UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2015

 

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 May 1, 2015
Common Stock, par value $.10 per share		7,006,883

 

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

FORM 10-Q

 

FOR THE QUARTER ENDED MARCH 31, 2015

 

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		30
Item 3. Quantitative and Qualitative Disclosures about Market Risk		42
Item 4. Controls and Procedures		44
PART II - Other Information
Item 1.  Legal Proceedings		45
Item 1A.  Risk Factors		45
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3.  Defaults Upon Senior Securities		45
Item 4.  Mine Safety Disclosures		45
Item 5.  Other Information		45
Item 6.  Exhibits		45
Signatures		46

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2015				2014
		(Unaudited)
ASSETS
Cash and due from banks		$	10,474,737			$	9,047,872
Interest-earning deposits			16,083,269				18,238,145
Federal funds sold			20,790,487				21,780,445
Total cash and cash equivalents			47,348,493				49,066,462
Interest-earning time deposits			1,781,352				1,776,970
Securities available for sale			108,290,351				104,470,692
Federal Home Loan Bank stock			2,887,763				2,887,763
Federal Reserve Bank stock			1,676,700				1,676,700
Loans, net of allowance for loan losses of $5,878,307 and $5,561,442 at March 31, 2015 and December 31, 2014, respectively			401,891,628				400,904,404
Loans held for sale			808,200				100,000
Property and equipment, net			10,238,822				10,380,310
Goodwill			11,385,323				11,385,323
Bank-owned life insurance			14,993,661				14,876,960
Core deposit intangible			181,515				196,000
Foreclosed assets			3,848,328				3,887,587
Mortgage servicing rights			984,155				961,823
Accrued interest receivable			1,876,389				1,762,310
Other assets			2,510,536				3,281,496
Total assets		$	610,703,216			$	607,614,800
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	63,535,580			$	68,170,743
Interest-bearing			445,611,036				442,135,896
Total deposits			509,146,616				510,306,639
Federal Home Loan Bank advances			2,489,680				2,487,745
Securities sold under agreements to repurchase			14,481,695				11,848,266
Subordinated debentures			4,000,000				4,000,000
Accrued interest payable			174,929				174,480
Other liabilities			1,708,642				1,667,777
Total liabilities			532,001,562				530,484,907
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  March 31, 2015 and December 31, 2014			700,728				700,728
Additional paid-in capital			55,818,936				55,818,936
Retained earnings			21,463,716				20,412,898
Accumulated other comprehensive income			718,274				197,331
Total stockholders' equity			78,701,654				77,129,893
Total liabilities and stockholders' equity		$	610,703,216			$	607,614,800

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2015				2014
Interest and dividend income:
Interest and fees on loans		$	4,293,439			$	4,032,611
Securities:
Taxable interest income			289,183				325,424
Nontaxable interest income			284,023				271,988
Federal Reserve Bank dividends			25,051				-
Interest-earning deposits, federal funds sold, and other			26,225				51,063
Total  interest and dividend income			4,917,921				4,681,086
Interest expense:
Deposits			524,628				544,517
Federal Home Loan Bank advances			25,815				74,681
Securities sold under agreements to repurchase			828				2,765
Subordinated debentures			21,657				21,776
Total  interest expense			572,928				643,739
Net interest income			4,344,993				4,037,347
Provision (credit) for loan losses			(500,000	)			-
Net interest income after provision (credit) for loan losses			4,844,993				4,037,347
Non-interest income:
Service fees on deposit accounts			106,908				88,705
Other service charges and fees			113,853				90,360
Loan servicing fees			72,768				71,641
Gain on sale of loans			181,121				26,055
Other			123,776				100,816
			598,426				377,577
Non-interest expense:
Compensation and employee benefits			1,851,637				1,811,160
Occupancy expense			390,759				403,526
Data processing services			191,790				185,373
Director fees			47,750				42,850
Professional fees			127,344				123,113
FDIC insurance premiums			110,000				117,102
Foreclosed asset related expenses			2,199				74,449
Amortization of core deposit intangible			14,485				31,485
Amortization of mortgage servicing rights			22,885				18,002
Other			595,462				554,432
			3,354,311				3,361,492
Income before income taxes			2,089,108				1,053,432
Income tax expense			617,854				276,279
Net income		$	1,471,254			$	777,153
Basic and diluted earnings per share		$	0.21			$	0.11
Dividends per share		$	0.06			$	0.06

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2015				2014
Net income		$	1,471,254			$	777,153
Other comprehensive income:
Unrealized gains on securities available for sale  arising during the period			864,277				1,390,931
Reclassification adjustment for realized gains included in income			-				-
Tax effect			(343,334	)			(514,646	)
Total other comprehensive income			520,943				876,285
Comprehensive income		$	1,992,197			$	1,653,438

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2015				2014
Cash flows from operating activities
Net income		$	1,471,254			$	777,153
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of:
Deferred loan origination costs, net			(6,945	)			(3,249	)
Premiums and discounts on securities			186,363				246,953
Core deposit intangible			14,485				31,485
Mortgage servicing rights			22,885				18,002
Fair value adjustments			(15,737	)			(23,195	)
Credit for loan losses			(500,000	)			-
Depreciation			156,431				142,769
Gain on sale of loans			(181,121	)			(26,055	)
Loss on sale of foreclosed assets			1,336				34,044
Earnings on bank-owned life insurance			(116,701	)			(66,634	)
Increase in mortgage servicing rights			(45,217	)			(5,595	)
Proceeds from sales of loans held for sale			5,500,731				684,405
Originations of loans held for sale			(6,027,810	)			(818,750	)
Change in assets and liabilities:
Accrued interest receivable and other assets			313,547				(33,616	)
Accrued interest payable			449				(16,279	)
Other liabilities			40,865				(50,051	)
Net cash provided by operating activities			814,815				891,387

 

(Continued)

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2015				2014
Cash flows from investing activities
Purchase of interest-earning time deposits		$	(4,382	)		$	(2,178	)
Available for sale securities:
Purchases			(9,021,065	)			(8,882,151	)
Proceeds from calls, maturities, and principal repayments			5,889,340				14,086,434
Decrease (increase) in loans			(468,609	)			6,989,883
Purchase of property and equipment			(18,961	)			(76,096	)
Proceeds from the sale of foreclosed assets			37,923				231,241
Net cash (used in) provided by investing activities			(3,585,754	)			12,347,133
Cash flows from financing activities
Net (decrease) increase in deposit accounts			(1,160,023	)			22,193,393
Net increase (decrease) in securities sold under agreements to repurchase			2,633,429				(11,888,616	)
Cash dividends paid			(420,436	)			(420,437	)
Net cash provided by financing activities			1,052,970				9,884,340
Net increase (decrease) in cash and cash equivalents			(1,717,969	)			23,122,860
Cash and cash equivalents:
Beginning			49,066,462				84,693,825
Ending		$	47,348,493			$	107,816,685
Supplemental schedule of noncash investing and financing activities
Assets acquired in settlement of loans		$	-			$	59,077
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	570,544			$	658,083

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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, 2014 contained in the 2014 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 and was formed by our predecessor company, First Federal Financial Services, Inc., in connection with the “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, an Illinois state bank headquartered in Edwardsville, Illinois. The second-step conversion, stock offering and acquisition of Clover Leaf Financial Corp. were consummated in July 2006. As a result of these transactions, Clover Leaf Financial Corp. was merged with and into First Clover Leaf and Clover Leaf Bank was merged with and into our wholly owned subsidiary, First Federal Savings and Loan Association of Edwardsville, which was renamed First Clover Leaf Bank (the “Bank”). In August 2014, the Bank converted from a federal savings and loan association to a nationally chartered bank. 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.

 

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.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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:

 

		March 31, 2015
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				(Losses)				Value
U.S. government agency obligations		$	27,754,910			$	93,928			$	(113,779	)		$	27,735,059
State and municipal securities			44,569,926				1,199,842				(152,243	)			45,617,525
Other securities(1)			248,501				-				-				248,501
Mortgage-backed: residential			34,539,516				244,035				(94,285	)			34,689,266
		$	107,112,853			$	1,537,805			$	(360,307	)		$	108,290,351
		December 31, 2014
U.S. government agency obligations		$	26,280,359			$	31,628			$	(442,381	)		$	25,869,606
State and municipal securities			44,828,579				1,025,719				(280,690	)			45,573,608
Other securities(1)			248,501				-				-				248,501
Mortgage-backed: residential			32,800,032				176,321				(197,376	)			32,778,977
		$	104,157,471			$	1,233,668			$	(920,447	)		$	104,470,692

 

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

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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 March 31, 2015 and December 31, 2014, are summarized as follows:

 

		March 31, 2015
		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		$	3,503,212			$	(8,665	)		$	8,412,604			$	(105,114	)		$	11,915,816			$	(113,779	)
State and municipal securities			5,301,497				(26,576	)			5,501,846				(125,667	)			10,803,343				(152,243	)
Mortgage-backed: residential			5,901,411				(25,575	)			8,797,039				(68,710	)			14,698,450				(94,285	)
		$	14,706,120			$	(60,816	)		$	22,711,489			$	(299,491	)		$	37,417,609			$	(360,307	)
		December 31, 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		$	6,477,461			$	(26,717	)		$	12,615,391			$	(415,664	)		$	19,092,852			$	(442,381	)
State and municipal securities			7,102,666				(43,614	)			9,369,188				(237,076	)			16,471,854				(280,690	)
Mortgage-backed: residential			1,474,590				(28,841	)			15,744,126				(168,535	)			17,218,716				(197,376	)
		$	15,054,717			$	(99,172	)		$	37,728,705			$	(821,275	)		$	52,783,422			$	(920,447	)

 

Management evaluates the investment portfolio on at least a quarterly basis to determine if investments have suffered an other-than-temporary decline in value. In addition, management monitors market trends, investment grades, bond defaults and other circumstances to identify trends and circumstances that might impact the carrying value of equity securities.

 

At March 31, 2015, the Company had 48 securities in an unrealized loss position which included: nine agency securities, 25 state and municipal securities, and 14 mortgage-backed securities. This was a decrease from 72 securities at December 31, 2014. 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 was expected as of March 31, 2015; therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2015.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

 

The amortized cost and fair value of the Company’s securities at March 31, 2015, 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		$	5,039,577			$	5,065,707
Due after one year through five years			22,523,616				22,614,312
Due after five years through ten years			31,457,395				32,048,687
Due after ten years			13,549,248				13,868,878
Other securities - non-maturing			3,501				3,501
Mortgage-backed: residential			34,539,516				34,689,266
		$	107,112,853			$	108,290,351

 

Securities with a carrying amount of approximately $63,810,000 and $66,600,000 were pledged to secure deposits, as required or permitted by law, at March 31, 2015 and December 31, 2014, respectively.

 

At March 31, 2015, 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 no proceeds from the sale of securities for the three months ended March 31, 2015 and 2014.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS

 

The components of the Company’s loans are as follows:

 

		At March 31,								At December 31,
		2015								2014
		Amount				Percent				Amount				Percent
Real estate loans:
One-to-four family		$	116,584,463				28.6	%		$	117,591,822				28.9	%
Multi-family			36,401,643				8.9				41,391,862				10.2
Commercial			145,493,285				35.7				129,415,314				31.9
Construction and land			17,113,920				4.2				28,590,745				7.0
			315,593,311				77.4				316,989,743				78.0
Commercial business			77,078,757				19.0				73,984,867				18.2
Consumer:
Home equity			13,235,279				3.2				13,523,985				3.3
Automobile and other			1,660,806				0.4				1,772,431				0.5
			14,896,085				3.6				15,296,416				3.8
Total gross loans			407,568,153				100.0	%			406,271,026				100.0	%
Deferred loan origination costs, net			201,782								194,820
Allowance for loan losses			(5,878,307	)							(5,561,442	)
Loans, net		$	401,891,628							$	400,904,404

 

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 2014 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 March 31, 2015 and December 31, 2014, these loans represented 2.11% and 2.17%, respectively, of our combined one-to-four family and home equity portfolios. The Company did not consider the level of such loans to be a significant concentration of credit as of March 31, 2015 or December 31, 2014.

 

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

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

The following tables present our past-due loans, segregated by class, as of March 31, 2015 and December 31, 2014:

 

March 31, 2015
		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		$	596,793			$	97,551			$	276,553			$	970,897			$	115,613,566			$	116,584,463			$	-
Multi-family			-				-				-				-				36,401,643				36,401,643				-
Commercial			1,096,288				-				-				1,096,288				144,396,997				145,493,285				-
Construction and land			-				-				-				-				17,113,920				17,113,920				-
			1,693,081				97,551				276,553				2,067,185				313,526,126				315,593,311				-
Commercial business			-				215,132				-				215,132				76,863,625				77,078,757				-
Consumer:
Home equity			-				-				47,303				47,303				13,187,976				13,235,279				-
Automobile and other			-				-				-				-				1,660,806				1,660,806				-
			-				-				47,303				47,303				14,848,782				14,896,085				-
Total		$	1,693,081			$	312,683			$	323,856			$	2,329,620			$	405,238,533			$	407,568,153			$	-
December 31, 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		$	843,185			$	166,965			$	408,228			$	1,418,378			$	116,173,444			$	117,591,822			$	-
Multi-family			-				-				-				-				41,391,862				41,391,862				-
Commercial			100,220				-				29,810				130,030				129,285,284				129,415,314				-
Construction and land			-				-				-				-				28,590,745				28,590,745				-
			943,405				166,965				438,038				1,548,408				315,441,335				316,989,743				-
Commercial business			-				25,095				-				25,095				73,959,772				73,984,867				-
Consumer:
Home equity			41,930				-				48,088				90,018				13,433,967				13,523,985				-
Automobile and other			-				-				-				-				1,772,431				1,772,431				-
			41,930				-				48,088				90,018				15,206,398				15,296,416				-
Total		$	985,335			$	192,060			$	486,126			$	1,663,521			$	404,607,505			$	406,271,026			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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:

 

		March 31,				December 31,
		2015				2014
Real estate loans:
One-to-four family		$	558,806			$	589,170
Multi-family			1,219,286				1,340,779
Commercial			1,214,132				1,242,009
Construction and land			1,309,233				1,431,619
			4,301,457				4,603,577
Commercial business			-				25,095
Consumer:
Home equity			47,303				48,088
Total non-accrual loans		$	4,348,760			$	4,676,760

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

The following tables present the activity in the allowance for loan losses for the three months ended March 31, 2015 and 2014. 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 March 31, 2015
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,119,762			$	(25,258	)		$	-			$	221,309			$	1,315,813
Multi-family			436,833				-				1,000				1,828				439,661
Commercial			1,650,290				(25,742	)			730				485,572				2,110,850
Construction and land			1,194,917				-				811,350				(1,277,178	)			729,089
			4,401,802				(51,000	)			813,080				(568,469	)			4,595,413
Commercial business			951,215				-				54,290				46,208				1,051,713
Consumer
Home equity			198,150				-				-				22,215				220,365
Automobile and other			10,275				-				495				46				10,816
			208,425				-				495				22,261				231,181
Total		$	5,561,442			$	(51,000	)		$	867,865			$	(500,000	)		$	5,878,307
Three months ended March 31, 2014
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,424,663			$	(89,679	)		$	415			$	11,564			$	1,346,963
Multi-family			661,358				-				-				(166,458	)			494,900
Commercial			1,454,455				(1,876	)			-				440,052				1,892,631
Construction and land			668,085				-				230,000				(256,311	)			641,774
			4,208,561				(91,555	)			230,415				28,847				4,376,268
Commercial business			1,219,080				-				3,414				(64,838	)			1,157,656
Consumer
Home equity			116,478				(20,859	)			899				68,748				165,266
Automobile and other			46,549				-				150				(32,757	)			13,942
			163,027				(20,859	)			1,049				35,991				179,208
Total		$	5,590,668			$	(112,414	)		$	234,878			$	-			$	5,713,132

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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 March 31, 2015 and December 31, 2014:

 

March 31, 2015
		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		$	194,694			$	1,121,119			$	1,315,813			$	1,228,050			$	115,356,413			$	116,584,463
Multi-family			-				439,661				439,661				1,219,286				35,182,357				36,401,643
Commercial			117,798				1,993,052				2,110,850				1,597,258				143,896,027				145,493,285
Construction and land			-				729,089				729,089				1,511,474				15,602,446				17,113,920
			312,492				4,282,921				4,595,413				5,556,068				310,037,243				315,593,311
Commercial business			111,305				940,408				1,051,713				111,305				76,967,452				77,078,757
Consumer:
Home equity			9,902				210,463				220,365				64,515				13,170,764				13,235,279
Automobile and other			-				10,816				10,816				-				1,660,806				1,660,806
			9,902				221,279				231,181				64,515				14,831,570				14,896,085
Total		$	433,699			$	5,444,608			$	5,878,307			$	5,731,888			$	401,836,265			$	407,568,153
December 31, 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		$	91,688			$	1,028,074			$	1,119,762			$	1,266,717			$	116,325,105			$	117,591,822
Multi-family			-				436,833				436,833				1,340,779				40,051,083				41,391,862
Commercial			155,863				1,494,427				1,650,290				2,267,362				127,147,952				129,415,314
Construction and land			-				1,194,917				1,194,917				1,639,030				26,951,715				28,590,745
			247,551				4,154,251				4,401,802				6,513,888				310,475,855				316,989,743
Commercial business			115,446				835,769				951,215				140,541				73,844,326				73,984,867
Consumer:
Home equity			9,902				188,248				198,150				65,452				13,458,533				13,523,985
Automobile and other			-				10,275				10,275				-				1,772,431				1,772,431
			9,902				198,523				208,425				65,452				15,230,964				15,296,416
Total		$	372,899			$	5,188,543			$	5,561,442			$	6,719,881			$	399,551,145			$	406,271,026

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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, including 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

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

The following tables present our credit quality indicators, segregated by class, as of March 31, 2015 and December 31, 2014:

 

March 31, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	115,317,918			$	211,175			$	902,054			$	153,316			$	116,584,463
Multi-family			32,499,108				2,683,249				1,219,286				-				36,401,643
Commercial			134,470,626				6,387,838				4,634,821				-				145,493,285
Construction and land			15,543,517				-				1,570,403				-				17,113,920
			297,831,169				9,282,262				8,326,564				153,316				315,593,311
Commercial business			76,592,837				374,615				111,305				-				77,078,757
Consumer:
Home equity			13,158,018				-				77,261				-				13,235,279
Automobile and other			1,660,806				-				-				-				1,660,806
			14,818,824				-				77,261				-				14,896,085
Total		$	389,242,830			$	9,656,877			$	8,515,130			$	153,316			$	407,568,153
December 31, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	116,218,120			$	280,067			$	936,372			$	157,263			$	117,591,822
Multi-family			37,340,022				2,711,061				1,340,779				-				41,391,862
Commercial			113,447,231				12,016,499				3,951,584				-				129,415,314
Construction and land			26,892,171				-				1,698,574				-				28,590,745
			293,897,544				15,007,627				7,927,309				157,263				316,989,743
Commercial business			73,372,401				471,925				140,541				-				73,984,867
Consumer:
Home equity			13,444,685				-				79,300				-				13,523,985
Automobile and other			1,772,431				-				-				-				1,772,431
			15,217,116				-				79,300				-				15,296,416
Total		$	382,487,061			$	15,479,552			$	8,147,150			$	157,263			$	406,271,026

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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 March 31, 2015												As of December 31, 2014
		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		$	769,309			$	608,249			$	-			$	551,510			$	467,191			$	-
Multi-family			1,701,764				1,219,286				-				1,823,257				1,340,779				-
Commercial			776,531				776,531				-				768,533				768,533				-
Construction and land			1,511,474				1,511,474				-				3,412,264				1,639,030				-
			4,759,078				4,115,540				-				6,555,564				4,215,533				-
Commercial business			-				-				-				215,350				25,095				-
Consumer:
Home equity			54,613				54,613				-				55,550				55,550				-
Subtotal		$	4,813,691			$	4,170,153			$	-			$	6,826,464			$	4,296,178			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	619,801			$	619,801			$	194,694			$	851,010			$	799,526			$	91,688
Commercial			964,126				820,727				117,798				1,691,064				1,498,829				155,863
			1,583,927				1,440,528				312,492				2,542,074				2,298,355				247,551
Commercial business			111,305				111,305				111,305				115,446				115,446				115,446
Consumer:
Home equity			9,902				9,902				9,902				9,902				9,902				9,902
Subtotal			1,705,134				1,561,735				433,699				2,667,422				2,423,703				372,899
Total		$	6,518,825			$	5,731,888			$	433,699			$	9,493,886			$	6,719,881			$	372,899

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

		For the three months ended March 31, 2015												For the three months ended March 31, 2014
		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		$	626,897			$	1,706			$	-			$	975,750			$	480			$	-
Multi-family			1,280,033				-				-				1,156,380				-				-
Commercial			772,532				-				-				818,333				4,254				-
Construction and land			1,575,252				2,267				-				652,213				-				-
			4,254,714				3,973				-				3,602,676				4,734				-
Commercial business			12,547				-				-				-				-				-
Consumer:
Home equity			55,082				256				-				136,973				261				-
Subtotal		$	4,322,343			$	4,229			$	-			$	3,739,649			$	4,995			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	709,663			$	5,711			$	-			$	669,294			$	-			$	-
Multi-family			-				-				-				828,887				-				-
Commercial			1,159,778				4,270				-				1,252,499				3,186				-
Construction and land			-				-				-				463,903				-				-
			1,869,441				9,981				-				3,214,583				3,186				-
Commercial business			113,375				1,893				-				129,823				2,435				-
Consumer:
Home equity			9,902				-				-				15,024				-				-
Subtotal			1,992,718				11,874				-				3,359,430				5,621				-
Total		$	6,315,061			$	16,103			$	-			$	7,099,079			$	10,616			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

Troubled Debt Restructurings:

 

The Company had allocations of $368,757 of specific reserves on $4,713,072 of loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2015. The Company had $328,442 of allocations of specific reserves on $5,661,342 of loans to customers whose loan terms were modified in troubled debt restructurings as of December 31, 2014. The amount the Company had committed to lend to loan customers that are classified as troubled debt restructurings was not material as of March 31, 2015 or December 31, 2014.

 

During the three months ending March 31, 2015 and 2014, there were no loans modified as troubled debt restructurings.

 

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2015.

 

There was one loan classified as a troubled debt restructuring for which there was a payment default within twelve months following the modification during the three months ended March 31, 2014. The loan was categorized as one-to-four family and the recorded investment was $25,253.

 

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

 

The recorded investment in consumer loans collateralized by residential real estate property that was in the process of foreclosure was not material as of March 31, 2015 and December 31, 2014.

 

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. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During 2014, at our annual impairment assessment date of September 30, our analysis indicated that no impairment existed. Additionally, there were no qualitative factors that indicate any possible impairment since our annual test performed at September 30, 2014.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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
		March 31,
		2015				2014
Net income		$	1,471,254			$	777,153
Basic potential common shares:
Basic weighted average shares outstanding			7,007,283				7,007,283
Dilutive potential common shares			-				-
Diluted weighted average shares outstanding			7,007,283				7,007,283
Basic and diluted earnings per share		$	0.21			$	0.11

 

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

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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 three months ended March 31, 2015, there were no transfers between Level 1 and Level 2. The valuation methodology was consistent for the three months ended March 31, 2015 and the year ended December 31, 2014.

 

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

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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 March 31, 2015 and December 31, 2014 are summarized below:

 

		Fair Value Measurements at March 31, 2015 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		$	-			$	27,735,059			$	-			$	27,735,059
State and municipal securities			-				45,617,525				-				45,617,525
Other securities			-				248,501				-				248,501
Mortgage-backed: residential			-				34,689,266				-				34,689,266
Total securities available for sale		$	-			$	108,290,351			$	-			$	108,290,351
		Fair Value Measurements at December 31, 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		$	-			$	25,869,606			$	-			$	25,869,606
State and municipal securities			-				45,573,608				-				45,573,608
Other securities			-				248,501				-				248,501
Mortgage-backed: residential			-				32,778,977				-				32,778,977
Total securities available for sale		$	-			$	104,470,692			$	-			$	104,470,692

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a nonrecurring basis by fair value hierarchy level during the periods ended March 31, 2015 and December 31, 2014 are summarized below:

 

		Fair Value Measurements at March 31, 2015 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Impaired loans:
Real estate loans:
One-to-four family		$	-			$	-			$	425,107			$	425,107
Commercial			-				-				702,929				702,929
Total impaired loans		$	-			$	-			$	1,128,036			$	1,128,036
		Fair Value Measurements at December 31, 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			-				-			$	1,042,087				1,042,087
Total foreclosed assets		$	-			$	-			$	1,042,087			$	1,042,087
Impaired loans:
Real estate loans:
One-to-four family		$	-			$	-			$	707,838			$	707,838
Commercial			-				-				1,342,966				1,342,966
			-				-				2,050,804				2,050,804
Total impaired loans		$	-			$	-			$	2,050,804			$	2,050,804

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 6 - FAIR VALUE MEASUREMENTS (Continued)

 

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. There were no foreclosed assets measured at fair value at March 31, 2015. At December 31, 2014, foreclosed assets had a carrying amount of $1,042,087, which was made up of the outstanding balance of $1,754,187, net of cumulative write-downs of $712,100.

 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $1,561,735, with a valuation allowance of $433,699 at March 31, 2015, resulting in a net decrease in provision for loan losses of $43,704 for the three months ended March 31, 2015. At December 31, 2014, impaired loans had a principal balance of $2,423,703 with a valuation allowance of $372,899.

 

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 March 31, 2015:

 

Fair Value

Valuation Techniques

Unobservable Inputs

Range

Weighted Average

Impaired loans:

Real estate loans:

One-to-four family

$

425,107

Sales Comparison

Adjustment for difference between comparable sales

-23% to 17

%

-7.8

%

Commercial

702,929

Income Approach

Investment Capitalization Rates

3% to 27

%

12.3

%

 

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, 2014:

 

		Fair Value				Valuation Techniques		Unobservable Inputs		Range				Weighted Average
Foreclosed assets:
Real estate:
Construction and land		$	1,042,087			Sales Comparison		Adjustment for difference between comparable sales			-10% to 30	%			10.3	%
Impaired loans:
Real estate loans:
One-to-four family		$	707,838			Sales Comparison		Adjustment for difference between comparable sales			-23% to 13	%			-7.2	%
Commercial			1,342,966			Income Approach		Investment Capitalization Rates			3% to 27	%			12.3	%

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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

MARCH 31, 2015 AND DECEMBER 31, 2014

 

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 March 31, 2015 and December 31, 2014 that have not been previously presented and the methods and assumptions used to estimate those fair values.

 

						Fair Value Measurements at March 31, 2015 Using:
		Carrying				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair
		Amount				(Level 1)				(Level 2)				(Level 3)				Value
Financial assets:
Cash and cash equivalents		$	47,348,493			$	47,348,493			$	-			$	-			$	47,348,493
Interest-earning time deposits			1,781,352				-				1,781,352				-				1,781,352
Federal Home Loan Bank stock			2,887,763				-				-				-				N/A
Federal Reserve Bank stock			1,676,700				-				-				-				N/A
Loans, net (excluding impaired loans at fair value)			400,763,592				-				-				408,476,156				408,476,156
Loans held for sale			808,200				-				808,200				-				808,200
Accrued interest receivable			1,876,389				-				609,277				1,267,112				1,876,389
Financial liabilities:
Non-interest bearing deposits			63,535,580				63,535,580				-				-				63,535,580
Interest-bearing deposits			445,611,036				320,878,921				125,308,378				-				446,187,299
Federal Home Loan Bank advances			2,489,680				-				2,535,356				-				2,535,356
Securities sold under agreements to repurchase			14,481,695				-				14,481,695				-				14,481,695
Subordinated debentures			4,000,000				-				4,000,000				-				4,000,000
Accrued interest payable			174,929				13,508				161,421				-				174,929

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

						Fair Value Measurements at December 31, 2014 Using:
		Carrying				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair
		Amount				(Level 1)				(Level 2)				(Level 3)				Value
Financial assets:
Cash and cash equivalents		$	49,066,462			$	49,066,462			$	-			$	-			$	49,066,462
Interest-earning time deposits			1,776,970				-				1,776,970				-				1,776,970
Federal Home Loan Bank stock			2,887,763				-				-				-				N/A
Federal Reserve Bank stock			1,676,700				-				-				-				N/A
Loans, net (excluding impaired loans at fair value)			398,853,600				-				-				402,238,073				402,238,073
Loans held for sale			100,000				-				100,000				-				100,000
Accrued interest receivable			1,762,310				-				506,888				1,255,422				1,762,310
Financial liabilities:
Non-interest bearing deposits			68,170,743				68,170,743				-				-				68,170,743
Interest-bearing deposits			442,135,896				314,508,234				128,258,671				-				442,766,905
Federal Home Loan Bank advances			2,487,745				-				2,542,945				-				2,542,945
Securities sold under agreement to repurchase			11,848,266				-				11,848,266				-				11,848,266
Subordinated debentures			4,000,000				-				4,000,000				-				4,000,000
Accrued interest payable			174,480				14,359				160,121				-				174,480

 

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.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND DECEMBER 31, 2014

 

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table summarizes the changes within each classification of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2015. There was no reclassification out of accumulated other comprehensive income for the three months ended March 31, 2015.

 

Changes in Accumulated Other Comprehensive Income by Component
For the Three Months Ended March 31, 2015(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Income at January 1, 2015		$	197,331			$	197,331
Other comprehensive income before reclassifications			520,943				520,943
Amount reclassified from accumulated other comprehensive income			-				-
Net current-period other comprehensive income			520,943				520,943
Accumulated Other Comprehensive Income at March 31, 2015		$	718,274			$	718,274

 

⁽¹⁾ All amounts are net of tax.

 

The following table summarizes the changes within each classification of accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2014. There was no reclassification out of accumulated other comprehensive loss for the three months ended March 31, 2014.

 

Changes in Accumulated Other Comprehensive Loss by Component
For the Three Months Ended March 31, 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			876,285				876,285
Amount reclassified from accumulated other comprehensive loss			-				-
Net current-period other comprehensive income			876,285				876,285
Accumulated Other Comprehensive Loss at March 31, 2014		$	(816,203	)		$	(816,203	)

 

⁽¹⁾ All amounts are net of tax.

 

NOTE 9 – SUBSEQUENT EVENTS

 

On April 28, 2015, the Board of Directors of the Company declared a cash dividend on the Company’s common stock of $0.06 per share for the quarter ended March 31, 2015. The dividend will be payable to stockholders of record as of May 22, 2015 and is expected to be paid on May 29, 2015.

 

 

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 Annual Report, the words or phrases “will,” “are expected to,” “we believe,” “should,” “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, (i) changes in general economic conditions, either nationally or in our market areas, that are worse than expected; (ii) competition among depository and other financial institutions; (iii) inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; (iv) adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including Basel III, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations issued thereunder; (v) our ability to enter new markets successfully and capitalize on growth opportunities; (vi) our ability to successfully integrate acquired entities, if any; (vii) 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 (the “SEC”) and the Public Company Accounting Oversight Board; (viii) changes resulting from shutdowns of the federal government; (ix) changes in our organization, compensation and benefit plans; (x) changes in our financial condition or results of operations that reduce capital available to pay dividends; and (xi) 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 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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements, which only speak as of the date made.

 

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 against income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely.

 

Our evaluation of risk in maintaining the allowance for loan losses includes the review of all loans on which the collectibility of principal may not be reasonably assured. We consider the following factors as part of this evaluation: our historical loan loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Management evaluates the total balance of the allowance for loan losses based on several factors that are not loan specific but are reflective of the probable incurred losses in the loan portfolio, including management’s periodic review of loan collectibility in light of historical experience, the nature and volume of the loan portfolio, prevailing economic conditions such as housing trends, inflation rates and unemployment rates, and geographic concentrations of loans within 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

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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.

 

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 is a financial holding company incorporated under the laws of Maryland. Its wholly owned subsidiary, First Clover Leaf Bank, is a community bank operating with six branch locations in Madison and St. Clair Counties in Illinois. The Bank is the source of all of the Company’s revenue. First Clover Leaf common stock is listed on the NASDAQ Capital Market and is traded under the symbol “FCLF”.

 

First Clover Leaf’s results of operations depend primarily on net interest income. Net interest income is the difference between the interest earned on interest-earning assets, and the interest paid on interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. The results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

 

We continue our focus on improving profitability through growth in our balance sheet and increased non-interest income. We recently implemented a comprehensive program focused on increasing our core deposit accounts to achieve increased deposit volume and service fee income. During the first quarter of 2015, we experienced an increase in service charges and fees of $42,000 compared to the same period in 2014. This was related to our focus on growing core deposit accounts. Additionally, our gain on sale of loans increased to $181,000 for the period ended March 31, 2015 from $26,000 for the period ended March 31, 2014. Our total non-interest income increased to $598,000 for the period ended March 31, 2015 from $378,000 for the same period in 2014.

 

Our net income increased to $1.5 million for the three months ended March 31, 2015 from $777,000 for the same period in 2014. The increase was primarily a result of the increase in non-interest income as

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

referenced above, in addition to a $500,000 credit provision for loan losses recorded during the first quarter of 2015 due to a large recovery on a previously charged-off loan. Basic and diluted earnings per share were $0.21 for the three months ended March 31, 2015 compared to $0.11 for the comparable period in 2014.

 

The following discussion and analysis of our Financial Condition and Asset Quality provides a comparison of our results as of March 31, 2015 to December 31, 2014, while our Operating Results compare the three months ended March 31, 2015 to the three months ended March 31, 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes.

 

Financial Condition

 

Total Assets. Total assets increased to $610.7 million at March 31, 2015 from $607.6 million at December 31, 2014. The increase was primarily due to an increase in securities available for sale and in loans, partially offset by lower balances of cash and cash equivalents.

 

Cash and cash equivalents decreased to $47.3 million at March 31, 2015 from $49.1 million at December 31, 2014 primarily due to the redeployment of funds to address increases in securities available for sale and loans during the first quarter of 2015.

 

Securities available for sale increased to $108.3 million at March 31, 2015 compared to $104.5 million at December 31, 2014. The increase was due primarily to purchases of $9.0 million partially offset by calls, maturities and principal repayments of $5.9 million. Overall, our U.S. government agency securities and mortgage backed securities each increased $1.9 million.

 

Loans, net, increased to $401.9 million at March 31, 2015 from $400.9 million at December 31, 2014. The categories with significant increases were commercial real estate and commercial business. Commercial real estate loans increased $16.1 million to $145.5 million at March 31, 2015 from $129.4 million at December 31, 2014. An increase of $11.5 million was due to loans classified as construction and land as of December 31, 2014 moving into permanent financing within the commercial real estate category as of March 31, 2015. Commercial business loans increased $3.1 million to $77.1 million at March 31, 2015 from $74.0 million at December 31, 2014. These increases were partially offset by decreases in construction and land loans, multi-family loans, and one-to-four family loans. Construction and land loans decreased $11.5 million to $17.1 million at March 31, 2015 from $28.6 million at December 31, 2014 primarily due to loans moving into permanent financing within our commercial real estate loan category. Multi-family loans decreased $5.0 million to $36.4 million at March 31, 2015 from $41.4 million at December 31, 2014. One-to-four family loans decreased $1.0 million to $116.6 million at March 31, 2015 from $117.6 million at December 31, 2014.

 

Total Liabilities. Total liabilities increased to $532.0 million at March 31, 2015 from $530.5 million at December 31, 2014. The increase was primarily due to an increase in securities sold under agreements to repurchase (“Repo Sweeps”) partially offset by a decrease in deposits. Repo Sweeps increased to $14.5 million at March 31, 2015 from $11.8 million at December 31, 2014. The increase was primarily due to normal account fluctuations.

 

Deposits decreased to $509.1 million at March 31, 2015 from $510.3 million at December 31, 2014. The decrease in deposits was primarily due to normal fluctuations in our business accounts partially offset by an increase in our core deposits in connection with our newly-implemented program to grow core deposits.

 

Stockholders’ Equity. Stockholders’ equity increased to $78.7 million at March 31, 2015 from $77.1 million at December 31, 2014 primarily due to net income of $1.5 million, and other comprehensive income on securities of $521,000, partially offset by the payment of cash dividends to the holders of our common stock in the amount of $420,000.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Asset Quality

 

The Company experienced a decline in non-performing assets as of March 31, 2015 compared to December 31, 2014. 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:

 

		March 31,				December 31,
		2015				2014
Non-accrual loans(1)		$	4,348,760			$	4,676,760
Other impaired loans			1,383,128				2,043,121
Total non-performing loans			5,731,888				6,719,881
Foreclosed assets			3,848,328				3,887,587
Total non-performing assets		$	9,580,216			$	10,607,468

 

⁽¹⁾ The entire balance was also classified as impaired as of March 31, 2015 and December 31, 2014.

 

		March 31,				December 31,
		2015				2014
Non-performing assets to total assets			1.57	%			1.75	%
Non-performing loans to total loans			1.41				1.65
Allowance for loan losses to non-performing loans			102.55				82.76
Allowance for loan losses to total loans			1.44				1.37

 

Non-Performing and Impaired Loans and Other Non-Performing Assets. At March 31, 2015, our total non-performing and impaired loans and other non-performing assets decreased $1.0 million to $9.6 million compared to $10.6 million at December 31, 2014. At March 31, 2015, the Company’s non-accrual loans decreased to $4.3 million from $4.7 million at December 31, 2014.

 

At March 31, 2015, the Bank had two relationships classified as non-accrual with a balance in excess of $1.0 million. The largest credit was a $1.3 million credit secured by a subdivision development. The credit was placed on non-accrual status during the first quarter of 2013. The development has experienced very limited lot sales, and the cash flow was not sufficient to cover the principal and interest. The Bank received a payoff on this loan early in the second quarter of 2015 from another financial institution. The second non-accrual relationship was a $1.2 million credit to a real estate investor. This credit was placed on non-accrual status in 2012. The investor has experienced cash flow difficulties due to higher vacancy rates and the need for property repairs. Since being placed on non-accrual, $1.1 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 Bank to aid in selling some of the properties to further reduce the debt. We believe the collateral on this loan was sufficient to cover the majority of the outstanding balance and that sufficient allowances have been set aside for the remaining outstanding balance.

 

In addition to the non-accrual loans discussed above, we have loans that were accruing interest that we categorize as impaired due to observed credit deterioration or restructured status, which allows us to more easily individually evaluate them for our allowance for loan losses. At March 31, 2015, there were six credits in this classification with a total balance of $1.4 million. The largest loan in this classification at March 31, 2015 was a $497,000 credit to a real estate investor that has experienced cash flow shortfalls. The loan was restructured to allow the creditor to improve the cash flow. The loan was performing in accordance with the restructured terms at March 31, 2015. In comparison, there were seven loans that met this classification at December 31, 2014 with a total balance of $2.0 million.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

The following table presents a summary of our past-due loans as of March 31, 2015 and December 31, 2014:

 

		March 31,				December 31,
		2015				2014
Loans 30-59 Days Past Due		$	1,693,081			$	985,335
Loans 60-89 Days Past Due			312,683				192,060
Loans 90 or more Days Past Due			323,856				486,126
Total Past Due Loans		$	2,329,620			$	1,663,521

 

Past due balances increased $666,000 from $1.7 million at December 31, 2014 to $2.3 million at March 31, 2015. The category with the largest increase was the 30-59 day category which increased $708,000, and the majority of the increase in past due balances was in the commercial real estate loan category, due to two loans. The 60-89 day category increased $120,000 due to one loan in the commercial real estate loan category, and the 90 or more days category decreased $162,000 and a 1-4 family home was brought current.

 

The following table presents a summary of our credit quality indicators as of March 31, 2015 and December 31, 2014:

 

		March 31,				December 31,
		2015				2014
Pass		$	389,242,830			$	382,487,061
Special Mention			9,656,877				15,479,552
Substandard			8,515,130				8,147,150
Doubtful			153,316				157,263
Total Loans		$	407,568,153			$	406,271,026

 

In addition to the decline in total non-performing loans at March 31, 2015 compared to December 31, 2014, loans classified as special mention declined $5.8 million as these balances were upgraded to the Pass category. Loans classified as Substandard increased $368,000 to $8.5 million at March 31, 2015 compared to $8.1 million at December 31, 2014. This increase was due to a commercial real estate loan being downgraded from Special Mention.

 

At March 31, 2015, the Bank had seven properties classified as foreclosed assets valued at $3.8 million. The foreclosed asset balance declined $39,000 from December 31, 2014 due to two lot sales that occurred during the first quarter of 2015. The collateral on the remaining properties consists of farmland, two residential lot developments, a commercial development, and three single-family residences. All of these properties were transferred into foreclosed assets 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.

 

Results of Operations

 

General. We recorded net income of $1.5 million and $777,000 for the three months ended March 31, 2015 and 2014, respectively. The increase in net income for the three months ended March 31, 2015 resulted primarily from higher net interest income, a $500,000 credit provision for loan losses, and higher non-interest income, partially offset by higher income taxes.

 

During the three months ended March 31, 2015, yields on loans declined compared to the three months ended March 31, 2014, primarily due to longer-term assets re-pricing at current rates as well as

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

competitive market forces. Our commercial loans are the most sensitive to changes in market interest rates because they often have shorter terms to maturity, and, therefore, the interest rates adjust more frequently.

 

We have also experienced time deposits re-pricing as they mature; however, these fixed-rate contracts do not allow for immediate re-pricing as rates fluctuate. Our ability to lower rates paid on deposits is limited due to the already low deposit rates and the competitive environment in which we operate. Overall, further downward pressure on interest rates is unlikely to significantly benefit our net interest margin or net income because our earning assets are subject to greater downward re-pricing than our deposits. The Company’s 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, increasingly competitive market forces continue to pressure the yield on our earning assets.

 

Net interest income. Net interest income increased to $4.3 million for the three months ended March 31, 2015 from $4.0 million for the three months ended March 31, 2014. This increase was primarily due to a $31.1 million increase in average outstanding loans for the period ended March 31, 2015 compared to the same period in 2014. Net average interest-earning assets were $87.0 million for the three months ended March 31, 2015, compared to $78.3 million for the same period in 2014. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 118.82% for the three months ended March 31, 2015 from 115.66% for the same period in 2014. Our interest rate spread increased to 3.13% for the three months ended March 31, 2015 from 2.76% for the same period in 2014. Our net interest margin increased to 3.21% for the three months ended March 31, 2015 compared to 2.83% for the same period in 2014. This increase was primarily due to a change in our asset mix with a higher volume of loans yielding an average of 4.31% compared to cash levels yielding an average of 0.28%. The average rate earned on interest-earning assets increased by 35 basis points during the three months ended March 31, 2015 to 3.63% from 3.28% for the same period in 2014, while the average rate paid on interest-bearing liabilities decreased by 2 basis points during these periods to 0.50% from 0.52%.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

The following table sets forth the average balance sheets, average yields and cost of funds, and certain other information for the periods indicated. No tax-equivalent yield adjustments 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 March 31,												Three Months Ended March 31,
		2015												2014
		Average Outstanding Balance				Interest (5)				Yield/ Rate				Average Outstanding Balance				Interest (5)				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans, gross (1)		$	404,066			$	4,294				4.31	%		$	372,985			$	4,033				4.39	%
Securities (1)			104,916				573				2.21	%			116,032				597				2.09	%
Federal Reserve Stock			1,677				25				6.00	%			-				-				-	%
Interest-earning balances from depository institutions			38,263				26				0.28	%			89,525				51				0.23	%
Total interest-earning assets			548,922				4,918				3.63	%			578,542				4,681				3.28	%
Non-interest-earning assets			49,937												52,889
Total assets		$	598,859											$	631,431
Interest-bearing liabilities:
Interest-bearing transaction		$	283,078			$	175				0.25	%		$	305,013			$	180				0.24	%
Savings deposits			30,078				12				0.16	%			27,876				12				0.17	%
Time deposits			126,866				337				1.08	%			125,419				352				1.14	%
Securities sold under agreements to repurchase			15,459				1				0.03	%			23,911				3				0.05	%
Federal Home Loan Bank advances			2,488				26				4.24	%			13,981				75				2.18	%
Subordinated debentures			4,000				22				2.23	%			4,000				22				2.23	%
Total interest-bearing liabilities			461,969				573				0.50	%			500,200				644				0.52	%
Non-interest-bearing liabilities			58,913												57,274
Total liabilities			520,882												557,474
Stockholders’ equity			77,977												73,957
Total liabilities and stockholders’ equity		$	598,859											$	631,431
Net interest income						$	4,345											$	4,037
Net interest rate spread (2)											3.13	%											2.76	%
Net interest-earning assets (3)		$	86,953											$	78,342
Net interest margin (4)											3.21	%											2.83	%
Ratio of interest-earning assets to interest-bearing liabilities											118.82	%											115.66	%

 

⁽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 4.14% and 2.99% for the three months ended March 31, 2015 and 2014, 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 $19,417 and $12,663 for the three months ended March 31, 2015 and 2014, respectively.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Interest and dividend income. Components of interest income vary from time to time based on the availability and interest rates of loans, securities and other interest-earning assets. Interest and fee income on loans increased to $4.3 million for the three months ended March 31, 2015 from $4.0 million for the same period in 2014. This increase was primarily a result of a higher average balance of loans which was partially offset by a decline in yield primarily due to competitive pressure. The average yield on loans decreased to 4.31% for the three months ended March 31, 2015 from 4.39% for the comparable period in 2014. The average balance of loans was $404.1 million and $373.0 million for the three months ended March 31, 2015 and 2014, respectively.

 

Interest income on securities decreased to $573,000 for the three months ended March 31, 2015 from $597,000 for the same period in 2014. Interest income on securities decreased primarily due to a lower average balance of securities, partially offset by a higher yield. The average balance of securities was $104.9 million and $116.0 million for the three months ended March 31, 2015 and 2014, respectively. The average yield on securities increased to 2.21% for the three months ended March 31, 2015 from 2.09% for the comparable period in 2014.

 

Dividend income on Federal Reserve Bank stock was $25,000 for the three months ended March 31, 2015. The average balance of Federal Reserve Bank stock was $1.7 million. The Company was required to purchase the Federal Reserve Bank stock as a result of the Bank’s conversion from a thrift charter to a national bank charter in August 2014. There was no balance at March 31, 2014.

 

Interest on other interest-earning deposits decreased primarily due to a decrease in average balances. The average balance of other interest-earning deposits was $38.3 million and $89.5 million for the three months ended March 31, 2015 and 2014, respectively. The decrease was due to the redeployment of funds to support an increase in loans, as well as a partial disbursement of a non-customer special purpose deposit account. The average yield on other interest-earning deposits was 0.28% and 0.23% for the three months ended March 31, 2015 and 2014, respectively.

 

Interest expense. Interest expense on deposits decreased to $525,000 for the three months ended March 31, 2015 from $545,000 for the comparable period in 2014. The average balance of interest-bearing deposits decreased to $440.0 million for the three months ended March 31, 2015 from $458.3 million for the same period in 2014. This decrease was primarily due to a partial disbursement of a non-customer special purpose deposit account.

 

Interest expense on Federal Home Loan Bank advances decreased to $26,000 for the three months ended March 31, 2015 compared to $75,000 for the same period in 2014. The average balance of Federal Home Loan Bank advances was $2.5 million and $14.0 million for the three months ended March 31, 2015 and 2014, respectively. The average rate on Federal Home Loan Bank advances increased to 4.24% for the three months ended March 31, 2015 compared to 2.18% for the same period in 2014 primarily due to the maturity of short-term advances that had lower rates.

 

Provision for loan losses. A credit provision of $500,000 was recorded for the three months ended March 31, 2015 compared to no provision expense or credit for the three months ended March 31, 2014. Management determined that the credit provision was appropriate due to improvements in credit quality trends and recoveries received on previously charged-off loans. Non-performing and impaired loans totaled $5.7 million and $6.7 million at March 31, 2015 and December 31, 2014, respectively. The allowance for loan losses to non-performing and impaired loans increased to 102.55% at March 31, 2015, compared to 82.76% at December 31, 2014. During the three months ended March 31, 2015, we received net recoveries of $817,000, compared to net recoveries of $122,000 for the same period in 2014. The provision for loan losses is based upon management’s consideration of current economic conditions; First Clover Leaf’s loan portfolio composition and historical loss experience coupled with current market valuations on collateral; and management’s estimate of probable losses in the portfolio as well as the level of non-performing and impaired loans. While credit quality has improved, we made adjustments to certain qualitative factors as appropriate due to our continued expansion into newer markets and continued segment concentration in real estate loans that are collateral dependent. In addition, recent economic reports indicate that the vacancy rates, occupancy rates, and absorption rates

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

are not showing positive movement enough to overcome the economic declines experienced in 2010. Management also reviews individual loans for which full collectability 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 First Clover Leaf’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 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.

 

Non-interest income. Non-interest income increased to $598,000 for the three months ended March 31, 2015, compared to $378,000 for the same period in 2014, primarily due to increases in gain on sale of loans, service fees on deposit accounts and other service charges and fees.

 

Service fees on deposit accounts increased to $107,000 for the three months ended March 31, 2015 from $89,000 for the same period in 2014. The increase was due to higher non-sufficient fund income and treasury management fees during the three months ended March 31, 2015 related to our focus on growing core deposit accounts.

 

Other service charges and fees increased to $114,000 for the three months ended March 31, 2015 from $90,000 for the comparable period in 2014. The increase was primarily due to higher visa interchange fee income and automated teller machine fees during the three months ended March 31, 2015, also related to our focus on growing core deposit accounts.

 

Gain on sale of loans totaled $181,000 and $26,000 for the three months ended March 31, 2015 and 2014, respectively. The increase was due to a higher volume of loan sales for the three months ended March 31, 2015 compared to the same period in 2014. In an effort to increase loan gains, the Company has added additional one-to-four family real estate products and will continue the focus on increasing the volume of loans originated and sold. We sold loans totaling $7.0 million and $908,000 during the three months ended March 31, 2015 and 2014, respectively.

 

Non-interest expense. Non-interest expense remained relatively unchanged at $3.4 million for the three months ended March 31, 2015 and 2014. However, we experienced fluctuations within certain categories. The primary changes included an increase in compensation and employee benefits expense, partially offset by decreases in occupancy expense, foreclosed asset related expenses and amortization of core deposit intangible.

 

Compensation and employee benefits increased to $1.9 million for the three months ended March 31, 2015 from $1.8 million for the same period in 2014 primarily due to the addition of a supplemental retirement plan effective July 1, 2014, and increased employee insurance expenses.

 

Occupancy expense decreased to $391,000 for the three months ended March 31, 2015 compared to $404,000 for the same period in 2014 primarily due to less snow removal expense in the 2015 period.

 

Foreclosed asset related expenses decreased to $2,000 for the three months ended March 31, 2015 from $74,000 for the comparable period in 2014. The higher expense in the 2014 period was primarily due to necessary property repairs on a property that was sold later in 2014.

 

Amortization of core deposit intangible expense was $14,000 and $31,000 for the three months ended March 31, 2015 and 2014, respectively. The decrease was in accordance with our amortization schedule based on the double declining balance methodology.

 

Income taxes. Income tax expense increased to $618,000 for the three months ended March 31, 2015 compared to $276,000 for the same period in 2014 primarily as a result of higher pre-tax income for the three months ended March 31, 2015 along with a higher effective tax rate. The effective tax rate was 29.6% for the three months ended March 31, 2015 compared to 26.2% for the comparable period in 2014. The effective tax rate for the three months ended March 31, 2015 was higher primarily due to tax exempt income comprising a lower portion of total income, partially offset by the state tax rate being lowered to 7.75% from the prior year rate of 9.5%.

 

 

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 March 31, 2015 and December 31, 2014, $47.3 million and $49.1 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 $469,000 for the three months ended March 31, 2015, compared to principal collections exceeding loan originations by $7.0 million for the same period in 2014. Cash received from calls, maturities, and principal repayments of available-for-sale investment securities totaled $5.9 million and $14.1 million for the three months ended March 31, 2015 and 2014, respectively. We purchased $9.0 million and $8.9 million of available-for-sale investment securities during the three months ended March 31, 2015 and 2014, respectively.

 

Deposit flows are generally affected by market interest rates, products offered by local competitors, and other factors. Net deposits decreased by $1.2 million during the three months ended March 31, 2015 compared to an increase of $22.2 million for the same period in 2014.

 

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 $2.5 million of advances from the FHLB at March 31, 2015 and December 31, 2014. At March 31, 2015, we had additional available credit of approximately $78.5 million. Additionally, we have the ability to purchase funds through our affiliation with Promontory Interfinancial Network if we require additional liquidity. At March 31, 2015, the funds available for purchase through this program totaled $61.0 million.

 

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 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 March 31, 2015, 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.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

The Bank’s actual capital amounts and ratios under Basel III as of March 31, 2015 are presented in the following table. The Bank’s actual capital amounts and ratios as of December 31, 2014 are presented for comparison.

 

As of March 31, 2015
																		To be Well Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Common Equity Tier 1 Capital to Risk Weighted Assets		$	69,799,000				16.01	%		$	19,621,000				4.50	%		$	28,341,000				6.50	%
Tier I Capital to Adjusted Total Assets			69,799,000				11.88	%			23,499,000				4.00	%			29,373,000				5.00	%
Tier I Capital to Risk Weighted Assets			69,799,000				16.01	%			26,161,000				6.00	%			34,882,000				8.00	%
Total Capital to Risk Weighted Assets			74,189,000				17.02	%			34,882,000				8.00	%			43,602,000				10.00	%

 

As of December 31, 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		$	67,995,000				11.22	%		$	24,235,000				4.00	%		$	30,294,000				5.00	%
Tier I Capital to Risk Weighted Assets			67,995,000				16.36	%			16,623,000				4.00	%			24,935,000				6.00	%
Total Capital to Risk Weighted Assets			71,949,000				17.31	%			33,247,000				8.00	%			41,558,000				10.00	%

 

The Company’s actual consolidated capital amounts and ratios under Basel III as of March 31, 2015 are presented in the following table. The Company’s actual consolidated capital amounts and ratios as of December 31, 2014 are presented for comparison.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

As of March 31, 2015
																		To be Well Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Common Equity Tier 1 Capital to Risk Weighted Assets		$	66,557,000				15.25	%		$	19,636,000				4.50	%		$	28,363,000				6.50	%
Tier I Capital to Adjusted Total Assets			66,557,000				10.70	%			24,885,000				4.00	%			31,107,000				5.00	%
Tier I Capital to Risk Weighted Assets			66,557,000				15.25	%			26,181,000				6.00	%			34,908,000				8.00	%
Total Capital to Risk Weighted Assets			74,947,000				17.18	%			34,908,000				8.00	%			43,635,000				10.00	%

 

As of December 31, 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		$	65,256,000				10.54	%		$	24,764,000				4.00	%		$	30,955,000				5.00	%
Tier I Capital to Risk Weighted Assets			65,256,000				15.70	%			16,630,000				4.00	%			24,945,000				6.00	%
Total Capital to Risk Weighted Assets			73,210,000				17.61	%			33,260,000				8.00	%			41,576,000				10.00	%

 

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 $1 billion). The Company and the Bank, along with other community banking organizations, became subject to the Basel III Rules effective January 1, 2015. As of March 31, 2015, the Company and the Bank met the requirements to be “well capitalized” under the Basel III Rules.

 

The Basel III Rules not only increased most of the required minimum regulatory capital ratios, but they introduced a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expanded 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 qualified previously as Tier 1 capital no longer qualify, or their qualifications may change as 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 previous treatment for accumulated other comprehensive income. The Bank elected this one-time opt-out to exclude accumulated other comprehensive income from regulatory capital with the filing of its regulatory reports for first quarter of 2015.

 

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.  Management will continue to assess the effect of the Basel III Rules during the phase-in period and the impact they may have on the Bank’s and the Company’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 March 31, 2015 follows:

 

														Range of Rates
		Variable Rate				Fixed Rate				Total				on Fixed Rate
		Commitments				Commitments				Commitments				Commitments
Commitments to extend credit		$	32,590,633			$	34,144,118			$	66,734,751			3.00% - 18.00%
Standby letters of credit			1,779,544				225,765				2,005,309			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 $81.0 million to the FHLB, of which approximately $72.2 million had been sold as of March 31, 2015. As a part of the agreement, the Bank had a maximum credit enhancement of $1.1 million at March 31, 2015. 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.

 

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

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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 December 31, 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 table below sets forth, as of December 31, 2014, 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.

 

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

 

December 31, 2014
			NPV												Net Portfolio Value as a Percentage of Present Value of Assets
			Estimated				Estimated Increase (Decrease) in NPV
Change in Interest			NPV				Amount				Percent				NPV Ratio				Change
+400	bp		$	65,349			$	(20,120	)			(24	)%			12.03	%			(201)	bp
+300	bp			73,117				(12,352	)			(14	)			13.08				(96)	bp
+200	bp			79,432				(6,037	)			(7	)			13.78				(26)	bp
+100	bp			84,576				(893	)			(1	)			14.25				21	bp
—	bp			85,469				—				—				14.04				—	bp
-100	bp			88,703				3,234				4				14.28				24	bp

 

The table above indicates that at December 31, 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 24% decrease in the net portfolio value. Management does not believe that the Company’s primary market risk exposures at March 31, 2015, and how those exposures were managed during the three months ended March 31, 2015, have changed materially when compared to the immediately preceding quarter ended December 31, 2014. However, the Company’s primary market risk exposure has not yet been quantified at March 31, 2015 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 such as the duration of our assets and liabilities as it relates to prepayments on loans and the average life of non-maturing deposits. In addition, we make rate assumptions for loans and deposits that are re-pricing. These assumptions 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

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

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.

 

We and our subsidiaries are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of our business. At March 31, 2015, we and our subsidiaries were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

 

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 March 31, 2015, 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:	May 15, 2015		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