UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 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 November 2, 2015
Common Stock, par value $.10 per share		7,005,883

 

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 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		6
Notes to Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	52
PART II -  Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	54
Item 6.	Exhibits	54
Signatures		55

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

		September 30,
		2015				December 31,
		(Unaudited)				2014
ASSETS
Cash and due from banks		$	13,046,272			$	9,047,872
Interest-earning deposits			14,867,959				18,238,145
Federal funds sold			16,311,656				21,780,445
Total cash and cash equivalents			44,225,887				49,066,462
Interest-earning time deposits			3,475,148				2,021,970
Securities available for sale			104,839,652				104,225,692
Federal Home Loan Bank stock			1,747,763				2,887,763
Federal Reserve Bank stock			1,676,700				1,676,700
Loans, net of allowance for loan losses of $5,910,655 and $5,561,442 at September 30, 2015 and December 31, 2014, respectively			411,811,094				400,904,404
Loans held for sale			697,625				100,000
Property and equipment, net			10,003,354				10,380,310
Goodwill			11,385,323				11,385,323
Bank-owned life insurance			15,222,356				14,876,960
Core deposit intangible			152,505				196,000
Foreclosed assets			3,121,564				3,887,587
Mortgage servicing rights			1,029,850				961,823
Accrued interest receivable			1,901,154				1,762,310
Other assets			2,979,207				3,281,496
Total assets		$	614,269,182			$	607,614,800
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	60,481,367			$	68,170,743
Interest-bearing			438,762,367				442,135,896
Total deposits			499,243,734				510,306,639
Federal Home Loan Bank advances			17,493,550				2,487,745
Securities sold under agreements to repurchase			12,040,148				11,848,266
Subordinated debentures			4,000,000				4,000,000
Accrued interest payable			206,941				174,480
Other liabilities			1,521,883				1,667,777
Total liabilities			534,506,256				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,  7,005,883 and 7,007,283 shares issued and outstanding at  September 30, 2015 and December 31, 2014			700,588				700,728
Additional paid-in capital			55,806,256				55,818,936
Retained earnings			22,699,535				20,412,898
Accumulated other comprehensive income			556,547				197,331
Total stockholders' equity			79,762,926				77,129,893
Total liabilities and stockholders' equity		$	614,269,182			$	607,614,800

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Interest and dividend income:
Interest and fees on loans		$	4,225,240			$	4,274,076			$	12,948,258			$	12,409,621
Securities:
Taxable interest income			264,004				304,935				802,439				950,432
Nontaxable interest income			284,628				297,193				857,403				843,282
Federal Reserve Bank dividends			25,709				12,793				76,010				12,793
Interest-earning deposits, federal funds sold, and other			37,666				41,225				93,362				154,103
Total  interest and dividend income			4,837,247				4,930,222				14,777,472				14,370,231
Interest expense:
Deposits			549,743				551,766				1,597,246				1,623,544
Federal Home Loan Bank advances			49,698				73,012				116,035				222,504
Securities sold under agreements to repurchase			1,084				1,115				2,669				4,792
Subordinated debentures			22,686				21,692				66,502				64,914
Total  interest expense			623,211				647,585				1,782,452				1,915,754
Net interest income			4,214,036				4,282,637				12,995,020				12,454,477
Provision (credit) for loan losses			-				(250,000	)			(500,000	)			(250,000	)
Net interest income after provision (credit) for loan losses			4,214,036				4,532,637				13,495,020				12,704,477
Non-interest income:
Service fees on deposit accounts			130,136				129,465				360,447				335,194
Other service charges and fees			120,475				112,159				351,569				306,380
Loan servicing fees			76,200				69,054				223,801				209,563
Gain on sale of securities			10,821				88,089				10,821				88,089
Gain on sale of loans			170,157				205,616				646,249				418,316
Gain (loss) on sale of assets, net			-				474				-				(74,565	)
Gain (loss) on sale of foreclosed assets			(16,755	)			40,521				(14,514	)			(156,678	)
Other			123,651				182,360				375,364				450,901
			614,685				827,738				1,953,737				1,577,200
Non-interest expense:
Compensation and employee benefits			1,858,900				1,807,984				5,636,293				5,399,016
Occupancy expense			397,091				419,850				1,153,242				1,247,561
Data processing services			189,791				195,056				566,225				575,896
Director fees			49,350				47,500				147,033				133,150
Professional fees			139,221				170,757				400,667				470,787
FDIC insurance premiums			64,000				120,000				268,000				357,102
Foreclosed asset related expenses			389,739				62,609				426,977				320,026
Amortization of core deposit intangible			14,505				14,505				43,495				60,495
Amortization of mortgage servicing rights			34,238				37,937				92,177				76,327
Other			596,213				611,429				1,860,217				1,818,318
			3,733,048				3,487,627				10,594,326				10,458,678
Income before income taxes			1,095,673				1,872,748				4,854,431				3,822,999
Income tax expense			231,508				544,721				1,306,532				1,008,010
Net income		$	864,165			$	1,328,027			$	3,547,899			$	2,814,989
Basic and diluted earnings per share		$	0.12			$	0.19			$	0.51			$	0.40
Dividends per share		$	0.06			$	0.06			$	0.18			$	0.18

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Net income		$	864,165			$	1,328,027			$	3,547,899			$	2,814,989
Other comprehensive income:
Unrealized gains (losses) on securities available for sale arising during the period			888,267				(90,103	)			609,974				2,536,136
Reclassification adjustment for realized gains included in income			(10,821	)			(88,089	)			(10,821	)			(88,089	)
Tax effect			(342,205	)			65,931				(239,937	)			(905,779	)
Total other comprehensive income (loss)			535,241				(112,261	)			359,216				1,542,268
Comprehensive income		$	1,399,406			$	1,215,766			$	3,907,115			$	4,357,257

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended
		September 30,
		2015				2014
Cash flows from operating activities
Net income		$	3,547,899			$	2,814,989
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of:
Deferred loan origination costs, net			(41,958	)			(35,004	)
Premiums and discounts on securities			609,927				747,471
Core deposit intangible			43,495				60,495
Mortgage servicing rights			92,177				76,327
Fair value adjustments			(47,161	)			(69,519	)
Credit for loan losses			(500,000	)			(250,000	)
Depreciation			442,450				441,894
Gain on sale of securities			(10,821	)			(88,089	)
Gain on sale of loans			(646,249	)			(418,316	)
Loss on sale of property and equipment			-				74,565
Loss on sale of foreclosed assets			14,514				156,678
Write-down on foreclosed assets			355,500				39,723
Earnings on bank-owned life insurance			(345,396	)			(261,129	)
Increase in mortgage servicing rights			(160,204	)			(102,470	)
Proceeds from sales of loans held for sale			24,308,230				13,869,469
Originations of loans held for sale			(24,259,606	)			(13,750,353	)
Change in assets and liabilities:
Accrued interest receivable and other assets			(76,492	)			(126,710	)
Accrued interest payable			32,461				(17,437	)
Other liabilities			(145,894	)			(11,643	)
Net cash provided by operating activities			3,212,872				3,150,941

 

(Continued)

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

		Nine Months Ended
		September 30,
		2015				2014
Cash flows from investing activities
Purchase of interest-earning time deposits		$	(1,453,178	)		$	(6,542	)
Available for sale securities:
Purchases			(15,639,250	)			(21,107,286	)
Proceeds from calls, maturities, and principal repayments			13,424,926				28,664,125
Proceeds from sales			1,630,421				2,759,787
Redemption of FHLB stock			1,140,000				-
Purchase of Federal Reserve Bank stock			-				(1,689,493	)
Increase in loans			(10,329,722	)			(19,215,487	)
Purchase of property and equipment			(77,548	)			(1,341,628	)
Proceeds from the sale of property and equipment			-				242,304
Proceeds from the sale of foreclosed assets			396,009				1,004,232
Purchase of bank-owned life insurance			-				(6,000,000	)
Net cash (used in) investing activities			(10,908,342	)			(16,689,988	)
Cash flows from financing activities
Net (decrease) increase in deposit accounts			(11,062,905	)			23,906,878
Net decrease (increase) in securities sold under agreements to repurchase			191,882				(12,506,716	)
Proceeds from Federal Home Loan Bank advances			15,000,000				-
Repayments of Federal Home Loan Bank advances			-				(5,000,000	)
Repurchase of common stock			(12,820	)			-
Cash dividends paid			(1,261,262	)			(1,261,311	)
Net cash provided by financing activities			2,854,895				5,138,851
Net decrease in cash and cash equivalents			(4,840,575	)			(8,400,196	)
Cash and cash equivalents:
Beginning			49,066,462				84,693,825
Ending		$	44,225,887			$	76,293,629
Supplemental schedule of noncash investing and financing activities
Assets acquired in settlement of loans		$	-			$	287,982
Loans made to finance sales of foreclosed assets			-				383,230
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	1,744,186			$	1,927,386
Income taxes, net of refunds			1,292,500				815,000

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 single-bank holding company, whose wholly-owned bank subsidiary, First Clover Leaf Bank (the “Bank”), provides deposits and loans to individual and corporate customers in Madison and St. Clair Counties in Illinois. In addition, the Bank recently opened a loan production office in Clayton, Missouri. The Bank is subject to competition from other financial institutions and nonfinancial institutions providing financial products and services. Additionally, the Company and the Bank are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies. 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, 2017.  We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

In June 2014, the FASB amended existing guidance related to repurchase-to-maturity transactions, repurchase financings, and disclosures (ASU 2014-11, Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures). These amendments align the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Pursuant to the revised guidance, these transactions are accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which result in outcomes referred to as off-balance-sheet accounting. These amendments require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. These amendments also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes in this update are effective for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

 

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

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE

 

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

 

		September 30, 2015
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				(Losses)				Value
U.S. government agency obligations		$	28,189,284			$	133,682			$	(24,479	)		$	28,298,487
State and municipal securities			45,029,413				1,076,180				(229,314	)			45,876,279
Other securities			3,501				-				-				3,501
Mortgage-backed: residential			30,705,080				88,836				(132,531	)			30,661,385
		$	103,927,278			$	1,298,698			$	(386,324	)		$	104,839,652

 

		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			3,501				-				-				3,501
Mortgage-backed: residential			32,800,032				176,321				(197,376	)			32,778,977
		$	103,912,471			$	1,233,668			$	(920,447	)		$	104,225,692

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 September 30, 2015 and December 31, 2014, are summarized as follows:

 

		September 30, 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		$	-			$	-			$	7,491,280			$	(24,479	)		$	7,491,280			$	(24,479	)
State and municipal securities			8,569,856				(72,837	)			4,879,709				(156,477	)			13,449,565				(229,314	)
Mortgage-backed: residential			14,664,125				(81,759	)			4,449,652				(50,772	)			19,113,777				(132,531	)
		$	23,233,981			$	(154,596	)		$	16,820,641			$	(231,728	)		$	40,054,622			$	(386,324	)

 

		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 September 30, 2015, the Company had 58 securities in an unrealized loss position which included: 5 agency securities, 33 state and municipal securities, and 20 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 September 30, 2015; therefore, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2015.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

 

The amortized cost and fair value of the Company’s securities at September 30, 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		$	8,746,163			$	8,767,942
Due after one year through five years			20,650,177				20,802,114
Due after five years through ten years			30,797,474				31,367,004
Due after ten years			13,024,883				13,237,706
Other securities - non-maturing			3,501				3,501
Mortgage-backed: residential			30,705,080				30,661,385
		$	103,927,278			$	104,839,652

 

Securities with a carrying amount of approximately $67,724,000 and $66,600,000 were pledged to secure deposits, as required or permitted by law, at September 30, 2015 and December 31, 2014, respectively.

 

At September 30, 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 proceeds of $1,630,421 from the sale of securities during the three and nine months ended September 30, 2015, resulting in gross realized gains of $30,860 and gross realized losses of $20,039. The Company received proceeds of $2,759,787 from the sale of securities during the three and nine months ended September 30, 2014, resulting in gross realized gains of $90,838 and gross realized losses of $2,749.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS

 

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

 

		At September 30,								At December 31,
		2015								2014
		Amount				Percent				Amount				Percent
Real estate loans:
One-to-four family		$	111,914,530				26.8	%		$	117,591,822				28.9	%
Multi-family			40,594,642				9.7				41,391,862				10.2
Commercial			149,488,249				35.8				129,415,314				31.9
Construction and land			14,427,204				3.5				28,590,745				7.0
			316,424,625				75.8				316,989,743				78.0
Commercial business			84,221,788				20.2				73,984,867				18.2
Consumer:
Home equity			13,765,028				3.3				13,523,985				3.3
Automobile and other			3,073,481				0.7				1,772,431				0.5
			16,838,509				4.0				15,296,416				3.8
Total gross loans			417,484,922				100.0	%			406,271,026				100.0	%
Deferred loan origination costs, net			236,827								194,820
Allowance for loan losses			(5,910,655	)							(5,561,442	)
Loans, net		$	411,811,094							$	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 September 30, 2015 and December 31, 2014, these loans represented 2.25% 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 September 30, 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

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

The following tables present our past-due loans, segregated by class, as of September 30, 2015 and December 31, 2014:

 

September 30, 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		$	103,228			$	373,165			$	383,417			$	859,810			$	111,054,720			$	111,914,530			$	-
Multi-family			-				-				-				-				40,594,642				40,594,642				-
Commercial			-				-				-				-				149,488,249				149,488,249				-
Construction and land			-				-				-				-				14,427,204				14,427,204				-
			103,228				373,165				383,417				859,810				315,564,815				316,424,625				-
Commercial business			-				-				-				-				84,221,788				84,221,788				-
Consumer:
Home equity			37,146				279,617				120,050				436,813				13,328,215				13,765,028				-
Automobile and other			2,603				-				1,970				4,573				3,068,908				3,073,481				-
			39,749				279,617				122,020				441,386				16,397,123				16,838,509				-
Total		$	142,977			$	652,782			$	505,437			$	1,301,196			$	416,183,726			$	417,484,922			$	-

 

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

SEPTEMBER 30, 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:

 

		September 30,				December 31,
		2015				2014
Real estate loans:
One-to-four family		$	766,904			$	589,170
Multi-family			1,018,384				1,340,779
Commercial			1,202,383				1,242,009
Construction and land			-				1,431,619
			2,987,671				4,603,577
Commercial business			207,392				25,095
Consumer:
Home equity			128,439				48,088
Automobile and other			1,970				-
			130,409				48,088
Total non-accrual loans		$	3,325,472			$	4,676,760

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 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 September 30, 2015
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,114,742			$	-			$	335			$	(168,139	)		$	946,938
Multi-family			473,568				-				3,001				(43,646	)			432,923
Commercial			2,191,199				-				4,053				(298,906	)			1,896,346
Construction and land			667,466				-				-				(79,385	)			588,081
			4,446,975				-				7,389				(590,076	)			3,864,288
Commercial business			1,186,648				-				4,242				574,479				1,765,369
Consumer
Home equity			250,887				-				-				467				251,354
Automobile and other			14,514				-				-				15,130				29,644
			265,401				-				-				15,597				280,998
Total		$	5,899,024			$	-			$	11,631			$	-			$	5,910,655

 

Three months ended September 30, 2014
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,225,852			$	-			$	465,270			$	(593,575	)		$	1,097,547
Multi-family			438,431				-				-				(31,035	)			407,396
Commercial			1,709,815				-				-				133,384				1,843,199
Construction and land			1,011,316				-				-				315,997				1,327,313
			4,385,414				-				465,270				(175,229	)			4,675,455
Commercial business			997,689				-				(600	)			(64,303	)			932,786
Consumer
Home equity			172,037				-				7,465				(5,168	)			174,334
Automobile and other			12,769				-				475				(5,300	)			7,944
			184,806				-				7,940				(10,468	)			182,278
Total		$	5,567,909			$	-			$	472,610			$	(250,000	)		$	5,790,519

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

Nine months ended September 30, 2015
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,119,762			$	(25,258	)		$	335			$	(147,901	)		$	946,938
Multi-family			436,833				-				8,753				(12,663	)			432,923
Commercial			1,650,290				(25,742	)			8,754				263,044				1,896,346
Construction and land			1,194,917				-				811,350				(1,418,186	)			588,081
			4,401,802				(51,000	)			829,192				(1,315,706	)			3,864,288
Commercial business			951,215				-				70,195				743,959				1,765,369
Consumer:
Home equity			198,150				-				-				53,204				251,354
Automobile and other			10,275				-				826				18,543				29,644
			208,425				-				826				71,747				280,998
Total		$	5,561,442			$	(51,000	)		$	900,213			$	(500,000	)		$	5,910,655

 

Nine months ended September 30, 2014
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,424,663			$	(219,163	)		$	466,287			$	(574,240	)		$	1,097,547
Multi-family			661,358				-				-				(253,962	)			407,396
Commercial			1,454,455				(1,876	)			-				390,620				1,843,199
Construction and land			668,085				-				230,000				429,228				1,327,313
			4,208,561				(221,039	)			696,287				(8,354	)			4,675,455
Commercial business			1,219,080				-				8,116				(294,410	)			932,786
Consumer:
Home equity			116,478				(43,519	)			9,381				91,994				174,334
Automobile and other			46,549				-				625				(39,230	)			7,944
			163,027				(43,519	)			10,006				52,764				182,278
Total		$	5,590,668			$	(264,558	)		$	714,409			$	(250,000	)		$	5,790,519

 

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 September 30, 2015 and December 31, 2014:

 

September 30, 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		$	120,411			$	826,527			$	946,938			$	1,198,868			$	110,715,662			$	111,914,530
Multi-family			-				432,923				432,923				1,018,384				39,576,258				40,594,642
Commercial			133,900				1,762,446				1,896,346				2,575,078				146,913,171				149,488,249
Construction and land			-				588,081				588,081				192,079				14,235,125				14,427,204
			254,311				3,609,977				3,864,288				4,984,409				311,440,216				316,424,625
Commercial business			301,520				1,463,849				1,765,369				536,956				83,684,832				84,221,788
Consumer:
Home equity			47,937				203,417				251,354				145,532				13,619,496				13,765,028
Automobile and other			1,970				27,674				29,644				1,970				3,071,511				3,073,481
			49,907				231,091				280,998				147,502				16,691,007				16,838,509
Total		$	605,738			$	5,304,917			$	5,910,655			$	5,668,867			$	411,816,055			$	417,484,922

 

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

SEPTEMBER 30, 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. A watch classification is generally used for new businesses, for a business expanding in a new direction, or for borrowers experiencing temporary difficulties. 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

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

The following tables present our credit quality indicators, segregated by class, as of September 30, 2015 and December 31, 2014:

 

September 30, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	110,404,318			$	482,396			$	886,342			$	141,474			$	111,914,530
Multi-family			36,938,042				2,638,216				1,018,384				-				40,594,642
Commercial			139,666,515				5,462,956				4,358,778				-				149,488,249
Construction and land			14,180,150				-				247,054				-				14,427,204
			301,189,025				8,583,568				6,510,558				141,474				316,424,625
Commercial business			75,618,435				8,066,397				536,956				-				84,221,788
Consumer:
Home equity			13,608,392				-				72,881				83,755				13,765,028
Automobile and other			3,065,717				-				7,764				-				3,073,481
			16,674,109				-				80,645				83,755				16,838,509
Total		$	393,481,569			$	16,649,965			$	7,128,159			$	225,229			$	417,484,922

 

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

 

In November 2015, a $5.8 million commercial business credit was reclassified from special mention to substandard until a collateral documentation issue is resolved. Management is currently assessing the credit and is working with the borrower to upgrade the loan before year end.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 September 30, 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		$	1,011,923			$	937,957			$	-			$	551,510			$	467,191			$	-
Multi-family			1,500,862				1,018,384				-				1,823,257				1,340,779				-
Commercial			1,580,641				1,580,641				-				768,533				768,533				-
Construction and land			192,079				192,079				-				3,412,264				1,639,030				-
			4,285,505				3,729,061				-				6,555,564				4,215,533				-
Commercial business			-				-				-				215,350				25,095				-
Consumer:
Home equity			53,387				53,387				-				55,550				55,550				-
Subtotal		$	4,338,892			$	3,782,448			$	-			$	6,826,464			$	4,296,178			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	260,911			$	260,911			$	120,411			$	851,010			$	799,526			$	91,688
Commercial			1,137,835				994,437				133,900				1,691,064				1,498,829				155,863
			1,398,746				1,255,348				254,311				2,542,074				2,298,355				247,551
Commercial business			536,956				536,956				301,520				115,446				115,446				115,446
Consumer:
Home equity			92,145				92,145				47,937				9,902				9,902				9,902
Automobile and other			1,970				1,970				1,970				-				-				-
			94,115				94,115				49,907				9,902				9,902				9,902
Subtotal			2,029,817				1,886,419				605,738				2,667,422				2,423,703				372,899
Total		$	6,368,709			$	5,668,867			$	605,738			$	9,493,886			$	6,719,881			$	372,899

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

		For the three months ended September 30, 2015												For the three months ended September 30, 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		$	825,423			$	1,764			$	-			$	508,560			$	763			$	-
Multi-family			1,029,746				-				-				1,842,099				30				-
Commercial			1,673,928				18,377				-				909,202				-				-
Construction and land			194,634				2,203				-				1,001,091				-				-
			3,723,731				22,344				-				4,260,952				793				-
Commercial business			-				-				-				677,727				-				-
Consumer:
Home equity			53,613				259				-				114,922				264				-
Subtotal		$	3,777,344			$	22,603			$	-			$	5,053,601			$	1,057			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	365,919			$	3,074			$	-			$	677,011			$	5,945			$	-
Multi-family			-				-				-				-				-				-
Commercial			902,038				-				-				1,318,324				4,481				-
Construction and land			-				-				-				106,123				2,430				-
			1,267,957				3,074				-				2,101,458				12,856				-
Commercial business			402,026				7,472				-				121,912				2,465				-
Consumer:
Home equity			92,341				-				-				-				-				-
Automobile and other			985				4								-				-				-
			93,326				4				-				-				-				-
Subtotal			1,763,309				10,550				-				2,223,370				15,321				-
Total		$	5,540,653			$	33,153			$	-			$	7,276,971			$	16,378			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

		For the nine months ended September 30, 2015												For the nine months ended September 30, 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		$	726,160			$	5,183			$	-			$	742,155			$	1,726			$	-
Multi-family			1,154,890				-				-				1,499,240				30				-
Commercial			1,223,230				32,519				-				863,767				7,709				-
Construction and land			884,943				6,706				-				826,652				-				-
			3,989,223				44,408				-				3,931,814				9,465				-
Commercial business			6,274				-				-				338,864				-				-
Consumer:
Home equity			54,347				772				-				125,947				838				-
Automobile and other			-				-				-				-				-				-
			54,347				772				-				125,947				838				-
Subtotal		$	4,049,844			$	45,180			$	-			$	4,396,625			$	10,303			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	537,791			$	15,200			$	-			$	673,152			$	5,945			$	-
Multi-family			-				-				-				414,444				-				-
Commercial			1,030,908				8,532				-				1,285,412				7,667				-
Construction and land			-				-				-				285,013				2,430				-
			1,568,699				23,732				-				2,658,021				16,042				-
Commercial business			257,701				13,015				-				125,867				7,190				-
Consumer:
Home equity			51,121				115				-				7,512				-				-
Automobile and other			492				4				-				-				-				-
			51,613				119				-				7,512				-				-
Subtotal			1,878,013				36,866				-				2,791,400				23,232				-
Total		$	5,927,857			$	82,046			$	-			$	7,188,025			$	33,535			$	-

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

Troubled Debt Restructurings:

 

The Company had allocations of $541,035 of specific reserves on $4,166,926 of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 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 September 30, 2015 or December 31, 2014.

 

During the three months ended September 30, 2015, there were no loans modified as troubled debt restructurings. During the nine months ended September 30, 2015, three loans totaling $1,163,970 were modified as troubled debt restructurings. The modifications included payment and maturity changes not available in the market.

 

The following tables presents loans, by class, modified as troubled debt restructurings that occurred during the nine months ended September 30, 2015, and during the three and nine months ended September 30, 2014:

 

Nine months ended September 30, 2015
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
Commercial			2			$	1,001,803			$	1,001,803
Commercial business			1				162,167				162,167
Total			3			$	1,163,970			$	1,163,970

 

The troubled debt restructurings described above resulted in a net increase in the allowance for loan losses of $103,558 during the nine months ended September 30, 2015. There was no change in the allowance for loan losses related to these troubled debt restructurings during the three months ended September 30, 2015. There were no charge offs during the three and nine months ended September 30, 2015.

 

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

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 3 - LOANS (Continued)

 

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2015.

 

There were four loans classified as a troubled debt restructuring for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2014. The loans were categorized as one-to-four family and the total recorded investment was $95,804. These troubled debt restructurings that subsequently defaulted resulted in a net decrease in the allowance for loan losses of $2,340 and resulted in charge-offs of $5,327 during the nine months ended September 30, 2014.

 

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

 

The recorded investment in consumer loans collateralized by residential real estate property that was in the process of foreclosure was not material as of September 30, 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 2015, at our annual impairment assessment date of September 30, our analysis indicated that no impairment existed.

 

NOTE 5 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase are shown below.

 

		September 30, 2015
		Remaining Contractual Maturity of the Agreements
		Overnight and Continuous				Up to 30 days				30 - 90 days				Greater than 90 days				Total
Repurchase agreements and repurchase-to-maturity transactions		$	12,040,148			$	-			$	-			$	-			$	12,040,148
Gross amount of recognized liabilities for repurchase agreements in Consolidated Balance Sheet																		$	12,040,148

 

		December 31, 2014
		Remaining Contractual Maturity of the Agreements
		Overnight and Continuous				Up to 30 days				30 - 90 days				Greater than 90 days				Total
Repurchase agreements and repurchase-to-maturity transactions		$	11,848,266			$	-			$	-			$	-			$	11,848,266
Gross amount of recognized liabilities for repurchase agreements in Consolidated Balance Sheet																		$	11,848,266

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 5 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)

 

Securities sold under agreements to repurchase were secured by securities with an approximate carrying amount of $27,302,000 and $32,639,000 at September 30, 2015 and December 31, 2014, respectively. The carrying amount at September 30, 2015 was comprised of $11,080,000 in securities issued by U.S. government agencies, $8,959,000 in state and municipal securities, and $7,263,000 in mortgage-backed securities. The carrying amount at December 31, 2014 was comprised of $14,352,000 in securities issued by U.S. government agencies, $10,553,000 in state and municipal securities, and $7,734,000 in mortgage-backed securities. Also included in total borrowings at September 30, 2015 and December 31, 2014 were FHLB advances of $17,494,000 and $2,488,000, respectively.

 

Given that the value of the securities that are pledged fluctuate due to market conditions, the Company has no control over the market value. If the market value of the securities pledged falls below the repurchase price, the Company is obligated to promptly transfer additional securities, per the terms of the agreements to repurchase.

 

NOTE 6 – EARNINGS PER SHARE

 

Basic and diluted earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Net income		$	864,165			$	1,328,027			$	3,547,899			$	2,814,989
Basic potential common shares:
Basic weighted average shares outstanding			7,006,742				7,007,283				7,006,995				7,007,283
Dilutive potential common shares			-				-				-				-
Diluted weighted average shares outstanding			7,006,742				7,007,283				7,006,995				7,007,283
Basic and diluted earnings per share		$	0.12			$	0.19			$	0.51			$	0.40

 

NOTE 7 - 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.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 7 - FAIR VALUE MEASUREMENTS (Continued)

 

·

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.

 

Securities: The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. For these investments, the pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. They also use model processes, such as the Option Adjusted Spread model to assess interest rate impact and develop prepayment scenarios. In the case of municipal securities, information on the Bloomberg terminal such as credit ratings, credit support, and call features are used to set the matrix values for the issues, which will be used to determine the yields from which the market values are calculated each month. Because they are not price quote valuations, the pricing methods are considered Level 2 inputs. At this time all of the Company’s securities fall within the Level 2 hierarchy for pricing. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company currently has no securities classified within Level 3. During the nine months ended September 30, 2015, there were no transfers between Level 1 and Level 2. The valuation methodology was consistent for the nine months ended September 30, 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

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 7 - FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a recurring basis segregated by fair value hierarchy level during the periods ended September 30, 2015 and December 31, 2014 are summarized below:

 

 

		Fair Value Measurements at September 30, 2015 Using:
		Quoted Prices
		in Active								Significant
		Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Securities:
U.S. government agency obligations		$	-			$	28,298,487			$	-			$	28,298,487
State and municipal securities			-				45,876,279				-				45,876,279
Other securities			-				3,501				-				3,501
Mortgage-backed: residential			-				30,661,385				-				30,661,385
Total securities available for sale		$	-			$	104,839,652			$	-			$	104,839,652

 

		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			-				3,501				-				3,501
Mortgage-backed: residential			-				32,778,977				-				32,778,977
Total securities available for sale		$	-			$	104,225,692			$	-			$	104,225,692

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 7 - FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a nonrecurring basis by fair value hierarchy level during the periods ended September 30, 2015 and December 31, 2014 are summarized below:

 

		Fair Value Measurements at September 30, 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
Foreclosed assets:
Real estate:
Commercial		$	-			$	-			$	19,000			$	19,000
Construction and land			-				-				604,500			$	604,500
Total foreclosed assets		$	-			$	-			$	623,500			$	623,500
Impaired loans:
Real estate loans:
One-to-four family		$	-			$	-			$	140,500			$	140,500
Commercial			-				-				860,537				860,537
			-				-				1,001,037				1,001,037
Commercial business			-				-				235,436				235,436
Consumer:
Home equity			-				-				44,208				44,208
Total impaired loans		$	-			$	-			$	1,280,681			$	1,280,681

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 7 - FAIR VALUE MEASUREMENTS (Continued)

 

		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

 

Foreclosed assets are collateral dependent and are recorded at the fair value less costs to sell and may be revalued on a nonrecurring basis. Foreclosed assets measured at fair value less costs to sell on a nonrecurring basis at September 30, 2015, had a net carrying amount of $623,500, which was made up of the outstanding balance of $1,637,378 net of cumulative write-downs of $1,013,878, which included $355,500 of write-downs that occurred during the nine months ended September 30, 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 $1,886,419, with a valuation allowance of $605,738 at September 30, 2015, resulting in a net increase in provision for loan losses of $232,839 for the nine months ended September 30, 2015. At December 31, 2014, impaired loans had a principal balance of $2,423,703 with a valuation allowance of $372,899.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 7 - FAIR VALUE MEASUREMENTS (Continued)

 

The following table presents quantitative information about Level 3 fair value measurements for significant categories of financial instruments measured at fair value on a non-recurring basis at September 30, 2015:

 

		Fair Value				Valuation Techniques		Unobservable Inputs		Range				Weighted Average
Foreclosed assets:
Real estate:
Construction and land		$	604,500			Sales Comparison		Adjustment for difference between comparable sales			-29% to 5	%			-8.9	%
Impaired loans:
Real estate loans:
One-to-four family		$	140,500			Sales Comparison		Adjustment for difference between comparable sales			-19% to -7	%			-13.0	%
Commercial			594,903			Sales Comparison		Adjustment for difference between comparable sales			-33% to 16	%			-7.8	%
Commercial			265,634			Income Approach		Investment Capitalization Rates			9.0	%			9.0	%
Commercial business			192,596			Fair Value of Collateral		Discount for type of business asssets			0% to 10	%			7.0	%

 

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

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

FASB ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. Fair value is determined under the framework established by ASC Topic 820, Fair Value Measurement and Disclosures. ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

 

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values given the short-term nature and active market for U.S. currency and are classified as Level 1.

 

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

 

Federal Home Loan Bank Stock: The Company is required to maintain these equity securities as a member of the Federal Home Loan Bank of Chicago (“FHLB”) and in amounts as required by this institution. These equity securities are "restricted" in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable securities and their fair value is not readily available.

 

Federal Reserve Bank Stock: The Company is required to maintain these equity securities as a member of the Federal Reserve Bank and in amounts as required by this institution. These equity securities are "restricted" in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable securities and their fair value is not readily available.

 

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segmented by type such as real estate, commercial business, and consumer loans. Each loan segment is further segregated into fixed and adjustable rate interest terms and by performing and non-performing classifications. The fair value of fixed rate loans is estimated by either observable market prices or by discounting future cash flows using discount rates that reflect the Company’s current pricing for loans with similar characteristics, such as loan type, pricing and remaining maturity resulting in a Level 3 classification. Impaired loans that have no specific reserve are classified as Level 3. Impaired loans that have been written down to the fair value of the corresponding collateral, less estimated costs to sell, are not included in this table as those amounts were presented previously. The fair value computed is not necessarily an exit price.

 

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

 

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

 

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified as Level 1. The carrying amounts for interest-bearing money market and savings accounts approximate their fair values at the reporting date and are classified as Level 1. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

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

 

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

 

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

 

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

 

The following information presents estimated fair values of the Company’s financial instruments as of September 30, 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 September 30, 2015 Using:
						Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Carrying Amount				(Level 1)				(Level 2)				(Level 3)				Fair Value
Financial assets:
Cash and cash equivalents		$	44,225,887			$	44,225,887			$	-			$	-			$	44,225,887
Interest-earning time deposits			3,475,148				-				3,475,148				-				3,475,148
Federal Home Loan Bank stock			1,747,763				-				-				-				N/A
Federal Reserve Bank stock			1,676,700				-				-				-				N/A
Loans, net (excluding impaired loans at fair value)			410,530,413				-				-				416,960,005				416,960,005
Loans held for sale			697,625				-				697,625				-				697,625
Accrued interest receivable			1,901,154				-				594,742				1,306,412				1,901,154
Financial liabilities:
Non-interest bearing deposits			60,481,367				60,481,367				-				-				60,481,367
Interest-bearing deposits			438,762,367				306,298,058				133,222,402				-				439,520,460
Federal Home Loan Bank advances			17,493,550				-				17,548,608				-				17,548,608
Securities sold under agreements to repurchase			12,040,148				-				12,040,148				-				12,040,148
Subordinated debentures			4,000,000				-				4,000,000				-				4,000,000
Accrued interest payable			206,941				11,019				195,922				-				206,941

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

						Fair Value Measurements at December 31, 2014 Using:
						Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Carrying Amount				(Level 1)				(Level 2)				(Level 3)				Fair Value
Financial assets:
Cash and cash equivalents		$	49,066,462			$	49,066,462			$	-			$	-			$	49,066,462
Interest-earning time deposits			2,021,970				-				2,021,970				-				2,021,970
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

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables summarize the changes within each classification of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2015, and summarize the significant amounts reclassified out of each component of accumulated other comprehensive income:

 

Changes in Accumulated Other Comprehensive Income by Component
For the Three Months Ended September 30, 2015(1)
		Unrealized Gains and Losses on Available-for-Sale  Securities				Total
Accumulated Other Comprehensive Income at July 1, 2015		$	21,306			$	21,306
Other comprehensive income before reclassifications			541,842				541,842
Amount reclassified from accumulated other comprehensive income(2)			(6,601	)			(6,601	)
Net current-period other comprehensive income			535,241				535,241
Accumulated Other Comprehensive Income at September 30, 2015		$	556,547			$	556,547

 

(1)

All amounts are net of tax.

(2)

See table below for details about reclassifications.

 

Reclassifications out of Accumulated Other Comprehensive Income
For the Three Months Ended September 30, 2015
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	10,821			Gain on sale of securities
			(4,220	)		Tax expense
Total reclassifications for the period		$	6,601			Net of tax

 

Changes in Accumulated Other Comprehensive Income by Component
For the Nine Months Ended September 30, 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			365,817				365,817
Amount reclassified from accumulated other comprehensive income(2)			(6,601	)			(6,601	)
Net current-period other comprehensive income			359,216				359,216
Accumulated Other Comprehensive Income at September 30, 2015		$	556,547			$	556,547

 

(1)

All amounts are net of tax.

(2)

See table below for details about reclassifications.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

 

Reclassifications out of Accumulated Other Comprehensive Income
For the Nine Months Ended September 30, 2015
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	10,821			Gain on sale of securities
			(4,220	)		Tax expense
Total reclassifications for the period		$	6,601			Net of tax

 

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

 

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

 

(1)

All amounts are net of tax.

(2)

See table below for details about reclassifications.

 

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

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

 

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

 

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

 

(1)

All amounts are net of tax.

(2)

See table below for details about reclassifications.

 

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

 

NOTE 10 – SUBSEQUENT EVENTS

 

On October 27, 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 September 30, 2015. The dividend will be payable to stockholders of record as of November 20, 2015 and is expected to be paid on November 27, 2015.

 

 

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, adverse situations that may affect the borrower’s ability to repay, and estimated value of any underlying collateral. Management also 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 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 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 2015, 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 economic conditions, 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 bank 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. In addition, the Bank recently opened a loan production office in Clayton, Missouri. The Bank is the source of all of the Company’s operating 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.

 

One of our strategic initiatives is increasing our non-interest income. During the nine months ended September 30, 2015, we experienced an increase in service charges and fees of $70,000 compared to the same period in 2014. Additionally, in an effort to increase gains on the sale of loans, we added additional one-to-four family real estate products and will continue to focus on increasing the volume of mortgage loans originated and sold. During the nine months ended September 30, 2015 and 2014, we sold loans totaling $23.7 million and $13.5 million, respectively, and our gain on sale of loans increased to $646,000 for the nine-month period ended September 30, 2015 from $418,000 for the same period in 2014. Our total non-interest income increased to $2.0 million for the nine-month period ended September 30, 2015 from $1.6 million for the comparable period in 2014.

 

Our net income increased to $3.5 million for the nine months ended September 30, 2015 from $2.8 million for the same period in 2014. The increase was primarily a result of the increase in non-interest

 

 

income as referenced above, an increase in net interest income from interest recaptured from non-accrual loan payoffs, and 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. During the nine months ended September 30, 2014, we recorded a $250,000 credit provision for loan losses. Basic and diluted earnings per share were $0.51 for the nine months ended September 30, 2015 compared to $0.40 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 September 30, 2015 to December 31, 2014, while our Operating Results compare the three and nine months ended September 30, 2015 to the three and nine months ended September 30, 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes.

 

Financial Condition

 

Total Assets. Total assets increased to $614.3 million at September 30, 2015 from $607.6 million at December 31, 2014. The increase was primarily due to an increase in loans partially offset by lower balances of cash and cash equivalents, and a partial redemption of FHLB stock.

 

Cash and cash equivalents decreased to $44.2 million at September 30, 2015 from $49.1 million at December 31, 2014 primarily due to the partial disbursement of a non-customer special purpose deposit account and an increase in loans. This decrease was partially offset by a new advance from FHLB, and a partial redemption of FHLB stock.

 

FHLB stock decreased to $1.7 million at September 30, 2015 compared to $2.9 million at December 31, 2014. The Company elected to have $1.2 million of excess voluntary stock redeemed during the second quarter of 2015. The Company is required to hold FHLB stock in order to be an FHLB member bank.

 

Loans, net, increased to $411.8 million at September 30, 2015 from $400.9 million at December 31, 2014. The category with a significant increase was commercial real estate, which increased $20.1 million to $149.5 million at September 30, 2015 from $129.4 million at December 31, 2014. This increase was partially offset by decreases in the one-to-four family, and construction and land categories. One-to-four family loans decreased $5.7 million to $111.9 million at September 30, 2015 from $117.6 million at December 31, 2014. Construction and land loans decreased $14.2 million to $14.4 million at September 30, 2015 from $28.6 million at December 31, 2014.

 

Total Liabilities. Total liabilities increased to $534.5 million at September 30, 2015 from $530.5 million at December 31, 2014. The increase was primarily due to an increase in FHLB advances partially offset by a decrease in deposits.

 

Deposits decreased to $499.2 million at September 30, 2015 from $510.3 million at December 31, 2014. The decrease in deposits was primarily due to the partial disbursement of a non-customer special purpose account partially offset with normal fluctuations in business deposit accounts.

 

FHLB advances increased to $17.5 million at September 30, 2015 from $2.5 million at December 31, 2014 due to new short and long term advances as a result of the change in deposits and the anticipation of future disbursements of a non-customer special purpose account during the fourth quarter of 2015. We expect that the disbursement of the special purpose account to be fully complete by January 30, 2016.

 

Stockholders’ Equity. Stockholders’ equity increased to $79.8 million at September 30, 2015 from $77.1 million at December 31, 2014 primarily due to net income of $3.5 million, partially offset by the payment of cash dividends to the holders of our common stock in the amount of $1.3 million.

 

 

Asset Quality

 

The Company experienced a decline in non-performing assets as of September 30, 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:

 

		September 30,				December 31,
		2015				2014
Non-accrual loans(1)		$	3,325,472			$	4,676,760
Other impaired loans			2,343,395				2,043,121
Total non-performing and impaired loans			5,668,867				6,719,881
Foreclosed assets			3,121,564				3,887,587
Total non-performing assets		$	8,790,431			$	10,607,468

 

⁽¹⁾ The entire balance was also classified as impaired as of September 30, 2015 and December 31, 2014.

 

		September 30,				December 31,
		2015				2014
Non-performing assets to total assets			1.43	%			1.75	%
Non-performing and impaired loans to total loans			1.36				1.65
Allowance for loan losses to non-performing and impaired loans			104.27				82.76
Allowance for loan losses to total loans			1.41				1.37

 

Non-Performing and Impaired Loans and Other Non-Performing Assets. At September 30, 2015, our total non-performing and impaired loans and other non-performing assets decreased $1.8 million to $8.8 million compared to $10.6 million at December 31, 2014. At September 30, 2015, the Company’s non-accrual loans decreased to $3.3 million from $4.7 million at December 31, 2014. This decrease was primarily due to a $1.4 million loan that was refinanced at another financial institution.

 

At September 30, 2015, the Bank had one relationship classified as non-accrual with a balance of at least $1.0 million. The relationship was a $1.0 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, $1.3 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. 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. At September 30, 2015, the collateral on this loan was sufficient to cover the majority of the outstanding balance and sufficient allowances have been set aside for the remaining outstanding balance.

 

In addition to the non-accrual loan 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 evaluate them individually for our allowance for loan losses. At September 30, 2015, there were ten credits in this classification, with a total balance of $2.3 million. The largest loan in this classification at September 30, 2015 was a $721,000 credit for a special purpose facility. The borrower has been experiencing insufficient cash flow and the credit has been recently restructured to allow the borrower time to improve cash flow. The second largest credit is a $371,000 credit to a real estate investor that has experienced cash flow shortfalls. The loan was performing in accordance with the original terms at September 30, 2015. In comparison, there were seven loans that met this classification at December 31, 2014 with a total balance of $2.0 million.

 

 

The following table presents a summary of our past due loans as of September 30, 2015 and December 31, 2014:

 

		September 30,				December 31,
		2015				2014
Loans 30-59 Days Past Due		$	142,977			$	985,335
Loans 60-89 Days Past Due			652,782				192,060
Loans 90 or more Days Past Due			505,437				486,126
Total Past Due Loans		$	1,301,196			$	1,663,521

 

Past due balances decreased $362,000 to $1.3 million at September 30, 2015 from $1.7 million at December 31, 2014. The category with the largest decrease was the 30-59 day category which decreased $842,000. The 60-89 day category increased $461,000 due to one loan in the commercial real estate loan category, and the 90 or more days past due category increased $19,000. The 90 or more days past due category increased $238,000 from second quarter 2015 to third quarter 2015. This was due to a 1-4 family real estate loan being past due and waiting for renewal. The loan has since been renewed.

 

The following table presents a summary of our credit quality indicators as of September 30, 2015 and December 31, 2014:

 

		September 30,				December 31,
		2015				2014
Pass		$	393,481,569			$	382,487,061
Special Mention			16,649,965				15,479,552
Substandard			7,128,159				8,147,150
Doubtful			225,229				157,263
Total Loans		$	417,484,922			$	406,271,026

 

At September 30, 2015, loans classified as Special Mention increased $1.2 million from $15.5 million at December 31, 2014. This category also increased $8.7 million from the previous quarter ended June 30, 2015. The increase was a result of two loans being downgraded to this category. One of the loans is a $5.8 million credit that currently requires some additional collateral documentation. The remaining increase was due to a borrower currently experiencing tightened cash flow. The Bank is currently monitoring the financial statements and receivables of the borrower. Loans classified as Substandard decreased $1.0 million to $7.1 million at September 30, 2015 compared to $8.1 million at December 31, 2014.

 

In November 2015, the $5.8 million commercial business credit previously mentioned was reclassified from special mention to substandard until a collateral documentation issue is resolved. Management is currently assessing the credit and is working with the borrower to upgrade the loan before year end.

 

At September 30, 2015, the Bank had six properties classified as foreclosed assets valued at $3.1 million. The foreclosed asset balance declined $766,000 from December 31, 2014 due to three lot sales that occurred during the first quarter of 2015, and two lot sales that occurred during the second quarter of 2015, along with a house sale. During the third quarter of 2015, there were a total of five additional lot sales and a write-down of $344,000 on a residential development. The collateral on the remaining properties consists of farmland, two residential lot developments, a commercial development, and two single-family residences. All of these properties were transferred into foreclosed assets at 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 $864,000 and $1.3 million for the three months ended September 30, 2015 and 2014, respectively. The decrease in net income for the three months ended September 30, 2015 resulted primarily from no credit provision for loan losses, lower non-interest income, and higher non-interest expenses partially offset by lower income taxes. We recorded net income of $3.5 million and $2.8 million for the nine months ended September 30, 2015 and 2014, respectively. The increase in net income for the nine months ended September 30, 2015 resulted primarily from higher net interest income, a credit provision for loan losses, and higher non-interest income, partially offset by higher income taxes.

 

During the nine months ended September 30, 2015, yields on loans decreased slightly to 4.29% compared to 4.35% for the nine months ended September 30, 2014. This decrease, however, included an interest recovery of $250,000 from non-accrual loan payoffs during the 2015 period. Without this interest recovery, our yields on loans would have decreased further, to 4.21%, for the 2015 period (from the same period in 2014). The decline in yield was primarily due to longer-term assets re-pricing at lower current rates as well as competitive market forces driving down rates. 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 yields 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 decreased to $4.2 million for the three months ended September 30, 2015, from $4.3 million for the comparable period in 2014, primarily due to a decline in yield and a lower average balance in securities, partially offset by a $10.9 million increase in average outstanding loans. Net interest income increased to $13.0 million for the nine months ended September 30, 2015 from $12.5 million for the same period in 2014. This increase was primarily due to a $22.6 million increase in average outstanding loans for the nine-month period ended September 30, 2015 compared to the same period in 2014. Net average interest-earning assets were $88.0 million for the nine months ended September 30, 2015, compared to $79.9 million for the same period in 2014. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 118.96% for the nine months ended September 30, 2015 from 116.03% for the same period in 2014. Our interest rate spread increased to 3.07% for the nine months ended September 30, 2015, compared to 2.81% for the comparable period in 2014. Our net interest margin increased to 3.15% for the nine months ended September 30, 2015 compared to 2.88% 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 4.29% compared to cash levels yielding an average of 0.30%. The average rate earned on interest-earning assets increased by 26 basis points for the nine months ended September 30, 2015 to 3.58% from 3.32% for the same period in 2014, while the average rate paid on interest-bearing liabilities remained at 0.51% for these periods.

 

 

The following tables set forth the average balance sheets, average yields and cost of funds, and certain other information for the periods indicated. No tax-equivalent yield adjustments on loans or securities were made. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred loan fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and rates have been annualized.

 

		Three Months Ended September 30,												Three Months Ended September 30,
		2015												2014
		Average Outstanding Balance				Interest				Yield/ Rate				Average Outstanding Balance				Interest				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans, gross (1) (2)		$	404,767			$	4,225				4.14	%		$	393,859			$	4,274				4.31	%
Securities (1)			105,984				549				2.06	%			114,888				602				2.08	%
Federal Reserve Bank stock			1,677				26				6.15	%			804				13				6.41	%
Interest-earning balances from depository institutions			44,561				37				0.33	%			66,163				41				0.25	%
Total interest-earning assets			556,989				4,837				3.45	%			575,714				4,930				3.40	%
Non-interest-earning assets			52,766												57,437
Total assets		$	609,755											$	633,151
Interest-bearing liabilities:
Interest-bearing transaction		$	269,767			$	157				0.23	%		$	307,958			$	198				0.26	%
Savings deposits			30,371				13				0.17	%			28,533				13				0.18	%
Time deposits			131,867				379				1.14	%			127,825				340				1.06	%
Securities sold under agreements to repurchase			14,711				1				0.03	%			19,518				1				0.02	%
Federal Home Loan Bank advances			17,492				50				1.13	%			11,377				73				2.58	%
Subordinated debentures			4,000				23				2.28	%			4,000				22				2.18	%
Total interest-bearing liabilities			468,208				623				0.53	%			499,211				647				0.51	%
Non-interest-bearing liabilities			62,178												57,974
Total liabilities			530,386												557,185
Stockholders’ equity			79,369												75,966
Total liabilities and stockholders’ equity		$	609,755											$	633,151
Net interest income						$	4,214											$	4,283
Net interest rate spread (3)											2.92	%											2.89	%
Net interest-earning assets (4)		$	88,781											$	76,503
Net interest margin (5)											3.00	%											2.95	%
Ratio of interest-earning assets to interest-bearing liabilities											118.96	%											115.32	%

 

⁽¹⁾ Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.19% and 3.14% for the three months ended September 30, 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⁾ Interest on loans includes loan fees collected in the amount of $22,747 and $32,682 for the three months ended September 30, 2015 and 2014, respectively.

 

⁽³⁾ Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

 

⁽⁴⁾ Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

 

⁽⁵⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

 

 

		Nine Months Ended September 30,												Nine Months Ended September 30,
		2015												2014
		Average Outstanding Balance				Interest				Yield/ Rate				Average Outstanding Balance				Interest				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans, gross (1) (2) (3)		$	403,725			$	12,948				4.29	%		$	381,103			$	12,409				4.35	%
Securities (1)			106,027				1,660				2.09	%			115,049				1,794				2.08	%
Federal Reserve Bank stock			1,677				76				6.06	%			271				13				6.41	%
Interest-earning balances from depository institutions			40,821				93				0.30	%			81,871				154				0.25	%
Total interest-earning assets			552,250				14,777				3.58	%			578,294				14,370				3.32	%
Non-interest-earning assets			51,744												54,234
Total assets		$	603,994											$	632,528
Interest-bearing liabilities:
Interest-bearing transaction		$	274,977			$	491				0.24	%		$	306,233			$	545				0.24	%
Savings deposits			30,341				38				0.17	%			28,366				38				0.18	%
Time deposits			128,873				1,067				1.11	%			127,310				1,040				1.09	%
Securities sold under agreements to repurchase			15,409				3				0.03	%			19,378				5				0.03	%
Federal Home Loan Bank advances			10,622				116				1.46	%			13,104				223				2.28	%
Subordinated debentures			4,000				67				2.24	%			4,000				65				2.17	%
Total interest-bearing liabilities			464,222				1,782				0.51	%			498,391				1,916				0.51	%
Non-interest-bearing liabilities			60,946												59,186
Total liabilities			525,168												557,577
Stockholders’ equity			78,826												74,951
Total liabilities and stockholders’ equity		$	603,994											$	632,528
Net interest income						$	12,995											$	12,454
Net interest rate spread (4)											3.07	%											2.81	%
Net interest-earning assets (5)		$	88,028											$	79,903
Net interest margin (6)											3.15	%											2.88	%
Ratio of interest-earning assets to interest-bearing liabilities											118.96	%											116.03	%

 

⁽¹⁾ Yields on loans and securities have not been adjusted to a tax-equivalent basis. Net interest margin on a fully tax-equivalent basis would have been 3.33% and 3.05% for the nine months ended September 30, 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⁾ Interest on loans includes loan fees collected in the amount of $79,569 and $90,609 for the nine months ended September 30, 2015 and 2014, respectively.

 

⁽³⁾ Interest on loans includes $250,000 of interest recaptured from non-accrual loan payoffs for the nine months ended September 30, 2015.

 

⁽⁴⁾ Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

 

⁽⁵⁾ Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

 

⁽⁶⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

 

Interest and dividend income. The relative 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 decreased to $4.2 million for the three months ended September 30, 2015 from $4.3 million for the same period in 2014. This decrease was primarily due to a decline in yield, partially offset by a $10.9 million increase in average outstanding loans. Interest and fee income on loans increased to $12.9 million for the nine months ended September 30, 2015 from $12.4 million for the same period in

 

 

2014. This increase was primarily a result of a higher average balance of loans along with interest recaptured from non-accrual loan payoffs of $250,000. The average yield on loans decreased to 4.29% for the nine months ended September 30, 2015 from 4.35% for the comparable period in 2014. Without the interest recapture, the yield on loans would have been 4.21% instead of 4.29% for the nine months ended September 30, 2015. The average balance of loans was $403.7 million and $381.1 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Interest income on securities decreased to $549,000 for the three months ended September 30, 2015 from $602,000 for the same period in 2014. Interest income on securities decreased to $1.7 million for the nine months ended September 30, 2015 from $1.8 million for the comparable period in 2014. Interest income on securities decreased primarily due to a lower average balance of securities. The average balance of securities declined primarily due to a redeployment of funds to support an average increase in loans as securities matured. The average balance of securities was $106.0 million and $115.0 million for the nine months ended September 30, 2015 and 2014, respectively. The average yield on securities increased slightly to 2.09% for the nine months ended September 30, 2015 from 2.08% for the comparable period in 2014.

 

Dividend income on Federal Reserve Bank stock was $26,000 and $76,000 for the three and nine months ended September 30, 2015, respectively. The average balance of Federal Reserve Bank stock was $1.7 million for the nine months ended September 30, 2015. 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. Dividend income for the three and nine months ended September 30, 2014 was $13,000.

 

Interest on interest-earning deposits decreased to $38,000 for the three months ended September 30, 2015 from $41,000 for the same period in 2014. Interest on interest-earning deposits decreased significantly for the nine months ended September 30, 2015 to $93,000 from $154,000 due to a decrease in average balances for the nine months ended September 30, 2015 compared to the same periods in 2014. The average balance of interest-earning deposits was $40.8 million and $81.9 million for the nine months ended September 30, 2015 and 2014, respectively. The decrease was due to the redeployment of funds to support an average increase in loans, as well as a partial disbursement of a non-customer special purpose deposit account. The average yield on interest-earning deposits was 0.30% and 0.25% for the nine months ended September 30, 2015 and 2014, respectively.

 

Interest expense. Interest expense on deposits decreased to $550,000 for the three months ended September 30, 2015, from $552,000 for the comparable period in 2014. Interest expense on deposits decreased $26,000 remaining at $1.6 million for the nine months ended September 30, 2015 and 2014. The decrease in interest expense was primarily due to a decrease in the average balance of interest-bearing deposits. The average balance of interest-bearing deposits decreased to $464.2 million for the nine months ended September 30, 2015 from $498.4 million for the same period in 2014. This decrease in average balance was primarily due to a partial disbursement of a non-customer special purpose deposit account partially offset with normal fluctuations in business deposit accounts.

 

Interest expense on Federal Home Loan Bank advances decreased to $50,000 for the three months ended September 30, 2015 compared to $73,000 for the same period in 2014. Interest expense on Federal Home Loan Bank advances decreased to $116,000 for the nine months ended September 30, 2015 compared to $223,000 for the comparable period in 2014. The decrease in interest expense was due to a decrease in average balances and average rates paid. The average balance of Federal Home Loan Bank advances was $10.6 million and $13.1 million for the nine months ended September 30, 2015 and 2014, respectively. The average rate on Federal Home Loan Bank advances decreased to 1.46% for the nine months ended September 30, 2015 compared to 2.28% for the same period in 2014.

 

Provision for loan losses. For the three months ended September 30, 2015, the Bank recorded no provision expense or provision credit compared to a $250,000 credit provision for the three months ended September 30, 2014. A credit provision of $500,000 was recorded for the nine months ended September 30, 2015 compared to a credit provision of $250,000 for the nine months ended September 30, 2014. Management determined that the credit provisions were 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 September 30, 2015 and December 31, 2014, respectively. We received recoveries of $12,000 and $473,000 for the three months ended September 30, 2015 and 2014, respectively. There were no charge-offs during the three months ended September 30, 2015 or 2014. We received recoveries of $900,000 and $714,000 and recorded charge-offs of $51,000 and $264,000 for the nine months ended September 30, 2015 and 2014, respectively.

 

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. Our credit quality has improved, which has allowed us not to record a provision in the third quarter; however, we continue to review and make 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 in our market areas, the vacancy rates, occupancy rates, and absorption rates 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 decreased to $615,000 for the three months ended September 30, 2015, compared to $828,000 for the same period in 2014. For the three months ended September 30, 2015, non-interest income decreased primarily due to lower gains on the sale of securities and on the sale of loans, in addition to a loss on the sale of foreclosed assets compared to the same period in 2014. Non-interest income increased to $2.0 million for the nine months ended September 30, 2015, compared to $1.6 million for the same period in 2014. For the nine months ended September 30, 2015, non-interest income increased primarily due to increases in service fees on deposit accounts and other service charges and fees, an increase in gain on sale of loans, and from a reduction in loss on sale of foreclosed assets compared to the comparable period in 2014.

 

Service fees on deposit accounts increased to $130,000 for the three months ended September 30, 2015 from $129,000 for the same period in 2014. Service fees on deposit accounts increased to $360,000 for the nine months ended September 30, 2015 from $335,000 for the comparable period in 2014. These increases were due to higher non-sufficient fund income and treasury management fees during the three and nine months ended September 30, 2015.

 

Other service charges and fees increased to $120,000 for the three months ended September 30, 2015 from $112,000 for the comparable period in 2014. Other service charges and fees increased to $352,000 for the nine months ended September 30, 2015 from $306,000 for the same period in 2014. These increases were primarily due to higher visa interchange fee income and automated teller machine fees during the three and nine months ended September 30, 2015.

 

Gain on sale of securities decreased to $11,000 from $88,000 for the three and nine months ended September 30, 2015 and 2014, respectively. During the three and nine months ended September 30, 2015, we sold $1.6 million of securities compared to selling $2.7 million of securities during the same periods in 2014.

 

Gain on sale of loans totaled $170,000 and $206,000 for the three months ended September 30, 2015 and 2014, respectively. We sold loans totaling $6.0 million and $7.1 million during the three months ended September 30, 2015 and 2014, respectively. Gain on sale of loans totaled $646,000 and $418,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase for the nine months ended September 30, 2015 was due to a higher volume of loan sales compared to the same period in 2014.

 

 

For the nine months ended September 30, 2015 and 2014, we sold loans totaling $23.7 million and $13.5 million, respectively.

 

Gain (loss) on sale of foreclosed assets was a loss of $17,000 for the three months ended September 30, 2015 compared to a gain of $41,000 for the same period in 2014. For the nine months ended September 30, 2015, the loss was $15,000 compared to a loss of $157,000 for the comparable period in 2014. The loss for the nine months ended September 30, 2014 was primarily due to the sale of one significant property.

 

Non-interest expense. Non-interest expense increased to $3.7 million for the three months ended September 30, 2015 from $3.5 million for the same period in 2014. Non-interest expense increased to $10.6 million for the nine months ended September 30, 2015 from $10.5 million for the comparable period in 2014. These increases were primarily due to an increase in compensation and employee benefits expense and foreclosed asset related expenses, partially offset by declines in occupancy expense, professional fees, and FDIC insurance premiums.

 

Compensation and employee benefits increased to $1.9 million for the three months ended September 30, 2015 from $1.8 million for the same period in 2014. Compensation and employee benefits increased to $5.6 million for the nine months ended September 30, 2015 from $5.4 million for the comparable period in 2014. These increases were primarily due to the addition of a supplemental retirement plan effective July 1, 2014, and increased employee insurance expenses. Salary expense has also increased due to increased commission expense on production-based earners.

 

Occupancy expense decreased to $397,000 for the three months ended September 30, 2015 compared to $420,000 for the same period in 2014. Occupancy expense decreased to $1.2 million for the nine months ended September 30, 2015 compared to $1.3 million for the comparable period in 2014. These decreases were primarily due to less building repairs and maintenance, lower property taxes, and less rent expense in the 2015 period. During the 2014 period we also incurred office relocation expenses.

 

Professional fees decreased to $139,000 for the three months ended September 30, 2015 compared to $171,000 for the same period in 2014. Professional fees decreased to $401,000 for the nine months ended September 30, 2015 compared to $471,000 for the comparable period in 2014. These decreases were primarily due to declines in the areas of legal, audit and consulting expenses for the 2015 period compared to the same period in 2014.

 

FDIC insurance premiums decreased to $64,000 for the three months ended September 30, 2015 compared to $120,000 for the same period in 2014. FDIC insurance premiums decreased to $268,000 for the nine months ended September 30, 2015 compared to $357,000 for the comparable period in 2014. These decreases were primarily due to declines in the assessment base and rates paid for the 2015 periods.

 

Foreclosed asset related expenses increased to $390,000 for the three months ended September 30, 2015 from $63,000 for the comparable period in 2014. Foreclosed asset related expenses increased to $427,000 for the nine months ended September 30, 2015 from $320,000 for the comparable period in 2014. The increase for the three and nine months ended September 30, 2015 was primarily due to a $344,000 write-down on a foreclosed property.

 

Income taxes. Income tax expense decreased to $232,000 for the three months ended September 30, 2015 compared to $545,000 for the same period in 2014 primarily as a result of lower pre-tax income for the three months ended September 30, 2015 along with a lower effective tax rate. Income tax expense increased to $1.3 million for the nine months ended September 30, 2015 compared to $1.0 million for the same period in 2014 primarily due to higher pre-tax income for the nine months ended September 30, 2015 along with a slightly higher effective tax rate. The effective tax rate was 21.1% for the three months ended September 30, 2015 compared to 29.1% for the comparable period in 2014. The effective tax rate for the three months ended September 30, 2015 was lower primarily due to tax exempt income comprising a higher portion of total income, in addition to the state tax rate being lowered to 7.75% from the prior year rate of 9.5%. The effective tax rate was 26.9% for the nine months ended September 30, 2015 compared to 26.4% for the comparable period in 2014 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%.

 

Liquidity and Capital Resources

 

We maintain liquid assets at levels considered adequate to meet liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

 

Our primary sources of liquidity are deposits, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.

 

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At September 30, 2015 and December 31, 2014, $44.2 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 $10.3 million and $19.2 million for the nine months ended September 30, 2015 and 2014, respectively. Cash received from calls, maturities, and principal repayments of available-for-sale investment securities totaled $13.4 million and $28.7 million for the nine months ended September 30, 2015 and 2014, respectively. We purchased $15.6 million and $21.1 million of available-for-sale investment securities during the nine months ended September 30, 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 $11.1 million during the nine months ended September 30, 2015 compared to an increase of $23.9 million for the same period in 2014. The decrease in deposits was primarily due to the partial disbursement of a non-customer special purpose account partially offset with normal fluctuations in business deposit accounts.

 

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 $17.5 million and $2.5 million of advances from the FHLB at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, we had additional available credit of approximately $83.2 million. Additionally, we have the ability to purchase funds through our affiliation with Promontory Interfinancial Network if we require additional liquidity. At September 30, 2015, the funds authorized 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 September 30, 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.

 

 

The Bank’s actual capital amounts and ratios under Basel III as of September 30, 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 September 30, 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		$	70,083,000				15.71	%		$	20,075,000				4.50	%		$	28,997,000				6.50	%
Tier I Capital to Adjusted Total Assets			70,083,000				11.71	%			23,932,000				4.00	%			29,916,000				5.00	%
Tier I Capital to Risk Weighted Assets			70,083,000				15.71	%			23,932,000				6.00	%			35,688,000				8.00	%
Total Capital to Risk Weighted Assets			75,034,000				16.82	%			35,688,000				8.00	%			44,610,000				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 September 30, 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.

 

As of September 30, 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		$	67,791,000				15.19	%		$	20,086,000				4.50	%		NA		NA
Tier I Capital to Adjusted Total Assets			67,791,000				10.83	%			25,027,000				4.00	%		NA		NA
Tier I Capital to Risk Weighted Assets			67,791,000				15.19	%			26,781,000				6.00	%		NA		NA
Total Capital to Risk Weighted Assets			76,742,000				17.19	%			35,708,000				8.00	%		NA		NA

 

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	%		NA		NA
Tier I Capital to Risk Weighted Assets			65,256,000				15.70	%			16,630,000				4.00	%		NA		NA
Total Capital to Risk Weighted Assets			73,210,000				17.61	%			33,260,000				8.00	%		NA		NA

 

 

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 non-public bank holding companies with consolidated assets of less than $1 billion). The Bank, along with other community banking organizations, became subject to the Basel III Rules effective January 1, 2015. As of September 30, 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.

 

Off-Balance Sheet Arrangements

 

In the ordinary course of business, the Company is a party to credit-related financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, as described further below. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

 

Unfunded commitments under construction lines of credit for residential and multi-family properties are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

 

 

A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at September 30, 2015 follows:

 

														Range of Rates
		Variable Rate				Fixed Rate				Total				on Fixed Rate
		Commitments				Commitments				Commitments				Commitments
Commitments to extend credit		$	39,441,069			$	54,077,672			$	93,518,741				2.29% - 18.00	%
Standby letters of credit			1,726,114				84,015				1,810,129				4.50% - 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 September 30, 2015. As a part of the agreement, the Bank had a maximum credit enhancement of $388,000 at September 30, 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 ratio; and (ii) offering a variety of adjustable rate loan products, including adjustable rate one-to-four family, multi-family and non-residential mortgage loans, short-term consumer loans, and a variety of adjustable-rate commercial loans. By maintaining a high equity-to-assets ratio and by investing in adjustable-rate and short-term assets, we are better positioned to react to increases in market interest rates. However, maintaining high equity balances reduces the return-on-equity ratio, and investments in shorter-term assets generally bear lower yields than longer-term investments.

 

First Clover Leaf utilized an independent third party to analyze interest rate risk sensitivity as of June 30, 2015. The model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value (“NPV”). The model estimates the economic value of each type of asset, liability and off-balance-sheet contract under the assumption of instantaneous rate increases of up to 400 basis points or decreases of 100 points in 100 basis point increments. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest” column.

 

The tables below set forth, as of June 30, 2015 and 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)

 

June 30, 2015
		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		$	71,429			$	(21,761	)			(23	)%			13.51	%		(211) bp
+300 bp			79,111				(14,079	)			(15	)			14.53			(109) bp
+200 bp			85,430				(7,760	)			(8	)			15.20			(42) bp
+100 bp			90,449				(2,741	)			(3	)			15.62			0  bp
0 bp			93,190				-				-				15.62			0  bp
-100 bp			92,977				(213	)			-				15.31			(31) bp

 

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 2015 table above indicates that at June 30, 2015 in the event of a 100 basis point decrease in interest rates, we would experience a slight decrease in the net portfolio value. In the event of a 400 basis point increase in interest rates, we would experience a 23% decrease in the net portfolio value. Management does not believe that the Company’s primary market risk exposures at September 30, 2015, and how those exposures were managed during the three months ended September 30, 2015, have changed materially when compared to the immediately preceding quarter ended June 30, 2015. However, the Company’s primary market risk exposure has not yet been quantified at September 30, 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 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 September 30, 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)

The following table presents for the periods indicated a summary of the purchases made by or on behalf of the Company of shares of its common stock.

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs(1)
July 1 - 31, 2015			-			$	-				-				44,634
August 1 - 31, 2015			-			$	-				-				44,634
September 1 - 30, 2015			1,000			$	9.35				1,000				349,344
Total			1,000								1,000

 

(1)

The Company’s board of directors approved a stock repurchase plan (the “Plan”) on November 12, 2008 for the repurchase of up to 924,480 shares of common stock, and on December 12, 2008, it increased the number of shares that may be repurchased pursuant to the Plan by an additional 382,641 shares. Additional increases of 25,000 shares to the Plan were made on April 27, 2010, August 24, 2010, November 23, 2010, June 28, 2011, and November 27, 2012. Additional increases of 100,000 shares to the Plan were made on September 25, 2012 and January 22, 2013. Additional increases of 150,000 shares were made on August 23, 2011 and February 26, 2013. An additional increase of 250,000 shares was made on July 23, 2013. The Plan has no expiration date. Effective September 3, 2015, the Company’s board of directors approved a new stock repurchase plan for the repurchase of up to 350,344 shares of common stock. The repurchase plan has no expiration date and replaces the Plan that was originally approved in 2008, and amended most recently in 2013.

 

Item 3. Defaults upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

(a)   Exhibits.

10.1:

First Amendment of First Clover Leaf Bank Employment Agreement with P. David Kuhl (1)

	31.1:	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2:	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32:	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101:	The following financial statements as of and for the quarter ended September 30, 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.

 

(1)

Incorporated by reference to the Current Report on Form 8-K of First Clover Leaf Financial Corp., filed with the Securities and Exchange Commission on September 8, 2015.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

			FIRST CLOVER LEAF FINANCIAL CORP.
			(Registrant)
DATE:	November 12, 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