EXHIBIT 13

 

PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS

 

 

Exhibit 13

PORTIONS OF 2014 ANNUAL REPORT TO STOCKHOLDERS

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF FIRST CLOVER LEAF FINANCIAL CORP.

 

The following information is derived from the audited consolidated financial statements of First Clover Leaf Financial Corp. For additional information, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of First Clover Leaf Financial Corp. and related notes included elsewhere in this Annual Report.

 

		At December 31,
		2014				2013				2012				2011				2010
		(Dollars in thousands)
Selected Financial Condition Data:
Total assets		$	607,615			$	622,044			$	600,769			$	562,725			$	574,970
Loans, net			400,904				372,569				394,869				387,635				387,568
Cash and cash equivalents			49,066				84,694				71,415				39,361				66,253
Securities available for sale			104,471				117,777				88,280				85,575				78,475
Federal Home Loan Bank stock			2,888				2,888				2,888				6,306				6,306
Federal Reserve Bank stock			1,677				-				-				-				-
Deposits			510,307				502,540				460,374				414,758				447,483
Securities sold under agreements to repurchase			11,848				26,766				34,495				36,874				21,457
Subordinated debentures			4,000				4,000				4,000				4,000				3,974
Federal Home Loan Bank advances			2,488				13,980				21,967				26,944				21,924
Stockholders' equity (1)			77,130				73,096				78,256				77,714				77,333

 

		Years Ended December 31,
		2014				2013				2012				2011				2010
		(Dollars in thousands, except per share data)
Selected Operating Data:
Total interest income		$	19,317			$	19,822			$	21,653			$	23,728			$	25,441
Total interest expense			2,516				3,316				4,468				6,453				8,936
Net interest income			16,801				16,506				17,185				17,275				16,505
Provision (credit) for loan losses			(250)				485				1,550				5,292				2,573
Net interest income after provision for loan losses			17,051				16,021				15,635				11,983				13,932
Other income			2,227				2,169				2,969				2,089				2,246
Other expense			14,091				13,448				12,494				11,742				10,400
Income before income taxes			5,187				4,742				6,110				2,330				5,778
Income tax expense			1,361				1,386				2,045				435				1,972
Net income		$	3,826			$	3,356			$	4,065			$	1,895			$	3,806
Basic and diluted earnings per share		$	0.55			$	0.46			$	0.53			$	0.24			$	0.49

  

(1)

Stockholders’ equity is restricted due to capital requirements imposed under federal capital regulations.

 

 

		At or For the Years Ended December 31,
		2014				2013				2012				2011				2010
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)			0.61	%			0.55	%			0.74	%			0.33	%			0.65	%
Return on equity (ratio of net income to average stockholders' equity)			5.07				4.40				5.17				2.41				4.88
Average interest rate spread (1)			2.86				2.85				3.22				3.09				2.77
Dividend payout ratio (2)			43.64				52.17				45.28				100.00				48.98
Dividends per share			0.24				0.24				0.24				0.24				0.24
Net interest margin (3)			2.93				2.95				3.39				3.29				3.04
Efficiency ratio (4)			74.05				72.01				61.99				60.64				55.46
Non-interest expense to average total assets			2.31				2.20				2.26				2.06				1.79
Average interest-earning assets to average interest-bearing liabilities			115.97				117.43				119.23				116.14				116.45
Asset Quality Ratios:
Non-performing assets and impaired loans to total assets			1.75	%			2.06	%			3.03	%			4.52	%			4.08	%
Non-performing and impaired loans to total loans			1.65				1.94				2.96				5.05				5.06
Net (recoveries) charge-offs to average loans outstanding			(0.06)				0.22				0.85				0.82				0.78
Allowance for loan losses to non-performing and impaired loans			82.76				77.28				50.89				39.76				29.19
Allowance for loan losses to total loans			1.37				1.50				1.51				2.01				1.48
Capital Ratios:
Stockholders' equity to total assets at end of year			12.69	%			11.75	%			13.03	%			13.81	%			13.45	%
Average stockholders' equity to average assets			12.00				12.48				14.23				13.81				13.43
Tier 1 (core) capital ratio			11.22				10.75				11.45				11.33				10.50
Tier 1 risk-based capital ratio (5)			16.36				16.63				17.89				16.80				15.69
Total risk-based capital ratio (6)			17.31				17.53				18.82				17.62				16.22
Other Data:
Number of full service offices			6				5				4				4				4

 

(1)

The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.

(2)

Dividends declared per share divided by diluted earnings per share.

(3)

The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(4)

The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

(5)

Tier 1 risk-based capital ratio represents Tier 1 capital of First Clover Leaf Bank divided by its risk-weighted assets as defined in federal regulations on required capital.

(6)

Total risk-based capital ratio represents total capital divided by risk-weighted assets.

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion and analysis reflects First Clover Leaf Financial Corp.’s consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from our audited consolidated financial statements, which appear elsewhere in this Annual Report. You should read the information in this section in conjunction with the business and financial information regarding First Clover Leaf Financial Corp. (“First Clover Leaf”) provided elsewhere in this annual report.

 

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 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 and the Public Company Accounting Oversight Board; (viii) changes resulting from shutdowns of the federal government; (ix) changes in our organization, compensation and benefit plans; (x) changes in our financial condition or results of operations that reduce capital available to pay dividends; and (xi) changes in the financial condition or future prospects of issuers of securities that we own, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements, which only speak as of the date made.

 

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

Critical Accounting Policies

 

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

 

Allowance for loan losses. The allowance for loan losses is a valuation account that reflects our evaluation of the probable incurred credit losses in our loan portfolio. We maintain the allowance through provisions for loan losses that we charge against income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely.

 

Our evaluation of risk in maintaining the allowance for loan losses includes the review of all loans on which the collectibility of principal may not be reasonably assured. We consider the following factors as part of this evaluation: our historical loan loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying

 

 

collateral, and prevailing economic conditions. Management evaluates the total balance of the allowance for loan losses based on several factors that are not loan specific but are reflective of the probable incurred losses in the loan portfolio, including management’s periodic review of loan collectibility in light of historical experience, the nature and volume of the loan portfolio, prevailing economic conditions such as housing trends, inflation rates and unemployment rates, and geographic concentrations of loans within First Clover Leaf 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 and Other Intangible Assets. In the past, First Clover Leaf has been involved in acquisitions accounted for under the purchase method of accounting.  Under the purchase method, First Clover Leaf was required to allocate the cost of an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition.  The excess cost over the net assets acquired represents goodwill, which is not subject to periodic amortization.

 

Customer relationship intangibles are required to be amortized over their estimated useful lives.  The method of amortization reflects the pattern in which the economic benefits of these intangible assets are estimated to be consumed or otherwise used up.  Our customer relationship intangibles are being amortized over 9.7 years using the double declining balance method. Since First Clover Leaf’s acquired customer relationships are subject to routine customer attrition, the relationships are more likely to produce greater benefits in the near-term than in the long-term, which typically supports the use of an accelerated method of amortization for the related intangible assets.  Management is required to evaluate the useful life of customer relationship intangibles to determine if events or circumstances warrant a change in the estimated life.  Should management determine the estimated life of any intangible asset is shorter than originally estimated, First Clover Leaf would adjust the amortization of that asset, which could increase future amortization expense.

 

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired.  Goodwill recorded by First Clover Leaf in connection with its acquisitions relates to the inherent value in the businesses acquired and this value is dependent upon First Clover Leaf’s ability to provide quality, cost effective services in a competitive market place.  The continued value of recorded goodwill is impacted by the value of our stock and continued profitability of the organization. In the event that the stock price experiences significant declines or the operations of the company lack profitability an impairment of goodwill may need to be recognized. Any impairment recognized would adversely impact earnings in the period in which it is recognized.

 

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. At our annual impairment assessment date of September 30, 2014, our analysis indicated that no additional impairment existed. Future events, such as adverse changes to First Clover Leaf’s business or changes in the economic market, could cause management to conclude that impairment indicators exist and require management to re-evaluate goodwill.  Should such re-evaluation determine goodwill is impaired; the resulting impairment loss

 

 

recognized could have a material, adverse impact on First Clover Leaf’s financial condition and results of operations. In accordance with current accounting guidance, management has determined that the Company has only one reporting unit for purposes of evaluating goodwill.

 

Overview

 

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

 

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

 

While much internal focus has been directed toward organic growth in 2014, our commitment to credit quality remains strong. Our success in growing loans was well-balanced across our footprint, as we serviced the funding needs of local businesses that support our communities. Moreover, as our loan portfolio expanded, our credit metrics continued to strengthen. Our non-performing and impaired loans and other non-performing assets declined to $10.6 million at December 31, 2014, compared to $12.8 million at December 31, 2013. At December 31, 2014, the Company’s non-accrual loans decreased $1.7 million to $4.7 million compared to $6.4 million at December 31, 2013.

 

First Clover Leaf had net income of $3.8 million for the year ended December 31, 2014 compared to net income of $3.4 million for the same period in 2013. We believe our emphasis on maximizing stockholder value was evidenced in 2014 by the upward momentum in earnings per share. Basic and diluted earnings per share were $0.55 for the year ended December 31, 2014 compared to $0.46 for the year ended December 31, 2013.

 

The following discussion and analysis of our Financial Condition and Operating Results provides a comparison of our results for the years 2014 and 2013. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes.

 

Comparison of Financial Condition at December 31, 2014 and December 31, 2013

 

Total Assets. Total assets decreased to $607.6 million at December 31, 2014 from $622.0 million at December 31, 2013. The decrease was primarily due to lower balances of cash and cash equivalents, securities available for sale, and foreclosed assets, partially offset by an increase in loans and bank-owned life insurance.

 

Cash and cash equivalents decreased to $49.1 million at December 31, 2014 from $84.7 million at December 31, 2013 primarily due to a decrease of $39.9 million in federal funds sold. The decrease in federal funds sold was primarily due to the redeployment of funds to address an increase in loans, the purchase of bank-owned life insurance, the repayment of advances, and a reduction in securities sold under agreements to repurchase, partially offset by a decrease in securities available for sale, a reduction in foreclosed assets, and an increase in deposits.

 

Securities available for sale decreased to $104.5 million at December 31, 2014 compared to $117.8 million at December 31, 2013. The decrease was due primarily to calls, maturities and principal repayments of $37.0 million and sales of $5.3 million partially offset by purchases of $26.7 million. Overall, our state and

 

 

municipal securities increased $6.8 million, U.S. treasury securities decreased $5.0 million, and U.S. government agency securities decreased $15.0 million.

 

Loans, net, increased to $400.9 million at December 31, 2014 from $372.6 million at December 31, 2013, as we experienced a solid level of originations with both new and existing customers. The categories with significant increases were commercial real estate and construction and land, as those were the opportunities that were most prominent in our market during the past year. Commercial real estate loans increased $8.6 million to $129.4 million at December 31, 2014 from $120.8 million at December 31, 2013. Construction and land loans increased $15.8 million to $28.6 million at December 31, 2014 from $12.8 million at December 31, 2013.

 

Bank-owned life insurance increased to $14.9 million at December 31, 2014 from $8.5 million at December 31, 2013 primarily due to an additional purchase of $6.0 million to offset some of the expenses of our existing employee benefit plans. Foreclosed assets decreased to $3.9 million at December 31, 2014 compared to $5.6 million at December 31, 2013. The decrease was primarily due to the sale and write-down of foreclosed assets.

 

Total Liabilities. Total liabilities decreased to $530.5 million at December 31, 2014 from $548.9 million at December 31, 2013. Deposits increased to $510.3 million at December 31, 2014 from $502.5 million at December 31, 2013. The increase in deposits was primarily due to an increase of $12.9 million in our noninterest-bearing transaction accounts which grew primarily from the transfer of customer deposits in the securities sold under agreements to repurchase (“Repo Sweeps”) accounts. This increase was partially offset by a decrease of $4.1 million in our savings accounts.

 

Federal Home Loan Bank advances at December 31, 2014 were $2.5 million compared to $14.0 million at December 31, 2013. The decrease was due to repayments of $11.5 million. These advances were not renewed at the time of maturity due to the liquidity position of First Clover Leaf Bank, which had adequate cash to operate without the borrowings.

 

Repo Sweeps decreased $14.9 million to $11.8 million at December 31, 2014 from $26.8 million at December 31, 2013. This decrease was due primarily to some of these accounts being transitioned to noninterest-bearing transaction accounts.

 

Stockholders’ Equity. Stockholders’ equity increased to $77.1 million at December 31, 2014 from $73.1 million at December 31, 2013 primarily due to net income of $3.8 million, and other comprehensive income on securities of $1.9 million, partially offset by the payment of cash dividends to the holders of our common stock in the amount of $1.7 million.

 

 

Comparison of Operating Results for the Years Ended December 31, 2014 and 2013.

 

General. We recorded net income of $3.8 million and $3.4 million for the years ended December 31, 2014 and 2013, respectively. The increase in net income for the year ended December 31, 2014 resulted primarily from higher net interest income, a credit provision for loan losses, and lower income taxes partially offset by higher non-interest expenses.

 

During 2014, yields on loans continued to decline primarily due to assets re-pricing in the current rate environment. 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. The Company’s yield on earning assets and cost of funds are largely dependent on the interest rate environment. While the decline in industry interest rates has slowed, competitive and market forces continue to pressure the yield on our earning assets.

 

Net interest income. Net interest income increased to $16.8 million for the year ended December 31, 2014 from $16.5 million for the year ended December 31, 2013. Net average interest-earning assets were $79.0 million for 2014, compared to $82.9 million for 2013. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 115.97% for 2014 from 117.43% for 2013. Our interest rate spread and net interest margin remained consistent in 2014 with the prior year 2013. The average rate earned on interest-earning assets decreased by 18 basis points during 2014 to 3.37% from 3.55% during 2013, while the average rate paid on interest-bearing liabilities decreased by 19 basis points during 2014 to 0.51% from 0.70% during 2013.

 

 

The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense.

 

		Years Ended December 31,
		2014												2013												2012
		Average Outstanding Balance				Interest (5)				Yield/ Rate				Average Outstanding Balance				Interest (5)				Yield/ Rate				Average Outstanding Balance				Interest (5)				Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans, gross (1)		$	386,018			$	16,715				4.33	%		$	381,791			$	17,589				4.61	%		$	397,667			$	19,613				4.93	%
Securities (1)			112,373				2,369				2.11				105,344				2,051				1.95				81,670				1,967				2.41
Federal Reserve Bank stock			631				38				6.00				-				-				0.00				-				-				0.00
Interest-earning balance from depository institutions			74,843				196				0.26				71,583				182				0.25				27,834				73				0.26
Total interest-earning assets			573,865				19,318				3.37				558,718				19,822				3.55				507,171				21,653				4.27
Non-interest-earning assets			54,904												51,993												45,502
Total assets		$	628,769											$	610,711											$	552,673
Interest-bearing liabilities:
Interest-bearing transactions		$	305,375			$	739				0.24	%		$	258,136			$	1,018				0.39	%		$	194,916			$	1,204				0.62	%
Savings deposits			28,460				50				0.18				27,029				78				0.29				24,115				115				0.48
Time deposits			127,482				1,385				1.09				138,024				1,674				1.21				150,524				2,515				1.67
Securities sold under agreement to repurchase			18,975				5				0.03				28,496				14				0.05				25,946				18				0.07
Federal Home Loan Bank advances			10,534				250				2.37				20,111				444				2.21				25,876				518				2.00
Subordinated debentures			4,000				87				2.18				4,000				88				2.20				4,000				98				2.45
Total interest-bearing liabilities			494,826				2,516				0.51				475,796				3,316				0.70				425,377				4,468				1.05
Non-interest-bearing liabilities			58,488												58,703												48,657
Total liabilities			553,314												534,499												474,034
Stockholders' equity			75,455												76,212												78,639
Total liabilities and stockholders' equity		$	628,769											$	610,711											$	552,673
Net interest income						$	16,802											$	16,506											$	17,185
Net interest rate spread (2)											2.86	%											2.85	%											3.22	%
Net interest-earning assets (3)		$	79,039											$	82,922											$	81,794
Net interest margin (4)											2.93	%											2.95	%											3.39	%
Ratio of interest-earning assets to interest-bearing liabilities											115.97	%											117.43	%											119.23	%

 

⁽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 3.10%, 3.09%, and 3.49% for 2014, 2013, and 2012, respectively. The tax equivalent basis was computed by calculating the deemed interest on tax-exempt loans and municipal bonds that would have been earned on a fully taxable basis to yield the same after-tax income using a combined federal and state marginal tax rate of 36%.

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

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

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

⁽⁵⁾ Interest on loans includes $116,637, $118,054, and $205,021 of loan fees collected in 2014, 2013, and 2012, respectively.

 

 

The following tables present the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

		Year Ended December 31,
		2014 vs. 2013
		Increase (Decrease) Due to								Total Increase
		Volume				Rate				(Decrease)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	195			$	(1,069)			$	(874)
Securities			138				180				318
Federal Reserve Bank stock			-				38				38
Interest-earning balances from depository institutions			7				7				14
Total interest-earning assets			340				(844)				(504)
Interest-bearing liabilities:
Interest-bearing transactions			181				(460)				(279)
Savings deposits			3				(31)				(28)
Time deposits			(132)				(157)				(289)
Securities sold under agreement to repurchase			(5)				(4)				(9)
Federal Home Loan Bank advances			(211)				17				(194)
Subordinated debentures			-				(1)				(1)
Total interest-bearing liabilities			(164)				(636)				(800)
Change in net interest income		$	504			$	(208)			$	296

 

		Year Ended December 31,
		2013 vs. 2012
		Increase (Decrease) Due to								Total Increase
		Volume				Rate				(Decrease)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	(793)			$	(1,231)			$	(2,024)
Securities			570				(486)				84
Interest-earning balances from depository institutions			120				(11)				109
Total interest-earning assets			(103)				(1,728)				(1,831)
Interest-bearing liabilities:
Interest-bearing transactions			400				(586)				(186)
Savings deposits			14				(51)				(37)
Time deposits			(208)				(633)				(841)
Securities sold under agreement to repurchase			2				(6)				(4)
Federal Home Loan Bank advances			(116)				42				(74)
Subordinated debentures			-				(10)				(10)
Total interest-bearing liabilities			92				(1,244)				(1,152)
Change in net interest income		$	(195)			$	(484)			$	(679)

 

 

Interest and fee income. Interest and fee income on loans decreased to $16.7 million for 2014 from $17.6 million for 2013. This decrease was primarily a result of a decline in yield, which primarily resulted due to competitive pressure, which was partially offset by a higher average balance of loans. The average yield on loans decreased to 4.33% for 2014 from 4.61% for 2013. The average balance of loans was $386.0 million and $381.8 million during 2014 and 2013, respectively.

 

Interest income on securities increased to $2.4 million for 2014 from $2.1 million for 2013. Interest income on securities increased primarily due to a higher average balance of securities in addition to a higher yield. The average yield on securities increased to 2.11% for 2014 from 1.95% for 2013. The average balance of securities was $112.4 million and $105.3 million for 2014 and 2013, respectively.

 

Interest income on Federal Reserve Bank stock was $38,000 for 2014. The average balance was $631,000. The Company was required to purchase the Federal Reserve Bank stock as a result of the Bank’s conversion from a thrift charter to a national bank charter in August 2014. There was no balance at December 31, 2013.

 

Interest on other interest-earning deposits increased primarily due to an increase in average balances. The average balance of other interest-earning deposits was $74.8 million and $71.6 million for 2014 and 2013, respectively. The average yield on other interest-earning deposits was 0.26% for 2014 and 0.25% for 2013.

 

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 expense. Interest expense on deposits decreased to $2.2 million for 2014 from $2.8 million for 2013. While the average balance of interest-bearing deposits increased to $461.3 million during 2014 from $423.2 million for 2013, the average rate on interest-bearing deposits decreased to 0.47% for 2013 from 0.65% for 2013, as interest rates have remained at historic lows.

 

Interest on securities sold under agreements to repurchase decreased to $5,000 from $14,000 due to a decline in rate in addition to a lower average balance. The average rate decreased to 0.03% for 2014 from 0.05% for 2013. The average balance of securities sold under agreements to repurchase was $19.0 million and $28.5 million for 2014 and 2013, respectively.

 

Interest on Federal Home Loan Bank advances decreased in 2014 due to a lower average balance partially offset by an increase in rate. The average balance of Federal Home Loan Bank advances was $10.5 million and $20.1 million for 2014 and 2013, respectively. The average rate on Federal Home Loan Bank advances increased to 2.37% for 2014 compared to 2.21% for 2013. The purchase accounting amortization recorded in 2014 and 2013 increased interest expense on Federal Home Loan Bank advances by $8,000 and $13,000, respectively.

 

Interest expense on subordinated debentures decreased to $87,000 for 2014 from $88,000 for 2013. The average rate declined to 2.18% for 2014 compared to 2.20% for 2013.

 

 

Provision for loan losses. A credit provision of $250,000 was recorded in 2014 compared to a provision expense of $485,000 in 2013. Management determined that the credit provision was appropriate due to improvements in credit quality trends and recoveries received on previously charged-off loans. Non-performing and impaired loans totaled $6.7 million and $7.2 million at December 31, 2014 and 2013, respectively. The allowance for loan losses to non-performing and impaired loans increased to 82.76% at December 31, 2014, compared to 77.28% at December 31, 2013. In 2014, we received net recoveries of $221,000, compared to net charge-offs of $839,000 in 2013. Furthermore, a recovery of $811,000 was recorded in the first quarter of 2015. We are currently evaluating the impact of this recovery on our loan loss reserve. The provision for loan losses is based upon management’s consideration of current economic conditions, First Clover Leaf’s loan portfolio and historical loss experience coupled with current market valuations on collateral, and management’s estimate of probable losses in the portfolio as well as the level of non-performing and impaired loans. Management also reviews individual loans for which full 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.

 

In addition, the 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.

 

Non-interest income. Non-interest income increased $58,000 for the year ended December 31, 2014, remaining at $2.2 million for the years ended December 31, 2014 and 2013, primarily due to increases on service fees on deposit accounts, gain on sale of loans, and earnings from bank-owned life insurance, partially offset by a reduction in gain on sale of securities, and losses on the sale of assets and on the sale of foreclosed assets.

 

Service fees on deposit accounts increased $84,000 to $455,000 for the year ended December 31, 3014 from $371,000 for the year ended December 31, 2013. The increase was due to higher non-sufficient fund income and treasury management fees in 2014.

 

Gain on sale of loans totaled $631,000 for the year ended December 31, 2014 compared to $561,000 for the comparable period in 2013. The increase was due to a higher average yield despite a lower volume of loan sales in 2014 compared to 2013. The average yield in 2014 was 3.4% compared to 2.3% in 2013. In 2014, we sold loans totaling $18.3 million, compared to $24.3 million in 2013.

 

Bank-owned life insurance earnings increased to $379,000 for the year ended December 31, 2014 from $254,000 for the same period in 2013 due to additional bank-owned life insurance purchases of $6.0 million.

 

Gain on sale of securities totaled $110,000 for the year ended December 31, 2014 compared to $359,000 for the same period in 2013. We sold fewer securities in 2014 than we did in 2013, primarily due to the 2014 interest rate markets not being as favorable for security sales. In 2014 we sold securities of $5.3 million compared to $9.0 million in 2013. We experienced a loss of $81,000 on the sale of property and equipment during 2014 compared to no such loss in 2013. We incurred a loss on the sale of foreclosed assets of $164,000 during 2014 compared to a loss of $56,000 during 2013.

 

Non-interest expense. Non-interest expense increased to $14.1 million for 2014 from $13.4 million for 2013. The increase was primarily due to higher compensation and employee benefits and an

 

 

increase in occupancy expense. These increases were partially offset by a decrease in foreclosed asset related expenses.

 

Compensation and employee benefits increased to $7.2 million for 2014 from $6.3 million for 2013 primarily due to the addition of staff for a loan production office starting in January 2014, and the additional staff related to opening a new branch facility in July, 2014.

 

Occupancy expense increased to $1.7 million for 2014 compared to $1.4 million for 2013 primarily due to opening a new branch facility in July, 2014.

 

Foreclosed asset related expenses decreased to $507,000 for 2014 compared to $1.3 million for 2013. The higher expense in 2013 was primarily due to necessary property repairs. These repairs provided us the opportunity to sell the related property in 2014

 

Income taxes. Income tax expense remained relatively unchanged at $1.4 million for 2014 and 2013 primarily as a result of a lower effective tax rate partially offset by higher pre-tax income for 2014. The effective tax rate was 26.2% for 2014 compared to 29.2% for 2013. The effective tax rate for 2014 was lower primarily due to tax exempt income comprising a higher portion of total income. Beginning January 2015, the state tax rate was lowered to 7.75% from the previous rate of 9.5%.

 

Management of Market Risk

 

General

 

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 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.

 

Net Portfolio Value

 

The Office of the Comptroller of Currency requires the Company to monitor and test interest rate risk under increasing and decreasing rate shocks. First Clover Leaf utilized an independent third party to analyze interest rate risk sensitivity as of December 31, 2014 and 2013. 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 Rates” column.

The tables below set forth, as of December 31, 2014 and 2013, the estimated changes in the NPV that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

The 2014 table below indicates that at December 31, 2014, in the event of a 100 basis point decrease in interest rates, we would experience a 4% increase in the net portfolio value. In the event of a 400 basis point increase in interest rates, we would experience a 24% decrease in net portfolio value.

 

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

 

December 31, 2013
		NPV												Net Portfolio Value as a Percentage
Change in						Estimated Increase								of Present Value of Assets
Interest Rates		Estimated				(Decrease) in NPV												Change in
(basis points)		NPV				Amount				Percent				NPV Ratio				(basis points)
		(Dollars in thousands)
+400		$	59,863			$	(19,708)				(25) %				10.68 %				(336)
+300			67,556				(12,015)				(15)				11.73				(231)
+200			73,434				(6,137)				(8)				12.39				(165)
+100			78,174				(1,397)				(2)				12.84				(120)
—			79,571				—				—				12.76				—
-100			84,224				4,653				6				13.25				(79)

 

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of the interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of the interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results.

 

 

Liquidity and Capital Resources

 

First Clover Leaf maintains 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 December 31, 2014 and 2013, $49.1 million and $84.7 million, respectively, were invested in cash and cash equivalents. The decrease in our cash and cash equivalents was due to the redeployment of funds to address an increase in loans, the purchase of bank-owned life insurance, the repayment of advances, a reduction in Repo Sweeps, partially offset by a decrease in securities available for sale, a reduction in foreclosed assets, and an increase in deposits. The primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, increases in deposit accounts and related securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank of Chicago.

 

Cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows included with the Consolidated Financial Statements.

 

Our primary investing activities are the origination of loans and the purchase of investment securities. During the year ended December 31, 2014, loan originations exceeded principal collections by $27.9 million. During the year ended December 31, 2013, principal collections exceeded loan originations by $21.0 million. We received proceeds from sales of loans of $18.3 million and $24.9 million of one-to-four family real estate loans in 2014 and 2013, respectively. Cash received from calls, maturities and principal repayments of available-for-sale investment securities totaled $37.0 million and $66.9 million for 2014 and 2013, respectively. During 2014 and 2013, we also received proceeds of $5.3 million and $9.0 million, respectively, from sales of available-for-sale investment securities. We purchased $26.7 million and $110.4 million in available-for-sale investment securities during 2014 and 2013, respectively. During 2014 and 2013, the Company also purchased $6.0 million and $3.0 million, respectively, of bank-owned life insurance for investment purposes and to offset some of the expenses of our existing employee benefit plans, as permitted by federal regulation.

 

Deposit flows are generally affected by market interest rates, the products offered by local competitors, and other factors. The net increase in total deposits was $7.8 million and $42.2 million for 2014 and 2013, respectively.

 

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago, which provides an additional source of funds. At December 31, 2014, we had $2.5 million in advances from the Federal Home Loan Bank of Chicago and an additional available borrowing limit of approximately $73.9 million. Additionally, we will sell investment securities under agreements to repurchase (commonly referred to as “repurchase agreements”) if we require additional liquidity. At December 31, 2014, our repurchase agreements totaled $11.8 million.

 

 

First Clover Leaf Bank is required to maintain certain minimum capital requirements under OCC regulations. Failure by a banking organization 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 First Clover Leaf Bank’s financial statements. First Clover Leaf Bank was considered “well-capitalized” at December 31, 2014. See Note 14 to the Consolidated Financial Statements, and the section captioned “Supervision and Regulation” in Part I, Item 1. Business of our Form 10K for additional discussion of capital requirements.

 

At December 31, 2014, certificates of deposit scheduled to mature within one year totaled $51.0 million. Based on prior experience, management believes that a significant portion of such deposits will remain with First Clover Leaf Bank, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained, First Clover Leaf Bank will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago advances, in order to maintain our level of assets. Alternatively, First Clover Leaf Bank would reduce the level of liquid assets, such as cash and cash equivalents. In addition, the cost of such deposits may be significantly higher if market interest rates are higher at the time of renewal.

 

Off-Balance Sheet Arrangements

 

In the ordinary course of business, First Clover Leaf Bank 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. First Clover Leaf Bank 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 First Clover Leaf Bank, 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 First Clover Leaf Bank is committed.

 

At December 31, 2014 and 2013, First Clover Leaf Bank had $58.8 million and $70.2 million, respectively, of commitments to extend credit, and $1.7 million and $2.3 million, respectively, of standby letters of credit.

 

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include agreements with respect to borrowed funds and deposit liabilities, agreements with respect to investments, and agreements with respect to securities sold under agreements to repurchase.

 

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2014. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

 

		Payments Due by Period
						More than				More than
						One Year				Three
						through				Years				More than
		Less than				Three				through				Five
Contractual Obligations		One Year				Years				Five Years				Years				Total
		(Dollars in thousands)
Federal Home Loan Bank advances		$	1,500			$	988			$	-			$	-			$	2,488
Subordinated debentures			-				-				-				4,000				4,000
Certificates of deposit			50,987				62,750				10,810				3,081				127,628
Securities sold under agreements to repurchase			11,848				-				-				-				11,848
Total		$	64,335			$	63,738			$	10,810			$	7,081			$	145,964

 

Recent Accounting Pronouncements

 

See Note 1 to the Consolidated Financial Statements.

 

Impact of Inflation and Changing Prices

 

The consolidated financial statements and related notes of First Clover Leaf Financial Corp. have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

 

 

 

Market for Common Stock

 

First Clover Leaf Financial Corp.’s common stock trades on the Nasdaq Capital Market under the trading symbol “FCLF.”

 

The information in the following table for 2014 and 2013 indicates the high and low closing prices for the common stock, based upon information provided by the Nasdaq Capital Market, and the cash dividend payment for each quarter presented. As of March 15, 2015, there were 7,007,283 shares of our common stock issued and outstanding held by approximately 670 holders of record.

 

We expect that, subject to regulatory requirements and our financial condition and results of operations, quarterly dividends will continue to be paid in the future. See Note 14 to our Consolidated Financial Statements for information on regulatory restrictions on the payment of dividends. In addition, the Company is subject to state law limitations on the payment of dividends. Maryland law generally limits dividends if (1) the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend, or (2) if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

 

								Dividend
								Declared Per
Year Ended December 31, 2014			High			Low		Share
Fourth quarter		$	9.21		$	8.66		$	0.06
Third quarter			9.83			9.01			0.06
Second quarter			10.53			9.26			0.06
First quarter			9.78			8.90			0.06

 

								Dividend
								Declared Per
Year Ended December 31, 2013			High			Low		Share
Fourth quarter	$		9.95		$	8.58		$	0.06
Third quarter			9.24			7.95			0.06
Second quarter			8.25			7.85			0.06
First quarter			7.95			6.25			0.06

 

 

STOCKHOLDER INFORMATION

 

 

ANNUAL MEETING   The Annual Meeting of Stockholders will be held at 4:00 p.m. Illinois time on May 28, 2015 at Sunset Hills Country Club located at 2525 South State Route 157, Edwardsville, Illinois 62025.	TRANSFER AGENT   Computershare, Inc. P.O. BOX 30170 College Station, TX 77842 If you have any questions concerning your stockholder account, please call our transfer agent, noted above, at (800) 368-5948. This is the number to call if you require a change of address or need records or information about lost certificates.
STOCK LISTING   The Company's Common Stock trades on the Nasdaq Capital Market under the symbol "FCLF."	ANNUAL REPORT ON FORM 10-K   A copy of the Company's Form 10-K for the year ended December 31, 2014, will be furnished without charge to stockholders as of the record date, upon written request to the Secretary, First Clover Leaf Financial Corp. PO Box 540, Edwardsville, Illinois 62025.
SPECIAL COUNSEL   Barack Ferrazzano Kirschbaum & Nagelberg LLP 200 West Madison Street Chicago, Illinois 60606	INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   Crowe Horwath LLP One Mid America Plaza PO Box 3697 Oak Brook, Illinois 60522

 

 

DIRECTORS
Gerard A. Schuetzenhofer Chairman of the Board; President, Coldwell Banker Brown Realtors/ Coldwell Banker Commercial Brown Realtors   Mona Haberer President & Chief Executive Officer, Hortica Insurance & Employee Benefits   P. David Kuhl President & Chief Executive Officer, First Clover Leaf Bank   Joseph Stevens Owner, Market Basket Grocery & Garden Center   Mary Westerhold Vice President & Chief Financial Officer, Madison Communications Company	Joseph J. Gugger Vice Chairman of the Board; Partner, Fastechnology LLC; Owner, Gugger Group, Inc.   Kenneth P. Highlander Retired, President, Ready-Mix Services Inc.   Gary D. Niebur President & Chief Executive Officer, Edwardsville YMCA   Dennis M. Terry Director of Market Relations and Board Projects, First Clover Leaf Bank

 

 

OFFICERS

P. David Kuhl President & Chief Executive Officer

William D. Barlow Executive Vice President & Chief Lending Officer   Lisa R. Fowler Executive Vice President & Chief Credit Officer   Darlene F. McDonald Executive Vice President & Chief Financial Officer

 

FIRST CLOVER LEAF FINANCIAL CORP.

Edwardsville, Illinois

 

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

CONTENTS

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS	2
CONSOLIDATED STATEMENTS OF INCOME	3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	4
CONSOLIDATED STATEMENTS OF CASH FLOWS	5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and Stockholders

First Clover Leaf Financial Corp.

Edwardsville, Illinois

 

We have audited the accompanying consolidated balance sheets of First Clover Leaf Financial Corp. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Clover Leaf Financial Corp. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

 

/s/Crowe Horwath LLP

Oak Brook, Illinois

March 12, 2015

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

December 31, 2014 and 2013

 

		2014				2013
ASSETS
Cash and due from banks		$	14,967,050			$	14,363,461
Interest-earning deposits			12,318,967				8,681,426
Federal funds sold			21,780,445				61,648,938
Total cash and cash equivalents			49,066,462				84,693,825
Interest-earning time deposits			1,776,970				1,766,493
Securities available for sale			104,470,692				117,776,982
Federal Home Loan Bank stock			2,887,763				2,887,763
Federal Reserve Bank stock			1,676,700				-
Loans, net of allowance for loan losses of $5,561,442 and $5,590,668 at 2014 and 2013, respectively			400,904,404				372,568,962
Loans held for sale			100,000				-
Property and equipment, net			10,380,310				9,873,198
Goodwill			11,385,323				11,385,323
Bank-owned life insurance			14,876,960				8,497,895
Core deposit intangible			196,000				271,000
Foreclosed assets			3,887,587				5,577,481
Mortgage servicing rights			961,823				918,247
Accrued interest receivable			1,762,310				1,551,258
Other assets			3,281,496				4,276,015
Total assets		$	607,614,800			$	622,044,442
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	68,170,743			$	55,263,604
Interest-bearing			442,135,896				447,276,088
Total deposits			510,306,639				502,539,692
Federal Home Loan Bank advances			2,487,745				13,980,005
Securities sold under agreements to repurchase			11,848,266				26,766,169
Subordinated debentures			4,000,000				4,000,000
Accrued interest payable			174,480				199,764
Other liabilities			1,667,777				1,463,182
Total liabilities			530,484,907				548,948,812
Commitments and Contingent Liabilities (Note 15)
Stockholders' Equity
Preferred stock, $.10 par value, 10,000,000 shares authorized, no shares issued			-				-
Common stock, $.10 par value, 20,000,000 shares authorized, 7,007,283 shares issued and outstanding at 2014 and 2013			700,728				700,728
Additional paid-in capital			55,818,936				55,818,936
Retained earnings			20,412,898				18,268,454
Accumulated other comprehensive income (loss)			197,331				(1,692,488	)
Total stockholders' equity			77,129,893				73,095,630
Total liabilities and stockholders' equity		$	607,614,800			$	622,044,442

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2014 and 2013

 

		2014				2013
Interest and dividend income:
Interest and fees on loans		$	16,714,749			$	17,589,152
Securities:
Taxable interest income			1,232,399				1,042,137
Nontaxable interest income			1,136,630				1,008,926
Federal Reserve Bank dividends			37,726				-
Interest-earning deposits, federal funds sold, and other			196,224				181,318
Total  interest and dividend income			19,317,728				19,821,533
Interest expense:
Deposits			2,174,066				2,769,685
Federal Home Loan Bank advances			250,018				444,070
Securities sold under agreements to repurchase			5,437				13,713
Subordinated debentures			86,901				88,286
Total  interest expense			2,516,422				3,315,754
Net interest income			16,801,306				16,505,779
Provision (credit) for loan losses			(250,000	)			485,000
Net interest income after provision (credit) for loan losses			17,051,306				16,020,779
Non-interest income:
Service fees on deposit accounts			454,903				371,424
Other service charges and fees			414,992				376,115
Loan servicing fees			281,979				284,875
Gain on sale of securities			109,712				359,138
Gain on sale of loans			630,779				560,526
Loss on sale of property and equipment			(80,545	)			-
Loss on sale of foreclosed assets			(164,084	)			(56,035	)
Other			579,195				272,604
			2,226,931				2,168,647
Non-interest expense:
Compensation and employee benefits			7,224,771				6,298,405
Occupancy expense			1,699,734				1,353,783
Data processing services			767,213				723,977
Director fees			183,300				177,467
Professional fees			587,907				448,423
FDIC insurance premiums			459,059				476,731
Foreclosed asset related expenses			506,885				1,343,883
Amortization of core deposit intangible			75,000				264,000
Amortization of mortgage servicing rights			106,970				118,511
Other			2,480,608				2,242,177
			14,091,447				13,447,357
Income before income taxes			5,186,790				4,742,069
Income tax expense			1,360,598				1,386,008
Net income		$	3,826,192			$	3,356,061
Basic and diluted earnings per share		$	0.55			$	0.46
Dividends per share		$	0.24			$	0.24

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2014 and 2013

 

		2014				2013
Net income		$	3,826,192			$	3,356,061
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale arising during the period			3,109,425				(4,226,053	)
Reclassification adjustment for realized gains included in income			(109,712	)			(359,138	)
Tax effect			(1,109,894	)			1,696,592
Total other comprehensive income (loss)			1,889,819				(2,888,599	)
Comprehensive income		$	5,716,011			$	467,462

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years ended December 31, 2014 and 2013

 

 

														Accumulated
						Additional								Other
		Common				Paid-in				Retained				Comprehensive
		Stock				Capital				Earnings				Income (Loss)				Total
Balance, January 1, 2013		$	748,132			$	59,660,244			$	16,651,916			$	1,196,111			$	78,256,403
Net income			-				-				3,356,061				-				3,356,061
Other comprehensive loss			-				-				-				(2,888,599	)			(2,888,599	)
Dividends ($0.24 per share)			-				-				(1,739,523	)			-				(1,739,523	)
Repurchase of 474,034 shares of common stock			(47,404	)			(3,841,308	)			-				-				(3,888,712	)
Balance, December 31, 2013			700,728				55,818,936				18,268,454				(1,692,488	)			73,095,630
Net income			-				-				3,826,192				-				3,826,192
Other comprehensive income			-				-				-				1,889,819				1,889,819
Dividends ($0.24 per share)			-				-				(1,681,748	)			-				(1,681,748	)
Balance, December 31, 2014		$	700,728			$	55,818,936			$	20,412,898			$	197,331			$	77,129,893

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2014 and 2013

 

		2014				2013
Cash flows from operating activities
Net income		$	3,826,192			$	3,356,061
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes			(148,198	)			373,238
Amortization (accretion) of:
Deferred loan origination costs, net			(47,784	)			(97,172	)
Premiums and discounts on securities			953,830				796,576
Core deposit intangible			75,000				264,000
Mortgage servicing rights			106,970				118,511
Fair value adjustments			(92,677	)			(62,140	)
Provision (credit) for loan losses			(250,000	)			485,000
Depreciation			597,526				557,113
Gain on sale of securities available for sale			(109,712	)			(359,138	)
Gain on sale of loans			(630,779	)			(560,526	)
Loss on sale of property and equipment			80,545				-
Loss on sale of foreclosed assets			164,084				56,035
Write-down on foreclosed assets			202,694				812,687
Earnings on bank-owned life insurance			(379,065	)			(253,560	)
Increase in mortgage servicing rights			(150,546	)			(224,975	)
Proceeds from sales of loans held for sale			18,342,115				24,868,925
Originations of loans held for sale			(17,811,336	)			(22,481,399	)
Change in assets and liabilities:
Accrued interest receivable and other assets			(178,229	)			(1,099,572	)
Accrued interest payable			(25,284	)			(84,506	)
Other liabilities			204,595				1,766,790
Net cash provided by operating activities			4,729,941				8,231,948
Cash flows from investing activities
Purchase of interest-earning time deposits			(10,477	)			(16,749	)
Available for sale securities:
Purchases			(26,749,263	)			(110,376,174	)
Proceeds from calls, maturities, and principal repayments			37,021,352				66,891,461
Proceeds from sales			5,259,541				9,025,930
Purchase of Federal Reserve Bank stock			(1,676,700	)			-
Decrease (increase) in loans			(27,895,667	)			21,004,213
Purchase of property and equipment			(1,456,558	)			(288,453	)
Proceeds from the sale of property and equipment			255,304				-
Proceeds from the sale of foreclosed assets			1,227,868				998,050
Purchase of bank-owned life insurance			(6,000,000	)			(3,000,000	)
Net cash used in investing activities			(20,024,600	)			(15,761,722	)

 

(Continued)

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2014 and 2013

		2014				2013
Cash flows from financing activities
Net increase in deposit accounts		$	7,766,947			$	42,165,646
Net decrease in securities sold under agreements to repurchase			(14,917,903	)			(7,728,410	)
Repayments of Federal Home Loan Bank advances			(11,500,000	)			(8,000,000	)
Repurchase of common stock			-				(3,888,712	)
Cash dividends paid			(1,681,748	)			(1,739,523	)
Net cash provided by (used in) financing activities			(20,332,704	)			20,809,001
Net increase (decrease) in cash and cash equivalents			(35,627,363	)			13,279,227
Cash and cash equivalents:
Beginning			84,693,825				71,414,598
Ending		$	49,066,462			$	84,693,825
Supplemental schedule of noncash investing and financing activities
Assets acquired in settlement of loans		$	287,982			$	1,469,619
Loans made to finance sales of foreclosed assets			383,230				531,278
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	2,533,966			$	3,387,005
Income taxes, net of refunds			1,535,000				2,348,004

 

See notes to consolidated financial statements.

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

First Clover Leaf Financial Corp. (the “Company” or “First Clover Leaf”) is a one-bank holding company, whose wholly-owned bank subsidiary, First Clover Leaf Bank (the “Bank”), provides deposits and loans to individual and corporate customers in Edwardsville, Illinois and the surrounding communities. 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.

 

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and the Bank and have been prepared in conformity with U.S. generally accepted accounting principles and conform to preponderant practices in the banking industry. The financial statements also include two wholly-owned entities on a deconsolidated basis, Clover Leaf Financial Services Inc., and First Clover Leaf Statutory Trust I. On July 25, 2014, Clover Leaf Financial Services Inc., an inactive subsidiary, was dissolved in connection with the Bank’s conversion from a thrift charter to a national bank charter effective August 15, 2014. All material intercompany accounts and transactions have been eliminated in the consolidation.

 

Use of Estimates: In preparing the accompanying consolidated financial statements, the Company’s management is required to make estimates and assumptions which affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, cash items in process of clearing, and federal funds sold. Generally, federal funds are sold for one-day periods. Cash flows from loans, deposits, and securities sold under agreements to repurchase are treated as net increases or decreases in the statements of cash flows.

 

The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank. Those reserve balances were approximately $6,575,000 and $5,849,000, respectively, at December 31, 2014 and 2013.

 

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

Interest-Earning Time Deposits: Interest-earning time deposits in banks are carried at cost. At December 31, 2014 and 2013, interest-earning time deposits amounted to $1,776,970 and $1,766,493, respectively.

 

Securities: Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.

 

Securities available for sale are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company evaluates its debt securities for other-than-temporary impairment (“OTTI”) on an ongoing basis for those securities with a fair value below amortized cost. The review takes into consideration current market conditions, issuer rating changes and trends, the credit worthiness of the obligator of the security, current analysts’ evaluations, failure of the issuer to make scheduled interest or principal payments, the Company’s lack of intent to sell the security or whether it is more-likely-than-not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term OTTI is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Any portion of such a decline in value associated with credit loss is recognized in earnings as an impairment loss with the remaining noncredit-related component being recognized in other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered, by comparing the present value of cash flows expected to be collected from the security, computed using original yield as the discount rate, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the "credit loss."

 

Federal Home Loan Bank Stock: The Company held Federal Home Loan Bank of Chicago (“FHLB”) stock of $2,887,763 for the years ended December 31, 2014 and 2013. The Company is required to maintain these equity securities as a member of the FHLB and in amounts as required by this institution. These equity securities are "restricted" in that they can only be redeemed by the respective institution at par. Therefore, they are less liquid than other tradable equity securities and their fair value is not readily available.

 

Federal Reserve Bank Stock: Federal Reserve Bank stock totaled $1,676,700 at December 31, 2014, which the Company was required to purchase as a result of the Bank’s conversion from a thrift charter to a national bank charter. There was no balance at December 31, 2013. 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: The Company offers real estate, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans throughout Edwardsville, Illinois and the surrounding area. The ability of the Company’s debtors to comply with repayment terms is dependent upon the real estate and general economic conditions in this area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred costs (fees) on originated loans.

 

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs (fees), are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

The accrual of interest on real estate, commercial business, and consumer loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Loans held for sale: Loans originated and intended for sale are carried at the lower of cost or estimated fair value which is based on market pricing. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

 

Allowance for Loan Losses: The allowance for loan losses is a valuation account for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using our historical loan loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

The allowance for loan losses is evaluated on at least a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management considers the allowance for loan losses at December 31, 2014 and 2013 to be at an adequate level. However, changes may be necessary if further economic and other conditions differ substantially from the current environment. To the extent actual outcomes differ from the estimates, additional provision for credit losses may be required that would reduce future earnings.

 

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements related to delinquency.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings. All troubled debt restructurings are classified as impaired.

 

Factors considered by management in determining impairment include payment status, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

All loans classified as substandard and loans over $250,000 categorized as special mention are evaluated for impairment. If a loan is impaired, we further test to see if it is considered collateral dependent. If the loan is collateral dependent, a portion of the allowance is allocated so that the loan is reported at the fair value of the collateral. If the loan is not collateral dependent, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate.

 

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component of the allowance covers non-impaired loans. Once the non-impaired loans are separated into the specified loan pools, we analyze the pools using two criteria: historical loss data, and qualitative adjustments. Historical data is based on actual loss history specific to each portfolio segment. We utilize four years of data summarized by quarter. These data are analyzed and used to arrive at a base for our reserve percentage. The qualitative adjustments are determined based on various publications, market research, economic reports and management’s expertise and knowledge of the immediate lending market and include the following:

 

·

Changes in sector’s portfolio health

·

Changes in non-impaired classified assets

·

National and/or local economic conditions

·

Changes in financial industry/regulation

·

Changes in value of underlying collateral

·

Changes in segment concentrations

·

Changes in volume/nature of loan portfolio

·

Changes in past dues, non-accruals/asset quality

·

Changes in lending policies/underwriting practices

·

Changes in loan review/oversight

·

Changes in staff depth/experience

·

Changes in competition/legal

 

The consideration of all of these factors results in a loss allocation percentage for each portfolio segment. The following portfolio segments have been identified:

 

Real Estate Loans:

One-to-four family (owner occupied and non-owner occupied)

Multi-family

Commercial (owner occupied, non-owner occupied, farmland, and raw land)

Construction and land

 

Commercial

Commercial business

 

Consumer:

Home equity

Automobile and other

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and presents these policies to the board 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.

 

One-to-four family real estate loans are predominately collateralized by properties located in our primary market area. Due to high customer demand in the continuing low interest rate environment, virtually all of these loans have fixed rates of interest. We generally sell most of the conforming, fixed-rate loans that we originate, but we generally retain the servicing rights on these loans. We may generally lend up to 80% of the property’s appraised value, or up to 90% of the property’s appraised value if the borrower obtains private mortgage insurance. We require title insurance on all of our one-to-four family real estate loans, and we also require that fire and extended coverage casualty insurance be maintained in an amount equal to at least the lesser of the loan balance or the replacement cost of the improvements on the property. We also require a property appraisal for all one-to-four family loans that are underwritten to comply with secondary market standards. Appraisals are conducted by independent or in-house licensed appraisers from a list approved by our board of directors.

 

Multi-family real estate loans are generally secured by apartment buildings and rental properties with five or more units. The majority of our multi-family real estate loans are secured by properties located within our market area. Multi-family real estate loans generally are offered with interest rates that adjust after one, three or five years. The majority of these loans either float with the prime rate or they are fixed balloon loans. When originating multi-family real estate loans we evaluate the qualifications and financial condition of the borrower, profitability and expertise, as well as the value and condition of the mortgaged property securing the loans. We also consider the financial resources of the borrower, the borrower’s experience in owning or managing a similar property, and the borrower’s payment history with us and other financial institutions. Multi-family real estate loans are generally originated in amounts up to 85% of the lower of the sale price or the appraised value of the mortgaged property securing the loans. All multi-family real estate loans over $250,000 are appraised by independent or in-house licensed appraisers approved by the board of directors.

 

Commercial real estate loans are secured predominately by office buildings, and to a lesser extent warehouse properties and more specialized properties such as churches and schools. We originate commercial real estate loans generally with a typical term of five years with balloon payments. These loans generally amortize over 15 to 25 years. We offer both adjustable and fixed rates of interest on commercial real estate loans, with the interest rate for adjustable rate loans tied to the prime interest rate. We may generally lend up to 85% of the properties appraised value. We require independent or in-house licensed appraisals for all commercial real estate loans in excess of $250,000. Creditworthiness is determined by considering the character, experience, management and financial strength of the borrower, and the ability of the property to generate adequate funds to cover both operating expenses and debt service. We require title insurance on all of our commercial real estate loans, and we also require that fire and extended coverage casualty insurance be maintained.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Construction lending generally involves a greater degree of risk than our other real estate lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of the project. The construction phase of a loan for a one-to-four family, owner-occupied property generally lasts up to six months with loan-to-value ratios of up to 80%, (or up to 90% if the borrower obtains private mortgage insurance) of the appraised estimated value of the completed property or cost, whichever is less. The duration and loan to value ratios for non one-to-four family, owner-occupied properties vary depending on the property type. Our procedures for underwriting construction loans include an assessment of the borrower’s credit history and the borrower’s ability to meet other existing debt obligations, as well as payment of principal and interest on the proposed loan. We use the same underwriting standards and procedures for construction/permanent lending as we do for one-to-four family residential real estate lending.

 

Commercial business loans vary in type and may be secured or unsecured for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. The terms of these loans are generally for less than five years. The loans are either fixed-rate or carry variable interest rates indexed to the prime rate. Commercial credit decisions are based upon a complete credit review of the borrower. A determination is made as to the borrower’s ability to repay in accordance with the proposed terms as well as an overall assessment of the credit risks involved. Personal guarantees of borrowers are generally required. In evaluating a commercial business loan, we consider debt service capabilities, actual and projected cash flows, and the borrower’s inherent industry risks. Credit agency reports of an individual borrower’s or guarantor’s credit history as well as bank checks and trade investigations supplement the analysis of the borrower’s creditworthiness.

 

Although we originate fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed-versus adjustable-rate loans, and the interest rates offered on each type of loan by competing lenders in our market area. Loan originations are derived from a number of sources, including existing or prior customers and walk-in customers.

 

Consumer loans consist primarily of home equity lines of credit, automobile loans, loans secured by deposits and securities, and unsecured personal loans. Home equity lines of credit account for the largest segment of our consumer loans. They are generally made for owner-occupied homes and are secured by first or second mortgages on the residential properties. We generally offer home equity lines of credit with a maximum loan to appraised value ratio of 90%, including senior liens on the subject property. Our procedures for underwriting consumer loans include an assessment of the borrower’s credit history and ability to meet other existing debt obligations, as well as payments of principal and interest on the proposed loans. Although the borrower’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Property and Equipment: Land is stated at cost. Property and equipment are stated at cost less accumulated depreciation. Depreciation is determined under the straight-line method over the balance of estimated useful lives of the assets, which are 2-50 years for buildings and improvements and 2-10 years for furniture and equipment.

 

Goodwill: Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected September 30 as the date to perform the annual impairment test. Our annual impairment assessment for 2014 and 2013 resulted in no goodwill impairment. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

 

Bank-Owned Life Insurance: The Bank has purchased life insurance policies on certain key employees. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

 

Core Deposit Intangible: Core deposit intangible represents the value of acquired customer relationships. The balance created from our 2008 acquisition of Partners Financial Holdings, Inc. is being amortized over 9.7 years using the double declining balance method.

 

Foreclosed Assets: Real estate acquired through foreclosure or deed in lieu of foreclosure represents specific assets to which the Bank has acquired legal title in satisfaction of indebtedness. Such real estate is initially recorded at the property’s fair value at the date of foreclosure less estimated selling costs. Initial valuation adjustments, if any, are charged against the allowance for losses on loans. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value. Subsequent declines in estimated fair value are charged to expense when incurred. Revenues and expenses related to holding and operating these properties are recognized or expensed as incurred.

 

Mortgage Servicing Rights: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. For sales of one-to-four family loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. To determine impairment the Company applies a pooling methodology to the servicing valuation, in which loans with similar characteristics are "pooled" together for valuation purposes. Once pooled, each grouping of loans is evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from the portfolio. Earnings are projected from a variety of sources including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income and costs to service the loans. If the Company later determines that all or a portion of the impairment no longer exists for a particular pool, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income Taxes: Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not realizable. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Income tax expense (benefit) is the tax payable (refundable) for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

 

Earnings Per Common Share: Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. No dilutive potential common shares existed at December 31, 2014 and 2013.

 

		Year Ended
		December 31,
		2014				2013
Net income		$	3,826,192			$	3,356,061
Basic weighted average shares outstanding			7,007,283				7,227,642
Dilutive potential common shares			-				-
Diluted weighted average shares outstanding			7,007,283				7,227,642
Basic and diluted earnings per share		$	0.55			$	0.46

 

Fair Value Measurements: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Notes 16 and 17. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.

 

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters at this time that will have a material effect on the financial statements.

 

Operating Segments: While management monitors revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

Recent Accounting Pronouncements: The following provides a description of recently adopted or newly issued but not yet effective accounting standards that could have a material effect on our financial statements:

 

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

 

In January 2014, the FASB amended existing guidance clarifying that if an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update were effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not expect this amendment to have a material impact on the consolidated financial statements.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These

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

 

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE

 

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

		December 31, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				(Losses)				Value
U.S. government agency obligations		$	26,280,359			$	31,628			$	(442,381	)		$	25,869,606
State and municipal securities			44,828,579				1,025,719				(280,690	)			45,573,608
Other securities(1)			248,501				-				-				248,501
Mortgage-backed: residential			32,800,032				176,321				(197,376	)			32,778,977
		$	104,157,471			$	1,233,668			$	(920,447	)		$	104,470,692

 

		December 31, 2013
U.S. government agency obligations		$	41,982,901			$	34,010			$	(1,101,316	)		$	40,915,595
U.S. treasury securities			5,000,000				-				-				5,000,000
State and municipal securities			39,827,427				439,363				(1,521,921	)			38,744,869
Other securities(1)			248,501				-				-				248,501
Mortgage-backed: residential			33,404,645				234,517				(771,145	)			32,868,017
		$	120,463,474			$	707,890			$	(3,394,382	)		$	117,776,982

 

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

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

 

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2014 and 2013, are summarized as follows:

 

		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	)

 

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

 

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

 

At December 31, 2014, the Company had 72 securities in an unrealized loss position which included: 12 agency securities, 41 state and municipal securities, and 19 mortgage-backed securities. This was a decrease from 97 securities at December 31, 2013. The securities in an unrealized loss position at December 31, 2014 had an aggregate valuation adjustment of 1.71% from the Company’s amortized cost basis of these securities. The unrealized losses resulted from changes in market interest rates and liquidity, not from changes in the probability of contractual cash flows. While 50 of our securities have been in an unrealized loss position for more than 12 months and were at a 2.13% unrealized loss position of the Company’s amortized cost basis on these securities at December 31, 2014, which we believe is interest rate driven, there have been no defaults to date, and the securities remain above investment grade. The Company does not intend to sell the securities, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of the amortized cost. Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2014.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

 

The amortized cost and fair value at December 31, 2014, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Other securities have no stated maturity. Therefore, stated maturities are not disclosed for these categories.

 

		Amortized				Fair
		Cost				Value
Due in one year or less		$	2,276,239			$	2,309,843
Due after one year through five years			19,480,607				19,406,226
Due after five years through ten years			35,466,514				35,571,103
Due after ten years			14,130,578				14,401,042
Other securities - non-maturing			3,501				3,501
Mortgage-backed: residential			32,800,032				32,778,977
		$	104,157,471			$	104,470,692

 

Securities with a carrying amount of approximately $66,600,000 and $88,180,000 were pledged to secure deposits as required or permitted by law at December 31, 2014 and 2013, respectively.

 

At year-end 2014 and 2013, 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 $5,259,541 from the sale of securities during 2014 resulting in gross realized gains of $131,586 and gross realized losses of $21,874. The Company received proceeds of $9,025,930 from the sale of securities during 2013 resulting in gross realized gains of $373,489 and gross realized losses of $14,351. The tax related to these net realized gains and losses was $40,593 and $132,881 for 2014 and 2013, respectively.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS

 

The components of loans are as follows:

 

		At December 31,
		2014				2013
Real estate loans:
One-to-four family		$	117,591,822			$	118,884,453
Multi-family			41,391,862				40,262,269
Commercial			129,415,314				120,839,112
Construction and land			28,590,745				12,848,111
			316,989,743				292,833,945
Commercial business			73,984,867				71,940,431
Consumer:
Home equity			13,523,985				11,712,701
Automobile and other			1,772,431				1,525,594
			15,296,416				13,238,295
Total gross loans			406,271,026				378,012,671
Deferred loan origination costs, net			194,820				146,959
Allowance for loan losses			(5,561,442	)			(5,590,668	)
Loans, net		$	400,904,404			$	372,568,962

 

On occasion, the Company originates loans secured by single-family dwellings with loan to value ratios exceeding 90%. As of December 31, 2014 and December 31, 2013, these loans represented 2.17% and 1.07%, respectively, of our combined one-to-four family and home equity portfolios. The Company does not consider the level of such loans to be a significant concentration of credit as of December 31, 2014 or December 31, 2013.

 

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

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

The following tables present our past-due loans, segregated by class, are as follows:

 

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			$	-

 

December 31, 2013
		Loans 30-59 Days Past Due				Loans 60-89 Days Past Due				Loans 90 or More Days Past Due				Total Past Due Loans				Current Loans				Total				Accruing Loans 90 or More Days Past Due
Real estate loans:
One-to-four family		$	631,656			$	116,090			$	673,677			$	1,421,423			$	117,463,030			$	118,884,453			$	-
Multi-family			-				-				-				-				40,262,269				40,262,269				-
Commercial			15,162				-				30,016				45,178				120,793,934				120,839,112				-
Construction and land			-				-				-				-				12,848,111				12,848,111				-
			646,818				116,090				703,693				1,466,601				291,367,344				292,833,945				-
Commercial business			4,719				-				-				4,719				71,935,712				71,940,431				-
Consumer:
Home equity			40,473				-				30,047				70,520				11,642,181				11,712,701				-
Automobile and other			-				-				-				-				1,525,594				1,525,594				-
			40,473				-				30,047				70,520				13,167,775				13,238,295				-
Total		$	692,010			$	116,090			$	733,740			$	1,541,840			$	376,470,831			$	378,012,671			$	-

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, there is reasonable probability of loss of principal or collection of additional interest is deemed insufficient to warrant further accrual. Generally, we place all loans 90 days or more past due on non-accrual status. However, exceptions may occur when a loan is in process of renewal, but it has not yet been completed. In addition, we may place any loan on non-accrual status if any part of it is classified as loss or if any part has been charged-off. When a loan is placed on non-accrual status, total interest accrued and unpaid to date is reversed Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.

 

Year-end non-accrual loans, segregated by class, are as follows:

 

		At December 31,
		2014				2013
Real estate loans:
One-to-four family		$	589,170			$	1,671,324
Multi-family			1,340,779				2,100,064
Commercial			1,242,009				1,388,887
Construction and land			1,431,619				1,141,057
			4,603,577				6,301,332
Commercial business			25,095				-
Consumer:
Home equity			48,088				144,800
Total non-accrual loans		$	4,676,760			$	6,446,132

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

The following tables present the activity in the allowance for loan losses for the years ended December 31, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

Year ended December 31, 2014
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	1,424,663			$	(263,258	)		$	466,287			$	(507,930	)		$	1,119,762
Multi-family			661,358				-				-				(224,525	)			436,833
Commercial			1,454,455				(1,876	)			-				197,711				1,650,290
Construction and land			668,085				-				230,000				296,832				1,194,917
			4,208,561				(265,134	)			696,287				(237,912	)			4,401,802
Commercial business			1,219,080				(190,255	)			13,048				(90,658	)			951,215
Consumer
Home equity			116,478				(43,519	)			9,402				115,789				198,150
Automobile and other			46,549				-				945				(37,219	)			10,275
			163,027				(43,519	)			10,347				78,570				208,425
Total		$	5,590,668			$	(498,908	)		$	719,682			$	(250,000	)		$	5,561,442

  

Year ended December 31, 2013
		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
Real estate loans:
One-to-four family		$	847,285			$	(549,877	)		$	17,036			$	1,110,219			$	1,424,663
Multi-family			958,303				(482,478	)			-				185,533				661,358
Commercial			1,268,081				(216,750	)			204,681				198,443				1,454,455
Construction and land			1,413,002				-				302,114				(1,047,031	)			668,085
			4,486,671				(1,249,105	)			523,831				447,164				4,208,561
Commercial business			1,296,114				(141,104	)			58,924				5,146				1,219,080
Consumer
Home equity			151,625				(30,243	)			331				(5,235	)			116,478
Automobile and other			10,175				(7,574	)			6,023				37,925				46,549
			161,800				(37,817	)			6,354				32,690				163,027
Total		$	5,944,585			$	(1,428,026	)		$	589,109			$	485,000			$	5,590,668

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

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

 

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

  

December 31, 2013
		Period-end allowance allocated to loans:												Loans evaluated for impairment:
		Individually evaluated for impairment				Collectively evaluated for impairment				Ending Balance				Individually				Collectively				Ending Balance
Real estate loans:
One-to-four family		$	160,881			$	1,263,782			$	1,424,663			$	1,720,101			$	117,164,352			$	118,884,453
Multi-family			-				661,358				661,358				2,100,064				38,162,205				40,262,269
Commercial			195,103				1,259,352				1,454,455				1,978,525				118,860,587				120,839,112
Construction and land			10,315				657,770				668,085				1,141,057				11,707,054				12,848,111
			366,299				3,842,262				4,208,561				6,939,747				285,894,198				292,833,945
Commercial business			131,774				1,087,306				1,219,080				131,774				71,808,657				71,940,431
Consumer:
Home equity			8,602				107,876				116,478				162,449				11,550,252				11,712,701
Automobile and other			-				46,549				46,549				-				1,525,594				1,525,594
			8,602				154,425				163,027				162,449				13,075,846				13,238,295
Total		$	506,675			$	5,083,993			$	5,590,668			$	7,233,970			$	370,778,701			$	378,012,671

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

Credit Quality Indicators: As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements. The Company considers current financial information, historical payment experience, credit documentation, public information and current economic trends. Generally, all sizeable credits receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile. Credits classified as watch generally receive a review more frequently than annually. The risk category of homogeneous loans such as consumer loans and smaller balance loans is evaluated when the loan becomes delinquent. For special mention, substandard, and doubtful credit classifications, the frequency of review is increased to no less than quarterly in order to determine potential impact on credit loss estimates.

 

The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:

 

Pass - A pass asset is well protected by the current worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner. Pass assets also include certain assets considered watch, which are still protected by the worth and paying capacity of the borrower but deserve closer attention and a higher level of credit monitoring.

 

Special Mention - A special mention asset has potential weaknesses that deserve management’s close attention. The asset may also be subject to a weak or speculative market or to economic conditions, which may, in the future adversely affect the obligor. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

 

Substandard - A substandard asset is an asset with a well-defined weakness that jeopardizes repayment, in whole or in part, of the debt. These credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These assets are characterized by the distinct possibility that the institution will sustain some loss of principal and/or interest if the deficiencies are not corrected. It is not necessary for a loan to have an identifiable loss potential in order to receive this rating.

 

Doubtful - An asset that has all the weaknesses inherent in the substandard classification, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely likely, but it is not identified at this point due to pending factors.

 

Loss - An asset, or portion thereof, classified as loss is considered uncollectible and of such little value that its continuance on the Company’s books as an asset is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; rather, there is much doubt about whether, how much, or when the recovery would occur. As such, it is not practical or desirable to defer the write-off. Therefore, there is no balance to report at December 31, 2014 or 2013.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

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

 

 

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

 

December 31, 2013
		Pass				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	115,491,532			$	1,672,820			$	1,367,925			$	352,176			$	118,884,453
Multi-family			35,412,469				2,749,736				2,100,064				-				40,262,269
Commercial			110,571,786				5,902,447				4,334,863				30,016				120,839,112
Construction and land			11,583,780				-				1,264,331				-				12,848,111
			273,059,567				10,325,003				9,067,183				382,192				292,833,945
Commercial business			71,074,289				534,368				331,774				-				71,940,431
Consumer:
Home equity			11,518,523				31,730				132,401				30,047				11,712,701
Automobile and other			1,525,594				-				-				-				1,525,594
			13,044,117				31,730				132,401				30,047				13,238,295
Total		$	357,177,973			$	10,891,101			$	9,531,358			$	412,239			$	378,012,671

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

The following tables provide details of impaired loans, segregated by class, as of and for the periods indicated. The unpaid contractual balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loans.

 

		As of December 31, 2014												As of December 31, 2013
		Unpaid Contractual Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Unpaid Contractual Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated
With no related allowance recorded:
Real estate loans:
One-to-four family		$	551,510			$	467,191			$	-			$	1,082,196			$	899,959			$	-
Multi-family			1,823,257				1,340,779				-				2,734,462				2,100,064				-
Commercial			768,533				768,533				-				808,008				808,008				-
Construction and land			3,412,264				1,639,030				-				1,986,485				213,251				-
			6,555,564				4,215,533				-				6,611,151				4,021,282				-
Commercial business			215,350				25,095				-				-				-				-
Consumer:
Home equity			55,550				55,550				-				132,402				132,402				-
Subtotal		$	6,826,464			$	4,296,178			$	-			$	6,743,553			$	4,153,684			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	851,010			$	799,526			$	91,688			$	864,017			$	820,142			$	160,881
Commercial			1,691,064				1,498,829				155,863				1,360,876				1,170,517				195,103
Construction and land			-				-				-				927,806				927,806				10,315
			2,542,074				2,298,355				247,551				3,152,699				2,918,465				366,299
Commercial business			115,446				115,446				115,446				131,774				131,774				131,774
Consumer:
Home equity			9,902				9,902				9,902				30,047				30,047				8,602
Subtotal			2,667,422				2,423,703				372,899				3,314,520				3,080,286				506,675
Total		$	9,493,886			$	6,719,881			$	372,899			$	10,058,073			$	7,233,970			$	506,675

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 3 - LOANS (Continued)

 

		For the year ended December 31, 2014												For the year ended December 31, 2013
		Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized				Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized
With no related allowance recorded:
Real estate loans:
One-to-four family		$	633,963			$	2,306			$	-			$	1,012,186			$	1,010			$	-
Multi-family			1,309,419				30				-				1,038,953				-				-
Commercial			853,898				7,709				-				2,024,872				16,192				-
Construction and land			1,183,097				2,376				-				1,457,315				-				-
			3,980,377				12,421				-				5,533,326				17,202				-
Commercial business			345,137				-				-				12,077				-				-
Consumer:
Home equity			106,734				1,101				-				139,259				582				-
Automobile and other			-				-				-				910				-				-
			106,734				1,101				-				140,169				582				-
Subtotal		$	4,432,248			$	13,522			$	-			$	5,685,572			$	17,784			$	-
With an allowance recorded:
Real estate loans:
One-to-four family		$	667,999			$	11,874			$	-			$	1,047,761			$	-			$	-
Multi-family			414,443				-				-				1,544,361				-				-
Commercial			1,367,490				18,584				-				655,830				-				-
Construction and land			53,062				2,430				-				185,561				-				-
			2,502,994				32,888				-				3,433,513				-				-
Commercial business			121,785				8,577				-				275,701				4,811				-
Consumer:
Home equity			2,475				-				-				31,887				-				-
Automobile and other			-				-				-				2,704				-				-
			2,475				-				-				34,591				-				-
Subtotal			2,627,254				41,465				-				3,743,805				4,811				-
Total		$	7,059,502			$	54,987			$	-			$	9,429,377			$	22,595			$	-

 

(Continued)

 

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 3 - LOANS (Continued)

 

Troubled Debt Restructurings:

 

During the years ending December 31, 2014 and 2013, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: (1) payment and maturity changes not available in the market; and (2) a reduction of the stated interest rate of the loan.

 

The Company had allocations of $328,442 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 Company had $354,822 of allocations of specific reserves on $6,215,918 of loans to customers whose loan terms were modified in troubled debt restructurings as of December 31, 2013. The amount the Company has committed to lend to loan customers that are classified as troubled debt restructurings was not material as of December 31, 2014. The Company had no commitments to lend additional amounts as of December 31, 2013 to customers with outstanding loans that are classified as troubled debt restructurings.

 

The following tables present loans, by class, modified as troubled debt restructurings that occurred during the years ended December 31, 2014 and 2013:

 

Year ended December 31, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family			2			$	504,465			$	504,465
Construction and land			1				985,787				985,787
Total			3			$	1,490,252			$	1,490,252

 

The troubled debt restructurings described above resulted in a net increase in the allowance for loan losses of $46,420 but resulted in no charge offs during the year ended December 31, 2014.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 3 - LOANS (Continued)

 

Year ended December 31, 2013
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family			8			$	210,014			$	207,054
Commercial			5				981,496				978,759
			13				1,191,510				1,185,813
Commercial business			1				138,002				131,774
Consumer:
Home equity			1				18,778				17,648
Total			15			$	1,348,290			$	1,335,235

 

The troubled debt restructurings described above resulted in a net increase in the allowance for loan losses of $134,729 and charge offs of $54,052 during the year ended December 31, 2013.

 

The following table presents the troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2013. There were no payment defaults within twelve months following the modifications during the year ended December 31, 2014.

 

Year ended December 31, 2013
		Number of Contracts				Recorded Investment (as of period end)
Real estate loans:
One-to-four family			1			$	53,152
Total			1			$	53,152

 

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $2,440 but resulted in no charge offs during the year ending December 31, 2013.

 

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

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 3 - LOANS (Continued)

 

The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers, their immediate families and companies in which these individuals have a 10% or more beneficial ownership. Changes in these loans for the years ended December 31, 2014 and 2013 are summarized as follows:

 

		Year Ended
		December 31,
		2014				2013
Balance, beginning of year		$	7,932,877			$	8,128,743
Additions			7,066,199				2,767,710
Repayments			(3,050,455	)			(2,703,798	)
Change in status of borrower			(102,948	)			(259,778	)
Balance, end of year		$	11,845,673			$	7,932,877

 

The change in status of borrower represents the loans that are no longer required to be reported due to an executive officer or director no longer being associated with the Company.

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

The components of property and equipment are as follows:

 

		December 31,
		2014				2013
Land		$	1,829,738			$	1,808,958
Buildings and improvements			9,997,562				9,088,367
Furniture and equipment			2,296,531				1,352,260
			14,123,831				12,249,585
Less accumulated depreciation			(3,743,521	)			(2,376,387	)
		$	10,380,310			$	9,873,198

 

Depreciation expense for the years ended December 31, 2014 and 2013 amounted to $597,526 and $557,113, respectively.

 

NOTE 5 - MORTGAGE SERVICING RIGHTS

 

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were approximately $113,156,000 and $108,029,000 at December 31, 2014 and 2013, respectively.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 5 - MORTGAGE SERVICING RIGHTS (Continued)

 

The carrying amount of servicing rights recorded on loans serviced for others was $961,823 and $918,247, respectively, at December 31, 2014 and 2013, which approximated their fair value. The fair value of servicing rights at December 31, 2014 was determined using a discount rate of 9%, monthly prepayment speeds ranging from 262% to 407%, depending on the stratification of the specific right, ancillary income of $48 per loan annually, and incremental cost to service of approximately $43 per loan annually. The fair value of servicing rights at December 31, 2013 was determined using a discount rate of 9%, monthly prepayment speeds ranging from 260% to 667%, depending on the stratification of the specific right, ancillary income of $48 per loan annually, and incremental cost to service of approximately $43 per loan annually. The ancillary income and cost to service assumptions include projected loan defaults.

 

The following summarizes the activity pertaining to mortgage servicing rights along with the aggregate activity in related valuation allowances:

 

		Year Ended
		December 31,
		2014				2013
Balance, beginning		$	918,247			$	811,783
Mortgage servicing rights capitalized			150,546				224,975
Mortgage servicing rights amortized			(106,970	)			(173,239	)
Decrease in provision for loss in fair value			-				54,728
Balance, ending		$	961,823			$	918,247
Valuation allowances:
Balance, beginning		$	178,896			$	233,624
Decrease			-				(54,728	)
Balance, ending		$	178,896			$	178,896

 

Estimated future amortization expense on mortgage servicing rights is as follows:

 

Year Ending December 31,		Amount
2015		$	148,084
2016			108,035
2017			102,795
2018			80,761
2019			36,941
Thereafter			485,207
		$	961,823

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 6 - CORE DEPOSIT INTANGIBLE

 

The gross carrying value and accumulated amortization of the core deposit intangible is presented below:

 

		December 31,
		2014				2013
Core deposit intangible		$	3,258,000			$	3,258,000
Less accumulated amortization			(3,062,000	)			(2,987,000	)
		$	196,000			$	271,000

 

Amortization expense on core deposit intangible for the years ended December 31, 2014 and 2013 was $75,000 and $264,000, respectively.

 

Estimated future amortization expense on our remaining core deposit intangible is as follows:

 

Year Ending December 31,		Amount
2015		$	58,000
2016			58,000
2017			58,000
2018			22,000

 

NOTE 7 - GOODWILL

 

In accordance with ASC Topic 350, Intangibles- Goodwill and Other, goodwill and intangible assets with indefinite useful lives are no longer amortized; rather they are assessed, at least annually, for impairment. The Company tests goodwill for impairment on an annual basis as of September 30, or more often if events or circumstances indicate there may be impairment. Management has determined that the Company has only one reporting unit for purposes of evaluating goodwill.

 

Due to the current economic environment and other uncertainties, it is possible that our estimates and assumptions may adversely change in the future, and we may be required to record additional goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would result or, it if does, whether such charge would be material. However, any such future impairment loss would be limited to the remaining goodwill balance of $11,385,323 at December 31, 2014. Subsequent reversal of goodwill impairment losses is not permitted. At our annual impairment assessment date of September 30, 2014, our analysis indicated that no impairment existed.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 8 - DEPOSITS

 

Deposits are summarized as follows:

 

		At December 31,
		2014				2013
Noninterest-bearing		$	68,170,743			$	55,263,604
Interest-bearing transaction accounts			285,437,812				292,542,353
Savings			29,070,422				27,174,489
Time			127,627,662				127,559,246
		$	510,306,639			$	502,539,692

 

Included in time deposits were approximately $13,872,000 and $18,012,000 of brokered deposits at December 31, 2014 and 2013, respectively. Included in interest-bearing transaction accounts were approximately $83,281,000 and $106,525,000 of brokered deposits at December 31, 2014 and 2013, respectively.

 

Interest expense on deposits is summarized as follows:

 

		Year Ended
		December 31,
		2014				2013
Interest-bearing transaction accounts		$	738,536			$	1,018,327
Savings			50,422				77,990
Time			1,385,108				1,673,368
		$	2,174,066			$	2,769,685

 

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at year-end 2014 and 2013 were approximately $19,643,000 and $9,286,000.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 8 - DEPOSITS (Continued)

 

At December 31, 2014, the scheduled maturities of time deposits were as follows:

 

Year Ending December 31,		Amount
2015		$	50,986,504
2016			37,807,280
2017			24,942,541
2018			8,995,070
2019			1,815,309
Thereafter			3,080,958
		$	127,627,662

 

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES

 

The Bank had total advances from the FHLB of $2,487,745 and $13,980,005 at December 31, 2014 and 2013, respectively. The weighted average interest rate on the advances was 2.89% and 1.36% at December 31, 2014 and 2013, respectively. The range of rates on the outstanding advances at December 31, 2014 varied from 1.78% to 4.58%.

 

At December 31, 2014, the contractual maturities of advances were as follows:

 

Year Ending December 31,		Amount
2015		$	1,500,000
2016			987,745
		$	2,487,745

 

At December 31, 2014, in addition to FHLB stock, eligible residential real estate loans totaling approximately $77,790,000 were pledged to the FHLB to secure advances outstanding compared to $74,435,000 at December 31, 2013.

 

NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature daily. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The balance of our securities sold under agreements to repurchase fluctuates based upon our customers’ needs and activity. The Company has one significant customer whose balances fluctuate on a regular basis. Due to the nature of this customer’s business, large fluctuations in its accounts are a normal occurrence. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

 

Securities sold under agreements to repurchase were secured by securities with an approximate carrying amount of $32,639,000 and $54,673,000 at December 31, 2014 and 2013, respectively.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)

 

Information concerning securities sold under agreements to repurchase is summarized as follows:

 

		2014				2013
Average daily balance during the year		$	18,974,688			$	28,496,423
Average interest rate during the year			0.02	%			0.04	%
Maximum month-end balance during the year		$	23,275,868			$	30,962,993
Weighted average interest rate at year-end			0.02	%			0.05	%

 

NOTE 11 - SUBORDINATED DEBENTURES

 

The financial statements also include the following wholly-owned entity on a deconsolidated basis, First Clover Leaf Statutory Trust I. The sole asset of this trust are junior subordinated deferrable interest debentures. The Company issued $4,000,000 in May 2005 in cumulative trust preferred securities through this newly formed special-purpose trust. The proceeds of the offering were invested by the trust in junior subordinated debentures of Trust I. Distributions are cumulative and were payable at a fixed rate of 6.08% through May 2010 and then adjusted quarterly at a variable rate of 1.85% over the three month LIBOR rate, per annum of the stated liquidation amount of $1,000 per preferred security. At December 31, 2014 the interest rate was 2.09%. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The obligations of the trust are fully and unconditionally guaranteed, on a subordinated basis, by the Company. The trust preferred securities for Trust I are mandatorily redeemable upon the maturity of the debentures in May 2025, or to the extent of any earlier redemption of any debentures by the Company, and were callable beginning in May 2010. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s capital stock. For regulatory purposes, the trust preferred securities qualify as Tier I capital subject to certain provisions.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 12 - INCOME TAXES

 

The Company and the Bank file consolidated federal income tax returns and Illinois state income tax returns. The Company and the Bank are no longer subject to examination by federal and state taxing authorities for years prior to 2011.

 

Allocation of federal and state income taxes between current and deferred portions was as follows:

 

		Year Ended
		December 31,
		2014				2013
Federal:
Current		$	815,120			$	1,353,596
Deferred			71,545				(432,303	)
			886,665				921,293
State:
Current			397,280				405,650
Deferred			76,653				59,065
			473,933				464,715
		$	1,360,598			$	1,386,008

 

The Company’s income tax expense differed from the maximum statutory federal rate of 35% as follows:

 

		Year Ended
		December 31,
		2014				2013
Expected income taxes		$	1,815,376			$	1,659,724
Income tax effect of:
State taxes, net of federal income tax benefit			278,391				251,528
Tax exempt interest, net			(586,302	)			(419,935	)
Income taxed at lower rates			(51,868	)			(47,421	)
Other			(94,999	)			(57,888	)
		$	1,360,598			$	1,386,008

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 12 - INCOME TAXES (Continued)

 

The tax effects of principal temporary differences are shown in the following table:

 

		December 31,
		2014				2013
Deferred tax assets:
Allowance for loan losses		$	2,161,135			$	2,225,086
Deferred compensation			256,106				216,455
Accrued expenses			19,041				3,980
Purchase accounting adjustments for:
Loans			18,136				37,179
Securities			106,474				136,811
Unrealized loss on securities available for sale			-				994,004
OREO writedowns and expenses			464,326				557,506
Other			367,148				366,107
			3,392,366				4,537,128
Deferred tax liabilities:
Federal Home Loan Bank stock			(293,580	)			(300,687	)
Core deposit intangible			(76,164	)			(107,858	)
Mortgage servicing rights			(373,757	)			(365,462	)
Unrealized gain on securities available for sale			(115,890	)			-
Purchase accounting adjustments for:
Premises and equipment			(278,376	)			(291,512	)
Federal Home Loan Bank advances			(4,762	)			(7,958	)
Premises and equipment			(254,555	)			(210,278	)
			(1,397,084	)			(1,283,755	)
Net deferred taxes		$	1,995,282			$	3,253,373

 

Retained earnings at December 31, 2014 and 2013 include approximately $3,044,000 of the tax bad debt reserve which accumulated prior to 1988, for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $1,157,000 at December 31, 2014 and 2013. Management has determined that the probability of recapturing the reserve is not sufficient to record a liability.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 13 - EMPLOYEE BENEFITS

 

The Company has adopted a 401(k) plan and defined contribution profit sharing plan covering substantially all of its employees. The contribution to the plan for the profit sharing contribution is determined by the Board of Directors. The Company contributed $165,227 and $134,849 to the plan for the profit sharing contribution for the years ended December 31, 2014 and 2013, respectively. The 401(k) component of the plan allows participants to defer up to 50% of their compensation. Such deferral accumulates on a tax deferred basis until the employee withdraws the funds. The Company matched the employee contributions for the 401(k) plan up to 3% of compensation for the years ended December 31, 2014 and 2013. Total expense recorded for the Company’s match for the 401(k) plan was $144,807 and $117,366 for the years ended December 31, 2014 and 2013, respectively.

 

NOTE 14 - CAPITAL RATIOS

 

Banks and holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Company must meet specific capital guidelines that involve quantitative measures of the Bank’s and the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s and the Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the table below) of Tangible and Tier I capital to tangible assets, total and Tier I capital to risk-weighted assets, each as defined by applicable regulation. Management believes, as of December 31, 2014 and 2013, that the Bank and the Company meet all capital adequacy requirements to which they were subject.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. As of December 31, 2014, the Bank was considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

 

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval from the Office of the Comptroller of the Currency. Under these regulations, the amount of dividends that may be paid without prior consent in any calendar year is generally limited to the current year’s profits combined with retained net profits of the preceding two years, subject to the capital requirements described above.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 14 - CAPITAL RATIOS (Continued)

 

The Bank’s actual capital amounts and ratios as of December 31, 2014 and 2013 are presented in the following table.

 

																		To be Well Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		2014
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	%
		2013
Tier I Capital to Adjusted Total Assets		$	65,762,000				10.75	%		$	24,465,000				4.00	%		$	30,581,000				5.00	%
Tier I Capital to Risk Weighted Assets			65,762,000				16.63	%			15,820,000				4.00	%			23,729,000				6.00	%
Total Capital to Risk Weighted Assets			69,326,000				17.53	%			31,639,000				8.00	%			39,549,000				10.00	%

 

The Company’s actual capital amounts and ratios as of December 31, 2014 and 2013 are presented in the following table.

 

																		To be Well Capitalized
										For Capital								Under Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount		Ratio
		2014
Tier I Capital to Adjusted Total Assets		$	65,256,000				10.54	%		$	24,764,000				4.00	%		N/A		N/A
Tier I Capital to Risk Weighted Assets			65,256,000				15.70	%			16,630,000				4.00	%		N/A		N/A
Total Capital to Risk Weighted Assets			73,210,000				17.61	%			33,260,000				8.00	%		N/A		N/A
		2013
Tier I Capital to Adjusted Total Assets		$	63,040,000				9.92	%		$	25,419,000				4.00	%		N/A		N/A
Tier I Capital to Risk Weighted Assets			63,040,000				15.91	%			15,847,000				4.00	%		N/A		N/A
Total Capital to Risk Weighted Assets			70,604,000				17.82	%			31,694,000				8.00	%		N/A		N/A

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 15 - COMMITMENTS, CONTINGENCIES AND CREDIT RISK

 

The Company and the Bank could be a party to legal actions in the normal course of business. In the opinion of management, the ultimate resolution of these matters is generally not expected to have a material effect on the financial position or the results of operations of the Company.

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in addition to the amounts recognized in the consolidated balance sheets.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

A summary of the notional or contractual amounts of financial instruments, primarily variable rate, with off-balance-sheet risk follows:

 

														Range of Rates
		Variable Rate				Fixed Rate				Total				on Fixed Rate
		Commitments				Commitments				Commitments				Commitments
		2014
Commitments to extend credit		$	34,570,790			$	24,254,679			$	58,825,469				3.00% - 18.00	%
Standby letters of credit			1,361,322				300,765				1,662,087				3.50% - 6.00	%
		2013
Commitments to extend credit		$	14,758,140			$	55,460,066			$	70,218,206				1.85% - 18.00	%
Standby letters of credit			2,228,498				27,000				2,255,498				3.50% - 9.25	%

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is based on management’s credit evaluation of the counterparty.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities of customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The Bank holds collateral, which may include accounts receivables, inventory, property and equipment, and income producing properties, if deemed necessary to support such commitments. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. At December 31, 2014 and 2013, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 16 - FAIR VALUE MEASUREMENTS

 

The Company determines the fair market values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

 

·

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·

Level 2 - Inputs other than quoted prices included with Level 1 that are observable for the asset or liability either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived from or corroborated by market data by correlation or other means.

 

·

Level 3 - Unobservable inputs for determining the fair value of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

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. 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 December 31, 2014 and 2013, 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. During the years ended December 31, 2014 and 2013, there were no transfers between Level 1 and Level 2. The valuation methodology was consistent for the years ended December 31, 2014 and 2013.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

NOTE 16 - FAIR VALUE MEASUREMENTS (Continued)

 

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 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 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.

 

Mortgage Servicing Rights: Annually, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. Fair value is determined based on market prices for comparable mortgage servicing contracts, when available, resulting in a Level 2 classification, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data which also results in a Level 2 classification.

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 16 - FAIR VALUE MEASUREMENTS (Continued)

 

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

 

		Fair Value Measurements at December 31, 2014 Using:
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
Assets:		(Level 1)				(Level 2)				(Level 3)				Total
Securities:
U.S. government agency obligations		$	-			$	25,869,606			$	-			$	25,869,606
State and municipal securities			-				45,573,608				-				45,573,608
Other securities			-				248,501				-				248,501
Mortgage-backed: residential			-				32,778,977				-				32,778,977
Total securities available for sale		$	-			$	104,470,692			$	-			$	104,470,692

 

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

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 16 - FAIR VALUE MEASUREMENTS (Continued)

 

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

 

		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

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 16 - FAIR VALUE MEASUREMENTS (Continued)

 

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

 

Foreclosed assets are collateral dependent and are recorded at the lesser of the recorded investment in the receivable or the appraised value less costs to sell and may be revalued on a nonrecurring basis. Foreclosed assets measured at fair value less costs to sell on a nonrecurring basis during the year ended December 31, 2014, had a net carrying amount of $1,042,087, which is made up of the outstanding balance of $1,754,187, net of cumulative write-downs of $712,100 which includes $202,694 that occurred during the year ended December 31, 2014. At December 31, 2013, foreclosed assets had a carrying amount of $2,815,588, which was made up of the outstanding balance of $4,123,275, net of write-downs of $1,307,687.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 16 - FAIR VALUE MEASUREMENTS (Continued)

 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2,423,703, with a valuation allowance of $372,899 at December 31, 2014, resulting in a net decrease in provision for loan losses of $43,704 for the year ended

December 31, 2014. At December 31, 2013, impaired loans had a principal balance of $3,080,286 with a valuation allowance of $506,675, resulting in a net increase in provision for loan losses of $372,982 for the year ended December 31, 2013.

 

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

%

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 16 - FAIR VALUE MEASUREMENTS (Continued)

 

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

 

Fair Value

Valuation Techniques

Unobservable Inputs

Range

Weighted Average

Foreclosed assets:

Real estate:

One-to-four family

$

103,500

Sales Comparison

Adjustment for difference between comparable sales

-2% to 20%

8.3

%

Multi-family

118,100

Sales Comparison

Adjustment for difference between comparable sales

2% to 26%

15.5

%

Commercial

692,230

Sales Comparison

Adjustment for difference between comparable sales

-2% to 0%

-1.9

%

Construction and land

1,901,758

Sales Comparison

Adjustment for difference between comparable sales

-21% to 36%

5.5

%

Impaired loans:

Real estate loans:

One-to-four family

$

659,261

Sales Comparison

Adjustment for difference between comparable sales

-11% to 27%

2.9

%

Commercial

975,414

Sales Comparison

Adjustment for difference between comparable sales

-28% to 16%

-9.2

%

Construction and land

917,491

Sales Comparison

Adjustment for difference between comparable sales

-14% to 36%

19.1

%

Consumer:

Home Equity

21,445

Sales Comparison

Adjustment for difference between comparable sales

-9% to -3%

-5.6

%

 

NOTE 17 - 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.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

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 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.

 

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.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

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 December 31, 2014 and 2013 that have not been previously presented and the methods and assumptions used to estimate those fair values.

 

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

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

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

 

In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment.

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following tables summarize the changes within each classification of accumulated other comprehensive income, net of tax, for the year ended December 31, 2014 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income.

 

Changes in Accumulated Other Comprehensive Income by Component
For the Year Ended December 31, 2014(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Loss at January 1, 2014		$	(1,692,488	)		$	(1,692,488	)
Other comprehensive income before reclassifications			1,958,938				1,958,938
Amount reclassified from accumulated other comprehensive income(2)			(69,119	)			(69,119	)
Net current-period other comprehensive income			1,889,819				1,889,819
Accumulated Other Comprehensive Income at December 31, 2014		$	197,331			$	197,331

 

⁽¹⁾ All amounts are net of tax.

⁽²⁾ See table below for details about reclassifications.

 

Reclassifications out of Accumulated Other Comprehensive Income
For the Year Ended December 31, 2014
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		$	109,712			Gain on sale of securities
			(40,593	)		Tax expense
Total reclassifications for the period		$	69,119			Net of tax

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

 

The following tables summarize the changes within each classification of accumulated other comprehensive income, net of tax, for the year ended December 31, 2013, and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component
For the Year Ended December 31, 2013(1)
		Unrealized Gains and Losses on Available-for-Sale Securities				Total
Accumulated Other Comprehensive Income at January 1, 2013		$	1,196,111			$	1,196,111
Other comprehensive loss before reclassifications			(2,662,342	)			(2,662,342	)
Amount reclassified from accumulated other comprehensive income(2)			(226,257	)			(226,257	)
Net current-period other comprehensive loss			(2,888,599	)			(2,888,599	)
Accumulated Other Comprehensive Loss at December 31, 2013		$	(1,692,488	)		$	(1,692,488	)

 

⁽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 Year Ended December 31, 2013
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities		$	359,138			Gain on sale of securities
			(132,881	)		Tax expense
Total reclassifications for the period		$	226,257			Net of tax

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 19 - LIQUIDATION ACCOUNT

 

As required by federal regulations, a liquidation account in the amount of $20,700,000 was established in conjunction with our 2006 conversion from a mutual savings bank to a federal savings association.

 

As a result, each eligible account holder or supplemental account holder at the time of conversion is entitled to a proportionate share of this account in the unlikely event of a complete liquidation of the Bank, and only in such event. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance. The Bank may not declare, pay a dividend on, or repurchase any of its capital stock of the Bank, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements. Due to various natural events, such as death, relocation, and general attrition of accounts, the balance in the liquidation account has been reduced to $2,797,000 at December 31, 2014.

 

NOTE 20 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

 

Financial information pertaining only to First Clover Leaf Financial Corp. is as follows:

 

BALANCE SHEETS

December 31, 2014 and 2013

 

		2014				2013
Assets
Cash and cash equivalents		$	1,141,653			$	691,126
Investment in common stock of subsidiary			79,868,529				75,817,958
Other assets			173,079				680,685
Total assets		$	81,183,261			$	77,189,769
Liabilities and Stockholders' Equity
Subordinated debentures		$	4,000,000			$	4,000,000
Accrued interest payable			7,424				7,473
Other liabilities			45,944				86,666
Total liabilities			4,053,368				4,094,139
Stockholders' Equity
Common stock			700,728				700,728
Additional paid-in-capital			55,818,936				55,818,936
Retained earnings			20,412,898				18,268,454
Accumulated other comprehensive income (loss)			197,331				(1,692,488	)
			77,129,893				73,095,630
Total liabilities and stockholders' equity		$	81,183,261			$	77,189,769

 

(Continued)

 

  

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 20 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)

 

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Years ended December 31, 2014 and 2013

 

		2014				2013
Dividends from subsidiary		$	2,000,000			$	5,600,000
Interest income			2,614				6,022
Interest expense			(86,901	)			(88,286	)
Other income			51,205				-
Other expenses			(524,678	)			(751,605	)
Income before income tax benefit and equity in undistributed net income of subsidiary			1,442,240				4,766,131
Income tax benefit			223,200				333,600
Income before equity in undistributed net income of subsidiary			1,665,440				5,099,731
Equity in undistributed (distributions in excess of) net income of subsidiary			2,160,752				(1,743,670	)
Net income		$	3,826,192			$	3,356,061
Comprehensive income		$	5,716,011			$	467,462

 

(Continued)

 

 

FIRST CLOVER LEAF FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

 

 

NOTE 20 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)

 

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2014 and 2013

 

		2014				2013
Cash Flows from Operating Activities
Net income		$	3,826,192			$	3,356,061
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Distributions in excess of (equity in undistributed) net income of subsidiary			(2,160,752	)			1,743,670
Decrease in other assets			507,606				151,816
Decrease in accrued interest payable			(49	)			(477	)
Decrease in other liabilities			(40,722	)			(3,004	)
Net cash provided by operating activities			2,132,275				5,248,066
Cash Flows from Investing Activities
Loan payments			-				247,971
Net cash provided by investing activities			-				247,971
Cash Flows from Financing Activities
Repurchase of common stock			-				(3,888,712	)
Dividends			(1,681,748	)			(1,739,523	)
Net cash used in financing activities			(1,681,748	)			(5,628,235	)
Net increase (decrease) in cash and cash equivalents			450,527				(132,198	)
Cash and cash equivalents:
Beginning of year			691,126				823,324
End of year		$	1,141,653			$	691,126