying Amount				(Level 1)				(Level 2)				(Level 3)				Fair Value
Financial assets:
Cash and cash equivalents		$	76,293,629			$	76,293,629			$	-			$	-			$	76,293,629
Interest-earning time deposits			1,773,035				-				1,773,035				-				1,773,035
Federal Home Loan Bank stock			2,887,763				-				-				-				N/A
Federal Reserve Bank stock			1,689,493																N/A
Loans, net (excluding impaired loans at fair value)			390,006,427				-				-				390,271,875				390,271,875
Loans held for sale			299,200				-				299,200				-				299,200
Accrued interest receivable			1,907,235				-				643,898				1,263,337				1,907,235
Financial liabilities:
Non-interest bearing deposits			55,507,117				55,507,117				-				-				55,507,117
Interest-bearing deposits			470,939,453				344,305,790				129,640,720				-				473,946,510
Federal Home Loan Bank advances			8,985,810				-				9,055,841				-				9,055,841
Securities sold under agreements to repurchase			14,259,453				-				14,259,453				-				14,259,453
Subordinated debentures			4,000,000				-				4,000,000				-				4,000,000
Accrued interest payable			182,327				13,198				169,129				-				182,327

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

						Fair Value Measurements at December 31, 2013 Using:
						Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Carrying Amount				(Level 1)				(Level 2)				(Level 3)				Fair Value
Financial assets:
Cash and cash equivalents		$	84,693,825			$	84,693,825			$	-			$	-			$	84,693,825
Interest-earning time deposits			1,766,493				-				1,766,493				-				1,766,493
Federal Home Loan Bank stock			2,887,763				-				-				-				N/A
Loans, net (excluding impaired loans at fair value)			369,995,351				-				-				369,987,191				369,987,191
Accrued interest receivable			1,551,258				-				546,692				1,004,566				1,551,258
Financial liabilities:
Non-interest bearing deposits			55,263,604				55,263,604				-				-				55,263,604
Interest-bearing deposits			447,276,088				319,716,842				128,515,854				-				448,232,696
Federal Home Loan Bank advances			13,980,005				-				14,114,389				-				14,114,389
Securities sold under agreements to repurchase			26,766,169				-				26,766,169				-				26,766,169
Subordinated debentures			4,000,000				-				4,000,000				-				4,000,000
Accrued interest payable			199,764				15,233				184,531				-				199,764

 

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, non-financial 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, our trained work force, customer goodwill and similar items.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables summarize the changes within each classification of accumulated other comprehensive loss, net of tax, for the three and nine months ended September 30, 2014, and summarize the significant amounts reclassified out of each component of accumulated other comprehensive income:

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2014(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Loss at July 1, 2014		$	(37,959	)		$	(37,959	)
Other comprehensive loss before reclassifications			(56,765	)			(56,765	)
Amount reclassified from accumulated other comprehensive loss(2)			(55,496	)			(55,496	)
Net current-period other comprehensive loss			(112,261	)			(112,261	)
Accumulated Other Comprehensive Loss at September 30, 2014		$	(150,220	)		$	(150,220	)

 

⁽¹⁾ All amounts are net of tax.

⁽²⁾ See table below for details about reclassifications.

 

Reclassifications out of Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended September 30, 2014
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	88,089			Gain on sale of securities
			(32,593	)		Tax expense
Total reclassifications for the period		$	55,496			Net of tax

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2014(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Loss at January 1, 2014		$	(1,692,488	)		$	(1,692,488	)
Other comprehensive income before reclassifications			1,597,764				1,597,764
Amount reclassified from accumulated other comprehensive loss(2)			(55,496	)			(55,496	)
Net current-period other comprehensive income			1,542,268				1,542,268
Accumulated Other Comprehensive Loss at September 30, 2014		$	(150,220	)		$	(150,220	)

 

⁽¹⁾ All amounts are net of tax.

⁽²⁾ See table below for details about reclassifications.

 

Reclassifications out of Accumulated Other Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2014
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	88,089			Gain on sale of securities
			(32,593	)		Tax expense
Total reclassifications for the period		$	55,496			Net of tax

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

 

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2013 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income for the nine months ended September 30, 2013. There was no reclassification out of accumulated other comprehensive loss for the three months ended September 30, 2013.

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Three Months Ended September 30, 2013(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Loss at July 1, 2013		$	(1,041,050	)		$	(1,041,050	)
Other comprehensive loss before reclassifications			(230,162	)			(230,162	)
Amount reclassified from accumulated other comprehensive loss			-				-
Net current-period other comprehensive loss			(230,162	)			(230,162	)
Accumulated Other Comprehensive Loss at September 30, 2013		$	(1,271,212	)		$	(1,271,212	)

 

⁽¹⁾ All amounts are net of tax.

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Nine Months Ended September 30, 2013(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Income at January 1, 2013		$	1,196,111			$	1,196,111
Other comprehensive loss before reclassifications			(2,241,066	)			(2,241,066	)
Amount reclassified from accumulated other comprehensive income(2)			(226,257	)			(226,257	)
Net current-period other comprehensive loss			(2,467,323	)			(2,467,323	)
Accumulated Other Comprehensive Loss at September 30, 2013		$	(1,271,212	)		$	(1,271,212	)

 

⁽¹⁾ All amounts are net of tax.

⁽²⁾ See table below for details about reclassifications.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

 

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

 

Reclassifications out of Accumulated Other Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2013
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	359,138			Gain on sale of securities
			(132,881	)		Tax expense
Total reclassifications for the period		$	226,257			Net of tax

 

NOTE 9 – SUBSEQUENT EVENTS

 

On October 28, 2014, 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 September 30, 2014. The dividend will be payable to stockholders of record as of November 21, 2014 and is expected to be paid on November 28, 2014.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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, capital requirements and allowance for loan losses 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 resulting from shutdowns of the federal government; 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

 

First Clover Leaf considers the allowance for loan losses and goodwill and other intangible assets to be its critical accounting estimates, due to the higher degree of judgment and complexity than its other significant accounting estimates.

 

Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects our evaluation of the probable incurred credit losses 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. For each allowance portfolio class, we apply loss factors to calculate the required allowance based upon actual historical loss rates over a time period that we have determined represents the current credit cycle. The Company extended the look back period used to establish the loss history for the general reserve component of the allowance for loan losses in the first quarter of 2014, from three years to five years, in an effort to continue to factor in the higher loss experience that resulted from the credit crisis. 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 probable incurred losses in the loan portfolio, including management’s periodic review of loan collectibility in light of historical experience, loan portfolio composition, prevailing economic conditions such as housing trends,

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

inflation rates and unemployment rates, and geographic concentrations of loans within the Bank’s immediate market area.

 

There may be other factors that may warrant our consideration in maintaining an allowance at a level sufficient to provide for probable incurred 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 the Comptroller of the Currency (“OCC”), as an integral part of its examination process, periodically reviews our loan portfolio and the related allowance for loan losses. The OCC 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. There can be no assurance that the OCC will not require further increases to the allowance.

 

Goodwill. 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.

 

The goodwill impairment analysis allows the assessment of qualitative factors to determine if it is more-likely-than-not that the fair value of a reporting unit is less than the carrying value. If it is determined that we should proceed with impairment testing, we then estimate the fair value of our single reporting unit as of the measurement date utilizing two approaches including the comparable transactions approach, and the control premium approach which utilizes the Company’s stock price. We then compare the estimated fair value of the reporting unit to the current carrying value of the reporting unit to determine if goodwill impairment had occurred as of the measurement date. During 2014, at our annual impairment assessment date of September 30, our analysis indicated that no impairment existed. 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.

 

Overview

 

First Clover Leaf had net income of $1.3 million for the three months ended September 30, 2014 compared to net income of $860,000 for the same period in 2013.

 

The increase was primarily due to:

i.

reductions in interest expense and foreclosed asset related expenses;

ii.

a negative provision; and

iii.

increases in:

a.

gain on sale of securities,

b.

gain on sale of loans,

c.

gain on sale of foreclosed assets, and

d.

earnings from bank-owned life insurance

 

Basic and diluted earnings per share were $0.19 for the three-month period ended September 30, 2014 and $0.12 for the comparable period in 2013.

 

First Clover Leaf had net income of $2.8 million for the nine months ended September 30, 2014 compared to net income of $2.9 million for the same period in 2013.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

The decrease was primarily due to:

i.

reductions in gain on sale of securities and gain on sale of loans;

ii.

losses on the sale of assets and on the sale of foreclosed assets;

iii.

higher compensation and employee benefits; and

iv.

increases in occupancy expense and professional fees

 

Basic and diluted earnings per share were $0.40 for the nine-month periods ended September 30, 2014 and 2013.

 

Financial Condition

 

Total Assets. Total assets increased to $631.5 million at September 30, 2014 from $622.0 million at December 31, 2013. The increase was primarily due to higher balances of loans, bank-owned life insurance, and Federal Reserve Bank stock, partially offset by a decrease in cash and cash equivalents, securities available for sale, and foreclosed assets.

 

Total cash and cash equivalents decreased $8.4 million to $76.3 million at September 30, 2014 from $84.7 million at December 31, 2013. The decrease was primarily due to increased loan originations, and the purchases of Federal Reserve Bank stock and bank-owned life insurance, which were partially offset by a reduction in securities available for sale and sales of foreclosed assets.

 

Net loans increased $19.6 million to $392.2 million at September 30, 2014 from $372.6 million at December 31, 2013. This was primarily due to new loan originations exceeding loan repayments. We experienced increased activity in construction and land loans due to the funding of several large projects during the nine months ended September 30, 2014. Construction and land loans increased $16.7 million to $29.5 million at September 30, 2014 from $12.8 million at December 31, 2013. Loans held for sale at September 30, 2014 totaled $299,000. There were no loans held for sale at December 31, 2013.

 

Federal Reserve Bank stock totaled $1.7 million at September 30, 2014, which the Company was required to purchase as a result of the Bank’s conversion from a thrift charter to a national bank charter. There was no balance at December 31, 2013.

 

Bank-owned life insurance increased to $14.8 million at September 30, 2014 from $8.5 million at December 31, 2013 due to an additional purchase of $6.0 million. The Bank purchased the additional bank-owned life insurance to offset some of the expenses of our employee benefit plans, as allowed by federal regulation.

 

Securities available for sale decreased to $109.3 million at September 30, 2014 compared to $117.8 million at December 31, 2013. The decrease was due primarily to calls, maturities and principal repayments of $28.7 million and sales of $2.8 million partially offset by purchases of $21.1 million.

 

Foreclosed assets decreased to $4.3 million at September 30, 2014 from $5.6 million at December 31, 2013. The decrease was primarily due to sales of $1.5 million partially offset by additions of $288,000.

 

Total Liabilities. Total liabilities increased to $555.3 million at September 30, 2014 from $548.9 million at December 31, 2013. Deposits increased $23.9 million to $526.4 million at September 30, 2014 from $502.5 million at December 31, 2013. Interest bearing deposits increased $23.7 million to $470.9 million at September 30, 2014 from $447.3 million at December 31, 2013. This increase was primarily due to deposits predominately from a non-customer special purpose account that we expect to be disbursed beginning in the second quarter of 2015.

 

Federal Home Loan Bank advances at September 30, 2014 were $9.0 million compared to $14.0 million at December 31, 2013. The decrease was due to a repayment of $5.0 million.

 

Securities sold under agreements to repurchase decreased $12.5 million to $14.3 million at September 30, 2014 from $26.8 million at December 31, 2013. This decrease was due primarily to normal fluctuations in these business accounts.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Stockholders’ Equity. Stockholders’ equity increased to $76.2 million at September 30, 2014 from $73.1 million at December 31, 2013, primarily due to net income of $2.8 million and a reduction in accumulated other comprehensive loss of $1.5 million, partially offset by the payment of cash dividends of $1.3 million during the nine months ended September 30, 2014.

 

Asset Quality

 

The Company experienced a decline in non-performing assets as of September 30, 2014 compared to December 31, 2013. The decrease was primarily due to the sale of foreclosed assets of $1.3 million. The following tables set forth information with respect to the Company’s non-performing and impaired loans and other non-performing assets at the dates indicated:

 

		September 30,				December 31,
		2014				2013
Non-accrual loans(1)		$	5,338,631			$	6,446,132
Other impaired loans			2,444,737				787,838
Total non-performing loans			7,783,368				7,233,970
Foreclosed assets			4,281,600				5,577,481
Total non-performing assets		$	12,064,968			$	12,811,451

 

⁽¹⁾ The entire balance was also classified as impaired as of September 30, 2014 and December 31, 2013.

 

		September 30,				December 31,
		2014				2013
Non-performing assets to total assets			1.91	%			2.06	%
Non-performing loans to total loans			1.96				1.91
Allowance for loan losses to non-performing loans			74.40				77.28
Allowance for loan losses to total loans			1.45				1.48

 

Non-Performing and Impaired Loans and Other Non-Performing Assets. At September 30, 2014, our total non-performing and impaired loans and other non-performing assets were $12.1 million compared to $12.8 million at December 31, 2013. At September 30, 2014, the Company’s non-accrual loans decreased $1.1 million to $5.3 million from $6.4 million at December 31, 2013.

 

At September 30, 2014, the Bank had two relationships classified as non-accrual with a balance in excess of $1.0 million. The largest credit is a $2.0 million credit secured by a subdivision development. The credit was placed on non-accrual status during the three months ended March 31, 2013. The development has experienced very limited lot sales, and the cash flow was not sufficient to cover the principal and interest. Currently, we believe the collateral is sufficient to cover the outstanding loan balance. The second non-accrual relationship is a $1.4 million credit to a real estate investor. This credit was placed on non-accrual status in 2012. The investor has been experiencing cash flow difficulties due to higher vacancy rates and the need for property repairs. Since being placed on non-accrual, $1.0 million in pay-downs from the sale of collateral has been received on this relationship, and a charge-off of $483,000 was recorded in June 2013, all of which was previously reserved. A property manager is overseeing the daily operations, and all non-rented properties have been listed for sale. The borrower has signed a forbearance agreement with the Company to aid in selling some of the properties to further reduce the debt. We believe the collateral on this loan is sufficient to cover the majority of the outstanding balance and that sufficient allowances have been set aside for the remaining outstanding balance.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

In addition to the non-accrual loans discussed above, we may have loans that are still accruing interest that we categorize as impaired due to observed credit deterioration or restructured status. This allows us to individually evaluate them for our allowance for loan losses. At September 30, 2014, there were eight credits in this classification with a total balance of $2.4 million. The largest loan in this classification at September 30, 2014 is a $512,000 credit to a real estate investor that has been experiencing cash flow shortfalls. The loan was restructured to allow the creditor to improve the cash flow. The loan is performing in accordance with the restructured terms. In comparison, there were four loans that met this classification at December 31, 2013 with a total balance of $788,000.

 

The following table presents a summary of our past due loans as of September 30, 2014 and December 31, 2013:

 

		September 30,				December 31,
		2014				2013
Loans 30-59 Days Past Due		$	863,980			$	692,010
Loans 60-89 Days Past Due			654,922				116,090
Loans 90 or more Days Past Due			405,444				733,740
Total Past Due Loans		$	1,924,346			$	1,541,840

 

Past due balances increased approximately $400,000 from $1.5 million at December 31, 2013 to $1.9 million at September 30, 2014. The category experiencing the largest increase was the 60-89 days past due category, increasing approximately $539,000 from year-end December 31, 2013. The increase in the 60-89 past due was primarily a result of two one-to-four family loans which the Bank is working with the borrowers on repayment plans, and a home equity loan for which the Bank is considering a forbearance agreement.

 

The following table presents a summary of our credit quality indicators as of September 30, 2014 and December 31, 2013:

 

		September 30,				December 31,
		2014				2013
Pass		$	374,182,486			$	357,177,973
Special Mention			14,622,101				10,891,101
Substandard			8,839,842				9,531,358
Doubtful			163,842				412,239
Total Loans		$	397,808,271			$	378,012,671

 

In addition to the decline in total non-performing loans at September 30, 2014 compared to balances at December 31, 2013, there was also a decline in loans classified as substandard and doubtful. Loans classified as special mention increased $3.7 million primarily due to a credit to a commercial real estate investor that was downgraded during the three months ended September 30, 2014. The investor is struggling with cash flow, and the Bank is working with the investor to restructure the credit.

 

At September 30, 2014, the Bank had eight properties classified as foreclosed assets valued at $4.3 million, which is a decrease of $1.3 million from December 31, 2013. The collateral on these properties consists of farmland, two residential lot developments, a commercial development, and four single-family residences. All of these properties were transferred into foreclosed assets at cost or the property’s fair value, less estimated costs of disposal, at the date of foreclosure. Initial valuation adjustments, if any, are charged against the allowance for loan losses. The properties are evaluated on a non-recurring basis to verify that the recorded amount is supported by its current fair value.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Results of Operations

 

General. First Clover Leaf had net income of $1.3 million for the three months ended September 30, 2014 compared to net income of $860,000 for the same period in 2013. The increase was primarily due to: (i) reductions in interest expense and foreclosed asset related expenses; (ii) a negative provision; and (iii) increases in gain on sale of securities, gain on sale of loans, gain on sale of foreclosed assets, and earnings from bank-owned life insurance. These increases were partially offset by higher compensation and employee benefits; and increases in occupancy expense, professional fees, and income taxes. Basic and diluted earnings per share were $0.19 for the three-month period ended September 30, 2014 and $0.12 for the comparable period in 2013.

 

First Clover Leaf had net income of $2.8 million for the nine months ended September 30, 2014 compared to net income of $2.9 million for the same period in 2013. The decrease was primarily due to: (i) reductions in gain on sale of securities and gain on sale of loans; (ii) losses on the sale of assets and on the sale of foreclosed assets; (iii) higher compensation and employee benefits; and (iv) increases in occupancy expense and professional fees. These decreases were partially offset by a negative provision, an increase in earnings from bank-owned life insurance, and decreases in foreclosed asset related expenses and income taxes. Basic and diluted earnings per share were $0.40 for the nine-month periods ended September 30, 2014 and 2013.

 

Net interest income. Net interest income increased to $4.3 million for the three months ended September 30, 2014 from $4.1 million for the comparable period in 2013, primarily due to a higher average balance in loans and securities and lower rates on interest-bearing liabilities, partially offset by a lower yield on interest-earning assets. Net interest income increased to $12.5 million for the nine months ended September 30, 2014 from $12.4 million for the same period in 2013, primarily due to lower rates on interest-bearing liabilities partially offset by a lower yield on interest-earning assets. Net average interest-earning assets, which represent our average total interest-earning assets less our average total interest-bearing liabilities, were $79.9 million for the nine months ended September 30, 2014, compared to $83.4 million for the same period in 2013. The ratio of interest-earning assets to interest-bearing liabilities decreased to 116.03% for the nine months ended September 30, 2014 from 117.77% for the same period in 2013. The net interest rate spread decreased to 2.81% for the nine months ended September 30, 2014, compared to 3.00% for the comparable period in 2013. The average rate earned on interest-earning assets decreased by 31 basis points for the nine months ended September 30, 2014 to 3.32% from 3.63% for the same period in 2013, while the average rate paid on interest-bearing liabilities decreased by 23 basis points during these periods to 0.51% from 0.74%.

 

Our net interest rate spread decreased to 2.81% from 2.89% and our net interest margin decreased to 2.88% from 3.00% for the nine months ended September 30, 2014 compared to the same period in 2013. The decrease in the interest rate spread was attributable to the yield on interest-earning assets declining faster than the cost of funds. As with most financial institutions, yield on earning assets and cost of funds are largely dependent on the interest rate environment. While the decline in industry interest rates has slowed, competitive and market forces continue to pressure the yield on our earning assets. Our ability to lower rates paid on deposits has been 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 re-pricing as rates fluctuate.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

The following tables set forth the average balance sheets, average yields and cost of funds, and certain other information for the periods indicated. No tax-equivalent yield adjustments on loans or securities were made. 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 September 30,												Three Months Ended September 30,
		2014												2013
		Average Outstanding Balance				Interest (5)				Yield/ Rate				Average Outstanding Balance				Interest (5)				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans, gross (1)		$	393,859			$	4,274				4.31	%		$	374,320			$	4,335				4.59	%
Securities (1)			114,888				602				2.08	%			106,234				527				1.97	%
Federal Reserve Stock			804				13				6.41	%			-				-				-	%
Interest-earning balances from depository institutions			66,163				41				0.25	%			82,685				54				0.26	%
Total interest-earning assets			575,714				4,930				3.40	%			563,239				4,916				3.46	%
Non-interest-earning assets			57,437												51,706
Total assets		$	633,151											$	614,945
Interest-bearing liabilities:
Interest-bearing transaction		$	307,958			$	198				0.26	%		$	268,228			$	242				0.36	%
Savings deposits			28,533				13				0.18	%			27,466				17				0.25	%
Time deposits			127,825				340				1.06	%			135,223				399				1.17	%
Securities sold under agreements to repurchase			19,518				1				0.02	%			26,486				2				0.03	%
Federal Home Loan Bank advances			11,377				73				2.58	%			21,976				123				2.22	%
Subordinated debentures			4,000				22				2.18	%			4,000				23				2.28	%
Total interest-bearing liabilities			499,211				647				0.51	%			483,379				806				0.66	%
Non-interest-bearing liabilities			57,974												56,560
Total liabilities			557,185												539,939
Stockholders’ equity			75,966												75,006
Total liabilities and stockholders’ equity		$	633,151											$	614,945
Net interest income						$	4,283											$	4,110
Net interest rate spread (2)											2.89	%											2.80	%
Net interest-earning assets (3)		$	76,503											$	79,860
Net interest margin (4)											2.95	%											2.90	%
Ratio of interest-earning assets to interest-bearing liabilities											115.32	%											116.52	%

 

⁽¹⁾ Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.14% and 3.04% for the three months ended September 30, 2014 and 2013, respectively. The tax equivalent basis was computed by calculating the deemed interest on tax-exempt loans and municipal bonds that would have been earned on a fully taxable basis to yield the same after-tax income using a combined federal and state marginal tax rate of 36%.

⁽²⁾ Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽³⁾ Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

⁽⁴⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

⁽⁵⁾ Interest on loans includes loan fees collected in the amount of $32,682 and $32,510 for the three months ended September 30, 2014 and 2013, respectively.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

		Nine Months Ended September 30,												Nine Months Ended September 30,
		2014												2013
		Average Outstanding Balance				Interest (5)				Yield/ Rate				Average Outstanding Balance				Interest (5)				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans, gross (1)		$	381,103			$	12,409				4.35	%		$	383,640			$	13,395				4.67	%
Securities (1)			115,049				1,794				2.08	%			102,297				1,470				1.92	%
Federal Reserve Stock			271				13				6.41	%			-				-				-	%
Interest-earning balances from depository institutions			81,871				154				0.25	%			66,566				125				0.25	%
Total interest-earning assets			578,294				14,370				3.32	%			552,503				14,990				3.63	%
Non-interest-earning assets			54,234												51,549
Total assets		$	632,528											$	604,052
Interest-bearing liabilities:
Interest-bearing transaction		$	306,233			$	545				0.24	%		$	247,053			$	807				0.44	%
Savings deposits			28,366				38				0.18	%			27,000				63				0.31	%
Time deposits			127,310				1,040				1.09	%			140,940				1,299				1.23	%
Securities sold under agreements to repurchase			19,378				5				0.03	%			28,178				11				0.05	%
Federal Home Loan Bank advances			13,104				223				2.28	%			21,972				367				2.23	%
Subordinated debentures			4,000				65				2.17	%			4,000				66				2.21	%
Total interest-bearing liabilities			498,391				1,916				0.51	%			469,143				2,613				0.74	%
Non-interest-bearing liabilities			59,186												57,906
Total liabilities			557,577												527,049
Stockholders’ equity			74,951												77,003
Total liabilities and stockholders’ equity		$	632,528											$	604,052
Net interest income						$	12,454											$	12,377
Net interest rate spread (2)											2.81	%											2.89	%
Net interest-earning assets (3)		$	79,903											$	83,360
Net interest margin (4)											2.88	%											3.00	%
Ratio of interest-earning assets to interest-bearing liabilities											116.03	%											117.77	%

 

⁽¹⁾ Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.05% and 3.13% for the nine months ended September 30, 2014 and 2013, respectively. The tax equivalent basis was computed by calculating the deemed interest on tax-exempt loans and municipal bonds that would have been earned on a fully taxable basis to yield the same after-tax income using a combined federal and state marginal tax rate of 36%.

⁽²⁾ Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽³⁾ Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

⁽⁴⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

⁽⁵⁾ Interest on loans includes loan fees collected in the amount of $90,609 and $107,582 for the nine months ended September 30, 2014 and 2013, respectively.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Interest and fee income. Interest and fee income on loans decreased $61,000 for the three months ended September 30, 2014 compared to the same period in 2013, remaining at $4.3 million for each period primarily as a result of a lower average yield partially offset by a higher average balance in the 2014 period. Interest and fee income decreased to $12.4 million for the nine months ended September 30, 2014 from $13.4 million for the comparable period in 2013, primarily as a result of a lower average yield in addition to a lower average balance in the 2014 periods. The average loan balance was $381.1 million and $383.6 million for the nine months ended September 30, 2014 and 2013, respectively. The average yield on loans decreased to 4.35% for the nine months ended September 30, 2014 from 4.67% for the comparable period in 2013. The decline in yield was primarily due to new loan originations having lower rates than the loans maturing or being paid off.

 

Interest income on securities increased to $602,000 for the three months ended September 30, 2014 compared to $527,000 for the same period in 2013. Interest income on securities increased to $1.8 million for the nine months ended September 30, 2014 compared to $1.5 million for the same period in 2013. These increases were due primarily to a higher average balance in addition to a higher average yield for both periods. The average balance of securities was $115.0 million and $102.3 million for the nine months ended September 30, 2014 and 2013, respectively. The average yield on securities increased to 2.08% for the nine months ended September 30, 2014 from 1.92% for the comparable period in 2013.

 

Interest on other interest-earning deposits decreased to $41,000 for the three months ended September 30, 2014 from $54,000 for the comparable period in 2013 primarily as a result of a lower average balance. Interest on other interest-earning deposits increased to $154,000 for the nine months ended September 30, 2014 from $125,000 for the comparable period in 2013. This increase was due primarily to a higher average balance of other interest-earning deposits in the 2014 period. The average balance of other interest-earning deposits increased to $81.9 million for the nine months ended September 30, 2014 from $66.6 million for the same period in 2013. The average yield on other interest-earning deposits remained stable at 0.25% for the nine months ended September 30, 2014 and 2013.

 

Interest expense. Interest expense on deposits decreased to $552,000 for the three months ended September 30, 2014 from $658,000 for the comparable period in 2013. Interest expense on deposits decreased to $1.6 million for the nine months ended September 30, 2014 from $2.2 million for the comparable period in 2013. The decreases were due primarily to a decline in rate and in lower average balances in time deposits, partially offset by a higher average balance in interest-bearing transaction accounts for both periods. The average balance of interest-bearing deposits, comprised of interest-bearing transaction, savings deposits, and time deposits, was $461.9 million and $415.0 million for the nine months ended September 30, 2014 and 2013, respectively. The rate for time deposits decreased to 1.09% for the nine months ended September 30, 2014 from 1.23% for the comparable period in 2013. The average rate declined due to time deposits with higher rates maturing and being replaced by time deposits with lower rates. The rate for interest-bearing transaction accounts for the nine months ended September 30, 2014 decreased to 0.24% from 0.44% for the nine months ended September 30, 2013. The rate for savings deposits decreased to 0.18% for the nine months ended September 30, 2014 from 0.31% for the same period in 2013. The Bank continues to review and adjust the rates paid on deposit products in an effort to maintain our net interest margin.

 

Interest expense on FHLB advances decreased to $73,000 for the three months ended September 30, 2014 from $123,000 for the same period in 2013, due primarily to a lower average balance partially offset by an increase in rate. Interest expense on FHLB advances decreased to $223,000 for the nine months ended September 30, 2014 from $367,000 for the same period in 2013 for the same reasons. FHLB advances that have matured in the last year have not been renewed due to the Company’s sufficient liquidity position. The average balance of FHLB advances was $13.1 million and $22.0 million for the nine months ended September 30, 2014 and 2013, respectively. The average rate on FHLB advances increased to 2.28% for the nine months ended September 30, 2014 compared to 2.23% for the comparable period in 2013.

 

Provision for loan losses. A negative provision of $250,000 was recorded during the three- and nine- month periods ended September 30, 2014 compared to a provision expense of $35,000 and $485,000

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

for the three- and nine-month periods ended September 30, 2013, respectively. The negative provision expense was appropriate due to improvements in credit quality trends and recoveries received on previously charged-off loans. Provisions for loan losses are charged to operations to bring the allowance for loan losses to a level deemed appropriate by the Company based on the factors discussed under “Allowance for Loan Losses.”

 

The one-to-four family loans category had a significant decrease in the provision expense allocation for the three- and nine-month periods ended September 30, 2014. A $465,000 recovery was received during the three months ended September 30, 2014 resulting in a provision credit in this category.

 

On the other hand there was a significant increase in the provision allocation for construction and land loans over the three and nine months ended September 30, 2014. The provision allocation increased because the volume of construction and land loans outstanding increased $16.7 million over the nine months ended September 30, 2014.

 

Provision for loan losses is based upon management’s consideration of current economic conditions, the Company’s loan portfolio composition and historical loss experience, and current market valuations on collateral, as well as management’s estimate of probable losses in the portfolio and the level of non-performing and impaired loans. The Company is expanding its historical loss look back period from three years to five years, as this more accurately reflects the risk of our current portfolio.  As of September 30, 2014, our non-performing and impaired loans and the related specific reserves each decreased from September 30, 2013. Our ratio of non-performing loans to total loans decreased to 1.96% at September 30, 2014 from 2.23% at September 30, 2013. Charge-offs for the nine months ended September 30, 2014 decreased to $265,000 from $1.4 million for the nine months ended September 30, 2013. Recoveries for the nine months ended September 30, 2014 increased to $714,000 from $466,000 for the nine months ended September 30, 2013. Therefore, we did not incur any provision expense for the nine months ended September 30, 2014 and recorded a negative provision of $250,000 in the third quarter.

 

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 OCC, 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 OCC will not require further increases to the allowance.

 

Non-interest income. Non-interest income increased to $828,000 for the three months ended September 30, 2014 from $417,000 for the comparable period in 2013, primarily due to gain on sale of securities; and increases on gain on sale of loans, gain on sale of foreclosed assets, and earnings from bank-owned life insurance. Non-interest income decreased to $1.6 million for the nine months ended September 30, 2014 from $2.0 million for the comparable period in 2013, primarily due to reductions in gain on sale of securities and gain on sale of loans; and losses on the sale of assets and on the sale of foreclosed assets partially offset by an increase in earnings from bank-owned life insurance.

 

During the three months ended September 30, 2014, gain on sale of securities totaled $88,000 compared to no gain for the same period in 2013. During the nine months ended September 30, 2014, gain on sale of securities totaled $88,000 compared to $359,000 for the same period in 2013. Gain on sale of loans totaled $206,000 for the three months ended September 30, 2014 compared to $57,000 for the comparable period in 2013. Gain on sale of loans totaled $418,000 for the nine months ended September 30, 2014 compared to $490,000 for the comparable period in 2013. We experienced a loss of $75,000 on the sale of a building during the nine months ended September 30, 2014 compared to no such loss in the same period in 2013. We experienced a gain on the sale of foreclosed assets of $40,000 during the three months ended September 30, 2014 compared to a loss of $32,000 during the comparable period in 2013. Loss on the sale of foreclosed assets totaled $157,000 during the nine months ended September 30, 2014 compared to a gain of $4,000 during the comparable period in 2013. Earnings on bank-owned life insurance increased to $117,000 for the three months ended September 30, 2014 from $70,000 for the same period in 2013. Earnings on bank-owned life insurance increased to $261,000 for the nine months

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

ended September 30, 2014 from $182,000 for the same period in 2013 due to additional bank-owned life insurance purchases of $6.0 million.

 

Non-interest expense. Non-interest expense increased to $3.5 million for the three months ended September 30, 2014 from $3.3 million for the same period in 2013. The increase was due primarily to an increase in compensation and employee benefits, and increases in occupancy expense and professional fees, partially offset by a reduction in foreclosed asset related expenses. Non-interest expense increased to $10.5 million for the nine months ended September 30, 2014 from $9.6 million for the same period in 2013. The increase was primarily due to the same factors described above for the three months ended September 30, 2014, in addition to an increase in other expenses.

 

Compensation and employee benefits increased to $1.8 million for the three months ended September 30, 2014 from $1.5 million for the same period in 2013. Compensation and employee benefits increased to $5.4 million for the nine months ended September 30, 2014 from $4.6 million for the same period in 2013. The increases were primarily due to normal merit increases and increased staffing levels necessary to support our growth and strategy.

 

Occupancy expense increased to $420,000 for the three months ended September 30, 2014 compared to $343,000 for the comparable period in 2013. Occupancy expense increased to $1.2 million for the nine months ended September 30, 2014 compared to $1.0 million for the comparable period in 2013. The increases were primarily due to incurring higher snow removal expenses, additional software expenses for new products, new rent expense for the loan production office opened in January 2014, relocation expenses, additional facility expenses for a branch office that opened in July 2014, and increased property repairs compared to the nine months ended September 30, 2013.

 

Professional fees increased to $171,000 for the three months ended September 30, 2014 compared to $105,000 for the same period in 2013. Professional fees increased to $471,000 for the nine months ended September 30, 2014 compared to $317,000 for the same period in 2013. The increases were primarily due to increased legal fees and consulting fees.

 

Foreclosed asset related expenses decreased to $63,000 for the three months ended September 30, 2014 compared to $283,000 for the comparable period in 2013. Foreclosed asset related expenses decreased to $320,000 for the nine months ended September 30, 2014 compared to $708,000 for the comparable period in 2013. The decrease was due to the Company incurring less property value write-downs on foreclosed properties in 2014.

 

Other expenses increased to $1.8 million for the nine months ended September 30, 2014 compared to $1.6 million for the same period in 2013. The increase was due to higher expenses in several categories. The largest category increase was $61,000 for deposit account expenses related to a new deposit promotion program.

 

Income taxes. Income tax expense increased to $545,000 for the three months ended September 30, 2014 from $351,000 for the same period in 2013. The increase was primarily due to a higher level of pre-tax income for the 2014 period. Income tax expense decreased to $1.0 million for the nine months ended September 30, 2014 from $1.3 million for the same period in 2013. The decrease was primarily due to a lower level of pre-tax income and an increased level of tax exempt income for the 2014 period.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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 September 30, 2014 and December 31, 2013, $76.3 million and $84.7 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 FHLB.

 

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 under Item 1 of Part I of this 10-Q.

 

Our primary investing activities are the origination of loans and the purchase of investment securities. Loan originations exceeded principal collections on loans by $19.2 million for the nine months ended September 30, 2014, compared to principal collections exceeding loan originations by $24.5 million for the nine months ended September 30, 2013. Cash received from calls, maturities, and principal repayments of available-for-sale investment securities totaled $28.7 million and $19.7 million for the nine months ended September 30, 2014 and 2013, respectively. We purchased $21.1 million and $54.5 million of available-for-sale investment securities during the nine months ended September 30, 2014 and 2013, respectively. The security purchases made during 2014 were to maintain the portfolio size by offsetting the calls and maturities also occurring during that time compared to growing the portfolio and offsetting calls and maturities in the prior year. During the nine months ended September 30, 2014, we received proceeds of $2.8 million from the sale of available-for-sale investment securities compared to $9.0 million during the same period in 2013. Purchases of property and equipment totaled $1.3 million and $180,000 for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, we purchased $6.0 million of bank-owned life insurance compared to $3.0 million during the same period in 2013.

 

Deposit flows are generally affected by market interest rates, products offered by local competitors, and other factors. Net deposits increased by $23.9 million and $61.7 million for the nine months ended September 30, 2014 and 2013, respectively.

 

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 FHLB, which provide an additional source of funds. We had $9.0 million and $14.0 million of advances from the FHLB at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, we had additional available credit of approximately $73.1 million. Additionally, we may sell investment securities under agreements to repurchase (commonly referred to as “repurchase agreements”) if we require additional liquidity. At September 30, 2014 our repurchase agreements totaled $14.3 million, down from $26.8 million at December 31, 2013.

 

The Bank is required to maintain certain minimum capital requirements under OCC regulations. Failure by a national bank 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. Under the capital adequacy guidelines and regulatory framework for prompt

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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. As of September 30, 2014, under regulatory standards, the Bank had capital levels in excess of the minimums necessary to be considered “well capitalized,” which is the highest regulatory designation.

 

The Bank’s actual capital amounts and ratios are presented in the following table.

 

As of September 30, 2014
																		To be Well Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier I Capital to Adjusted Total Assets		$	66,897,000				10.78	%		$	24,786,000				4.00	%		$	30,982,000				5.00	%
Tier I Capital to Risk Weighted Assets			66,897,000				16.11	%			16,608,000				4.00	%			24,913,000				6.00	%
Total Capital to Risk Weighted Assets			70,708,000				17.03	%			33,217,000				8.00	%			41,521,000				10.00	%

 

The Company’s actual consolidated capital amounts and ratios are presented in the following table:

 

As of September 30, 2014
		Actual
		Amount				Ratio
Tier I Capital to Adjusted Total Assets		$	64,652,000				10.05	%
Tier I Capital to Risk Weighted Assets			64,652,000				15.56	%
Total Capital to Risk Weighted Assets			72,463,000				17.44	%

 

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million).  The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered additional Tier 1 capital (Tier 1 capital in addition to common equity) and Tier 2 capital.  A number of instruments that now generally qualify as Tier 1 capital will not qualify, or their qualifications will change when the Basel III rules are fully implemented.  The Basel III Rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the common equity Tier 1 capital ratio.  In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more.  Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes.  Management is continuing to assess the effect the Basel III Rules may have on the Company’s and the Bank’s capital positions and will monitor developments in this area. At present, management concludes that its current capital structure and the execution of its capital plan will be sufficient to meet and exceed the revised regulatory capital ratios as required by the new Basel III Rules.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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, as described further below. 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 September 30, 2014 follows:

 

														Range of Rates
		Variable Rate				Fixed Rate				Total				on Fixed Rate
		Commitments				Commitments				Commitments				Commitments
Commitments to extend credit		$	17,310,990			$	57,519,367			$	74,830,357				3.15% - 18.00%
Standby letters of credit			2,216,045				300,765				2,516,810				3.50% - 6.00%

 

Loans sold to the FHLB under the Mortgage Partnership Finance (“MPF”) program are sold with recourse. The Bank has an agreement to sell residential loans of up to $131.0 million to the FHLB, of which approximately $72.2 million had been sold as of September 30, 2014. As a part of the agreement, the Bank had a maximum credit enhancement of $1.2 million at September 30, 2014. The Company intends to continue originating and selling mortgage loans while retaining the servicing of the loans. In addition to the MPF program, the Company currently has a relationship to sell loans to Fannie Mae. These loans are also sold with recourse. The Company has a recourse liability reserve established. Since the Company has no loss experience at this time, we utilized the current Fannie Mae loss history rates in the calculation of our reserve.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The majority of First Clover Leaf’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, the 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 Bank’s 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 at least quarterly 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, multi-family 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.

 

First Clover Leaf utilized an independent third party to analyze interest rate risk sensitivity as of June 30, 2014. The model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value (“NPV”). The model estimates the economic value of each type of asset, liability and off-balance-sheet contract under the assumption of instantaneous rate increases of up to 400 basis points or decreases of 100 points in 100 basis point increments. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest” column.

 

The tables below set forth, as June 30, 2014 and December 31, 2013, 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.

 

June 30, 2014
		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
+400 bp		$	57,906			$	(23,571	)			(29	)%			10.12	%			(261) bp
+300 bp			66,582				(14,895	)			(18	)			11.32				(141) bp
+200 bp			72,788				(8,689	)			(11	)			12.02				(71) bp
+100 bp			77,917				(3,560	)			(4	)			12.52				(21) bp
0 bp			81,477				-				-				12.73				0  bp
-100 bp			84,902				3,425				4				13.06				33  bp

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk (Continued)

 

December 31, 2013
		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
+400 bp		$	59,863			$	(19,708	)			(25	)%			10.68	%			(208) bp
+300 bp			67,556				(12,015	)			(15	)			11.73				(103) bp
+200 bp			73,434				(6,137	)			(8	)			12.39				(37) bp
+100 bp			78,174				(1,397	)			(2	)			12.84				8 bp
— bp			79,571				—				—				12.76				— bp
-100 bp			84,224				4,653				6				13.25				49 bp

 

The 2014 table above indicates that at June 30, 2014 in the event of a 100 basis point decrease in interest rates, we would experience a 4% increase in the net portfolio value. In the event of a 400 basis point increase in interest rates, we would experience a 29% decrease in the net portfolio value. Management does not believe that the Company’s primary market risk exposures at September 30, 2014, and how those exposures were managed during the three months ended September 30, 2014, have changed materially when compared to the immediately preceding quarter ended June 30, 2014. However, the Company’s primary market risk exposure has not yet been quantified at September 30, 2014 as it 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 re-pricing 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 (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 

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.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

PART II - Other Information

 

Item 1 - Legal Proceedings.

 

There are no material legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their properties is subject other than ordinary routine litigation incidental to their respective businesses.

 

Item 1A – Risk Factors.

 

Not required.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a)

None.

(b)

Not applicable.

(c)

None.

 

Item 3 - Defaults upon Senior Securities.

 

Not applicable.

 

Item 4 – Mine Safety Disclosures.

 

Not applicable.

 

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.
	101:	The following financial statements as of and for the quarter ended September 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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:	November 14, 2014		BY:	/s/ P. David Kuhl
				P. David Kuhl,
				President and Chief Executive Officer
			BY:	/s/ Darlene F. McDonald
				Darlene F. McDonald,
				Executive Vice-President and Chief Financial Officer