PROSPECTUS
Clover Leaf Financial Corp.
(Proposed holding company for Clover Leaf Bank, SB)
Up to 575,000 Shares of Common Stock
Clover Leaf Bank, SB is converting from the mutual to the stock form of
organization. As part of this conversion, Clover Leaf Financial Corp. is
offering its shares of common stock for sale. Clover Leaf Financial Corp. will
be the holding company for Clover Leaf Bank after the conversion. Under certain
circumstances, Clover Leaf Bank may proceed with its conversion without
utilizing a holding company. Under these circumstances, Clover Leaf Bank, and
not Clover Leaf Financial, will offer its shares of common stock for sale.
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TERMS OF THE OFFERING
Price Per Share: $10.00
Expected Trading Market: OTC Bulletin Board
Minimum Purchase: 25 shares ($250)
MINIMUM MAXIMUM
---------- ----------
Number of shares: 425,000 575,000
Gross offering proceeds: $4,250,000 $5,750,000
Estimated offering expenses: $ 444,000 $ 444,000
Estimated net proceeds: $3,806,000 $5,306,000
Estimated net proceeds per share: $ 8.95 $ 9.23
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With regulatory approval, we may increase the maximum number of shares by
up to 15%, to 661,250 shares.
Please refer to "Risk Factors" beginning on page 7 of this document. An
investment in the common stock is subject to various risks, including possible
loss of principal.
Neither the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation, the Illinois Office of Banks and Real Estate, nor any
state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The shares of common stock offered hereby are not savings accounts or
deposits and are not insured by the Federal Deposit Insurance Corporation or any
other government agency.
Keefe, Bruyette & Woods will use its best efforts to assist Clover Leaf
Financial in selling at least the minimum number of shares but does not
guarantee that this number will be sold. Keefe, Bruyette & Woods is not
obligated to purchase any shares of common stock in the offering. Keefe,
Bruyette & Woods intends to make a market in the common stock.
We have granted depositors of Clover Leaf Bank as of certain dates the
right to purchase our stock before we sell any shares to the general public. If
you wish to exercise this right, we must receive your order no later than 12:00
noon, central time, on December 12, 2001. We may offer any remaining shares in a
community offering to persons who do not have these priority rights. We may
terminate the community offering at any time without notice. We will place funds
we receive for stock purchases in a separate interest-bearing account at Clover
Leaf Bank until we complete or terminate the offering.
For assistance, please contact the Stock Information Center at (618)
656-9650.
Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is November 13, 2001
Table of Contents
Page
----
SUMMARY ................................................................... 2
RISK FACTORS .............................................................. 7
SELECTED FINANCIAL DATA ................................................... 13
RECENT DEVELOPMENTS ....................................................... 14
PROPOSED MANAGEMENT PURCHASES ............................................. 19
USE OF PROCEEDS ........................................................... 19
DIVIDEND POLICY ........................................................... 21
MARKET FOR COMMON STOCK ................................................... 22
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE .................... 23
CAPITALIZATION ............................................................ 24
PRO FORMA DATA ............................................................ 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................... 30
BUSINESS OF CLOVER LEAF FINANCIAL CORP .................................... 44
BUSINESS OF CLOVER LEAF BANK, SB .......................................... 44
REGULATION ................................................................ 61
TAXATION .................................................................. 69
MANAGEMENT ................................................................ 70
THE CONVERSION ............................................................ 77
RESTRICTIONS ON ACQUISITIONS OF STOCK AND RELATED TAKEOVER
DEFENSIVE PROVISIONS .................................................... 95
DESCRIPTION OF CAPITAL STOCK OF CLOVER LEAF FINANCIAL ..................... 99
DESCRIPTION OF CAPITAL STOCK OF CLOVER LEAF BANK .......................... 100
LEGAL AND TAX MATTERS ..................................................... 101
CHANGE IN ACCOUNTANTS ..................................................... 102
EXPERTS ................................................................... 102
WHERE YOU CAN FIND MORE INFORMATION ....................................... 102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ................................ F-1
[Map of Clover Leaf Bank's Branch Network Appears Here]
200 East Park Street
Edwardsville, Illinois 62025
2143 South State Route 157
Edwardsville, Illinois 62025
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this prospectus carefully, including the
financial statements and the notes to financial statements of Clover Leaf Bank,
SB.
Clover Leaf Financial Corp.
We formed Clover Leaf Financial in September 2001 as a Delaware
corporation. Clover Leaf Financial is expected to be the holding company for
Clover Leaf Bank following the conversion. Clover Leaf Financial has not engaged
in any significant business to date. Our executive office is located at 200 East
Park Street, Edwardsville, Illinois, 62025, and our telephone number is (618)
656-6122.
Clover Leaf Bank, SB
Founded in 1889, we are a customer-oriented, Illinois-chartered savings
bank. We operate from our main office in Edwardsville, Illinois, and one branch
office. We emphasize personal service for our customers, and providing prompt
responses to customers' needs and inquiries is an important part of our business
strategy. Edwardsville, Illinois has experienced significant growth and
development in the past 15 years. We recently have altered the focus of the
products and services we offer to take advantage of the opportunity this growth
has presented. We have expanded our commercial lending, in particular our
commercial business and commercial real estate lending. Our commercial business
loans have increased to $4.4 million at June 30, 2001 from $1.1 million at
December 31, 1999, and our commercial real estate loans have increased to $7.8
million at June 30, 2001 from $2.7 million at December 31, 1999. During this
period we also discontinued indirect automobile lending, and consequently
automobile loans decreased to $4.4 million at June 30, 2001 from $6.9 million at
December 31, 1999. We have sought to expand our banking relationships with our
commercial borrowers by having them establish deposit accounts with us. As a
result, we have significantly increased our money market deposit accounts to
$13.1 million at June 30, 2001 from $4.0 million at December 31, 1999. A full
description of our products and services begins on page 44 of this prospectus.
Our Conversion to Stock Form
The conversion is a series of transactions that will convert Clover Leaf
Bank from its current status as a mutual savings bank to a stock savings bank.
Following the conversion, we will retain our current name, "Clover Leaf Bank,
SB," but we expect to be a subsidiary of Clover Leaf Financial. As a stock
savings bank, we intend to continue our current business strategies, and we will
continue to be subject to the regulation and supervision of the Illinois Office
of Banks and Real Estate and the Federal Deposit Insurance Corporation. In
addition, Clover Leaf Financial will be subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System and the
Securities and Exchange Commission.
In the event that we decide not to utilize the holding company structure as
part of the conversion, we will sell to the public common stock of Clover Leaf
Bank, instead of common stock of Clover Leaf Financial. The terms of the
offering would not change, except that Clover Leaf Bank would receive all of the
net proceeds of the offering. We will not utilize the holding company structure
if Clover Leaf Financial does not receive the approval of the Board of Governors
of the Federal Reserve System to become a bank holding company for Clover Leaf
Bank, or if Clover Leaf Financial's approval contains conditions that we find to
be objectionable or overly burdensome.
2
As part of the conversion, we are offering between 425,000 and 575,000
shares of common stock. The purchase price will be $10.00 per share. All
investors will pay the same price per share in the offering. We may increase the
amount of stock to be sold to 661,250 shares without any further notice to you.
The offering proceeds will increase our capital and the amount of funds
available to us for lending and investment. This will give us greater
flexibility to diversify operations and expand the products and services we
offer. In addition, we will be able to compensate our employees, officers and
directors in the form of stock.
Potential Conversion to a Commercial Bank Charter
Following completion of our conversion to stock form, and consistent with
our business plan to emphasize commercial lending and commercial business
banking, Clover Leaf Bank may convert to either a national bank or an
Illinois-chartered commercial bank. A conversion to a commercial bank charter
would be a separate transaction from our proposed mutual-to-stock conversion,
and would require separate corporate and regulatory approvals. Clover Leaf
Bank's board of directors, however, may choose not to proceed with a conversion
to a commercial bank charter. Upon consummation of a charter conversion, the
converted bank would succeed to all of Clover Leaf Bank's assets and
liabilities, and initially would continue to conduct business in substantially
the same manner as currently conducted by Clover Leaf Bank. Over time, however,
management anticipates that Clover Leaf Bank will focus more on commercial
lending and less on mortgage lending consistent with a commercial bank charter.
In the event Clover Leaf Bank converts to an Illinois-chartered commercial
bank, it would remain subject to regulation and supervision by the Illinois
Office of Banks and Real Estate and by the Federal Deposit Insurance
Corporation. In the event Clover Leaf Bank converts to a national bank, the
Office of the Comptroller of the Currency would be the primary regulator of
Clover Leaf Bank. Clover Leaf Bank would remain a member of the Federal Home
Loan Bank of Chicago if it converts to a commercial bank charter. See "The
Conversion--Potential Conversion to a Commercial Bank Charter" for a discussion
of our potential conversion to a commercial bank charter, including our current
operating restrictions under a savings bank charter.
How We Determined the Offering Range
The offering range is based on an independent appraisal of our pro forma
market value prepared by Keller & Company, Inc., a firm experienced in
appraisals of financial institutions. The pro forma market value is our
estimated market value assuming the sale of shares in this offering. Keller &
Company has estimated that in its opinion, as of August 24, 2001 the value was
between $4,250,000 and $5,750,000, with a midpoint of $5,000,000. The appraisal
was based in part upon our financial condition and operations and the effect of
the additional capital we will raise from the sale of common stock in this
offering.
We may increase the amount of common stock offered by up to 15%, up to a
total of 661,250 shares, without any further notice to you. The appraisal will
be updated before we complete the conversion. If the pro forma market value of
the common stock at that time is either below $4,250,000 or above $6,612,500, we
will notify you, and you will have the opportunity to change or cancel your
order. See "The Conversion--Stock Pricing and Number of Shares to be Issued" for
a description of the factors and assumptions used in determining the stock price
and offering range.
Two measures investors use to analyze an issuer's stock are the ratio of
the offering price to the issuer's book value and the ratio of the offering
price to the issuer's annual net income.
3
Keller & Company considered these ratios in preparing its appraisal. Book value
is the same as total equity, and represents the difference between the issuer's
total assets and total liabilities.
The following table presents the ratio of the offering price to our pro
forma book value and earnings per share for the periods indicated. See "Pro
Forma Data" for a description of the assumptions we used in making these
calculations.
At and For the Six Months Ended June 30, 2001
--------------------------------------------------
425,000 500,000 575,000 661,250
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
Pro forma price to book value ratio ... 44.39% 48.88% 52.77% 56.75%
====== ====== ====== ======
Pro forma price to earnings ratio ..... 26.32x 29.41x 31.25x 33.33x
====== ====== ====== ======
At and For the Year Ended December 31, 2000
--------------------------------------------------
425,000 500,000 575,000 661,250
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
Pro forma price to book value ratio ... 45.23% 49.73% 53.65% 57.64%
====== ====== ====== ======
Pro forma price to earnings ratio ..... (30.30)x (38.46)x (47.62)x (58.82)x
====== ====== ====== ======
The independent appraisal does not indicate market value. Do not assume or
expect that Clover Leaf Bank's valuation as indicated above means that the
common stock will trade at or above the $10.00 purchase price after the
conversion.
Use of Proceeds
The primary reason for the conversion and the offering is to raise capital
for Clover Leaf Financial and Clover Leaf Bank. Clover Leaf Financial will use
at least 50% of the net offering proceeds to buy all of the common stock of
Clover Leaf Bank, and it will retain the remaining net proceeds for general
business purposes. These purposes may include investment in securities, paying
cash dividends or repurchasing shares of common stock, subject to statutory and
regulatory restrictions. Clover Leaf Bank will use the funds it receives for
general business purposes, including originating loans and purchasing
securities.
Clover Leaf Financial also will loan funds to the employee stock ownership
plan to fund its purchase of common stock equal to 8% of the shares issued in
the conversion. These purchases will be made either at the time of the
conversion or in open market transactions following the conversion.
In the event that we decide not to utilize the holding company structure as
part of the conversion, Clover Leaf Bank will retain all of the net proceeds of
the offering. Clover Leaf Bank would be required to obtain a loan from a third
party to fund the purchase of shares by the employee stock ownership plan.
Clover Leaf Bank may be subject to an additional tax liability if it repurchases
its common stock following the offering.
Clover Leaf Financial and Clover Leaf Bank may also use the proceeds of the
offering to expand and diversify their businesses, although they do not have any
contracts, understandings or arrangements for the acquisition of other financial
institutions or financial service companies.
4
The Amount of Stock You May Purchase
The minimum purchase is $250 (25 shares). Generally, no individual or
individuals, acting through a single account, may purchase more than $150,000
(15,000 shares). If any of the following persons purchase stock, their
purchases, when combined with your purchases, cannot exceed $200,000:
o relatives of you or your spouse living in your house;
o companies, trusts or other entities in which you have a substantial
interest or hold a position as an officer or a partner; or
o other persons who may be acting together with you.
We may decrease or increase the maximum purchase limitation without notifying
you.
How We Will Prioritize Orders If We Receive Orders for More Shares Than Are
Available for Sale
You might not receive any or all of the shares you order. If we receive
orders for more shares than are available, we will allocate stock, pursuant to
our plan of conversion, to the following persons or groups in order of priority:
o ELIGIBLE ACCOUNT HOLDERS - Our depositors with a balance of at least
$50 at the close of business on May 31, 2000. Any remaining shares
will be offered to:
o OUR TAX-QUALIFIED EMPLOYEE PLANS - Any remaining shares will be
offered to:
o SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Our depositors with a balance
of at least $50 at the close of business on September 30, 2001. Any
remaining shares will be offered to:
o OTHER MEMBERS - Our depositors as of the close of business on November
9, 2001.
If the above persons do not subscribe for all of the shares offered, we
will offer the remaining shares to the general public in a community offering,
giving preference to persons who reside in Madison County, Illinois.
How You Can Pay For Stock
You can pay for your shares by check, bank draft or money order, or by
authorization of withdrawal from deposit accounts you maintain at Clover Leaf
Bank, without any penalty to you for early withdrawal. Although we will not
withdraw your funds until the completion of the stock offering, you will not be
able to otherwise use the funds you designated for withdrawal. You may also pay
for your shares by cash, but only if delivered in person to Clover Leaf Bank's
Stock Information Center. If you wish to pay cash, we request that you exchange
your cash for a check from Clover Leaf Bank. If you wish to use your Clover Leaf
Bank individual retirement account to pay for your shares, you must contact the
Stock Information Center no later than December 3, 2001, as you must complete
additional paperwork to use a Clover Leaf Bank individual retirement account.
5
Your Subscription Rights Are Not Transferable
You may not assign or sell your subscription rights. Any transfer of
subscription rights is prohibited by law. If you exercise subscription rights,
you will be required to certify that you are purchasing shares solely for your
own account and that you have no agreement or understanding regarding the sale
or transfer of shares. We intend to pursue any and all legal and equitable
remedies if we learn of the transfer of any subscription rights. We will reject
orders that we determine to involve the transfer of subscription rights.
Benefits to Management from the Offering
Our full-time employees will benefit from the offering through our employee
stock ownership plan. This plan will buy shares of stock with a portion of the
proceeds of the offering and then allocate the stock to employees over a period
of time, at no cost to the employees. You can find more information about our
employee stock ownership plan by reading the section of this document entitled
"Management--Benefit Plans--Employee Stock Ownership Plan and Trust." Following
the conversion, we also intend to implement a recognition and retention plan and
a stock option plan, which will benefit our officers and directors. These two
plans will not be implemented unless stockholders approve them, and stockholder
approval cannot be obtained for at least six months after the conversion. The
recognition and retention plan and the stock option plan may require regulatory
approval. If stockholders approve our recognition and retention plan, our
officers and directors will be awarded shares of common stock at no cost to
them. If stockholders approve our stock option plan, stock options will be
granted at no cost to officers and directors, but these persons will be required
to pay the applicable option exercise price at the time of exercise in order to
receive the shares of common stock.
The following table summarizes the benefits that directors, officers and
employees may receive from the conversion at the midpoint of the offering range:
Value of Shares
Individuals Eligible % of Based on Midpoint
Plan to Receive Awards Shares Sold of Offering Range
------------------------------ ---------------------- ----------- -----------------
Employee stock ownership plan All employees 8% $400,000
Recognition and retention plan Directors and officers 4%(1) $200,000
Stock option plan Directors and officers 10% --(2)
----------
(1) If we implement a recognition and retention plan within 12 months after the
conversion, Federal Deposit Insurance Corporation regulations would limit
the plan to no more than 4% of the shares sold in the conversion. The 4%
limitation would not apply if we implement the plan more than 12 months
after the conversion. It is our present intention to implement the plan no
earlier than 12 months after the conversion.
(2) Stock options will be granted with a per share exercise price at least
equal to the market price of our common stock on the date of grant. The
value of a stock option will depend upon increases, if any, in the price of
our stock during the life of the stock option.
When combined with the proposed stock purchases by our directors and
officers, the above plans may give our directors and officers effective voting
control following the conversion. See "Risk Factors--The Expected Voting Control
by Management and Employees Could Enable Insiders to Prevent a Merger That May
Provide Stockholders a Premium for Their Shares."
6
Risk Factors
An investment in our common stock is subject to various risks, including
possible loss of principal. Consequently, our common stock may not be a suitable
investment for persons who are unable to evaluate the risks of the investment.
In making an investment decision, you must rely on your own examination of
Clover Leaf Financial, Clover Leaf Bank and the terms of the offering, including
the merits and risks involved. We encourage you to consult with your investment
advisor before deciding whether to purchase our common stock. In addition,
please refer to "Risk Factors" beginning on page 7 of this document.
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in deciding whether to purchase our common
stock.
We Had an Operating Loss During Our Last Full Fiscal Year and Losses May
Continue in the Future or Have an Adverse Impact on Our Stock Price
Clover Leaf Bank had a net operating loss of $171,000 for the year ended
December 31, 2000. The primary reason for the operating loss was our provision
for loan losses of $428,000 during the year. We made this provision for loan
losses following the charge-off of all assets we had classified as "Loss"
assets, as described in "Regulation--Clover Leaf Bank--Memorandum of
Understanding." Our operating results were also affected by our narrowing
interest rate spread, which is the difference between the weighted average yield
on our interest-earning assets and the weighted average cost of our
interest-bearing liabilities. Our interest rate spread decreased to 1.80% for
the six months ended June 30, 2001 from 2.40% for the six months ended June 30,
2000.
We May Not Form a Holding Company as Part of the Conversion, and there are
Material Differences Between the Rights of Stockholders of a Delaware
Corporation and of an Illinois-Chartered Savings Bank
We may determine not to utilize the holding company structure as part of
the conversion, and you will not be given the opportunity to modify or withdraw
your order if we complete the conversion and stock offering without the use of a
holding company. Stockholders of a Delaware corporation have different rights
and are subject to different restrictions than stockholders of an
Illinois-chartered savings bank, including differences in voting rights,
regulation and anti-takeover protections. Moreover, it would be easier for a
holding company to repurchase its common stock following the conversion.
There are Increased Lending Risks Associated with Commercial Real Estate,
Commercial Business and Home Equity Lending and We May Experience Losses by
Originating These Types of Loans
In recent years we have increased our commercial real estate and commercial
business lending, and we have begun recently to emphasize home equity lending,
consistent with safe and sound practices. We have not expanded, and we do not
intend to expand, our primary geographic lending area in connection with the
origination of these types of loans. At June 30, 2001, our commercial real
estate loans totaled $7.8 million, or 12.9% of total loans, which represented an
increase of $5.1 million, or 187.8%, from $2.7 million of commercial real estate
loans at December 31, 1999. Commercial business loans totaled $4.4 million, or
7.2% of total loans at June 30, 2001, which represented an increase of $3.3
million, or 295.5%, from $1.1 million of commercial business loans at December
31, 1999. We have not yet experienced an increase in home equity lending. These
types of loans generally involve greater risk of loss than
7
one- to four-family residential mortgage loans because repayment of the loans
often depends on the successful operation of a business or the underlying
property, and the loans normally have larger principal balances than one- to
four-family residential mortgage loans.
Changes in Interest Rates May Hurt Our Profitability
At June 30, 2001, our cumulative one-year gap position, the difference
between the amount of interest-earning assets maturing or repricing within one
year and interest-bearing liabilities maturing or repricing within one year,
expressed as a percentage of assets, was a negative 37.1%. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Our loan portfolio consists primarily
of loans that mature in more than five years. However, $34.2 million, or 62.9%,
of our certificates of deposit mature within one year. Therefore, if interest
rates rise, the amount of interest we pay on deposits is likely to increase more
quickly than the amount of interest we receive on our loans and investments.
This could cause our interest rate spread, net interest income and profits to
decrease, or could result in losses. If interest rates fall, many borrowers may
refinance more quickly, and interest rates on interest-earning assets could fall
faster than the interest rates on our liabilities. This also could cause our
interest rate spread, net interest income and profits to decrease, or could
result in losses. Management presently believes that a prolonged increase in
interest rates may be more beneficial to us than a prolonged decrease in
interest rates, given the current structure of our balance sheet. Investors
should note, however, that an increase in interest rates may be less beneficial
than a decrease in interest rates, or may in fact be detrimental to us. Although
we have changed our lending priorities as part of an effort to shorten the
maturities or repricing of our interest earning assets and, therefore, better
match the maturities or repricing of our interest-bearing liabilities, there can
be no assurance that we will do so successfully. For additional information on
our exposure to changes in interest rates, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management of Market
Risk."
We are Subject to a Formal Supervisory Agreement and We Have Adopted Supervisory
Resolutions
On April 9, 2001, Clover Leaf Bank entered into a Supervisory Agreement
with the Illinois Office of Banks and Real Estate relating to the preparation
and timely filing of Clover Leaf Bank's audited financial statements. Under the
Illinois Savings Bank Act, we are required to file audited financial statements
with the Illinois Office of Banks and Real Estate within 90 days of the end of
our fiscal year. We failed to prepare and file audited financial statements with
the Illinois Office of Banks and Real Estate relating to the year ended December
31, 2000 in a timely manner. As part of the Supervisory Agreement, we agreed to
file the required audited financial statements by May 31, 2001. These statements
were filed in accordance with the Supervisory Agreement. We further agreed that
we would take certain actions in connection with the engagement of auditors and
the audit of our financial statements for the year ending December 31, 2001,
and, to date, we are in compliance with this aspect of the Supervisory
Agreement. We have already engaged our external auditors to prepare our audited
financial statements for the year ending December 31, 2001, and management
intends to comply with the remaining provisions of the Supervisory Agreement
relating to the preparation of future audited financial statements. The failure
to take the actions required by the Supervisory Agreement could result in the
Illinois Office of Banks and Real Estate imposing penalties or restrictions on
the way we conduct our business, or taking custody of Clover Leaf Bank.
In September 2001, the board of directors of Clover Leaf Bank adopted
resolutions regarding the implementation of additional programs and policies to
assist in measuring and monitoring interest rate risk, to lessen the effect of
changes in interest rates on Clover Leaf Bank, to maintain a minimum Tier 1
capital ratio of 7.0% and to improve earnings. The board resolved
8
to adopt a contingency plan regarding the maintenance of the minimum capital
level, and further resolved to update our strategic/profit plan to reflect the
board's actions. If we fail to comply with the board resolutions, the Federal
Deposit Insurance Corporation may take enforcement action against us.
We May Not Receive Regulatory Approval to Convert to a Commercial Bank Charter
A conversion to a national bank or Illinois-chartered commercial bank is
subject to the approval of the Office of the Comptroller of the Currency (in the
case of a national bank) or the Illinois Office of Banks and Real Estate (in the
case of an Illinois-chartered commercial bank). These agencies may deny a
conversion or impose burdensome conditions on an approval. Under these
circumstances, Clover Leaf Bank's board of directors may choose not to proceed
with conversion to a national bank or an Illinois-chartered commercial bank. If
the board of directors elects not to proceed with a charter conversion, or to
proceed with a charter conversion despite the imposition of conditions by
federal or state regulators, we will not resolicit subscribers for our common
stock.
Our Low Return on Equity and Increased Non-Interest Expense May Cause Our Common
Stock Price to Decline
Net income divided by average equity, known as "return on equity," is a
ratio many investors use to compare the performance of a financial institution
to its peers. Following the conversion, our return on equity is expected to be
significantly lower than that of comparable savings banks until we are able to
increase our net interest income by originating or purchasing new loans. Our
return on equity also will be reduced by the increased equity from the
conversion and increased expenses due to the costs of being a public company,
added expenses associated with our employee stock ownership plan, and, later on,
our stock recognition and retention plan. Until we can increase our net interest
income and non-interest income, we expect our return on equity to be below the
industry average, which may negatively impact the value of our common stock.
Strong Competition In Our Market Area May Limit Our Growth and Profitability
We conduct most of our business in Madison County, Illinois. Competition in
the banking and financial services industry in our market area is intense. Our
profitability depends in large part on our continued ability to compete
successfully. We compete with commercial banks, savings institutions, credit
unions, finance companies, mutual funds, insurance companies, and brokerage and
investment banking firms. There are 20 commercial banks and five savings
institutions, including Clover Leaf Bank, located in Madison County. Based on
deposit data as of June 30, 2000, we held 1.99% of Madison County's deposits,
giving us the thirteenth largest market share as of that date. Many of these
competitors have substantially greater resources and lending limits than we do,
and offer certain services that we do not or cannot provide. This strong
competition may limit Clover Leaf Bank's ability to grow in the future.
Our Employee Stock Benefit Plans Will Increase Our Costs, Which Would Reduce Our
Income and Stockholders' Equity
We anticipate that our employee stock ownership plan will purchase 8% of
the common stock issued in the conversion with funds borrowed from Clover Leaf
Financial or from a third-party lender. The cost of acquiring the employee stock
ownership plan shares will be between $340,000 at the minimum of the offering
range and $529,000 at the adjusted maximum of the offering range. We will record
annual employee stock ownership plan expenses in an amount equal to the fair
value of shares committed to be released to employees. If shares of common stock
appreciate in value over time, compensation expense relating to the employee
stock
9
ownership plan would increase. We also intend to submit a recognition and
retention plan to our stockholders for approval no earlier than six months after
completion of the conversion. If the recognition and retention plan is
implemented within 12 months after the conversion, our officers and directors
could be awarded, at no cost to them, up to an aggregate of 4% of the shares
issued in the conversion. These shares would be restricted as to transfer in
accordance with the terms of the plan. Assuming the shares of common stock to be
awarded under the plan are repurchased in the open market and cost the same as
the purchase price in the conversion, the reduction to stockholders' equity from
the plan would be between $170,000 and $265,000 if 4% of the shares issued in
the conversion were awarded. See "Pro Forma Data" for a discussion of the
increased benefit costs we will incur after the conversion and how these costs
could decrease our return on equity.
Our Stock Value May Suffer Due to Our Ability to Impede Potential Takeovers
Provisions in our corporate documents and in Delaware corporate law, as
well as certain federal and state banking regulations, make it difficult and
expensive to pursue a tender offer, change in control or to attempt a takeover
that our board of directors opposes. For example, our corporate documents
require a supermajority vote of stockholders to amend or repeal specific
sections of Clover Leaf Financial's certificate of incorporation and bylaws, or
to remove directors from our board of directors. As a result, you may not have
an opportunity to participate in this type of transaction, and the trading price
of our common stock may not rise to the level of other institutions that are
more vulnerable to hostile takeovers.
These provisions also will make it more difficult for an outsider to remove
our current board of directors or management. See "Restrictions on Acquisitions
of Stock and Related Takeover Defensive Provisions" for a description of
anti-takeover provisions in our corporate documents and under Delaware law and
federal and state banking regulations.
The Expected Voting Control by Management and Employees Could Enable Insiders to
Prevent a Merger That May Provide Stockholders a Premium for Their Shares
The shares of common stock that our directors and officers intend to
purchase in the conversion, when combined with the shares that may be awarded to
participants under our employee stock ownership plan and other stock benefit
plans, could result in management and employees controlling a significant
percentage of our common stock. If these individuals were to act together, they
could have significant influence over the outcome of any stockholder vote. This
voting power may discourage takeover attempts you might like to see happen. In
addition, the total voting power of management and employees could reach in
excess of 20% of our outstanding stock. That level would enable management and
employees as a group to defeat any stockholder matter that requires an 80% vote,
including removal of directors, approval of certain business combinations with
interested shareholders and certain amendments to our certificate of
incorporation and bylaws.
Our Employee Stock Benefit Plans May Dilute Your Ownership Percentage
If the conversion is completed and stockholders subsequently approve a
recognition and retention plan and a stock option plan, we will issue stock to
our officers and directors through these plans. We may fund these plans in whole
or in part with shares repurchased in the open market. If, however, the shares
for the recognition and retention plan are issued from our authorized but
unissued stock, your ownership percentage could be diluted by approximately
3.8%, assuming issuance of an amount equal to 4% of the shares issued in the
conversion, and the trading price of our stock may be reduced. Your ownership
percentage would also decrease by approximately 9.1% if all potential stock
options were exercised. See "Pro Forma Data" for
10
data on the dilutive effect of the recognition and retention plan and
"Management--Benefit Plans" for a description of the plans. These plans will
also involve additional expense.
Management Will Have Substantial Discretion Over Investment of the Offering
Proceeds, and You May Disagree with Management's Investment Decisions
The net proceeds from the offering are estimated to range from $3.8 million
to $6.2 million. We intend to use these funds for general business purposes,
giving management substantial discretion over their investment. Although in past
years our capital has been adequate to support new loan originations, management
believes that our future lending activities would be restricted without the
additional capital raised in the offering. Accordingly, management believes that
the additional capital raised in the offering can be used to support our lending
and investment programs. You may disagree with investments that management
makes. See "Use of Proceeds" for further discussion.
A Possible Increase in the Offering Range Would Be Dilutive to the Value of Your
Investment
We can increase the maximum of the offering range by up to 15% to reflect
changes in market or financial conditions. An increase in the offering range
will decrease our pro forma net income per share and our pro forma stockholders'
equity per share. This would also increase the purchase price per share as a
percentage of pro forma stockholders' equity per share and net income per share.
Our Valuation Is Not Indicative of the Future Price of Our Common Stock
We cannot assure you that if you purchase common stock in the offering you
will later be able to sell it at or above the purchase price in the offering, if
at all. The final aggregate purchase price of the common stock in the conversion
will be based upon an independent appraisal. The appraisal is not intended, and
should not be construed, as a recommendation of any kind as to the advisability
of purchasing shares of common stock. The valuation is based on estimates and
projections of a number of matters, all of which are subject to change from time
to time. See "The Conversion--Stock Pricing and Number of Shares to be Issued"
for the factors considered by Keller & Company in determining the appraisal.
Our Stock Price May Decline
The shares of common stock offered by this document are not savings
accounts or deposits, are not insured or guaranteed by the Federal Deposit
Insurance Corporation, the Savings Association Insurance Fund or any other
government agency, and involve investment risk, including the possible loss of
principal.
Due to possible continued market volatility and to other factors, including
certain risk factors discussed in this document, we cannot assure you that,
following the conversion, the trading price of our common stock will be at or
above the initial per share offering price. Publicly traded stocks, including
stocks of financial institutions, have recently experienced substantial market
price volatility. These market fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded. In several cases,
common stock issued by converted financial institutions has traded at a price
that is below the price at which the shares were sold in the initial offerings
of those companies. After our shares begin trading, the trading price of our
common stock will be determined by the marketplace, and may be influenced by
many factors, including prevailing interest rates, investor perceptions and
general industry and economic conditions.
11
A Limited Market for Our Common Stock May Lower the Market Price
We expect that our common stock will trade on the OTC Electronic Bulletin
Board. We cannot predict whether a liquid trading market in shares of our common
stock will develop or how liquid that market may become. Persons purchasing
shares may not be able to sell their shares when they desire if a liquid trading
market does not develop or sell them at a price equal to or above the initial
purchase price of $10.00 per share even if a liquid trading market develops.
The Offering May Extend Beyond December 12, 2001. An Extension Could Result in
Increased Costs, and We May Experience a Change in Our Financial Condition
In the event that all shares of our common stock are not sold in the
subscription offering and concurrent community offering, we may extend the
community offering for a period of up to 45 days from the date of the expiration
of the subscription offering. Further extensions are subject to Illinois Office
of Banks and Real Estate and Federal Deposit Insurance Corporation approval and
may be granted for successive periods until December 18, 2003.
If the conversion is not completed within 45 days after the expiration date
of the subscription offering and the Illinois Office of Banks and Real Estate
and Federal Deposit Insurance Corporation consent to an extension of time to
complete the conversion, subscribers will be given the right to maintain, modify
or rescind their subscriptions. A material delay in the completion of the sale
of our common stock may result in a significant increase in the costs of
completing the conversion. In addition, during any delay, there may be
significant changes in our operations and financial condition or in the
aggregate market value of the stock we will sell.
We Intend to Remain Independent and You Should Not Expect to Receive a Takeover
Premium for Our Common Stock in the Near Term
We intend to remain independent for the foreseeable future. Because we do
not plan on seeking possible acquirors, it is unlikely that we will be acquired
in the foreseeable future. Accordingly, you should not purchase our common stock
with any expectation that a takeover premium will be paid to you in the near
term.
We May Not Pay a Dividend on Our Common Stock
We do not initially intend to pay a dividend on our common stock. We have
not determined, when, or if we intend to pay dividends on our common stock.
Accordingly, you should not purchase our common stock if you need or desire
dividend income.
12
SELECTED FINANCIAL DATA
The following tables set forth selected consolidated historical financial
and other data of Clover Leaf Bank for the periods and at the dates indicated.
In the opinion of management, all adjustments necessary for a fair presentation,
consisting only of normal recurring adjustments, have been included in the
information at June 30, 2001 and for the six months ended June 30, 2001 and
2000. The information is derived in part from, and should be read together with,
the Consolidated Financial Statements and Notes thereto of Clover Leaf Bank
beginning at page F-1 of this prospectus.
At June 30, At December 31,
----------- ---------------------
2001 2000 1999
----------- ------- -------
(In Thousands)
Selected Financial Condition Data:
----------------------------------
Total assets ......................... $87,752 $85,785 $71,253
Loans, net ........................... 59,926 56,859 55,494
Interest-bearing deposits (asset) .... 5,262 6,408 34
Securities ........................... 15,304 15,384 9,877
Deposits ............................. 79,393 76,036 60,604
Borrowed funds ....................... 1,500 3,000 4,000
Equity ............................... 6,277 6,098 6,083
For the Six Months For the Years
Ended June 30, Ended December 31,
------------------ ------------------
2001 2000 2000 1999
------ ------ ------- ------
(In Thousands)
Selected Operations Data:
-------------------------
Total interest income .................. $2,914 $2,536 $ 5,324 $4,707
Total interest expense ................. 2,017 1,556 3,467 2,820
------ ------ ------- ------
Net interest income .................... 897 980 1,857 1,887
Provision for loan losses .............. 16 30 428 48
------ ------ ------- ------
Net interest income after provision for
loan losses .......................... 881 950 1,429 1,839
Non-interest income .................... 142 88 229 129
Non-interest expense ................... 969 928 1,918 1,601
------ ------ ------- ------
Net income (loss) before income taxes .. 54 110 (260) 367
Income taxes expense (benefit) ......... -- 35 (89) 114
------ ------ ------- ------
Net income (loss) ...................... $ 54 $ 75 $ (171) $ 253
====== ====== ======= ======
At or For the At or For the
Six Months Ended Years Ended
June 30, (1) December 31,
---------------- ---------------
2001 2000 2000 1999
------ ------ ------ -------
Selected Financial Ratios and Other Data:
-----------------------------------------
Performance Ratios:
Return on average assets (2) .............. 0.13% 0.21% (0.22)% 0.38%
Return on average equity (3) .............. 1.75 2.65 (2.73) 4.09
Interest rate spread (4) .................. 1.80 2.40 2.09 2.38
Net interest margin (5) ................... 2.26 2.87 2.59 2.94
Ratio of non-interest expense to
average total assets .................... 2.28 2.54 2.51 2.38
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................. 109.75 110.86 110.35 112.54
Efficiency ratio (6) ...................... 93.26 86.89 91.95 79.41
Asset Quality Ratios:
Non-performing loans to total gross
loans at end of period .................. 1.04 0.51 0.25 1.03
Non-performing assets to total assets
at end of period ........................ 0.72 0.39 0.17 0.81
Allowance for loan losses to non-performing
loans ................................... 100.63 154.55 437.06 79.13
Allowance for loan losses to gross loans
receivable .............................. 1.05 0.79 1.09 0.81
Capital Ratios:
Equity to total assets at end of period ... 7.15 8.31 7.11 8.54
Average equity to average assets .......... 7.32 8.54 8.21 9.21
Other Data:
Number of offices ......................... 2 2 2 2
----------
(1) All performance ratios for the six-month periods have been annualized.
(2) Ratio of net income to average total assets.
(3) Ratio of net income to average equity.
(4) The difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(5) Net interest income divided by average interest-earning assets.
(6) Non-interest expense divided by the sum of net interest income and
non-interest income.
13
RECENT DEVELOPMENTS
The following tables set forth selected consolidated historical financial
and other data of Clover Leaf Bank for the periods and at the dates indicated.
In the opinion of management, all adjustments necessary for a fair presentation,
consisting only of normal recurring adjustments, have been included in the
information at September 30, 2001 and for the three and nine months ended
September 30, 2001 and 2000. The information is derived in part from, and should
be read together with, the Consolidated Financial Statements and Notes thereto
of Clover Leaf Bank beginning at page F-1 of this prospectus.
At September 30, At December 31,
2001 2000
---------------- ---------------
(In Thousands)
Selected Financial Condition Data:
----------------------------------
Total assets ......................... $87,268 $85,785
Loans, net ........................... 61,305 56,859
Interest-bearing deposits (asset) .... 1,904 6,408
Securities ........................... 15,766 15,384
Deposits ............................. 78,723 76,036
Borrowed funds ....................... 1,687 3,000
Equity ............................... 6,381 6,098
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2001 2000 2001 2000
------ ------ ------- ------
(In Thousands)
Selected Operations Data:
-------------------------
Total interest income .................. $1,435 $1,352 $ 4,341 $3,881
Total interest expense ................. 975 882 2,992 2,438
------ ------ ------- ------
Net interest income .................... 460 470 1,349 1,443
Provision for loan losses .............. 12 237 28 267
------ ------ ------- ------
Net interest income after provision for
loan losses .......................... 448 233 1,321 1,176
Non-interest income .................... 59 54 201 143
Non-interest expense ................... 523 465 1,484 1,387
------ ------ ------- ------
Net income (loss) before income taxes .. (16) (178) 38 (68)
Income taxes expense (benefit) ......... (8) (60) (8) (25)
------ ------ ------- ------
Net income (loss) ...................... $ (8) $ (118) $ 46 $ (43)
====== ====== ======= ======
At or For the At or For the
Three Months Ended Nine Months Ended
September 30, (1) September 30, (1)
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ -------
Selected Financial Ratios and Other Data:
-----------------------------------------
Performance Ratios:
Return on average assets (2) .............. (0.04)% (0.62)% 0.07% (0.08)%
Return on average equity (3) .............. (0.51) (7.68) 0.97 (0.94)
Interest rate spread (4) .................. 1.73 1.72 1.73 2.08
Net interest margin (5) ................... 2.22 2.64 2.22 2.75
Ratio of non-interest expense to
average total assets .................... 2.38 2.44 2.30 2.49
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................. 110.43 114.53 109.97 118.74
Efficiency ratio (6) ...................... 100.77 88.74 95.74 87.45
Asset Quality Ratios:
Non-performing loans to total gross
loans at end of period .................. 2.36 0.50 2.36 0.50
Non-performing assets to total assets
at end of period ........................ 1.68 0.36 1.68 0.36
Allowance for loan losses to non-performing
loans ................................... 41.18 218.12 41.18 218.12
Allowance for loan losses to gross loans
receivable .............................. 0.97 1.08 0.97 1.08
Capital Ratios:
Equity to total assets at end of period ... 7.31 7.75 7.31 7.75
Average equity to average assets .......... 7.21 8.06 7.34 8.27
Other Data:
Number of offices ......................... 2 2 2 2
----------
(1) All performance ratios for the three- and nine-month periods have been
annualized.
(2) Ratio of net income to average total assets.
(3) Ratio of net income to average equity.
(4) The difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing liabilities.
(5) Net interest income divided by average interest-earning assets.
(6) Non-interest expense divided by the sum of net interest income and
non-interest income.
14
Comparison of Financial Condition at September 30, 2001 and December 31, 2000
Our total assets increased by $1.5 million, or 1.7%, to $87.3 million at
September 30, 2001 from $85.8 million at December 31, 2000. The increase
resulted primarily from an increase in loans, net, and our investment in Federal
Home Loan Bank stock, partially offset by a decrease in interest-bearing
deposits in other financial institutions. Loans, net of the allowance for loan
losses, increased by $4.4 million, or 7.8%, to $61.3 million at September 30,
2001 from $56.9 million at December 31, 2000. The increase in loans reflects a
$4.5 million, or 85.0%, increase in commercial real estate loans to $9.9 million
at September 30, 2001 from $5.4 million at December 31, 2000. Federal Home Loan
Bank stock increased by $2.5 million, or 560.2%, to $3.0 million at September
30, 2001 from $452,000 at December 31, 2000. Interest-bearing deposits in other
financial institutions decreased $4.5 million, or 70.3%, to $1.9 million at
September 30, 2001 from $6.4 million at December 31, 2000. During this period,
we invested our liquid assets in Federal Home Loan Bank stock and other
securities with higher yields.
Total deposits increased $2.7 million, or 3.5%, to $78.7 million at
September 30, 2001 from $76.0 million at December 31, 2000. Savings, passbook,
NOW and money market accounts increased $9.6 million, or 85.0%, to $20.9 million
at September 30, 2001 from $11.3 million at December 31, 2000. Time deposits
decreased $7.8 million, or 13.2%, to $51.5 million at September 30, 2001 from
$59.3 million at December 31, 2000 as depositors reinvested funds from maturing
certificates of deposit into higher-yielding, shorter-term money market savings
accounts. We emphasized money market savings accounts as part of our recent
marketing efforts.
Equity increased $283,000, or 4.6%, to $6.4 million at September 30, 2001
from $6.1 million at December 31, 2000, primarily as a result of an increase in
accumulated other comprehensive income of $237,000 and net income of $46,000.
Comparison of Operating Results for the Three Months Ended September 30, 2001
and 2000
General. Net loss decreased by $110,000 to $8,000 for the three months
ended September 30, 2001 from $118,000 for the three months ended September 30,
2000. The decrease resulted from an increase in total interest income and a
decrease in the provision for loan losses, partially offset by increases in
interest expense and non-interest expense, and a decrease in non-interest
income.
Total Interest Income. Total interest income increased by $83,000, or 6.1%,
to $1.4 million for the three months ended September 30, 2001 from $1.4 million
for the three months ended September 30, 2000. The increase resulted primarily
from increases in interest income on securities and interest bearing deposits in
other financial institutions, partially offset by a decrease in interest income
on loans.
Interest income on securities increased $68,000, or 45.0%, to $219,000 for
the three months ended September 30, 2001 from $151,000 for the three months
ended September 30, 2000, reflecting an increase in our average balance of
Federal Home Loan Bank stock between the periods. Interest income on interest
bearing deposits in other financial institutions increased $57,000, or 150.0%,
to $95,000 for the three months ended September 30, 2001 from $38,000 for the
three months ended September 30, 2001, due primarily to an increase in the yield
we received on these deposits. Interest income on loans decreased $42,000, or
3.6%, to $1.1 million for the three months ended September 30, 2001 from $1.2
million for the three months ended September 30, 2000, primarily because of a
decrease in the average yield we received on our loans.
15
Total Interest Expense. Total interest expense increased by $93,000, or
10.5%, to $975,000 for the three months ended September 30, 2001 from $882,000
for the three months ended September 30, 2000. The increase resulted primarily
from an increase in interest expense on savings deposits and time deposits,
which was partially offset by a decrease in interest expense on Federal Home
Loan Bank advances. Interest expense on savings deposits increased $98,000, or
130.7%, to $173,000 for the three months ended September 30, 2001 from $75,000
for the three months ended September 30, 2000. Interest expense on time deposits
increased by $32,000, or 4.3%, to $771,000 for the three months ended September
30, 2001 from $739,000 for the three months ended September 30, 2000. Interest
expense on Federal Home Loan Bank advances decreased $37,000, or 63.8%, to
$21,000 for the three months ended September 30, 2001 from $58,000 for the three
months ended September 30, 2000, as a result of our decreasing reliance on these
high-cost advances as a source of liquidity.
Net Interest Income. Net interest income decreased $10,000, or 2.1%, to
$460,000 for the three months ended September 30, 2001 from $470,000 for the
three months ended September 30, 2000. Despite our interest rate spread
increasing by 1 basis point to 1.73% for the three months ended September 30,
2001 from 1.72% for the three months ended September 30, 2000, our net interest
margin decreased 42 basis points to 2.22% for the three months ended September
30, 2001 from 2.64% for the three months ended September 30, 2000.
Provision for Loan Losses. We establish provisions for loan losses which
are charged to operations at a level we believe appropriate to absorb
management's best estimate of probable loan losses in the loan portfolio
incurred as of the balance sheet date. In evaluating the level of the allowance
for loan losses, management considers historical loss experience, the type and
amount of loans in the loan portfolio, adverse situations that may affect a
borrower's ability to repay the loan, the estimated value of any underlying
collateral, peer group information and prevailing economic conditions. 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.
We charged off $240,000 of loans during the third quarter of 2000 as a
result of weaknesses in our portfolio identified by management, the Federal
Deposit Insurance Corporation and the Illinois Office of Banks and Real Estate.
Following these charge-offs, we made additional provisions for loan losses to
reflect management's best estimate of probable loan losses in the loan portfolio
incurred as of the balance sheet date. Management made provisions of $12,000 and
$237,000 for the three months ended September 30, 2001 and 2000, respectively.
Our allowance for loan losses was $602,000, or 41.18% of total
nonperforming loans and 0.97% of gross loans at September 30, 2001. At June 30,
2001, our allowance for loan losses was 100.63% of total nonperforming loans at
that date. The decrease in the ratio of the allowance for loan losses to total
nonperforming loans was primarily due to a commercial business loan that had
been performing in accordance with its terms as of June 30, 2001, but as a
result of a subsequent fire at the borrower's facility, was not performing in
accordance with its terms as of September 30, 2001. Because the borrower
maintained full insurance on the property and listed Clover Leaf Bank as loss
payee on the insurance policy, we believe that we will not suffer a loss on this
loan, and therefore we have not made additional provisions for loan losses for
this loan. See "Business of Clover Leaf Bank, SB--Lending Activities--Commercial
Business Loans." Management assesses the allowance for loan losses on a
quarterly basis and makes provisions for loan losses as necessary in order to
maintain the adequacy of the allowance. Management uses available information,
including changes in the size and composition of the loan portfolio, overall
portfolio quality, a review of specific problem loans and current economic
conditions, to recognize losses on loans. Future loan loss provisions may be
necessary based on
16
changes in economic conditions, among other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses as of
September 30, 2001 was maintained at a level that represented management's best
estimate of probable loan losses in the loan portfolio incurred as of the
balance sheet date.
Non-interest Income. Non-interest income includes service charges on
deposit accounts, other service charges and fees, loan servicing fees, gain on
sale of securities and other income. Total non-interest income increased $5,000,
or 9.3%, to $59,000 for the three months ended September 30, 2001 from $54,000
for the three months ended September 30, 2000. The primary reason for this
increase was a $6,000 increase in rental income from a property we own.
Non-interest Expense. Non-interest expense includes salaries and employee
benefits, equipment and data processing, occupancy and other expenses. Total
non-interest expense increased $58,000, or 12.5%, to $523,000 for the three
months ended September 30, 2001 from $465,000 for the three months ended
September 30, 2000. Salaries and employee benefits expense increased $16,000, or
6.6%, to $259,000 for the three months ended September 30, 2001 from $243,000
for the three months ended September 30, 2000, as a result of increases in
contributions to our pension plan to compensate for decreases in the value of
securities held by that plan, as well as increases in employee health insurance
premiums. Equipment and data processing expense increased $17,000, or 25.0%, to
$85,000 for the three months ended September 30, 2001 from $68,000 for the three
months ended September 30, 2000, as a result of a higher volume of data
processing, as well as the implementation of image processing. Occupancy expense
increased $11,000, or 37.9%, to $40,000 for the three months ended September 30,
2001 from $29,000 for the three months ended September 30, 2000.
Provision for Income Taxes. Income taxes increased $52,000 to a benefit of
$8,000 for the three months ended September 30, 2001 from a benefit of $60,000
for the three months ended September 30, 2000. The difference in the income tax
expense reflects a reduction in tax loss carry-forwards that resulted from net
losses before tax benefit of $260,000 for the year ended December 31, 2000.
Comparison of Operating Results for the Nine Months Ended September 30, 2001 and
2000
General. Net income increased by $89,000 to $46,000 for the nine months
ended September 30, 2001 from a net loss of $43,000 for the nine months ended
September 30, 2000. The increase resulted from an increase in total interest
income and a decrease in the provision for loan losses, partially offset by
increases in interest expense and non-interest expense, and a decrease in
non-interest income. Our interest rate spread decreased by 35 basis points to
1.73% for the nine months ended September 30, 2001 from 2.08% for the nine
months ended September 30, 2000.
Total Interest Income. Total interest income increased by $460,000, or
11.9%, to $4.3 million for the nine months ended September 30, 2001 from $3.9
million for the nine months ended September 30, 2000. The increase resulted
primarily from increases in interest income on securities, loans and interest
bearing deposits at other financial institutions.
Interest income on securities increased $274,000, or 60.1%, to $730,000 for
the nine months ended September 30, 2001 from $456,000 for the nine months ended
September 30, 2000, reflecting an increase in our average balance of Federal
Home Loan Bank stock between the periods. Interest income on interest bearing
deposits in other financial institutions increased
17
$121,000, or 142.4%, to $206,000 for the nine months ended September 30, 2001
from $85,000 for the nine months ended September 30, 2000. Interest income on
loans increased $65,000, or 1.9%, to $3.4 million for the nine months ended
September 30, 2001 from $3.3 million for the nine months ended September 30,
2000. The increase was due primarily to increases in the average balances of and
the yield on commercial loans, as we have emphasized the origination of
commercial real estate and commercial business loans, which currently carry
higher interest rates than the rates on one- to four-family residential real
estate loans.
Total Interest Expense. Total interest expense increased by $554,000, or
22.7%, to $3.0 million for the nine months ended September 30, 2001 from $2.4
million for the nine months ended September 30, 2000. The increase resulted
primarily from an increase in interest expense on savings deposits and time
deposits, which was partially offset by a decrease in interest expense on
Federal Home Loan Bank advances. Interest expense on savings deposits increased
$182,000, or 83.1%, to $401,000 for the nine months ended September 30, 2001
from $219,000 for the nine months ended September 30, 2000. Interest expense on
time deposits increased by $495,000, or 25.0%, to $2.5 million for the nine
months ended September 30, 2001 from $2.0 million for the nine months ended
September 30, 2000. Interest expense on Federal Home Loan Bank advances
decreased $122,000, or 58.4%, to $87,000 for the nine months ended September 30,
2001 from $209,000 for the nine months ended September 30, 2000, as a result of
our decreasing reliance on these high-cost advances as a source of liquidity.
Net Interest Income. Net interest income remained constant at $1.4 million
for the nine months ended September 30, 2001 and 2000. Our interest rate spread
decreased by 35 basis points to 1.73% for the nine months ended September 30,
2001 from 2.08% for the nine months ended September 30, 2000.
Provision for Loan Losses. We charged-off $240,000 of loans during the
third quarter of 2000 as a result of weaknesses in our portfolio identified by
management, the Federal Deposit Insurance Corporation and the Illinois Office of
Banks and Real Estate. Management made provisions of $28,000 and $267,000 for
the nine months ended September 30, 2001 and 2000, respectively. The allowance
for loan losses as of September 30, 2001 was maintained at a level that
represented management's best estimate of probable loan losses in the loan
portfolio incurred as of the balance sheet date.
Non-interest Income. Total non-interest income increased $58,000, or 40.6%,
to $201,000 for the nine months ended September 30, 2001 from $143,000 for the
nine months ended September 30, 2000. Service charges on deposit accounts
increased $9,000, or 19.1%, to $56,000 for the nine months ended September 30,
2001 from $47,000 for the nine months ended September 30, 2000. Other service
charges and fees increased $30,000, or 40.5%, to $104,000 for the nine months
ended September 30, 2001 from $74,000 for the nine months ended September 30,
2000.
Non-interest Expense. Total non-interest expense increased $97,000, or
7.0%, to $1.5 million for the nine months ended September 30, 2001 from $1.4
million for the nine months ended September 30, 2000. Salaries and employee
benefits expense increased $43,000, or 6.1%, to $743,000 for the nine months
ended September 30, 2001 from $700,000 for the nine months ended September 30,
2000, as a result of increases in contributions to our pension plan to
compensate for decreases in the value of securities held by that plan, as well
as increases in employee health insurance premiums. Equipment and data
processing expense increased $32,000, or 14.7%, to $250,000 for the nine months
ended September 30, 2001 from $218,000 for the nine months ended September 30,
2000, as a result of a higher volume of data processing, as well as the
implementation of image processing.
18
Provision for Income Taxes. Income taxes increased $17,000 to a benefit of
$8,000 for the nine months ended September 30, 2001 from a benefit of $25,000
for the nine months ended September 30, 2000. The difference in income taxes
reflects a reduction in tax loss carry-forwards that resulted from net losses
before tax benefit of $260,000 for the year ended December 31, 2000.
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of our directors and executive
officers and their associates, and for all of the directors and executive
officers and their associates as a group, the proposed purchases of common
stock, assuming sufficient shares are available to satisfy their subscriptions.
Anticipated Anticipated
Number of Dollar Percent
Shares to be Amount to be of
Name and Title Purchased Purchased Shares(1)
----------------------------------------- ------------ ------------ ---------
Philip H. Weber, Chairman of the Board .. 10,000 $ 100,000 2.0%
Robert W. Schwartz, Vice Chairman of
the Board ............................. 20,000 200,000 4.0
Dennis M. Terry, President, Chief
Executive Officer and Director ........ 15,000 150,000 3.0
Joseph J. Gugger, Director .............. 20,000 200,000 4.0
Kenneth P. Highlander, Director ......... 20,000 200,000 4.0
Henry L. Malench, Director .............. 10,000 100,000 2.0
Gary D. Niebur, Director ................ 5,000 50,000 1.0
Charles W. Schmidt, Director ............ 5,000 50,000 1.0
Lisa R. Fowler, Senior Vice President ... 1,000 10,000 0.2
Darlene F. McDonald, Vice President,
Treasurer and Secretary ............... 1,000 10,000 0.2
------- ---------- ----
All directors and executive officers
as a group (ten persons) .............. 107,000 $1,070,000 21.4%
======= ========== ====
----------
(1) Based upon the midpoint of the offering range.
In addition, the employee stock ownership plan currently intends to
purchase 8% of the common stock issued in the conversion for the benefit of
officers and employees. Stock options and stock grants may also be granted in
the future to directors, officers and employees upon the receipt of stockholder
approval of our proposed stock benefit plans. See "Management--Benefit Plans"
for a description of these plans.
USE OF PROCEEDS
The following table presents the estimated net proceeds of the offering,
the amount to be retained by Clover Leaf Financial, the amount to be contributed
to Clover Leaf Bank, and the amount of Clover Leaf Financial's loan to the
employee stock ownership plan. In the event that we do not use the holding
company structure as part of the conversion, Clover Leaf Bank will retain all of
the net proceeds of the offering. See "Pro Forma Data" for the assumptions used
to arrive at these amounts.
19
425,000 500,000 575,000 661,250
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In Thousands)
Gross proceeds ...................... $4,250 $5,000 $5,750 $6,613
Less: estimated offering expenses ... 444 444 444 444
------ ------ ------ ------
Net proceeds ........................ $3,806 $4,556 $5,306 $6,169
====== ====== ====== ======
Amount to be contributed to
Clover Leaf Bank (50% of net
proceeds) ......................... $1,903 $2,278 $2,653 $3,085
Amount of loan to employee stock
ownership plan (8% of net
proceeds) ........................ 340 400 460 529
------ ------ ------ ------
Net amount to be retained by
Clover Leaf Financial (42% of net
proceeds) ........................ $1,563 $1,878 $2,193 $2,556
====== ====== ====== ======
Clover Leaf Financial will purchase all of the capital stock of Clover Leaf
Bank to be issued in the conversion in exchange for at least 50% of the net
proceeds of the stock offering. The net proceeds will increase Clover Leaf
Bank's capital and will support the expansion of Clover Leaf Bank's existing
business activities.
Clover Leaf Financial intends to loan to the employee stock ownership plan
the amount necessary to acquire 8% of the common stock issued in the conversion.
The employee stock ownership plan may purchase the common stock in the open
market following the conversion if it cannot purchase the shares in the
conversion. The loan to the employee stock ownership plan will be $340,000 and
$460,000 at the minimum and maximum of the offering range. See
"Management--Benefit Plans--Employee Stock Ownership Plan and Trust."
The net proceeds available to Clover Leaf Bank will be used for general
corporate purposes. On a short-term basis, Clover Leaf Bank may purchase
investment and mortgage-backed securities. The net proceeds received by Clover
Leaf Bank will further strengthen Clover Leaf Bank's capital position, which
already exceeds regulatory requirements. After the conversion, Clover Leaf
Bank's tangible capital ratio will be 9.00%, if the common stock is sold at the
midpoint of the offering range. As a result, Clover Leaf Bank will be a
well-capitalized institution.
Initially, we will use the remaining net proceeds retained by us to invest
in U.S. Government and federal agency securities of various maturities, deposits
in either the Federal Home Loan Bank of Chicago or other financial institutions,
or a combination of these items. Depending on market conditions or business
opportunities available to us, the net proceeds may ultimately be used to:
o support Clover Leaf Bank's lending activities;
o support the future expansion of operations, including establishing or
acquiring branch offices or acquiring other financial institutions,
although no such transactions are being considered at this time; or
o pay regular or special cash dividends, repurchase common stock or pay
returns of capital.
We have committed to the Federal Deposit Insurance Corporation that we will
not pay stockholders a return of capital for twelve months following the
completion of the conversion without the prior written consent of the Federal
Deposit Insurance Corporation.
20
Federal regulations require us to sell common stock in the conversion in an
amount equal to our estimated pro forma market value, as determined by an
independent appraisal. See "The Conversion--Stock Pricing and Number of Shares
to be Issued." As a result, we may be required to sell more shares in the
conversion than we may otherwise desire. To the extent we have excess capital
upon completion of the conversion, we may repurchase our common stock and pay
dividends subject to any regulatory restrictions of the Federal Deposit
Insurance Corporation and the Federal Reserve Board.
Our board of directors will consider repurchasing our stock after the
conversion, subject to applicable regulatory requirements and other market and
economic factors that may include, but not be limited to, the following:
o the price at which the stock is trading in the market, the volume of
trading, the attractiveness of other investment alternatives in terms
of the rate of return and risk involved in the investment, the ability
to increase the book value and/or earnings per share of the remaining
outstanding shares, and an improvement in our return on equity; and
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans.
We will not repurchase our stock unless Clover Leaf Bank continues to
exceed all applicable regulatory requirements after the repurchases. In
addition, during the first year following the conversion, the Federal Deposit
Insurance Corporation will only allow us to purchase up to 5% of our common
stock and only if compelling and valid business reasons exist for the
repurchase. No stock repurchases are permissible for the first six months after
the conversion. Stock repurchases in excess of 10% or more of our consolidated
net worth in any 12-month period may require the non-objection of the Board of
Governors of the Federal Reserve System. The payment of dividends or repurchase
of stock will be prohibited if Clover Leaf Bank's net worth would be reduced
below the amount required for the liquidation account to be established for the
benefit of eligible account holders and supplemental eligible account holders.
See "Dividend Policy," "The Conversion--Effects of Conversion to Stock Form on
Depositors and Borrowers of Clover Leaf Bank--Effect on Liquidation Rights" and
"--Restrictions on Transferability of Subscription Rights."
As a savings institution, Clover Leaf Bank may be subject to a significant
tax liability if it repurchases its common stock. This restriction would only be
applicable to Clover Leaf Bank if it completed the conversion without utilizing
the holding company structure. See "Taxation--Federal Taxation."
Our net proceeds may vary because total expenses of the conversion may be
more or less than those estimated. The net proceeds also will vary if the number
of shares to be issued in the conversion is adjusted to reflect a change in the
estimated pro forma market value of Clover Leaf Bank. Payments for shares made
through withdrawals from existing deposit accounts at Clover Leaf Bank will not
result in the receipt of new funds for investment by Clover Leaf Bank; rather
they will result in a reduction of Clover Leaf Bank's interest expense and
liabilities as funds are transferred from interest-bearing certificates or other
deposit accounts to purchase shares.
DIVIDEND POLICY
We have not determined, when, or if we intend to pay dividends on the
common stock. Any future payment of dividends will depend upon a number of
factors, including the amount of net proceeds retained by us in the conversion,
investment opportunities available to us, capital
21
requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, they will not be reduced or eliminated in future periods.
Clover Leaf Bank will not be permitted to pay dividends on its capital
stock to Clover Leaf Financial if Clover Leaf Bank's stockholders' equity would
be reduced below the amount required for the liquidation account. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of
Clover Leaf Bank--Effect on Liquidation Rights." For information concerning
federal and state law and regulations that apply to Clover Leaf Bank in
determining the amount of proceeds that may be retained by Clover Leaf Financial
and regarding a savings bank's capital requirements and other restrictions on
its ability to make capital distributions, including payment of dividends to its
holding company, see "Taxation--Federal Taxation" and "Regulation--Clover Leaf
Bank--Capital Requirements" and "Dividends."
Clover Leaf Financial is subject to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets of
Clover Leaf Financial over its statutory capital or, if there is no excess, to
its net profits for the current and/or immediately preceding fiscal year. For
these purposes, net assets means the amount by which total assets exceed total
liabilities, and statutory capital generally means the aggregate par value of
the outstanding shares of Clover Leaf Financial's capital stock. In addition,
under Federal Reserve Board policy, a bank holding company should pay dividends
only to the extent that the holding company's net income for the past year is
sufficient to cover both the payment of the dividend and a rate of earnings
retention that is consistent with the holding company's capital needs, asset
quality and overall financial condition.
MARKET FOR COMMON STOCK
Because this is our initial public offering, there is no market for our
common stock at this time. After we complete the offering, we anticipate that
our common stock will be traded on the Over-the-Counter Bulletin Board. In order
to be eligible for trading on the Over-the-Counter Bulletin Board, we must
remain current in our periodic reporting with the Securities and Exchange
Commission (or the Federal Deposit Insurance Corporation, if we do not utilize
the holding company structure as part of the conversion). Keefe, Bruyette &
Woods has indicated its intention to register with the National Association of
Securities Dealers, Inc. to be able to trade our common stock and to assist us
in identifying other firms to do the same. This may include the solicitation of
potential buyers and sellers in order to match buy and sell orders. However,
Keefe, Bruyette & Woods will not be subject to any obligation with respect to
these efforts.
The development of a public market having the desirable characteristics of
depth, liquidity and orderliness depends on the existence of willing buyers and
sellers, the presence of which is not within the control of Clover Leaf
Financial, Clover Leaf Bank or any market maker. There can be no assurance that
persons purchasing the common stock will be able to sell their shares at or
above the subscription price of $10.00 per share. Therefore, purchasers of the
common stock should have a long-term investment intent and should recognize that
there may be a limited trading market in the common stock. This may make it
difficult to sell the common stock after the conversion and may have an adverse
effect on the price at which the common stock can be sold.
22
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At June 30, 2001, Clover Leaf Bank exceeded all of its regulatory capital
requirements. The following table sets forth Clover Leaf Bank's historical
capital under accounting principles generally accepted in the United States of
America and regulatory capital at June 30, 2001, and the pro forma capital of
Clover Leaf Bank after giving effect to the conversion, based upon the sale of
the number of shares shown in the table. The pro forma capital amounts reflect
the receipt by Clover Leaf Bank of 50% of the net conversion proceeds. The pro
forma risk-based capital amounts assume the investment of the net proceeds
received by Clover Leaf Bank in assets that have a risk-weight of 20% under
applicable regulations, as if the net proceeds had been received and so applied
at June 30, 2001. In the event that we do not use the holding company structure
as part of the conversion, Clover Leaf Bank's pro forma capital levels will
exceed those set forth in the table below, as Clover Leaf Bank will retain all
of the net proceeds of the offering. For further information regarding Clover
Leaf Bank's historical capital see Note 9 to Notes to Consolidated Financial
Statements.
The Federal Reserve Board has adopted capital adequacy guidelines for bank
holding companies (on a consolidated basis) substantially similar to those of
the Federal Deposit Insurance Corporation for Clover Leaf Bank. On a pro forma
basis, assuming the sale of common stock by Clover Leaf Financial at the minimum
of the offering range, Clover Leaf Financial's pro forma Tier 1 and total
capital would significantly exceed the Federal Reserve Board's capital adequacy
requirements.
Pro Forma at June 30, 2001, Based Upon the Sale of
--------------------------------------------------------------------
661,250 Shares(1)
425,000 Shares 500,000 Shares 575,000 Shares at 15% above
Historical at at Minimum of at Midpoint of at Maximum of Maximum of
June 30, 2001 Offering Range Offering Range Offering Range Offering Range
--------------- --------------- --------------- --------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Equity under generally
accepted accounting
principles ............ $6,277 7.15% $7,670 8.60% $7,955 8.90% $8,240 9.18% $8,568 9.51%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible capital(2):
Actual (3) ............ $6,143 7.21% $7,536 8.70% $7,821 9.00% $8,106 9.30% $8,434 9.64%
Requirement ........... 1,278 1.50 1,299 1.50 1,303 1.50 1,307 1.50 1,312 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess .............. $4,865 5.71% 6,237 7.20% 6,518 7.50% 6,799 7.80% 7,122 8.14%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tier 1 (core) capital(2):
Actual (3) ............ $6,143 7.21% $7,536 8.70% $7,821 9.00% $8,106 9.30% $8,434 9.64%
Requirement ........... 3,407 4.00 3,463 4.00 3,475 4.00 3,486 4.00 3,499 4.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess .............. $2,736 3.21% $4,073 4.70% $4,346 5.00% $4,620 5.30% $4,935 5.64%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Risk-based capital(2):
Actual (3) ............ $6,779 13.33% $8,172 15.98% $8,457 16.52% $8,742 17.06% $9,070 17.67%
Requirement ........... 4,069 8.00 4,091 8.00 4,096 8.00 4,100 8.00 4,106 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess .............. $2,710 5.33% $4,081 7.98% $4,361 8.52% $4,642 9.06% $4,964 9.67%
====== ===== ====== ====== ====== ===== ====== ===== ====== =====
----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations, demand for the shares, or changes in
market conditions or general financial and economic conditions following
the commencement of the offering.
(2) Tangible and Tier 1 capital levels are shown as a percentage of total
adjusted average assets. Risk-based capital levels are shown as a
percentage of risk-weighted assets.
(3) Pro forma capital levels assume that (i) the recognition plan is funded
through purchases in the open market of a number of shares equal to 4% of
the common stock sold in the offering, and (ii) the employee stock
ownership plan purchases 8% of the shares sold in the offering. See
"Management" for a discussion of the recognition plan and employee stock
ownership plan.
23
CAPITALIZATION
The following table presents the historical capitalization of Clover Leaf
Bank at June 30, 2001, and our pro forma consolidated capitalization after
giving effect to the conversion, based upon the sale of the number of shares
shown below and the other assumptions set forth under "Pro Forma Data." The
determination not to utilize the holding company structure as part of the
conversion would not impact the pro forma total equity information set forth in
the following table, as the pro forma total equity information is presented on a
consolidated basis.
Clover Leaf Financial - Pro Forma
Based upon Sale at $10.00 Per Share
--------------------------------------------------
661,250
425,000 500,000 575,000 Shares (1)
Clover Leaf Shares Shares Shares (15% above
Bank (Minimum of (Midpoint of (Maximum of Maximum of
Historical Offering Offering Offering Offering
Capitalization Range) Range) Range) Range)
-------------- ----------- ------------ ----------- ----------
(In Thousands)
Deposits(2) .............................. $79,392 $79,392 $79,392 $79,392 $79,392
Borrowings ............................... 1,500 1,500 1,500 1,500 1,500
------- ------- ------- ------- -------
Total deposits and borrowings ............ $80,892 $80,892 $80,892 $80,892 $80,892
======= ======= ======= ======= =======
Stockholders' equity:
Preferred stock, $.10 par value, 250,000
shares authorized; none to be issued . $ -- $ -- $ -- $ -- $ --
Common stock, $.10 par value, 2,000,000
shares authorized; shares to be issued
as reflected(3) ...................... -- 43 50 58 66
Additional paid-in capital(3) ............ -- 3,763 4,506 5,248 6,103
Retained earnings(4) ..................... 6,143 6,143 6,143 6,143 6,143
Accumulated other comprehensive income ... 134 134 134 134 134
Less:
Common stock acquired by our employee
stock ownership plan (5) ............. -- 340 400 460 529
Common stock to be acquired by our
recognition and retention plan(6) .... -- 170 200 230 265
------- ------- ------- ------- -------
Total equity ............................. $ 6,277 $ 9,573 $10,233 $10,893 $11,652
======= ======= ======= ======= =======
----------
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations, demand for the shares, or changes in
market conditions or general financial and economic conditions following
the commencement of the offering, or to fill the order of the employee
stock ownership plan.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. These withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(3) The sum of the par value and additional paid-in capital accounts equals the
net conversion proceeds. No effect has been given to the issuance of
additional shares of common stock pursuant to a stock option plan. We
intend to adopt a stock option plan and to submit the plan to stockholders
at a meeting of stockholders to be held no earlier than six months
following completion of the conversion. If the plan is approved by
stockholders, an amount equal to 10% of the shares of common stock sold in
the conversion will be reserved for issuance under the plan. See "Pro Forma
Data" and "Management--Benefit Plans--Stock Option Plan."
(4) The retained earnings of Clover Leaf Bank will be substantially restricted
after the conversion. See "The Conversion--Effects of Conversion to Stock
Form on Depositors and Borrowers of Clover Leaf Bank--Effect on Liquidation
Rights."
(5) Assumes that 8% of the common stock will be purchased by our employee stock
ownership plan. The common stock acquired by this plan is reflected as a
reduction of stockholders' equity. Assumes the funds used to acquire the
shares will be borrowed from Clover Leaf Financial. See Note 1 to the table
set forth under "Pro Forma Data" and "Management--Benefit Plans--Employee
Stock Ownership Plan and Trust."
(6) Gives effect to the recognition and retention plan that we expect to adopt
after the conversion and present to stockholders for approval at a meeting
of stockholders to be held no earlier than six months after we complete the
conversion. No shares will be purchased by the recognition and retention
plan in the conversion, and the plan cannot purchase any shares until
stockholder approval has been obtained. If the recognition and retention
plan is approved by our stockholders within 12
(footnotes continued on next page)
24
(continued from previous page)
months after the conversion, it is expected the plan would acquire an
amount of common stock equal to 4% of the shares of common stock issued in
the conversion, or 17,000, 20,000, 23,000 and 26,450 shares at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively. The table assumes that stockholder approval has been obtained
and that the shares are purchased in the open market at $10.00 per share.
The common stock so acquired by the recognition and retention plan is
reflected as a reduction in stockholders' equity. If the shares are
purchased at prices higher or lower than the initial purchase price of
$10.00 per share, the purchases would have a greater or lesser impact,
respectively, on stockholders' equity. If the recognition and retention
plan purchases authorized but unissued shares from Clover Leaf Financial,
the issuance would dilute the voting interests of existing stockholders by
approximately 3.8%. If the recognition and retention plan is implemented
more than 12 months after the conversion, the plan would not be subject to
Federal Deposit Insurance Corporation regulations limiting the plan to no
more than 4% of the shares of common stock issued in the conversion. See
"Pro Forma Data" and "Management--Benefit Plans--Recognition and Retention
Plan."
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of our common
stock until the conversion is completed. However, net proceeds are currently
estimated to be between $3.8 million and $5.3 million (or $6.2 million in the
event the offering range is increased by 15%) based upon the following
assumptions: (1) all shares of common stock will be sold in the subscription
offering; and (2) total expenses, including the marketing fees to be paid to
Keefe, Bruyette & Woods, will be fixed at $444,000. Actual expenses may
otherwise vary from those estimated because expenses related to items such as
mailing and community marketing may be incurred following the date of this
prospectus, and therefore cannot be predicted with certainty, or because we
would need to incur additional expenses due to a material delay in the
completion of the conversion. See "Risk Factors--The Offering May Extend Beyond
December 12, 2001. An Extension Could Result in Increased Costs, and We May
Experience a Change in Our Financial Condition." Total expenses will not vary
depending on the number of shares purchased by our officers, directors,
employees or employee stock ownership plan, as Keefe, Bruyette & Woods will
receive a fixed fee for its services. Except for the $10.00 purchase price per
share, proposed purchasers will not be required to pay a fee to purchase our
common stock. See "Proposed Management Purchases."
We calculated pro forma net income and stockholders' equity for the six
months ended June 30, 2001 and the year ended December 31, 2000 as if the common
stock to be issued in the offering had been sold at the beginning of the
respective periods. The table assumes that the estimated adjusted net proceeds
had been invested at 3.70% for the six months ended June 30, 2001 and for the
year ended December 31, 2000, which represents the yield on the one-year U.S.
Treasury Bill as of June 30, 2001 (which, in light of changes in interest rates
in recent periods, is deemed by Clover Leaf Financial and Clover Leaf Bank to
more accurately reflect the pro forma reinvestment rate in recent periods than
an arithmetic average method). The effect of withdrawals from deposit accounts
for the purchase of common stock has not been reflected. We assumed a combined
effective federal and state income tax rate of 34.0% for the six months ended
June 30, 2001 and the year ended December 31, 2000, resulting in an after-tax
yield of 2.44% for the six months ended June 30, 2001 and for the year ended
December 31, 2000. We calculated historical and pro forma per share amounts by
dividing historical and pro forma amounts by the indicated number of shares of
common stock, as adjusted to give effect to the shares purchased by the employee
stock ownership plan with respect to the net income per share calculations. See
Note 2 to the following tables. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
The following pro forma information may not be representative of the
financial effects of the conversion at the date on which the conversion actually
occurs and should not be considered as indicative of future results of
operations. Pro forma stockholders' equity represents the difference between the
stated amount of our assets and liabilities computed in accordance with
accounting principles generally accepted in the United States of America. The
pro forma stockholders' equity is not intended to represent the fair market
value of the common stock and
25
may be different than amounts that would be available for distribution to
stockholders in the event of liquidation. We did not reflect in the table the
possible issuance of additional shares equal to 10% of the common stock to be
reserved for future issuance pursuant to our proposed stock option plan, nor
does book value give any effect to the liquidation account to be established for
the benefit of eligible account holders and supplemental eligible account
holders or to Clover Leaf Bank's bad debt reserve. See "Management--Benefit
Plans" and "The Conversion--Effects of Conversion to Stock Form on Depositors
and Borrowers of Clover Leaf Bank--Effect on Liquidation Rights." The table does
give effect to the recognition and retention plan, which we expect to adopt
following the conversion and present together with the stock option plan to
stockholders for approval no earlier than six months following the conversion.
If the recognition and retention plan is approved by stockholders within 12
months after the conversion, it is expected the recognition and retention plan
would acquire an amount of common stock equal to 4% of the shares of common
stock issued in the conversion, either through open market purchases, if
permissible, or from authorized but unissued shares of common stock. The table
assumes that stockholder approval has been obtained and that the shares acquired
by the recognition and retention plan are purchased in the open market at $10.00
per share. There can be no assurance that stockholder approval of the
recognition and retention plan will be obtained, that the shares will be
purchased in the open market or that the purchase price will be $10.00 per
share. In addition, if the recognition and retention plan is implemented more
than 12 months after the conversion, the plan would not be subject to Federal
Deposit Insurance Corporation regulations limiting the plan to no more than 4%
of the shares issued in the conversion.
26
The following tables summarize historical consolidated data of Clover Leaf
Bank and pro forma data of Clover Leaf Financial at or for the dates and periods
indicated based on the assumptions set forth above and in the tables and should
not be used as a basis for projection of the market value of the common stock
following the conversion. The determination not to utilize the holding company
structure as part of the conversion would not impact the pro forma data in the
following tables, since the information is presented on a consolidated basis.
At and For the Six Months Ended June 30, 2001
-----------------------------------------------------
425,000 500,000 575,000 661,250
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(9)
----------- ----------- ----------- --------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds .................................... $ 4,250 $ 5,000 $ 5,750 $ 6,613
Less offering expenses ............................ (444) (444) (444) (444)
-------- -------- -------- --------
Estimated net conversion proceeds ................. 3,806 4,556 5,306 6,169
Less employee stock ownership plan adjustment ..... (340) (400) (460) (529)
Less recognition and retention plan adjustment .... (170) (200) (230) (265)
-------- -------- -------- --------
Estimated adjusted net proceeds(1) ................ $ 3,296 $ 3,956 $ 4,616 $ 5,375
======== ======== ======== ========
Net income:
Historical ...................................... $ 54 $ 54 $ 54 $ 54
Pro forma adjustments:
Income on adjusted net proceeds(1) ............ 40 48 56 66
Employee stock ownership plan (2) ............. (7) (9) (10) (12)
Recognition and retention plan(3) ............. (11) (13) (15) (17)
-------- -------- -------- --------
Pro forma net income ............................ $ 76 $ 80 $ 85 $ 91
======== ======== ======== ========
Net income per share:
Historical ...................................... $ 0.14 $ 0.12 $ 0.10 $ 0.09
Pro forma adjustments:
Income on adjusted net proceeds(1) ............ 0.10 0.10 0.11 0.11
Employee stock ownership plan (2) ............. (0.02) (0.02) (0.02) (0.02)
Recognition and retention plan(3) ............. (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma basic and diluted net income per share .. $ 0.19 $ 0.17 $ 0.16 $ 0.15
======== ======== ======== ========
Pro forma price to earnings ratio (annualized) .... 26.32x 29.41x 31.25x 33.33x
======== ======== ======== ========
Number of shares used in calculating net
income per share:
Basic and diluted earnings per share .......... 392,133 461,333 530,533 610,113
======== ======== ======== ========
Stockholders' equity:
Historical ...................................... $ 6,277 $ 6,277 $ 6,277 $ 6,277
Estimated net conversion proceeds ............... 3,806 4,556 5,306 6,169
Less employee stock ownership plan adjustment(2) (340) (400) (460) (529)
Less recognition and retention plan adjustment(3) (170) (200) (230) (265)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(5)(6) ......... $ 9,573 $ 10,233 $ 10,893 $ 11,652
======== ======== ======== ========
Stockholders' equity per share(6):
Historical ...................................... $ 14.77 $ 12.55 $ 10.92 $ 9.49
Estimated net conversion proceeds ............... 8.96 9.11 9.23 9.33
Less employee stock ownership plan adjustment(2) (0.80) (0.80) (0.80) (0.80)
Less recognition and retention plan adjustment(3) (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3)(4)(5) . $ 22.53 $ 20.46 $ 18.95 $ 17.62
======== ======== ======== ========
Pro forma price to book ratio(5)(6) ............... 44.39% 48.88% 52.77% 56.75%
======== ======== ======== ========
Number of shares used in equity per share
calculations(7) ................................. 425,000 500,000 575,000 661,250
======== ======== ======== ========
----------
(footnotes begin on next page)
27
At and For the Year Ended December 31, 2000
-----------------------------------------------------
425,000 500,000 575,000 661,250
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(9)
----------- ----------- ----------- --------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds .................................... $ 4,250 $ 5,000 $ 5,750 $ 6,613
Less offering expenses ............................ (444) (444) (444) (444)
-------- -------- -------- --------
Estimated net conversion proceeds ................. 3,806 4,556 5,306 6,169
Less employee stock ownership plan adjustment ..... (340) (400) (460) (529)
Less recognition and retention plan adjustment .... (170) (200) (230) (265)
-------- -------- -------- --------
Estimated adjusted net proceeds(1) ................ $ 3,296 $ 3,956 $ 4,616 $ 5,375
======== ======== ======== ========
Net income (loss):
Historical ...................................... $ (171) $ (171) $ (171) $ (171)
Pro forma adjustments:
Income on adjusted net proceeds(1) ............ 80 97 113 131
Employee stock ownership plan (2) ............. (15) (18) (20) (23)
Recognition and retention plan(3) ............. (22) (26) (30) (35)
-------- -------- -------- --------
Pro forma net income (loss) .................... $ (128) $ (118) $ (108) $ (98)
======== ======== ======== ========
Net income (loss) per share:
Historical ...................................... $ (0.43) $ (0.37) $ (0.32) $ (0.28)
Pro forma adjustments:
Income on adjusted net proceeds(1) ............ 0.20 0.21 0.21 0.21
Employee stock ownership plan (2) ............. (0.04) (0.04) (0.04) (0.04)
Recognition and retention plan(3) ............. (0.06) (0.06) (0.06) (0.06)
-------- -------- -------- --------
Pro forma basic and diluted net income (loss)
per share ....................................... $ (0.33) $ (0.26) $ (0.21) $ (0.17)
======== ======== ======== ========
Pro forma price to earnings ratio ................. (30.30)x (38.46)x (47.62)x (58.82)x
======== ======== ======== ========
Number of shares used in calculating net
income per share:
Basic and diluted earnings per share .......... 393,267 462,667 532,067 611,877
======== ======== ======== ========
Stockholders' equity:
Historical ...................................... $ 6,098 $ 6,098 $ 6,098 $ 6,098
Estimated net conversion proceeds ............... 3,806 4,556 5,306 6,169
Less employee stock ownership plan adjustment(2) (340) (400) (460) (529)
Less recognition and retention plan adjustment(3) (170) (200) (230) (265)
-------- -------- -------- --------
Pro forma stockholders' equity(4)(5) ............ $ 9,394 $ 10,054 $ 10,714 $ 11,473
======== ======== ======== ========
Stockholders' equity per share(6):
Historical ...................................... $ 14.35 $ 12.20 $ 10.61 $ 9.22
Estimated net conversion proceeds ............... 8.96 9.11 9.23 9.33
Less employee stock ownership plan adjustment(2) (0.80) (0.80) (0.80) (0.80)
Less recognition and retention plan adjustment(3) (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3)(4)(5)(6) $ 22.11 $ 20.11 $ 18.64 $ 17.35
======== ======== ======== ========
Pro forma price to book ratio(5) .................. 45.23% 49.73% 53.65% 57.64%
======== ======== ======== ========
Number of shares used in equity per share
calculations(7) ................................. 425,000 500,000 575,000 661,250
======== ======== ======== ========
----------
(1) Estimated adjusted net proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by our
employee stock ownership plan and (ii) the value of the shares to be
purchased by our recognition and retention plan after the conversion,
subject to stockholder approval, at an assumed purchase price of $10.00 per
share.
(2) We assumed that 8% of the shares of common stock issued in the conversion
will be purchased by our employee stock ownership plan. We also assumed
that the funds used to acquire the shares will be borrowed by the employee
stock ownership plan from Clover Leaf Financial. The pro forma net income
assumes: (a) that the loan to the employee stock ownership plan is payable
over 15 years, with the employee stock ownership plan shares having an
average fair value of $10.00 per share in accordance with SOP 93-6,
entitled "Employers' Accounting for Employee Stock Ownership Plans," of the
American Institute of Certified Public Accountants; (b) that the employee
stock ownership plan expense for the period is equivalent to the principal
payment for the period and was made at the end of the period; (c) that
2,267, 2,667, 3,067 and 3,527 shares were
(footnotes continued on next page)
28
(continued from previous page)
committed to be released with respect to the year ended December 31, 2000,
and that 1,134, 1,334, 1,534 and 1,764 shares were committed to be released
with respect to the six months ended June 30, 2001, in each case at the
minimum, midpoint, maximum and 15% above the maximum of the offering range,
respectively; (d) in accordance with SOP 93-6, only the employee stock
ownership plan shares committed to be released during the period were
considered outstanding for purposes of the net income per share
calculations; (e) the effective tax rate was 34% for the period; and (f)
that the assumed interest rate of the employee stock ownership plan loan
was prime plus 1%. See "Risk Factors--Our Employee Stock Benefit Plans Will
Increase Our Costs, Which Would Reduce Our Income and Stockholders' Equity"
and "Management--Benefit Plans-- Employee Stock Ownership Plan and Trust."
(3) We assumed that the recognition and retention plan purchases 17,000,
20,000, 23,000 and 26,450 shares at the minimum, midpoint, maximum and 15%
above the maximum of the offering range, respectively, assuming that: (a)
stockholder approval of the recognition and retention plan is received; (b)
the shares were acquired by the recognition and retention plan at the end
of the period presented in purchases of authorized but unissued shares at
$10.00 per share; (c) the amortized expense for the year ended December 31,
2000 was 20% of the amount contributed and the amortized expense for the
six months ended June 30, 2001 was 5% of the amount contributed; and (d)
the effective tax rate applicable to the employee compensation expense was
34% in each period. See "Management -- Benefit Plans -- Recognition and
Retention Plan."
(4) The retained earnings of Clover Leaf Bank will be substantially restricted
after the conversion. See "Dividend Policy" and "The Conversion--Effects of
Conversion to Stock Form on Depositors and Borrowers of Clover Leaf
Bank--Effect on Liquidation Rights."
(5) Based on the number of shares sold in the conversion.
(6) We did not give any effect to the issuance of additional shares of common
stock pursuant to our proposed stock option plan, which we expect to adopt
after the conversion and present to stockholders for approval at a meeting
of stockholders to be held at least six months after we complete the
conversion. The issuance of authorized but previously unissued shares of
common stock pursuant to the exercise of options under such plan would
dilute existing stockholders' interests. Assuming stockholder approval of
the plan, that all the options were exercised at the end of the period at
an exercise price of $10.00 per share, and that the shares to fund
exercises under the stock option plan are acquired through open market
purchases at $10.00 per share, (a) pro forma net income per share for the
six months ended June 30, 2001 would be $0.22, $0.20, $0.19 and $0.18, and
(b) pro forma stockholders' equity per share at June 30, 2001 would be
$22.53, $20.46, $18.95 and $17.62, in each case at the minimum, midpoint,
maximum and 15% above the maximum of the offering range, respectively. In
addition, (a) pro forma net income per share for the year ended December
31, 2000 would be $(0.29), $(0.23), $(0.18) and $(0.14), and (b) pro forma
stockholders' equity per share at December 31, 2000 would be $22.11,
$20.11, $18.64 and $17.35, in each case at the minimum, midpoint, maximum
and 15% above the maximum of the offering range, respectively.
(7) As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations, demand for the shares, or changes in
market conditions or general financial and economic conditions following
the commencement of the offering.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Clover Leaf Bank's consolidated
financial statements and other relevant statistical data and is intended to
enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with Clover Leaf
Bank's financial statements, as well as other business and financial information
provided in this prospectus.
Forward Looking Statements
This prospectus contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing of products and services.
General
Clover Leaf Bank's results of operations depend primarily on our net
interest income. Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities and interest-bearing deposits with other financial
institutions, and the interest we pay on our interest-bearing liabilities,
primarily savings accounts and time deposits. Our results of operations are also
affected by our provisions for loans losses, non-interest income and
non-interest expense. For the year ended December 31, 2000, we made a provision
for loan losses of $428,000, as compared to $48,000 for the year ended December
31, 1999. This increase is described below in greater detail. Non-interest
income consists primarily of insurance commissions and service charges on
deposit accounts. Non-interest expense consists primarily of salaries and
employee benefits, occupancy, equipment, data processing and deposit insurance
premiums. Our results of operations also may be affected significantly by
general and local economic and competitive conditions, particularly those that
affect market interest rates, governmental policies and actions of regulatory
authorities.
Business Strategy
Our current business strategy is to operate as a well-capitalized and
profitable community bank dedicated to providing quality customer service.
Specifically, our business strategy incorporates the following elements: (1)
expanding our business banking; (2) discontinuing our originations of indirect
automobile loans; and (3) managing interest rate risk. We do not intend to
change our business strategy materially after the conversion.
Expanding our business banking. We have increased our emphasis on business
banking, and we intend to continue to do so following the conversion. Our
President and Chief Executive Officer and our Senior Vice President, both of
whom joined Clover Leaf Bank in 2000, have over 18 and 10 years of commercial
banking experience, respectively. Because of their experience, we have increased
our commercial real estate and commercial business lending,
30
consistent with prudent underwriting practices. These types of loans, while
involving greater risk, offer higher yields than one- to four-family residential
real estate loans, and are more sensitive to changes in market interest rates
because they generally have adjustable interest rates and are outstanding for
shorter terms. At June 30, 2001, commercial real estate loans totaled $7.8
million, or 12.9% of total gross loans, compared to $2.7 million, or 4.9% of
total loans at December 31, 1999, which represented an increase of $5.1 million,
or 187.8%. At June 30, 2001, commercial business loans totaled $4.4 million, or
7.2% of total gross loans, compared to $1.1 million, or 2.0% of total gross
loans at December 31, 1999, which represented an increase of $3.3 million, or
295.5%. We also have conducted a marketing campaign to attract lower-cost money
market deposit accounts. Consistent with our emphasis on business banking, our
plan of conversion authorizes us to convert to a commercial bank charter
following the conversion.
Discontinuing our originations of indirect automobile loans. We have
discontinued our indirect automobile lending, which involved originating loans
through automobile dealerships, due to the relatively high delinquency rate and
losses we have experienced with this type of lending. During the six months
ended June 30, 2001, we charged-off $37,000 of consumer loans, $23,000 of which
were indirect automobile loans. This represented 56.1% of our total loan
charge-offs of $41,000 for the entire period, even though our automobile loans
totaled only $4.4 million, or 7.3% of our total loan portfolio, at June 30,
2001.
Managing interest rate risk. As with other financial institutions, our most
significant form of market risk is interest rate risk. Our Board of Directors
has established an Asset/Liability Management Committee which is responsible for
evaluating the interest rate risk inherent in our assets and liabilities,
determining the level of risk that is appropriate consistent with our business
strategy, operating environment, capital, liquidity and performance objectives,
and managing this risk pursuant to guidelines and policy approved by the Board
of Directors. Our Asset/Liability Management Committee, consisting of senior
management, meets at least quarterly to review our asset/liability policies and
interest rate risk position, and then presents its analysis for review by the
entire Board of Directors. In an effort to shorten the average maturity or
repricing periods of our interest-earning assets to better match the average
maturity or repricing of our interest-bearing liabilities, we have emphasized
the origination of commercial real estate and commercial business loans, and we
have begun to emphasize the origination of home equity lines of credit. These
loans typically have shorter terms than one- to four-family mortgage loans, and
often have adjustable interest rates, while virtually all of our one- to
four-family loans have fixed rates of interest. We also intend to sell a greater
percentage of our residential real estate loan originations.
Management of Market Risk
As with other financial institutions, our most significant form of market
risk is interest rate risk. We have interest rate risk because our
interest-bearing liabilities mature or reprice more quickly than the average
maturity or repricing of our interest-earning assets. As explained below, in a
period of rising interest rates we would not be in a favorable position to
reinvest our assets into higher-yielding assets. We analyze our interest rate
sensitivity by monitoring our interest rate sensitivity "gap." Our interest rate
sensitivity gap is the difference between the amount of our interest-earning
assets maturing or repricing within a specific time period and the amount of our
interest bearing-liabilities maturing or repricing within that same time period.
At June 30, 2001, our cumulative one-year interest rate gap, the difference
between the amount of interest-earning assets and interest-bearing liabilities
maturing or repricing within one year, expressed as a percentage of total
assets, was negative 37.1%. A gap is considered negative when the amount of
interest rate sensitive liabilities maturing or repricing during a period
exceeds the amount of interest rate sensitive assets maturing or repricing
during the same period. Our negative gap has resulted primarily from the short
duration of our certificates of
31
deposit, of which $34.2 million, or 62.9%, mature within one year. During a
period of rising interest rates, an institution with a negative gap, such as
Clover Leaf Bank, generally would not be in as favorable a position, compared to
the assets of an institution with a positive gap, to reinvest its assets into
higher yielding assets. The resulting yield on the institution's assets
generally would increase at a slower rate than the increase in its cost of
liabilities. Conversely, during a period of falling interest rates, the assets
of an institution with a negative gap would tend to reprice at a slower rate
than its liabilities which, consequently, would generally result in its net
interest income increasing at a faster rate than an institution with a positive
gap position.
The following table sets forth our interest-earning assets and our
interest-bearing liabilities at June 30, 2001, which are anticipated to reprice
or mature in each of the future time periods shown based upon certain
assumptions. Except as stated below, the amount of assets and liabilities shown
which reprice or mature during a particular period were determined in accordance
with the earlier of term to repricing or the contractual maturity of the asset
or liability. The table sets forth an approximation of the projected repricing
of assets and liabilities at June 30, 2001, on the basis of contractual
maturities, anticipated prepayments and scheduled rate adjustments within a
three-month period and subsequent selected time intervals. The loan amounts in
the table reflect principal balances expected to be redeployed and/or repriced
as a result of contractual amortization and as a result of contractual rate
adjustments on adjustable-rate loans.
32
Amounts maturing or repricing at June 30, 2001
------------------------------------------------------------------------
Less 6 Months
Than Three 3-6 to 1-3 3-5 Over 5
Months Months 1 Year Years Years Years Total
---------- -------- -------- -------- -------- ------- -------
(Dollars in Thousands)
Interest-earning assets(1):
Loans receivable (2) ............... $ 10,030 $ 1,622 $ 2,652 $ 6,172 $ 14,340 $25,766 $60,582
Investment securities .............. 531 1,004 -- 551 4,242 8,112 14,440
Municipal-tax exempt securities .... -- -- 20 274 306 264 864
Cash and due from banks ............ 5,262 -- -- -- -- -- 5,262
FHLB stock ......................... 1,968 -- -- -- -- -- 1,968
-------- -------- -------- -------- -------- ------- -------
Total interest-earning assets .... 17,791 2,626 2,672 6,997 18,888 34,142 83,116
-------- -------- -------- -------- -------- ------- -------
Interest-bearing liabilities:
Savings deposits (3)(4) ............ 3,637 -- -- -- -- -- 3,637
Money market deposits(3) ........... 13,525 -- -- -- -- -- 13,525
NOW deposits(3) .................... 2,480 -- -- -- -- -- 2,480
Certificate accounts ............... 9,362 11,204 13,596 16,307 3,273 566 54,308
FHLB advances ...................... 126 -- -- -- 1,000 500 1,626
-------- -------- -------- -------- -------- ------- -------
Total interest-bearing liabilities $ 29,130 $ 11,204 $ 13,596 $ 16,307 $ 4,273 $ 1,066 $75,576
-------- -------- -------- -------- -------- ------- -------
Interest sensitivity gap (5) ......... $(11,339) $ (8,578) $(10,924) $ (9,310) $ 14,615 $33,076 $ 7,540
======== ======== ======== ======== ======== ======= =======
Cumulative interest sensitivity gap .. $(11,339) $(19,917) $(30,841) $(40,151) $(25,536) $ 7,540 $ 7,540
======== ======== ======== ======== ======== ======= =======
Cumulative interest sensitivity gap as
a percentage of total assets ....... (13.64)% (23.96)% (37.11)% (48.31)% (30.72)% 9.07%
----------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of scheduled rate
adjustments and contractual maturities.
(2) For the purposes of the gap analysis, the allowance for loan losses,
deferred loan fees, unearned income, and non-accrual loans have been
excluded.
(3) For the purposes of the gap analysis, 100% of savings deposits, money
market deposits and NOW account balances are assumed to be rate sensitive
and are included in the less than three months category.
(4) Includes borrowers' escrow payments.
(5) Interest sensitivity gap represents the difference between interest-earning
assets and interest-bearing liabilities.
33
Certain shortcomings are inherent in the method of analysis presented in
the gap table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features that restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Average Balance Sheets
The following tables present for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense, on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
Six Months Ended June 30,
--------------------------------------------------------------------
At June 30, 2001 2001 2000
----------------------- --------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Outstanding Earned/ Outstanding Earned/
Balance Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
----------- ---------- ----------- -------- ---------- ----------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans, gross ............... $60,582 7.52% $59,419 $2,292 7.78% $56,546 $2,169 7.70%
Interest bearing balances
from depository
institutions ............. 5,262 3.96 4,224 111 5.30 1,624 47 5.82
Securities ................. 12,968 6.30 13,590 432 6.41 8,361 253 6.09
FHLB stock ................. 1,968 6.50 621 17 5.52 428 15 7.05
Mortgage backed securities . 2,336 7.15 2,171 62 5.76 1,700 52 6.15
------- ------- ------ ------- ------
Total interest-earning
assets (1) ............. 83,116 7.11 80,025 $2,914 7.34 68,659 $2,536 7.42
====== ======
Other assets ............... 4,630 5,081 4,382
------- ------- -------
Total assets ............. $87,746 $85,106 $73,041
======= ======= =======
Interest-bearing liabilities:
Savings deposits .......... $19,212 3.78 $14,131 232 3.31 $11,263 149 2.67
Time deposits ............. 54,308 5.98 56,113 1,705 6.13 45,399 1,242 5.50
Federal funds purchased
and securities sold
under agreement to
repurchase .............. 126 2.69 61 1 3.31 -- -- --
Other borrowings .......... 430 4.59 404 13 6.49 431 14 6.53
FHLB advances ............. 1,500 5.65 2,204 66 6.04 4,838 151 6.28
------- ------- ------ ------- ------
Total interest-bearing
Liabilities ............. 75,576 5.40 72,913 2,017 5.54 61,931 1,556 5.02
------ ------
Other liabilities .......... 5,893 5,960 4,871
------- ------- -------
Total liabilities ........ 81,469 78,873 66,802
Equity ..................... 6,277 6,233 6,239
------- ------- -------
Total liabilities
and equity ............ $87,746 $85,106 $73,041
======= ======= =======
Net interest income ......... $ 897 $ 897 $ 980
======= ====== ======
Net interest rate spread .... 1.71% 1.80% 2.40%
==== ==== ====
Net interest margin ......... 2.26% 2.87%
==== ====
Average interest-earning
assets to average interest-
bearing liabilities ....... 1.10x 1.11x
====== ======
34
Years Ended December 31,
--------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
----------- -------- ---------- ----------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans, gross ............... $57,202 $4,429 7.74% $51,852 $3,965 7.65%
Interest bearing balances
from depository
institutions ............. 2,827 176 6.23 983 48 4.88
Securities ................. 9,543 586 6.14 9,172 556 6.06
FHLB stock ................. 437 31 7.09 399 27 6.77
Mortgage backed securities . 1,648 101 6.13 1,856 111 5.98
------- ------ ------- ------
Total interest-earning
assets (1) ............. 71,657 $5,323 7.43 64,262 $4,707 7.32
====== ======
Other assets ............... 4,711 2,944
------- -------
Total assets ............. $76,368 $67,206
======= =======
Interest-bearing liabilities:
Savings deposits .......... $11,003 306 2.78 $ 9,588 235 2.45
Time deposits ............. 49,340 2,877 5.83 41,461 2,238 5.40
Federal funds purchased
and securities sold
under agreement to
repurchase .............. 90 5 5.56 -- -- --
Other borrowings .......... 413 23 5.57 389 25 6.43
FHLB advances ............. 4,089 256 6.26 5,663 321 5.67
------- ------ ------- ------
Total interest-bearing
Liabilities ............. 64,935 3,467 5.34 57,101 2,819 4.94
------ ------
Other liabilities .......... 5,162 3,914
------- -------
Total liabilities ........ 70,097 61,015
Equity ..................... 6,271 6,191
------- -------
Total liabilities
and equity ............ $76,368 $67,206
======= =======
Net interest income ......... $1,856 $1,888
====== ======
Net interest rate spread .... 2.09% 2.38%
==== ====
Net interest margin ......... 2.59% 2.94%
==== ====
Average interest-earning
assets to average interest-
bearing liabilities ....... 1.10x 1.13x
====== ======
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate), (ii) changes in rate (i.e., changes
in rate multiplied by old volume) and (iii) changes attributable to both rate
and volume, which cannot be segregated.
35
Six Months Ended June 30, Years Ended December 31,
2001 vs. 2000 2000 vs. 1999
------------------------------------- --------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
------------------- Rate/ Increase ------------------- Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
---------- -------- ------ ---------- ------ ----- ------ ----------
(In Thousands)
Interest-earning assets:
Loans ........................ $ 214 $ 44 $(135) $ 123 $ 409 $ 50 $ 5 $ 464
Interest bearing balances from
depository institutions .... 151 (8) (79) 64 90 13 25 128
Securities ................... 318 27 (166) 179 22 7 -- 30
FHLB stock ................... 14 (7) (5) 2 3 1 -- 4
Mortgage backed securities ... 29 (7) (12) 10 (12) 3 -- (10)
----- ----- ----- ----- ----- ----- ---- -----
Total interest-earning
assets ................... 726 49 (397) 378 512 74 30 616
----- ----- ----- ----- ----- ----- ---- -----
Interest-bearing liabilities:
Savings deposits ............. 73 77 (67) 83 34 32 5 71
Time deposits ................ 589 284 (410) 463 425 180 34 639
Federal funds purchased and
securities sold under
agreement to repurchase .... 1 -- -- 1 5 -- -- 5
Other borrowings ............. 1 -- (2) (1) 5 -- (7) (2)
FHLB advances ................ (165) (12) 92 (85) (89) 34 (10) (65)
----- ----- ----- ----- ----- ----- ---- -----
Total interest-bearing
liabilities ................ 499 349 (387) 461 380 246 22 648
----- ----- ----- ----- ----- ----- ---- -----
Net interest income ............ $ 227 $(300) $ (10) $ (83) $ 132 $(172) $ 8 $ (32)
===== ===== ===== ===== ===== ===== ==== =====
Comparison of Financial Condition at June 30, 2001 and December 31, 2000
Our total assets increased by $2.0 million, or 2.3%, to $87.8 million at
June 30, 2001 from $85.8 million at December 31, 2000. The increase resulted
primarily from an increase in loans and Federal Home Loan Bank stock, partially
offset by decreases in cash and due from banks and interest-bearing deposits in
other financial institutions. Loans, net of allowance for loan losses, increased
by $3.1 million, or 5.4%, to $59.9 million at June 30, 2001 from $56.9 million
at December 31, 2000. This was a result of a $2.5 million, or 46.1%, increase in
commercial real estate loans to $7.8 million at June 30, 2001 from $5.4 million
at December 31, 2000, and the result of a $448,000, or 11.4%, increase in
commercial business loans to $4.4 million at June 30, 2001 from $3.9 million at
June 30, 2000. Federal Home Loan Bank stock increased by $1.5 million, or
336.0%, to $2.0 million at June 30, 2001 from $452,000 at December 31, 2000,
while interest-bearing deposits in other financial institutions decreased $1.1
million, or 17.9%, to $5.3 million at June 30, 2001 from $6.4 million at
December 31, 2000. During this period, we invested our liquid assets in Federal
Home Loan Bank stock and other securities with higher yields. Cash and due from
banks decreased $1.3 million, or 46.4%, to $1.5 million at June 30, 2001 from
$2.8 million at December 31, 2000.
Total deposits increased $3.4 million, or 4.4%, to $79.4 million at June
30, 2001 from $76.0 million at December 31, 2000. Savings, passbook, NOW and
money market accounts increased $8.0 million, or 71.1%, to $19.3 million at June
30, 2001 from $11.3 million at December 31, 2000, and non-interest bearing
demand deposits increased $333,000, or 6.2%, to $5.7 million at June 30, 2001
from $5.4 million at December 31, 2000. Time deposits decreased $5.0 million, or
8.5%, to $54.3 million at June 30, 2001 from $59.3 million at December 31, 2000,
as depositors reinvested funds from maturing certificates of deposit into
higher-yielding, shorter-term money market savings accounts. We emphasized these
accounts as part of our recent marketing efforts.
36
Equity increased $179,000, or 2.9%, to $6.3 million at June 30, 2001 from
$6.1 million at December 31, 2000, primarily as a result of an increase in
accumulated other comprehensive income of $125,000 and net income of $54,000.
Comparison of Financial Condition at December 31, 2000 and December 31, 1999
Our total assets increased by $14.5 million, or 20.4%, to $85.8 million at
December 31, 2000 from $71.3 million at December 31, 1999. Asset growth was
funded by an increase in deposits, which management believes reflected
volatility in the equity markets and rising market interest rates. During this
period, we experienced increases in all asset categories except bank premises
and equipment. Loans, net of allowance for loan losses, increased $1.4 million,
or 2.5%, to $56.9 million at December 31, 2000 from $55.5 million at December
31, 1999. Interest-bearing deposits in other financial institutions increased to
$6.4 million at December 31, 2000 from $34,000 at December 31, 1999. Securities
available for sale increased $5.5 million, or 55.8%, to $15.4 million at
December 31, 2000 from $9.9 million at December 31, 1999. Cash and due from
banks increased $1.2 million, or 75.4%, to $2.8 million at December 31, 2000
from $1.6 million at December 31, 1999. Bank premises and equipment decreased
$90,000, or 3.2%, to $2.8 million at December 31, 2000.
Total deposits increased $15.4 million, or 25.5%, to $76.0 million at
December 31, 2000 from $60.6 million at December 31, 1999. Time deposits
increased $14.3 million, or 31.6%, to $59.3 million at December 31, 2000 from
$45.1 million at December 31, 1999, as depositors invested in certificates of
deposit during a period of rising market interest rates. Passbook, NOW and money
market accounts increased $729,000, or 6.9%, to $11.3 million at December 31,
2000 from $10.6 million at December 31, 1999, and non-interest bearing demand
deposits increased $445,000, or 9.0%, to $5.4 million at December 31, 2000 from
$5.0 million at December 31, 1999.
Equity increased $15,000 to $6.1 million at December 31, 2000 from $6.1
million at December 31, 1999, primarily as a result of an increase in
accumulated other comprehensive income of $186,000, as compared to an
accumulated other comprehensive loss of $176,000 at December 31, 1999. This
increase was offset by a decrease in retained earnings of $171,000, or 2.7%,
which resulted from a net operating loss of $171,000 during 2000.
Comparison of Operating Results for the Six Months Ended June 30, 2001 and 2000
General. Net income decreased by $21,000, or 27.5%, to $54,000 for the six
months ended June 30, 2001 from $75,000 for the six months ended June 30, 2000.
The decrease resulted from increases in total interest expense and non-interest
expense, partially offset by an increase in total interest income and a decrease
in the provision for loan losses. Our interest rate spread decreased by 60 basis
points to 1.80% for the six months ended June 30, 2001 from 2.40% for the six
months ended June 30, 2000.
Total Interest Income. Total interest income increased by $378,000, or
14.9%, to $2.9 million for the six months ended June 30, 2001 from $2.5 million
for the six months ended June 30, 2000. The increase resulted from increases in
interest income from all categories of interest-earning assets, but primarily
securities, loans, and interest-bearing deposits at other depository
institutions.
Interest income on securities increased $179,000, or 70.8%, to $432,000 for
the six months ended June 30, 2001 from $253,000 for the six months ended June
30, 2000. The increase resulted both from a 62.5% increase in the average
balance of securities, excluding Federal Home Loan Bank stock and
mortgage-backed securities, to $13.6 million for the six
37
months ended June 30, 2001 from $8.4 million for the six months ended June 30,
2000, as well as an increase in the average yield to 6.41% for the six months
ended June 30, 2001 from 6.09% for the six months ended June 30, 2000. The
increase in the average balance of securities was primarily due to an increase
in the average balance of United States Government agency securities of $4.9
million, or 71.0%, to $11.8 million for the six months ended June 30, 2001 from
$7.0 million for the six months ended June 30, 2000, as we invested our liquid
assets in securities with higher yields relative to cash and overnight deposits.
Interest income on loans increased $123,000, or 5.7%, to $2.3 million for
the six months ended June 30, 2001 from $2.2 million for the six months ended
June 30, 2000. The increase resulted from an increase in the average balance of
loans to $59.4 million for the six months ended June 30, 2001 from $56.6 million
for the six months ended June 30, 2000, and from a slight increase in the
average yield to 7.78% for the six months ended June 30, 2001 from 7.70% for the
six months ended June 30, 2000. These increases were due primarily to increases
in the average balances of and the yield on commercial loans, as we have
recently emphasized the origination of commercial real estate and commercial
business loans, which currently carry higher interest rates than the rates on
one- to four-family residential real estate loans.
Total Interest Expense. Total interest expense increased by $461,000, or
29.6%, to $2.0 million for the six months ended June 30, 2001 from $1.6 million
for the six months ended June 30, 2000. The increase resulted primarily from an
increase in interest expense on time deposits and savings deposits, which was
partially offset by a decrease in interest expense on Federal Home Loan Bank
advances. Interest expense on time deposits increased by $463,000, or 37.3%, to
$1.7 million for the six months ended June 30, 2001 from $1.2 million for the
six months ended June 30, 2000. Both the average balance and the average cost of
time deposits increased between periods. The average balance of time deposits
increased $10.7 million, or 23.6%, to $56.1 million for the six months ended
June 30, 2001, from $45.4 million for the six months ended June 30, 2000, and
the average rate paid on time deposits increased 63 basis points to 6.13% from
5.50%. Interest expense on savings deposits increased $83,000, or 55.7%, to
$232,000 for the six months ended June 30, 2001 from $149,000 for the six months
ended June 30, 2000. The increase resulted from a $2.9 million, or 25.5%,
increase in the average balance of savings deposits, as well as a 64 basis point
increase of the average rate paid on savings deposits to 3.31% from 2.67%.
Interest expense on Federal Home Loan Bank advances decreased $85,000, or 56.4%,
to $66,000 for the six months ended June 30, 2001 from $151,000 for the six
months ended June 30, 2000, as a result of a $2.6 million decrease in the
average balance of such advances and a 24 basis point decrease in the average
rate paid on such advances.
Net Interest Income. Net interest income decreased $83,000, or 8.5%, to
$897,000 for the six months ended June 30, 2001 from $980,000 for the six months
ended June 30, 2000. The primary reason for the decrease in net interest income
was the decrease in our interest rate spread, which is the difference between
the average yield on total interest-earning assets and the average cost of total
interest-bearing liabilities. Our interest rate spread decreased by 60 basis
points to 1.80% for the six months ended June 30, 2001 from 2.40% for the six
months ended June 30, 2000. The primary reason for the decrease in our interest
rate spread was the 63 basis points increase in the average cost of our time
deposits as well as the $10.7 million increase in the average balance of such
deposits, which was only partially offset by an 8 basis points increase in the
yield on our loans.
Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, at a level we believe appropriate to absorb
management's best estimate of probable loan losses in the loan portfolio
incurred as of the balance sheet date. In evaluating the level of the allowance
for loan losses, management considers historical loss experience, the type and
amount of loans in the loan portfolio, adverse situations that may affect a
borrower's ability to repay the loan, the estimated value of any underlying
collateral, peer group information and
38
prevailing economic conditions. 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. Based on our
evaluation of these factors, as well as the factors discussed above, management
made provisions of $16,000 and $30,000 for the six months ended June 30, 2001
and 2000, respectively.
Management assesses the allowance for loan losses on a quarterly basis and
makes provisions for loan losses as necessary in order to maintain the adequacy
of the allowance. Management uses available information, including changes in
the size and composition of the loan portfolio, overall portfolio quality, a
review of specific problem loans and current economic conditions, to recognize
losses on loans. Future loan loss provisions may be necessary based on changes
in economic conditions, among other factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for loan losses and may require us to recognize additional
provisions based on their judgment of information available to them at the time
of their examination.
Management had identified additional weaknesses inherent in the loan
portfolio prior to December 31, 2000, and had increased the allowance for loan
losses accordingly, as discussed below in "Comparison of Operating Results for
the Years Ended December 31, 2000 and 1999--Provision for Loan Losses." During
the six months ended June 30, 2001, our balance of commercial loans increased to
$7.8 million from $5.4 million. These loans are considered to have greater
credit risk than loans secured by residential real estate. See "Business of
Clover Leaf Bank, SB--Lending Activities--Loan Portfolio Composition." However,
aggressive collection efforts regarding consumer loans resulted in recoveries of
$36,000 during this period. As a result of these actions, our allowance for loan
losses was $636,000, or 100.6% of total nonperforming loans and 1.1% of gross
loans at June 30, 2001, compared to $625,000, or 437.1% of total nonperforming
loans and 1.1% of gross loans at December 31, 2000. The increase in
nonperforming loans reflected the weaknesses in our loan portfolio that had been
identified by management prior to December 31, 2000. The allowance for loan
losses as of June 30, 2001 was maintained at a level that represented
management's best estimate of probable loan losses in the loan portfolio
incurred as of the balance sheet date.
Non-Interest Income. Non-interest income includes service charges on
deposit accounts, other service charges and fees, loan servicing fees, gain on
sale of securities and other income. Total non-interest income increased
$54,000, or 61.4%, to $142,000 for the six months ended June 30, 2001 from
$88,000 for the six months ended June 30, 2000. Other service charges and fees
increased $30,000, or 68.6%, to $73,000 for the six months ended June 30, 2001
from $43,000 for the six months ended June 30, 2000, and service charges on
deposit accounts increased $12,000, or 45.5%, to $37,000 for the six months
ended June 30, 2001 from $26,000 for the six months ended June 30, 2000. The
increase in service charges and fees resulted from implementing service charges
on checking accounts and fees for using automated teller machines by non-Clover
Leaf Bank customers.
Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, equipment and data processing, occupancy and other expenses. Total
non-interest expense increased $41,000, or 4.4%, to $969,000 for the six months
ended June 30, 2001 from $928,000 for the six months ended June 30, 2000.
Salaries and employee benefits expense increased $29,000, or 6.4%, to $485,000
for the six months ended June 30, 2001 from $456,000 for the six months ended
June 30, 2000 as a result of increases in contributions to our pension plan to
compensate for decreases in the value of securities held by that plan, as well
as increases in employee health insurance premiums. Equipment and data
processing expense increased $16,000, or 10.8%, to $166,000 for the six months
ended June 30, 2001 from $150,000 for the six months ended June 30, 2000, as a
result of a higher volume of data processing, as well as the implementation of
image processing. Occupancy expense decreased $6,000, or 6.6%, to $85,000
39
for the six months ended June 30, 2001 from $91,000 for the six months ended
June 30, 2000, as a result of decreases in real estate taxes and utilities
expense.
Provision for Income Taxes. Income tax expense decreased $35,000 to a
benefit of $270 for the six months ended June 30, 2001 from a provision of
$35,000 for the six months ended June 30, 2000. The difference in the provision
reflects an income tax loss carry-forward that resulted from a net loss of
$260,000 for the year ended December 31, 2000.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
General. Net income decreased $424,000, or 167.5%, to a net loss of
$171,000 for the year ended December 31, 2000 from net income of $253,000 for
the year ended December 31, 1999. The decrease resulted from a $380,000 increase
in the provision for loan losses to $428,000 for the year ended December 31,
2000, as well as a decrease in net interest income, which was partially offset
by an increase in non-interest income.
Total Interest Income. Total interest income increased $617,000, or 13.1%,
to $5.3 million for the year ended December 31, 2000 from $4.7 million for the
year ended December 31, 1999. The increase resulted from increases in interest
income on loans and interest-bearing deposits in other financial institutions,
while interest income on securities remained relatively constant during the
periods.
Interest income on loans increased $464,000, or 11.7%, to $4.4 million for
the year ended December 31, 2000 from $4.0 million for the year ended December
31, 1999. The increase resulted primarily from an increase in the average
balance of loans to $57.2 million for the year ended December 31, 2000 from
$51.8 million for the year ended December 31, 1999, as well as a slight increase
in the average yield to 7.74% for the year ended December 31, 2000 from 7.65%
for the year ended December 31, 1999. The increase in average balance of loans
was due to an increase in commercial business loans of $2.8 million, or 254.9%,
to $3.9 million at December 31, 2000 from $1.1 million at December 31, 1999, and
an increase in commercial real estate loans of $2.6 million, or 96.9%, to $5.4
million at December 31, 2000, from $2.7 million at December 31, 1999. Management
has recently emphasized the origination of these types of loans, in an effort to
increase our interest income and to reduce our interest rate risk.
Interest income on securities remained nearly constant, increasing to
$586,000 for the year ended December 31, 2000 from $556,000 for the year ended
December 31, 1999. The average balance of securities, excluding Federal Home
Loan Bank stock and mortgage-backed securities, increased to $9.5 million for
the year ended December 31, 2000 from $9.2 million for the year ended December
31, 1999, and the yield between periods increased slightly to 6.14% from 6.06%.
Other interest income increased $122,000, or 65.6%, to $308,000 for the
year ended December 31, 2000 from $186,000 for the year ended December 31, 1999,
mainly due to an increase in income on interest-bearing deposits in other
financial institutions. The average balance of these deposits increased $1.8
million, or 187.6%, to $2.8 million for the year ended December 31, 2000 from
$983,000 for the year ended December 31, 1999, and the yield increased between
periods to 6.23% from 4.88%.
Total Interest Expense. Total interest expense increased by $648,000, or
23.0%, to $3.5 million for the year ended December 31, 2000 from $2.8 million
for the year ended December 31, 1999. The increase resulted primarily from an
increase in interest expense on time deposits and on savings deposits, which was
partially offset by a decrease in interest expense on Federal Home Loan Bank
advances. Interest expense on time deposits increased by $639,000, or 28.6%,
40
to $2.9 million for the year ended December 31, 2000 from $2.2 million for the
year ended December 31, 1999. Both the average balance of time deposits and the
rate paid on time deposits increased between periods, reflecting the rising
market interest rates between the periods. The average balance of time deposits
increased $7.9 million, or 19.0%, to $49.3 million for the year ended December
31, 2000, from $41.5 million for the year ended December 31, 1999, and the
average rate paid on time deposits increased 43 basis points to 5.83% from
5.40%. Interest expense on savings deposits increased $71,000, or 30.2%, to
$306,000 for the year ended December 31, 2000 from $235,000 for the year ended
December 31, 1999. Interest expense on Federal Home Loan Bank advances decreased
$65,000, or 20.2%, to $256,000 for the year ended December 31, 2000 from
$321,000 for the year ended December 31, 1999.
Net Interest Income. Net interest income decreased $32,000, or 1.7%, to
$1.9 million for the year ended December 31, 2000 from $1.9 million for the year
ended December 31, 1999. The primary reason for the decrease in net interest
income was the 29 basis point decrease in our net interest rate spread to 2.09%
for the year ended December 31, 2000 from 2.38% for the year ended December 31,
1999. Our interest rate spread decreased primarily because of the 43 basis
points increase in the average rate paid on time deposits as well as a $7.9
million increase in the average balance of time deposits.
Provision for Loan Losses. During the year ended December 31, 2000, we
charged off $273,000 of loans. We charged off $240,000 of these loans as a
result of weaknesses in our portfolio identified by management, the Federal
Deposit Insurance Corporation and the Illinois Office of Banks and Real Estate.
See "Business--Lending Activities--Loan Portfolio Composition." Following these
charge-offs, we made additional provisions for loan losses to reflect
management's best estimate of probable loan losses in the loan portfolio
incurred as of the balance sheet date. During the year ended December 31, 2000,
our balance of commercial loans increased to $5.4 million from $2.6 million.
These loans are considered to have greater credit risk than loans secured by
residential real estate. See "Business of Clover Leaf Bank, SB--Lending
Activities--Loan Portfolio Composition." In addition, the increase in our
provision reflected management's ongoing assessment of the risks associated with
indirect automobile loans. As a result, the total provision for the year ended
December 31, 2000, was $428,000, compared to $48,000 for the year ended December
31, 1999. The allowance for loan losses was $625,000, or 437.1% of total
nonperforming loans, at December 31, 2000, compared to $455,000, or 79.13% of
total nonperforming loans at December 31, 1999. The allowance for loan losses as
of December 31, 2000 was maintained at a level that represented management's
best estimate of probable loan losses in the loan portfolio incurred as of the
balance sheet date.
Non-Interest Income. Total non-interest income increased $100,000, or
77.3%, to $229,000 for the year ended December 31, 2000 from $129,000 for the
year ended December 31, 1999. Service charges on deposit accounts increased
$54,000, or 162.2%, to $88,000 for the year ended December 31, 2000 from $34,000
for the year ended December 31, 1999, and other service charges and fees
increased $35,000, or 64.9%, to $90,000 for the year ended December 31, 2000
from $55,000 for the year ended December 31, 1999. The increase in service
charges and fees resulted from the implementation of service charges on checking
accounts and fees for the use of automated teller machines by non-Clover Leaf
Bank customers.
Non-Interest Expense. Non-interest expense increased $318,000, or 19.9%, to
$1.9 million for the year ended December 31, 2000 from $1.6 million for the year
ended December 31, 1999. All categories of non-interest expense increased
between the periods. Salaries and employee benefits expense increased $220,000,
or 30.2%, to $948,000 for the year ended December 31, 2000 from $728,000 for the
year ended December 31, 1999. We experienced heavy employee turnover in 2000,
and a significant increase in severance expense related to this turnover. In
addition, Illinois law requires an employer to pay for both earned and unearned
vacation time upon an employee's termination of employment. Occupancy expense
increased
41
$41,000, or 31.3%, to $171,000 for the year ended December 31, 2000 from
$130,000 for the year ended December 31, 1999. Equipment and data processing
expense increased $42,000, or 16.3%, to $298,000 for the year ended December 31,
2000 from $256,000 for the year ended December 31, 1999. The increases in
occupancy and equipment and data processing expense related to the costs
associated with our new branch office, which we opened in the fourth quarter of
1999.
Provision for Income Taxes. Income tax expense decreased $203,000, or
178.3%, to a benefit of $89,000 for the year ended December 31, 2000 from a
provision expense of $114,000 for the year ended December 31, 1999.
Liquidity and Capital Resources
Our primary sources of liquidity or internally generated funds are
principal and interest payments on loans receivable, cash flows generated from
operations, and cash flows generated by investments. External sources of
liquidity consist primarily of increases in deposits.
Our cash and cash equivalents decreased $2.5 million during the six months
ended June 30, 2001, compared to an increase of $2.8 million during the six
months ended June 30, 2000. Net cash provided by operating activities was
$16,900 for the six months ended June 30, 2001, and net cash used in operating
activities was $295,000 for the six months ended June 30, 2000. Net cash used in
investing activities increased $2.2 million to $4.3 million for the six months
ended June 30, 2001 from $2.2 million for the same period in 2000. Cash used to
purchase Federal Home Loan Bank stock increased to $1.5 million for the six
months ended June 30, 2001 from $5,500 for the six months ended June 30, 2000.
Cash used to purchase securities increased $2.3 million to $3.3 million for the
six months ended June 30, 2001 from $1.0 million for the six months ended June
30, 2000. Cash used to originate loans, net, increased $997,000 to $3.1 million
for the six months ended June 30, 2001 from $2.1 million for the six months
ended June 30, 2000. Net cash provided by financing activities decreased $3.4
million, or 64.6%, to $1.9 million for the six months ended June 30, 2001 from
$5.2 million for the six months ended June 30, 2000. We received no Federal Home
Loan Bank advances during the six months ended June 30, 2001, compared to $5.4
million of these advances for the six months ended June 30, 2000. Partially
offsetting this decrease in Federal Home Loan Bank proceeds was a $2.9 million,
or 65.9% decrease in our repayments of Federal Home Loan Bank advances, to $1.5
million for the six months ended June 30, 2001 from $4.4 million for the six
months ended June 30, 2000.
Our cash and cash equivalents increased $7.6 million during the year ended
December 31, 2000, compared to a decrease of $1.1 million during the year ended
December 31, 1999. Net cash provided by operating activities decreased $199,000,
or 46.0%, to $233,000 for the year ended December 31, 2000, from $432,000 for
the year ended December 31, 1999. Net cash used in investing activities
decreased $3.4 million to $7.1 million for the year ended December 31, 2000 from
$10.5 million for the year ended December 31, 1999. Cash used to originate
loans, net, decreased $5.9 million to $1.8 million for the year ended December
31, 2000 from $7.7 million for the year ended December 31, 1999. Cash used for
the purchase of premises and equipment decreased to $86,000 for the year ended
December 31, 2000 from $2.1 million for the year ended December 31, 1999.
Partially offsetting these changes was an increase of $3.2 million, or 60.5%, in
the purchase of securities available-for-sale, to $8.5 million for the year
ended December 31, 2000 from $5.3 million for the year ended December 31, 1999.
Net cash provided by financing activities increased $5.5 million, or 62.1%, to
$14.4 million for the year ended December 31, 2000 from $8.9 million for the
year ended December 31, 1999. Our increase in deposits increased $7.5 million to
$15.4 million for the year ended December 31, 2000 from $7.9 million for the
year ended December 31, 1999. Our repayments of Federal Home Loan Bank advances
decreased $5.0 million to $1.0 million for the year ended December
42
31, 2000 from $6.0 million for the year ended December 31, 1999. We received no
Federal Home Loan Bank advances during the year ended December 31, 2000,
compared to $7.0 million of these advances for the year ended December 31, 1999.
Clover Leaf Bank will receive 50% of the net proceeds in the offering, or
approximately $1.6 million at the minimum of the offering range and $2.2 million
at the maximum of the offering range. Management of Clover Leaf Bank intends to
initially invest a substantial portion of these funds in shorter-term
investments that are considered "liquid" investments, and, as a result, Clover
Leaf Bank's liquidity will initially increase due to the cash received from the
stock offering. The effects of the stock offering on liquidity are likely to
decrease over time as the cash proceeds are reinvested in longer term
investments, such as mortgage and commercial business loans or additional branch
offices.
At June 30, 2001, Clover Leaf Bank had loan commitments of $1.5 million and
unused lines of credit of $4.2 million. Clover Leaf Bank believes it has
adequate resources to fund loan commitments as they arise. If Clover Leaf Bank
requires funds beyond its internal funding capabilities, advances from the
Federal Home Loan Bank of Chicago are available. At June 30, 2001, approximately
$34.2 million of time deposits were scheduled to mature within one year. We
expect that substantially all of these time deposits either will be renewed upon
maturity or will be placed in money market accounts at Clover Leaf Bank. Clover
Leaf Bank intends to sell a greater percentage of its residential real estate
loan originations, which will provide additional liquidity.
After the conversion, Clover Leaf Financial does not intend to engage in
any significant business activity other than owning all of the common stock of
Clover Leaf Bank. In order to provide sufficient funds for operations, Clover
Leaf Financial expects to retain and invest up to 50% of the net proceeds of the
stock offering remaining after making the loan to the employee stock ownership
plan. In the future, Clover Leaf Financial's primary source of funds will be
income from its investments and principal and interest payments received on the
employee stock ownership plan loan. Future dividends from Clover Leaf Bank will
also be a source of funds for Clover Leaf Financial; however, as a stock savings
bank, Clover Leaf Bank is subject to regulatory limitations on its ability to
pay cash dividends.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS No. 141"). SFAS No. 141 addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS 141 requires all business
combinations in the scope of this Statement to be accounted for using the
purchase method. SFAS No. 141 is effective for business combinations initiated
after June 30, 2001 and all business combinations accounted for using the
purchase method for which the acquisition date is July 1, 2001 or later.
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). This Statement
addresses financial accounting and reporting required for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
It addresses how intangible assets should be accounted for at acquisition and in
subsequent periods. Most significantly, goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. This statement also provides
specific guidance for testing goodwill for impairment and requires additional
disclosures about goodwill and intangible assets.
43
SFAS 142 is effective for fiscal years beginning after December 15, 2001.
It is required to be applied to the beginning of an entity's fiscal year and to
be applied to all goodwill and other intangible assets recognized in its
financial statements at that date. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
this statement are to be reported as resulting from a change in accounting
principle. Clover Leaf Financial does not believe the adoption of SFAS 142 will
have a material impact on its consolidated financial statements; however, the
evaluation of the impact has not been completed.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of Clover Leaf Bank
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 considering changes in the value 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.
BUSINESS OF CLOVER LEAF FINANCIAL CORP.
Clover Leaf Financial is a Delaware corporation organized in September 2001
by Clover Leaf Bank for the purpose of becoming the holding company of Clover
Leaf Bank. If Clover Leaf Bank utilizes the holding company structure as part of
the conversion, we will purchase all of the capital stock of Clover Leaf Bank to
be issued in the conversion in exchange for 50% of the net conversion proceeds,
and we will retain the remaining 50% of the net proceeds as our initial
capitalization. Immediately following the conversion, our only significant
assets will be the capital stock of Clover Leaf Bank, our loan to the employee
stock ownership plan, and the remaining net conversion proceeds. The business of
Clover Leaf Financial initially will consist of the business of Clover Leaf
Bank.
BUSINESS OF CLOVER LEAF BANK, SB
Market Area
Clover Leaf Bank's lending and deposit-gathering area is concentrated in
the neighborhoods surrounding its two offices in Edwardsville, Illinois, which
is located in Madison County. The population of Madison County grew 3.9% from
1990 to 2000, compared to an 8.6% increase in the population of the State of
Illinois during the same period. During this same period, however, our local
market area, consisting of Edwardsville and surrounding towns, has experienced a
significant increase in housing starts. The economy in Clover Leaf Bank's market
area is not dependent on any single employer or type of business. While Madison
County's economy is primarily industrial, Edwardsville, as the county seat, has
a primarily service-oriented economy. The three largest employers in Madison
County, all of which are headquartered in Edwardsville, are Southern Illinois
University at Edwardsville, the Madison County Government and Edwardsville
Community Schools.
44
Competition
We face significant competition in both originating loans and attracting
deposits. Madison County has a significant number of financial institutions,
many of which are significantly larger and have greater financial resources than
Clover Leaf Bank, and all of which are our competitors to varying degrees. Our
competition for loans comes principally from commercial banks, savings
institutions, mortgage banking companies, credit unions and insurance companies.
Our most direct competition for deposits historically has come from commercial
banks and credit unions. We face additional competition for deposits from
non-depository competitors such as mutual funds, securities and brokerage firms
and insurance companies. Management believes that the Gramm-Leach-Bliley Act,
which permits affiliation among banks, securities firms and insurance companies,
will increase competition in our market area.
Lending Activities
General. Our loan portfolio consists primarily of one- to four-family
residential real estate loans. The vast majority of these loans have fixed rates
of interest. In addition to one- to four-family residential real estate loans,
our loan portfolio consists of commercial and consumer loans, and, to a lesser
extent, construction and overdraft loans. At June 30, 2001, our total loans were
$60.6 million, of which $39.5 million, or 65.2%, were secured by one- to
four-family residential real estate, $7.8 million, or 12.9%, were secured by
commercial real estate, $8.0 million, or 13.1%, were consumer loans, $4.4
million, or 7.2%, were commercial business loans, and $939,000 were construction
loans.
In an effort to increase our interest income and to reduce the risk to our
net income from changes in market interest rates, we have emphasized the
origination of commercial real estate and commercial business loans. Compared to
our residential mortgage loans, commercial real estate and commercial business
loans generally have higher interest rates and are more sensitive to changes in
market interest rates because they have adjustable interest rates and shorter
terms to maturity. In addition, in order to improve our asset quality and reduce
our delinquencies, we have discontinued our indirect automobile lending.
45
Loan Portfolio Composition. The following table shows the composition of
our loan portfolio in dollar amounts and in percentages (before deductions for
loans in process, deferred fees and allowances for losses) as of the dates
indicated.
June 30, December 31,
--------------- ------------------------------------
2001 2000 1999
--------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
-----------------
One- to four- family ....... $39,508 65.21% $38,113 66.27% $40,268 71.94%
Commercial ................. 7,818 12.90 5,350 9.30 2,716 4.85
Construction and land ...... 939 1.55 749 1.30 1,320 2.36
------- ------ ------- ------ ------- ------
Total real estate loans 48,265 79.66 44,212 76.87 44,304 79.15
------- ------ ------- ------ ------- ------
Other Loans:
------------
Consumer:
Deposit account .......... 170 0.28 326 0.57 329 0.59
Automobile ............... 4,426 7.32 5,750 10.00 6,943 12.40
Home equity .............. 1,256 2.07 1,282 2.23 1,159 2.07
Other .................... 2,103 3.47 2,026 3.52 2,140 3.82
------- ------ ------- ------ ------- ------
Total consumer loans .. 7,955 13.14 9,384 16.32 10,571 18.88
------- ------ ------- ------ ------- ------
Commercial business ....... 4,362 7.20 3,914 6.81 1,103 1.97
------- ------ ------- ------ ------- ------
Total gross loans .. 60,582 100.00% 57,510 100.00% 55,978 100.00%
====== ====== ======
Less:
-----
Deferred fees and discounts 20 26 29
Allowance for losses ...... 636 625 455
------- ------- -------
Total loans receivable, net $59,926 $56,859 $55,494
======= ======= =======
The following table illustrates the interest rate sensitivity of our loan
portfolio at December 31, 2000. Mortgages which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the full
principal amount of the mortgage is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
Due in one year or Due after one year Due after five
less through five years years Total
------------------- ------------------- ----------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Real Estate loans:
One- to four-family................. $ 2,832 7.24% $ 10,204 7.29% $ 26,472 7.22% $ 39,508 7.24%
Commercial.......................... 247 7.53 6,948 7.63 623 7.35 7,818 7.60
Construction and land............... 735 7.37 183 7.88 21 8.50 939 7.48
Commercial business loans.............. 1,934 6.96 2,137 7.13 291 8.37 4,362 7.13
Consumer loans......................... 950 9.44 6,469 9.70 536 9.12 7,955 9.62
------- -------- -------- --------
Gross loans............................ $ 6,698 7.43% $ 25,941 7.83% $ 27,943 7.27% $ 60,582 7.52%
======= ======== ======== ========
The total amount of loans due after December 31, 2001 which have
predetermined interest rates is $46.5 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $7.4
million.
46
One- to Four-Family Residential Real Estate Loans. Historically, we have
emphasized the origination of one- to four-family loans secured by residential
real estate. As of June 30, 2001, these loans totaled $39.5 million, or 65.2% of
our total loan portfolio. Virtually all of our residential real estate loans
have fixed rates of interest. Currently, we do not offer adjustable interest
rates on our one- to four-family mortgage loans primarily because our customers
prefer fixed-rate mortgage loans in the relatively low interest rate environment
that currently exists. We generally retain most of the loans that we originate,
although in the past we have sold loans on a servicing-retained basis. We intend
to sell a greater percentage of our residential real estate loan originations on
a servicing-retained basis. At June 30, 2001, we were servicing $4.0 million in
loans for others.
We currently offer one- to four-family residential mortgage loans with
terms of 5, 15 and 30 years. Our five-year loans provide for principal and
interest amortization of up to 30 years with a balloon payment at the end of the
five-year term. All of our 15- and 30-year loans amortize over the term of the
loan.
For one- to four-family residential real estate loans, we may 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 mortgage loans, and we also require
that fire and extended coverage casualty insurance (and, if appropriate, flood
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 require
a property appraisal for all mortgage loans that are underwritten to comply with
secondary market standards. Appraisals are conducted by our on-staff appraisers
as well as independent appraisers from a list approved by our board of
directors. Our residential real estate loans include "due on sale" clauses.
Commercial Real Estate Loans. We have increased our emphasis on commercial
real estate lending in recent years. Loans secured by commercial real estate
totaled $7.8 million, or 12.9% of our total loan portfolio as of June 30, 2001.
Our commercial real estate loans are secured predominately by office buildings,
and to a lesser extent warehouse properties and more specialized properties such
as churches. We originate commercial real estate loans with a maximum term of
three 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. Our largest commercial real estate loan at June 30, 2001
had a principal balance of $839,000 and was collateralized by a fast food
restaurant. This loan is performing in accordance with its terms.
Commercial real estate loans generally have higher interest rates than the
interest rates on residential mortgage loans, and are more sensitive to changes
in market interest rates because they have adjustable interest rates and shorter
terms. Commercial real estate loans have significant additional risk compared to
one- to four-family residential mortgage loans, as they typically involve large
loan balances concentrated with single borrowers or groups of related borrowers.
In addition, the repayment of commercial real estate loans typically depends on
the successful operation of the related real estate project, and thus may be
subject to a greater extent than residential mortgage loans to adverse
conditions in the real estate market or in the economy generally.
In our underwriting of commercial real estate loans, we may lend up to 80%
of the property's appraised value in the case of loans secured by apartments,
and up to 75% of the property's appraised value on loans secured by other
commercial properties. We require independent appraisals for all commercial real
estate loans in excess of $250,000. For loans that do not exceed this amount, we
require that an officer prepare a memorandum of value detailing comparable
values based upon tax bills, prior appraisals, and income information on
revenue-
47
producing property. Decisions to lend are based on the economic viability of the
property and the creditworthiness of the borrower. 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. In evaluating whether
to make a commercial real estate loan, we place primary emphasis on the ratio of
net cash flow to debt service on the property, and we generally require a ratio
of cash flow to debt service of at least 120%, computed after deduction for a
vacancy factor and property expenses we deem appropriate.
We require title insurance on all of our commercial real estate loans, and
we also require that fire and extended coverage casualty insurance (and, if
appropriate, flood insurance) be maintained. In addition, we generally require
that the borrower personally guarantee the repayment of the loan.
Construction and Land Loans. We originate two types of residential
construction loans: (i) construction/speculative loans, and (ii) construction/
permanent loans. As of June 30, 2001, construction and land loans totaled
$939,000, or 1.6% of our total loan portfolio.
Construction/speculative loans are made to area homebuilders who do not
have, at the time the loan is originated, a signed contract with a homebuyer who
has a commitment for permanent financing with either Clover Leaf Bank or another
lender. The homebuyer may enter into a purchase contract either during or after
the construction period. These loans have the risk that the builder will have to
make interest and principal payments on the loan and finance real estate taxes
and other holding costs of the completed home for a significant time after the
completion of construction. Funds are disbursed in phases as construction is
completed. All construction/speculative loans require that the builder-borrower
personally guarantee the full repayment of the principal and interest on the
loan. These loans are generally originated for a term of twelve months, with
interest rates that are tied to the prime lending rate, and with a loan-to-value
ratio of no more than 75% of the lower of cost or the estimated value of the
completed property. Generally, we limit our construction/speculative loans to
one property per borrower at any given time, and the largest number of
construction/speculative loans we have originated to a single borrower at any
given time was for three properties. At June 30, 2001, the largest outstanding
concentration of credit to one builder consisted of two construction/speculative
loans with an aggregate balance of $221,000, which were performing in accordance
with their terms.
Construction/permanent loans are made to either a homebuilder or a
homeowner who, at the time of construction, has a signed contract together with
a commitment for permanent financing from Clover Leaf Bank for the finished
home. The construction phase of a loan generally lasts up to 6 months, and the
interest rate charged generally corresponds to the rate of the committed
permanent loan, 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. Following the initial 6-month
period, construction/permanent loans convert to permanent loans, regardless of
whether the construction phase has been completed. At June 30, 2001 the largest
single outstanding construction loan of this type had an outstanding balance of
$275,000 and was performing in accordance with its terms.
Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan is,
to a great degree, dependent upon the successful and timely completion of the
home construction. Construction delays or the financial impairment of the
builder may further impair the borrower's ability to repay the loan.
Our procedures for underwriting construction/speculative loans include an
assessment of the borrower's credit history and the borrower's ability to meet
other existing debt obligations, as
48
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.
We also originate land development loans to area homebuilders that are
secured by individual unimproved or improved residential building lots. Land
loans are generally offered with variable prime-based interest rates with terms
of up to two years. The maximum loan-to-value ratio is 65% of the lower of cost
or appraised value of the property.
Consumer Loans. Our consumer loans consist primarily of automobile loans,
and to a lesser extent, home equity lines of credit and overdraft loans, loans
secured by deposits and securities, and unsecured personal loans. As of June 30,
2001, consumer loans totaled $8.0 million, or 13.1% of our total loan portfolio.
Automobile loans are generally offered with maturities of up to 60 months
for new automobiles, while loans secured by used automobiles will have maximum
terms that vary depending on the age of the automobile. We require all borrowers
to maintain collision insurance on automobiles securing loans in excess of
$1,000, with Clover Leaf Bank listed as loss payee. In those instances where the
borrower fails to maintain adequate insurance coverage, we are further protected
against loss by vendors single interest insurance coverage.
Our indirect automobile loans have experienced relatively higher
delinquency and loss rates, and we discontinued this type of automobile lending
in July 2000. Our automobile loan portfolio totaled $4.4 million, or 7.3% of
total loans at June 30, 2001, compared to $6.9 million, or 12.4% of total loans,
at December 31, 1999.
Home equity lines of credit are generally made for owner-occupied homes,
and are secured by first or second mortgages on residential properties. We are
attempting to increase our originations of home equity loans through targeted
marketing. We generally offer home equity lines of credit with a maximum loan to
appraised value ratio of 85% (including senior liens on the subject property).
We currently offer these loans for terms of up to 10 years, and with adjustable
rates that are tied to the prime lending rate.
We offer overdraft loans by providing unsecured lines of credit to
qualifying checking accountholders. The line of credit must be pre-approved by
Clover Leaf Bank's loan department. Overdraft loans totaled $642,000, or 1.1% of
our total loan portfolio as of June 30, 2001.
Consumer loans generally entail greater credit risk than residential
mortgage loans, particularly in the case of loans that are unsecured or are
secured by assets that tend to depreciate in value, such as automobiles. In
these cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining value often does not warrant further substantial collection efforts
against the borrower. Further, consumer loan collections depend on the
borrower's continuing financial stability, and therefore are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
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. The
stability of the borrower's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. 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 amount. We
require independent appraisals for all
49
consumer loans in excess of $50,000. For loans that do not exceed this amount,
we require that an officer prepare a memorandum of value detailing comparable
values based upon tax bills or other available information.
Commercial Business Loans. We currently offer commercial business loans to
existing customers in our market area, some of which are secured in part by
additional real estate collateral. We make various types of secured and
unsecured commercial business loans 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 three years. Equipment loans
usually involve a one-time disbursement of funds, with repayment over the term
of the loan, while operating lines of credit involve multiple disbursements and
revolving notes that can be renewed annually. The loans are either negotiated on
a fixed-rate basis or carry variable interest rates indexed to the prime rate.
At June 30, 2001, we had 66 commercial business loans outstanding with an
aggregate balance of $4.4 million, or 7.2%, of the total loan portfolio. As of
June 30, 2001, our largest commercial business loan consisted of our
participation interest in a $1.1 million loan to a cabinet manufacturer, which
is secured by equipment, inventory, accounts receivable and a mortgage on the
commercial property. We are the lead lender in this participation, and the
principal balance of our participation interest was $729,000 at June 30, 2001.
Although this loan was performing in accordance with its terms as of June 30,
2001, as a result of a subsequent fire at the borrower's facility, this loan was
not performing in accordance with its terms as of July 31, 2001. However, Clover
Leaf Bank believes that it will not suffer a loss on this loan because the
borrower maintained full insurance on the property and listed Clover Leaf Bank
as loss payee on the insurance.
In recent years, we have increased our emphasis on commercial business
lending. These loans tend to have higher rates of interest than residential
mortgage loans, and are more sensitive to changes in market interest rates
because they have adjustable interest rates and shorter terms. In addition,
commercial business lending gives us greater access to commercial borrowers that
may open transactional checking accounts with Clover Leaf Bank.
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 real estate loan, we place primary emphasis on the
ratio of net cash flow to debt service for the property, generally requiring a
ratio of at least 1.2x. Credit agency reports of the borrower's credit history
as well as bank checks and trade investigations supplement the analysis of the
borrower's creditworthiness. Collateral supporting a secured transaction is also
analyzed to determine its marketability and liquidity. Commercial business loans
generally bear higher interest rates than residential loans, but they also may
involve a higher risk of default since their repayment generally depends on the
successful operation of the borrower's business.
Loan Originations, Purchases, Sales and Servicing. Although we originate
both 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. This includes banks,
savings institutions, credit unions, mortgage banking companies, and life
insurance companies. Loan originations are derived from a number of sources,
including existing or prior customers and walk-in customers.
Loan originations are adversely affected by rising interest rates, which
typically result in decreased loan demand. Accordingly, the volume of our loan
originations and the interest rates we can charge on loans vary from period to
period. One- to four-family residential mortgage loans are generally
underwritten to conform to Fannie Mae and Freddie Mac seller/servicer
50
guidelines, and are currently originated on a fixed interest rate basis only. We
generally retain the loans that we originate. When we do sell mortgage loans, we
generally retain the servicing rights, which means that we will continue to
collect payments on the loans and supervise foreclosure proceedings, if
necessary. We retain a portion of the interest paid by the borrower on the
loans, generally 25 basis points, as consideration for our services. We
currently service $4.0 million of loans for others, and we intend to sell a
portion of our one- to four-family residential mortgage loans in the future in
an effort to reduce our interest rate risk.
The following table summarizes our loan origination and repayment
activities for the periods indicated. We did not purchase any loans during the
periods indicated.
Six Months
Ended June 30, Years Ended December,
----------------- ---------------------
2001 2000 2000 1999
---- ---- ---- ----
(In Thousands)
Loans receivable, net,
at beginning of period .......... $ 56,859 $ 55,494 $ 55,494 $47,802
Originations by type:
Real estate
One- to four- family ......... 5,687 2,069 4,063 11,244
Commercial ................... 3,200 865 3,023 516
Construction and land ........ 350 -- -- 1,041
Non-real estate
Consumer ..................... 1,052 1,765 3,148 7,131
Commercial business .......... 2,585 33 2,697 790
-------- -------- -------- -------
Total loans originated .. 12,874 4,732 12,931 20,722
-------- -------- -------- -------
Sales and Repayments
Sales:
Real estate
One- to four- family ...... -- -- 2,132 --
Commercial ................ -- -- -- --
Construction and land ..... -- -- -- --
Non-real estate
Consumer ................... -- -- -- --
Commercial business ........ -- -- -- --
-------- -------- -------- -------
Total loans sold ........ -- -- 2,132 --
Principal repayments ........... 9,802 2,668 9,266 13,044
-------- -------- -------- -------
Total reductions ........ 9,802 2,668 11,398 13,044
Increase (decrease) in other
items, net ...................... (5) (7) (168) 14
Net increase ............ 3,067 2,057 1,365 7,692
-------- -------- -------- -------
Loans receivable, net,
at end of period ................ $ 59,926 $ 57,551 $ 56,859 $55,494
======== ======== ======== =======
Loan Approval Procedures and Authority. Our lending activities are subject
to written underwriting standards and loan origination procedures adopted by
management and the Board of Directors. For single family, owner-occupied real
estate loans, the President of Clover Leaf Bank is authorized to approve loans
up to $250,000, while the Senior Vice President is authorized to approve loans
up to $200,000. For secured commercial real estate loans and construction and
land loans, the President and Senior Vice President are authorized to approve
loans up to $150,000 and $75,000, respectively; for secured consumer loans,
these officers may approve loans up to $50,000; and for overdrafts and unsecured
credits, these officers may approve loans up to $25,000 and $15,000,
respectively. When acting together, these officers may approve new loans in
amounts up to 150% of their combined lending limits, and may approve renewals of
commercial business and commercial real estate loans in amounts up to 200% of
their combined lending limits where there has been no deterioration in either
the payment pattern or financial strength of the borrower. However, the entire
Board of Directors must approve all loans in excess of $625,000. In addition,
the Board of Directors generally ratifies all pre-authorized loan approvals.
51
Asset Quality
Delinquent Loans. The following table sets forth Clover Leaf Bank's loan
delinquencies by type, amount and percentage at June 30, 2001.
Loans Delinquent For:
---------------------------------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------------ ----------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four- family. 6 $339 0.86% -- $ -- --% 6 $339 0.86%
Consumer............... 33 259 3.26 3 5 0.06 36 264 3.32
Commercial business.... 1 192 4.40 1 8 0.18 2 200 4.58
--- ---- ---- --- ----- ---- --- ---- ----
Total............. 40 $790 1.30% 4 $ 13 0.02% 44 $803 1.32%
=== ==== ==== === ===== ==== === ==== ====
Of the consumer loans listed in the table above, 24 are indirect automobile
loans. As a result of the relatively high delinquency and loss rate we have
experienced with indirect automobile loans, we have discontinued this type of
lending.
Loan Delinquencies and Collection Procedures. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
correct the delinquency and restore the loan to a current status. We will send a
borrower a reminder notice 15 days after an account becomes delinquent, and our
employees are authorized to use their discretion whether direct telephone
contact is required at that time. If the borrower does not remit the entire
payment due by the end of the month, we try to make direct contact with the
borrower to arrange a payment plan. If a satisfactory payment plan is not
established within 50 days of a delinquency, we will send a demand letter to the
borrower. If a satisfactory payment plan has not been arranged with 60 days
following a delinquency, we may instruct our attorneys to institute foreclosure
proceedings depending on the loan-to-value ratio or our relationship with the
borrower. Foreclosed property is held as other real estate owned.
Our policies require that management continuously monitor the status of the
loan portfolio and report to the Board of Directors on a monthly basis. These
reports include information on delinquent loans and foreclosed real estate and
our actions and plans to cure the delinquent status of the loans and to dispose
of any real estate acquired through foreclosure.
Non-Performing Loans. 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 the 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. In addition, we 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 collectibility of the loan. Loans
are charged-off no later than 120 days following their delinquency, unless the
loans are well-collateralized or in the process of collection.
As of June 30, 2001, our total non-accrual loans amounted to $619,000
compared to $102,000 at December 31, 2000, and $36,000 at December 31, 1999. The
increase in non-accrual loans from December 31, 2000 to June 30, 2001, resulted
from increases in non-accruing
52
loans in all categories of loans, as we adopted and implemented a new loan
policy and loan review policy during the fourth quarter of 2000.
The table below sets forth the amounts and categories of non-performing
assets in our loan portfolio. For all years presented, we had no troubled debt
restructurings (which involve forgiving a portion of interest or principal on
loans or making loans at materially less than market interest rates), and no
foreclosed assets.
Six Months
Ended June 30, Years Ended December 31,
-------------- ------------------------
2001 2000 2000 1999
---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four- family .............. $292 $ -- $ 24 $ --
Construction ...................... 183 -- -- --
Commercial business ............... 29 -- -- --
Consumer .......................... 115 54 78 36
---- ---- ---- ----
Total .......................... 619 54 102 36
---- ---- ---- ----
Accruing loans delinquent
more than 90 days:
One- to four- family .............. -- 62 -- 314
Commercial business ............... 8 -- -- --
Consumer .......................... 5 181 41 225
---- ---- ---- ----
Total .......................... 13 243 41 539
---- ---- ---- ----
Total non-performing assets ......... $632 $297 $143 $575
==== ==== ==== ====
Total non-performing assets as
a percentage of total assets ....... 0.72% 0.39% 0.17% 0.81%
==== ==== ==== ====
Allowance for loan losses as
a percentage of non-performing
loans .............................. 100.63% 154.55% 437.06% 79.13%
====== ====== ====== =====
Allowance for loan losses as
a percentage of gross loans
receivable ......................... 1.05% 0.79% 1.09% 0.81%
==== ==== ==== ====
For the six months ended June 30, 2001, $36,000 of gross interest income
would have been recorded had the non-accruing loans been current in accordance
with their original terms.
Troubled Debt Restructurings. A troubled debt restructuring occurs when we,
for economic or legal reasons related to a borrower's financial difficulties,
grant a concession to the borrower, either as a deferment or reduction of
interest or principal on the loan, that we would not otherwise consider. We had
no troubled debt restructurings as of June 30, 2001.
Real Estate Owned. Real estate owned consists of property acquired through
formal foreclosure or by deed in lieu of foreclosure and is recorded at the
lower of recorded investment or fair value. Write-downs from recorded investment
to fair value which are required at the time of foreclosure are charged to the
allowance for loan losses. After transfer, the property is carried at the lower
of recorded investment or fair value, less estimated selling expenses.
Adjustments to the carrying value of the properties that result from subsequent
declines in value are charged to operations in the period in which the declines
occur. We held no property that was classified as real estate owned as of June
30, 2001.
Classification of Assets. Our policies, consistent with regulatory
guidelines, require that we classify loans and other assets, such as securities,
that are considered to be of lesser quality, as substandard, doubtful, or loss
assets. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets
53
classified as loss are those considered uncollectable and of such little value
that their continuance as assets is not warranted. Assets that do not expose us
to risk sufficient to warrant classification in one of the aforementioned
categories, but which possess some weaknesses, are required to be designated as
special mention by management.
When we classify assets as either substandard or doubtful, we allocate for
analytical purposes a portion of our general valuation allowances or loss
reserves to these assets as deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the probable
risk associated with lending activities, but which have not been allocated to
particular problem assets. When we classify problem assets as loss, we are
required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off the amount of the
assets. Our determination as to the classification of assets and the amount of
valuation allowances is subject to review by regulatory agencies, which can
order the establishment of additional loss allowances. Management regularly
reviews our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.
On the basis of management's review of our assets, at June 30, 2001, we had
classified a total of $2.5 million of our loans and other assets as follows:
At or For the Six
Months Ended
June 30, 2001
-----------------
(In Thousands)
Special Mention ......................... $ --
Substandard ............................. 2,433
Doubtful assets ......................... 28
Loss assets ............................. --
-------
Total ................................. $ 2,461
=======
General loss allowance .................. $ 636
Specific loss allowance ................. --
Charge-offs ............................. $ 41
54
Allowance for Loan Losses. The following table sets forth information
regarding our allowance for loan losses and other ratios at or for the dates
indicated.
Six Months Years Ended
Ended June 30, December 31,
---------------- --------------
2001 2000 2000 1999
---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ......... $625 $455 $455 $458
Charge-offs:
One- to four-family .................. -- -- -- (1)
Commercial business .................. (4) -- (75) --
Consumer ............................. (37) (32) (198) (87)
---- ---- ---- ----
(41) (32) (273) (88)
==== ==== ==== ====
Recoveries:
One- to four-family .................. -- -- -- 1
Consumer ............................. 36 6 15 36
---- ---- ---- ----
36 6 15 37
==== ==== ==== ====
Net charge-offs ........................ (5) (26) (258) (51)
Additions charged to operations ........ 16 30 428 48
---- ---- ---- ----
Balance at end of period ............... $636 459 $625 $455
==== ==== ==== ====
Ratio of net charge-offs during the
period to average loans outstanding
during the period .................... 0.01% --% 0.45% 0.10%
==== ==== ==== ====
Ratio of net charge-offs during the
period to average non-performing
assets ............................... 0.79% 8.75% 180.42% 8.87%
==== ==== ====== ====
The allowance for loan losses is a valuation account that reflects our
evaluation of the credit losses inherent in our loan portfolio. We maintain the
allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely. For a discussion of the charge-offs
and additions charged to operations during the year ended December 31, 2000, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for the Years Ended December 31,
2000 and 1999--Provision for Loan Losses."
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, peer group information and
prevailing economic conditions. There may be other factors that may warrant our
consideration in maintaining an allowance at a level sufficient to provide for
probable losses. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available or as future events change. Although we believe that we have
established and maintained the allowance for loan losses at adequate levels,
future additions may be necessary if economic and other conditions in the future
differ substantially from the current operating environment.
In addition, the Illinois Office of Banks and Real Estate and the Federal
Deposit Insurance Corporation, as an integral part of their examination process,
periodically review our loan portfolio and the related allowance for loan
losses. The Illinois Office of Banks and Real Estate and the Federal Deposit
Insurance Corporation may require us to increase the allowance for loan losses
based on their judgments of information available to them at the time of their
examination, thereby adversely affecting our results of operations.
55
Allocation of the Allowance for Loan Losses. The following table presents
our allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the periods indicated.
Years Ended December 31,
Six Months -----------------------------------------------------------------
Ended June 30, 2000 1999
--------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Catagory Amount of Amounts Catagory Amount of Amounts Catagory
Loan Loss By to Total Loan Loss By to Total Loan Loss By to Total
Allowance Catagory Loans Allowance Catagory Loans Allowance Catagory Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
Real Estate Loans:
One- to four-family ....... $321 $39,508 65.21% $304 $38,113 66.27% $203 $40,268 71.94%
Commercial ................ 101 7,818 12.90 -- 5,350 9.30 63 2,716 4.85
Construction and Land ..... -- 939 1.55 -- 749 1.30 7 1,320 2.36
Commercial business ........ 76 4,362 7.20 90 3,914 6.81 27 1,103 1.97
Consumer ................... 138 7,955 13.14 231 9,384 16.32 155 10,571 18.88
---- ------- ------ ---- ------- ------ ---- ------- ------
Total ................. $636 $60,582 100.00% $625 $57,510 100.00% $455 $55,978 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
Management evaluates the total balance of the allowance for loan losses
based on several factors that are not loan specific but are reflective of the
losses inherent in the loan portfolio, including management's periodic review of
loan collectibility in light of historical experience, the nature and volume of
the loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, prevailing economic
conditions such as housing trends, inflation rates and unemployment rates,
geographic concentrations of loans within Clover Leaf Bank's immediate market
area, and both peer financial institution historic loan loss experience and
allowance for loan loss levels.
For a discussion of the increase in the allowance for loan losses during
the year ended December 31, 2000, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Operating Results
for the Years Ended December 31, 2000 and 1999--Provision for Loan Losses."
Investment Activities
Clover Leaf Bank is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Government obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the Federal Home Loan Bank of Chicago, certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal funds.
Within certain regulatory limits, Clover Leaf Bank may also invest a portion of
its assets in commercial paper and corporate debt securities. We are also
required to invest in Federal Home Loan Bank stock. See "Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that securities be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."
56
Debt and equity securities held for current resale are classified as
"trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities are included in earnings. Clover
Leaf Bank does not currently use or maintain a trading account. Debt and equity
securities not classified as either "held to maturity" or "trading securities"
are classified as "available for sale." These securities are reported at fair
value, and unrealized gains and losses on the securities are excluded from
earnings and reported, net of deferred taxes, as a separate component of equity.
Clover Leaf Bank has classified all of its securities as available for sale.
All of our securities carry market risk insofar as increases in market
interest rates may cause a decrease in their market value. Many also carry
prepayment risk insofar as they may be called prior to maturity in times of low
market interest rates, so that we may have to invest the funds at a lower
interest rate. Investments in securities are made based on certain
considerations, which include the interest rate, tax considerations, yield,
settlement date and maturity of the security, our liquidity position, and
anticipated cash needs and sources. The effect that the proposed security would
have on our credit and interest rate risk and risk-based capital is also
considered. We purchase securities to provide necessary liquidity for day-to-day
operations, and when investable funds exceed loan demand.
Generally, the investment policy of Clover Leaf Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon our liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Our investment policy does not permit engaging directly in hedging
activities or purchasing high-risk mortgage derivative products.
Our securities are mainly composed of securities issued by the U.S.
Government and government agencies (primarily Federal Home Loan Bank, Fannie Mae
and Freddie Mac), although from time to time we make other investments as
permitted by applicable laws and regulations.
The following table sets forth information relating to the amortized cost
and fair value of our securities, all of which are classified as available for
sale. For further information, see Notes 1 and 3 of the Notes to Consolidated
Financial Statements.
December 31,
June 30, -----------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In Thousands)
U. S. Treasury ............. $ -- $ -- $ -- $ -- $ 3,002 $ 3,023
Federal agencies ........... 10,853 11,004 12,376 12,418 4,000 3,796
State and municipal ........ 932 934 946 949 912 911
Mortgage-backed securities . 2,303 2,336 1,548 1,522 1,753 1,661
Corporate .................. 1,012 1,030 499 495 497 486
------- ------- ------- ------- ------- -------
Total .................... $15,100 $15,304 $15,369 $15,384 $10,164 $ 9,877
======= ======= ======= ======= ======= =======
57
The following table sets forth the scheduled maturities, amortized cost and
weighted average yields for our securities at June 30, 2001.
Due in one year or Due after one year Due after five years
less through five years through ten years Due after ten years Total
--------------------- ------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Rate Cost Rate Cost Rate Cost Rate Cost Rate
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
U.S. Government
agency securities .. $1,000 6.06% $5,649 6.52% $4,204 6.72% $ -- --% $10,853 6.55%
Obligations of states
and political
subdivisions ....... 50 6.35 610 4.80 271 5.63 -- -- 931 5.13
Mortgage-backed
securities ......... -- -- -- -- 875 8.50 1,428 6.31 2,303 7.15
Corporate ........... 500 5.13 -- -- 513 6.88 -- -- 1,013 6.02
------ ------ ------ ------ -------
Total ............. $1,550 $6,259 $5,863 $1,428 $15,100
====== ====== ====== ====== =======
Sources of Funds
General. Deposits have been our primary source of funds for lending and
other investment purposes. In addition to deposits, we derive funds primarily
from principal and interest payments on loans. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by market interest rates. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources, and may be used on a longer-term basis for general business purposes.
Deposits. Residents of our primary market area are our main source of
deposits. Deposit account terms vary, with the principal differences being the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate. We do not use brokers to obtain deposits. Our deposit
products include commercial demand and NOW, money market, savings, and term
certificate accounts. In recent years, and in connection with our emphasis on
the origination of commercial business loans, we have promoted money market
accounts with adjustable interest rates. Interest rates paid, maturity terms,
service fees and withdrawal penalties are established by Clover Leaf Bank on a
periodic basis. Management determines the rates and terms based on rates paid by
our competitors, our needs for funds or liquidity, growth goals and federal and
state regulations.
58
Deposit Accounts by Type. The following table sets forth the dollar amount
of our deposits in the various types of deposit programs as of the dates
indicated.
Years Ended December 31,
Six Months Ended -----------------------------------
June 30, 2001 2000 1999
---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Transactions and savings deposits: (Dollars in Thousands)
---------------------------------
Commercial demand ............. $ 5,747 7.24% $ 5,414 7.12% $ 4,969 8.20%
Passbook accounts ............. 3,763 4.74 3,288 4.32 4,188 6.90
NOW accounts .................. 2,480 3.12 2,498 3.29 2,375 3.92
Money market accounts ......... 13,095 16.49 5,515 7.25 4,009 6.62
------- ------ ------- ------ ------- ------
Total non-certificates ...... 25,085 31.59 16,715 21.98 15,541 25.64
------- ------ ------- ------ ------- ------
Certificates of deposit:
-----------------------
0.00 - 3.99% .................. 41 0.05 18 0.02 15 .03
4.00 - 5.99% .................. 18,870 23.77 15,719 20.67 35,685 58.88
6.00 - 7.99% .................. 29,942 37.71 38,358 50.45 4,509 7.44
8.00 - 9.99% .................. -- -- 6 0.01 -- --
------- ------ ------- ------ ------- ------
Total certificates of deposit 48,853 61.53 54,101 71.15 40,209 66.35
------- ------ ------- ------ ------- ------
Individual retirement accounts:
------------------------------
0.00 - 3.99% .................. 12 0.02 -- -- -- --
4.00 - 5.99% .................. 2,507 3.16 2,263 2.98 2,388 3.94
6.00 - 7.99% .................. 2,936 3.70 2,957 3.89 2,466 4.07
------- ------ ------- ------ ------- ------
Total individual retirement
accounts .................. 5,455 6.88 5,220 6.87 4,854 8.01
------- ------ ------- ------ ------- ------
Total time deposits ......... $54,308 68.41% $59,321 78.02% $45,063 74.36%
======= ====== ======= ====== ======= ======
Total deposits ................ $79,393 100.00% $76,036 100.00% $60,604 100.00%
======= ====== ======= ====== ======= ======
Time Deposit Rates and Maturities. The following table indicates interest
rate and maturity information for our time deposits as of June 30, 2001.
Maturity
------------------------------------
Over Over
One Year 1 to 2 2 to 3 Over
Interest Rate or Less Years Years 3 Years Total
------------- ------- ----- ----- ------- -----
(In Thousands)
0-3.99%................ $ 53 $ -- $ -- $ -- $ 53
4-5.99%................ 12,212 5,389 3,117 659 21,377
6-7.99%................ 21,897 10,918 53 10 32,878
------ ------ ----- --- ------
Total time deposits.... $34,162 $16,307 $3,170 $669 $54,308
======= ======= ====== ==== =======
Time Deposit Balances and Maturities. The following table indicates balance
and maturity information for our time deposits as of June 30, 2001.
Maturity
---------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------- ------- --------- -------
(In Thousands)
Time deposits less than $100,000 ..... $7,636 $ 8,676 $11,984 $18,139 $46,435
Time deposits of $100,000 or more .... 1,725 2,528 1,613 2,007 7,873
------ ------- ------- ------- -------
Total time deposits .................. $9,361 $11,204 $13,597 $20,146 $54,308
====== ======= ======= ======= =======
59
Borrowings. Clover Leaf Bank may obtain advances from the Federal Home Loan
Bank of Chicago upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans and mortgage-backed securities,
provided certain standards related to creditworthiness have been met. These
advances are made pursuant to several credit programs, each of which has its own
interest rate and range of maturities. Federal Home Loan Bank advances are
generally available to meet seasonal and other deposit withdrawals and to permit
increased lending.
The following table sets forth the maximum month-end balance and average
balance of Federal Home Loan Bank advances for the periods indicated. Other than
Federal Home Loan Bank advances, we had no other borrowings during the periods
indicated.
Six Months
Ended June 30, Years Ended December 31,
------------------------- --------------------------
2001 2000 2000 1999
---- ---- ---- ----
(In Thousands)
Maximum Balance:
---------------
FHLB advances ........ $3,000 $5,000 $5,000 $8,450
Average Balance:
---------------
FHLB advances ........ $2,204 $4,838 $4,089 $5,663
The following table sets forth total borrowings and the weighted average
interest rate paid on such borrowings at the dates indicated.
Six Months
Ended June 30, Years Ended December 31,
-------------- ------------------------
2001 2000 1999
---- ---- ----
(Dollars in Thousands)
FHLB advances ................. $1,500 $3,000 $4,000
Weighted average interest
rate of FHLB advances ....... 5.65% 6.15% 5.85%
Employees
At June 30, 2001, Clover Leaf Bank had a total of 21 full-time and six
part-time employees. Clover Leaf Bank's employees are not represented by any
collective bargaining group. Management believes that we have good relations
with our employees.
Properties
At June 30, 2001, Clover Leaf Financial conducted its business from our
main office at 200 East Park Street, Edwardsville, Illinois. The following table
sets forth certain information with respect to the offices of Clover Leaf Bank
at June 30, 2001.
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
---------------------------- ------ --------- -------------
200 East Park Street Owned 1976 N/A
Edwardsville, Illinois 62025
2143 South State Route 157 Owned 1999 N/A
Edwardsville, Illinois 62025
60
Legal Proceedings
Clover Leaf Bank is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of its business.
At June 30, 2001, Clover Leaf Bank was not involved in any material legal
proceedings.
Subsidiary Activities
At June 30, 2001, Clover Leaf Bank owned one subsidiary, Clover Leaf
Financial Services, Inc., which serves as a conduit for life and disability
insurance policies purchased by customers of Clover Leaf Bank.
REGULATION
The following summarizes certain laws and regulations that are
considered material to Clover Leaf Financial and Clover Leaf Bank. However, this
summary does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations. Any change in this regulation,
whether by the Federal Deposit Insurance Corporation, the Illinois Office of
Banks and Real Estate, the Board of Governors of the Federal Reserve System, the
Illinois General Assembly or Congress, could have a material adverse impact on
Clover Leaf Financial and Clover Leaf Bank.
Clover Leaf Financial
Holding Company Acquisitions. If we complete the conversion utilizing
the holding company structure, Clover Leaf Financial will become a bank holding
company within the meaning of the Bank Holding Company Act and will be
registered with and regulated by the Federal Reserve Board. Clover Leaf
Financial would be subject to the same regulation as a bank holding company if
Clover Leaf Bank converted to a national bank or an Illinois-chartered
commercial bank. Federal law generally prohibits a company, without prior
Federal Reserve approval, from acquiring the ownership or control of any bank.
In accordance with Federal Reserve Board policy, Clover Leaf Financial will be
expected to act as a source of financial strength to Clover Leaf Bank and to
commit resources to support Clover Leaf Bank in circumstances where Clover Leaf
Financial might not do so absent such policy. Under the Bank Holding Company
Act, Clover Leaf Financial will be subject to periodic examination by the
Federal Reserve Board and will be required to file periodic reports of its
operations and such additional information as the Federal Reserve Board may
require. Clover Leaf Financial also will be subject to registration with, and
regulation by, the Commissioner under the Illinois Savings Bank Act.
Bank Holding Company Act Activities and Other Limitations. A bank
holding company is a legal entity separate and distinct from its subsidiary
bank. Normally, the major source of a holding company's revenue is dividends
from its subsidiary bank. The right of a bank holding company to participate as
a stockholder in any distribution of assets of its subsidiary bank upon its
liquidation or reorganization is subject to the prior claims of creditors of the
subsidiary bank. The subsidiary bank is subject to claims by creditors for
long-term and short-term debt obligations, including obligations for federal
funds purchased and securities sold under repurchase agreements, as well as
deposit liabilities.
The Bank Holding Company Act also prohibits a bank holding company,
with certain exceptions, from acquiring more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than banking
or managing or controlling banks. Under the Bank Holding Company Act, the
61
Federal Reserve Board is authorized to approve the ownership of shares by a bank
holding company in any company, the activities of which the Federal Reserve
Board has determined to be so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. The Federal Reserve Board
has by regulation determined that certain activities are closely related to
banking within the meaning of the Bank Holding Company Act. These activities
include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services. The Federal Reserve
Board also has determined that certain other activities, including real estate
brokerage and syndication, land development and property management, are not
closely related to banking and a proper incident thereto. In making such
determinations, the Federal Reserve Board is required to weigh the expected
benefit to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
A bank holding company that is registered as a "financial holding
company" is also permitted to engage in activities that are financial in nature
or incidental to such financial activities. Activities that are considered
financial in nature include: securities underwriting, dealing and market making;
insurance underwriting; and merchant banking.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines for bank holding companies (on a consolidated basis)
substantially similar to those of the FDIC for Clover Leaf Bank. On a pro forma
basis assuming consummation of the conversion, Clover Leaf Financial's pro forma
Tier 1 and total capital would significantly exceed the Federal Reserve Board's
capital adequacy requirements.
Restrictions On Transactions With Affiliates. Transactions between a
savings bank and its "affiliates" are subject to quantitative and qualitative
restrictions under Sections 23A and 23B of the Federal Reserve Act and FDIC
regulations. Affiliates of a savings bank include, among other entities, the
savings bank's holding company and companies that are controlled by or under
common control with the savings bank.
In general, the extent to which a savings bank or its subsidiaries may
engage in certain "covered transactions" with affiliates is limited to an amount
equal to 10% of the institution's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings bank and its subsidiaries may engage in covered transactions
and certain other transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the savings bank or its
subsidiary, as those prevailing at the time for comparable transactions with
nonaffiliated companies. A "covered transaction" is defined to include a loan or
extension of credit to an affiliate; a purchase of investment securities issued
by an affiliate; the purchase of assets from an affiliate, with certain
exceptions; the acceptance of securities issued by an affiliate as collateral
for a loan or extension of credit to any party; or the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a bank, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the bank's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
62
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a bank to
all insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.
Illinois Holding Company Regulation. Upon the completion of the
conversion, and assuming Clover Leaf Bank utilizes the holding company structure
as part of the conversion, Clover Leaf Financial will be required by the
Illinois Savings Bank Act to register as a savings bank holding company with the
Illinois Office of Banks and Real Estate. Under the Illinois Savings Bank Act
and applicable regulations, an Illinois-registered savings bank holding company
is required to obtain an annual audit of its financial statements, to file
financial reports with the Illinois Office of Banks and Real Estate and to
maintain complete corporate books and records. An Illinois savings bank holding
company is subject to examination by the Illinois Office of Banks and Real
Estate. An Illinois savings bank holding company may control more than 5% of the
voting shares of another savings bank or savings bank holding company if the
target savings bank or savings bank holding company is located in a state that
permits the acquisition of an Illinois-chartered savings bank or an Illinois
savings bank holding company. The Illinois Savings Bank Act provides that no
person, acting directly or indirectly or through or in concert with one or more
other persons, may acquire control of 10% or more of an Illinois savings bank
holding company unless 60 days' prior written notice has been given to the
Illinois Office of Banks and Real Estate.
Federal Securities Laws. Clover Leaf Financial has filed with the SEC a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in connection with the conversion. Upon completion
of the conversion, Clover Leaf Financial intends to register its common stock
with the SEC under Section 12(g) of the Securities Exchange Act of 1934. Clover
Leaf Financial will then be subject to the proxy and tender offer rules, insider
trading reporting requirements and restrictions, and certain other requirements
under the Exchange Act. Pursuant to FDIC regulations and the Plan of Conversion,
Clover Leaf Financial has agreed to maintain this registration for a minimum of
three years following the conversion.
The registration under the Securities Act of the shares of common stock
to be issued in the conversion does not cover the resale of such shares. Shares
of common stock purchased by persons who are not affiliates of Clover Leaf
Financial may be sold without registration. Shares purchased by an affiliate of
Clover Leaf Financial will be subject to the resale restrictions of Rule 144
under the Securities Act. If Clover Leaf Financial meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
Clover Leaf Financial who complies with the other conditions of Rule 144 would
be able to sell in the public market, without registration, a number of shares
not to exceed, in any three-month period, the greater of (i) 1% of the
outstanding shares of Clover Leaf Financial or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
Clover Leaf Bank
General. Clover Leaf Bank is an Illinois-chartered savings bank, the
deposit accounts of which are insured by the Saving Association Insurance Fund
of the FDIC. As an FDIC insured, Illinois-chartered savings bank, Clover Leaf
Bank is subject to the examination, supervision, reporting and enforcement
requirements of the Illinois Office of Banks and Real Estate, as the chartering
authority for Illinois savings banks, and the FDIC, as administrator of the
Savings Association Insurance Fund, and to the statutes and regulations
administered by the Illinois Office of Banks and Real Estate and the FDIC
governing such matters as capital standards, mergers, establishment of branch
offices, subsidiary investments and activities and general investment authority.
Clover Leaf Bank is required to file reports with the Illinois Office of Banks
and Real Estate and the FDIC concerning its activities and financial condition,
and will be required to obtain regulatory approvals prior to entering into
certain transactions, including mergers with, or acquisitions of, other
financial institutions.
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The Illinois Office of Banks and Real Estate and the FDIC have
extensive enforcement authority over Illinois-chartered savings banks, such as
Clover Leaf Bank. This enforcement authority includes, among other things, the
ability to issue cease-and-desist or removal orders, to assess civil money
penalties and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe and
unsound practices.
Following a conversion to an Illinois-chartered commercial bank, Clover
Leaf Bank would remain subject to regulation and supervision by the Illinois
Office of Banks and Real Estate and the Federal Deposit Insurance Corporation.
In the event Clover Leaf Bank converts to a national bank, it would be subject
to substantially similar regulation and supervision by the Office of the
Comptroller of the Currency. We have discussed herein certain laws and
regulations that would be applicable to Clover Leaf Bank following each type of
charter conversion.
The Illinois Office of Banks and Real Estate has established a schedule
for the assessment of "supervisory fees" upon all Illinois savings banks to fund
the operations of the Illinois Office of Banks and Real Estate. These
supervisory fees are computed on the basis of each savings bank's total assets
(including consolidated subsidiaries) and are payable at the end of each
calendar quarter. A schedule of fees has also been established for certain
filings made by Illinois savings banks with the Illinois Office of Banks and
Real Estate. The Illinois Office of Banks and Real Estate also assesses fees for
examinations conducted by its staff, based upon the number of hours spent by the
staff performing the examination. During the year ended December 31, 2000,
Clover Leaf Bank paid approximately $15,000 in supervisory fees and expenses.
Memorandum of Understanding. On October 13, 2000, we entered into a
Memorandum of Understanding, which is not a formal supervisory action, with the
Illinois Office of Banks and Real Estate and the Federal Deposit Insurance
Corporation. As part of this Memorandum of Understanding, we agreed to take
specific actions, including:
o collecting or charging off all assets classified as "Loss" assets, and
making a provision for loan losses deemed adequate by the board of
directors to reflect further losses in the loan portfolio;
o adopting a revised lending policy;
o maintaining complete loan documentation, current financial information
and realistic payment terms for all borrowers;
o developing a three-year strategic business plan covering strategies
and financial goals;
o establishing and implementing new procedures for placing delinquent
loans on nonaccrual status;
o adopting and submitting to our regulatory authorities a plan for the
collection of delinquent loans;
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o establishing a written growth plan and a written profit plan,
including comprehensive budgets, periodic salary review, and sources
of and projected uses of funds;
o establishing board review of our allowance for loan losses prior to
the submission of our financial reports to our regulatory authorities;
o providing notice to our regulatory authorities before increasing our
assets more than 5% in any three-month period;
o preparing and submitting to our regulatory authorities on a quarterly
basis a written growth plan;
o correcting violations noted in our 2000 examination report and
adopting procedures to assure future compliance with all applicable
laws, rules and regulations;
o submitting to our regulatory authorities progress reports regarding
compliance with the Memorandum of Understanding; and
o establishing an effective system of internal and external audit, and
internal audit controls.
As a result of the actions we took in response to the Memorandum of
Understanding, the Federal Deposit Insurance Corporation and the Illinois Office
of Banks and Real Estate terminated the Memorandum of Understanding on October
23, 2001. Accordingly, we are no longer subject to the Memorandum of
Understanding.
Supervisory Agreement. Clover Leaf Bank entered into a Supervisory
Agreement with the Illinois Office of Banks and Real Estate relating to the
preparation and timely filing of its audited financial statements. Under Section
9014 of the Illinois Savings Bank Act, we are required to file audited financial
statements with the Illinois Office of Banks and Real Estate within 90 days of
the end of our fiscal year. We failed to prepare and file audited financial
statements with the Illinois Office of Banks and Real Estate relating to the
year ended December 31, 2000 in a timely manner. As part of the Supervisory
Agreement, we agreed to file the required audited financial statements by May
31, 2001, and we further agreed that we would take certain actions in connection
with the engagement of auditors and the audit of our financial statements for
the year ending December 31, 2001. In accordance with the Supervisory Agreement,
we filed the audited financial statements for the year ended December 31, 2000
with the Illinois Office of Banks and Real Estate. Management intends to comply
with the remaining provisions of the Supervisory Agreement relating to the
preparation of future audited financial statements.
Insurance of Deposit Accounts. The Federal Deposit Insurance
Corporation has adopted a risk-based system for assessing deposit insurance
premiums. The Federal Deposit Insurance Corporation assigns an institution to
one of three capital categories based on the institution's financial
information, as of the reporting period ending seven months before the
assessment period, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on the earnings of Clover Leaf Bank.
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Capital Requirements. The FDIC has capital adequacy regulations and
policies regarding the capital adequacy of state-chartered banks that, like
Clover Leaf Bank, are not members of the Federal Reserve System. The FDIC's
capital regulations establish a minimum 3.0% Tier I leverage capital requirement
for the most highly-rated state-chartered, non-member banks, with additional
capital of at least 100 to 200 basis points for all other state-chartered,
non-member banks, which effectively will increase the minimum Tier I leverage
ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation,
the highest-rated banks are those that the FDIC determines are not anticipating
or experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, are considered strong banking organizations, rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. Under the risk-based capital standard, total capital, which is defined
as Tier I capital and supplementary (Tier 2 capital), must equal at least 8% of
risk-weighted assets. In determining the amount of risk-weighted assets, all
assets, plus certain off balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2001,
Clover Leaf Bank met each of its capital requirements.
A bank which has less than the minimum leverage capital requirement
must, within 60 days from the date it fails to comply with this requirement,
submit to its FDIC regional director for review and approval a reasonable plan
describing the means and timing by which the bank will achieve its minimum
leverage capital requirement. A bank that fails to file such a plan with the
FDIC is deemed to be operating in an unsafe and unsound manner and may be
subject to a cease-and-desist order from the FDIC. FDIC regulations also provide
that any insured depository institution with a ratio of Tier I capital to total
assets that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition and is subject to potential termination of deposit insurance. However,
such an institution will not be subject to an enforcement proceeding solely on
account of its capital ratios if it has entered into and is in compliance with a
written agreement with the FDIC to increase its Tier I leverage capital ratio
and to take such other action as may be necessary to operate in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC of a capital directive, which is a final order issued to a
bank that fails to maintain minimum capital to restore its capital to the
minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.
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At June 30, 2001, Clover Leaf Bank exceeded all of its regulatory
capital requirements, with leverage, Tier 1 risk-based and total risk-based
capital ratios of 7.21%, 7.21% and 13.33%, respectively. For a discussion of
Clover Leaf Bank's compliance with the above-described capital requirements as
of June 30, 2001, please refer to "Historical and Pro Forma Regulatory Capital
Compliance."
Any savings bank that fails any of the capital requirements is subject
to possible enforcement actions by the FDIC. These actions could include a
capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on the institution's operations, termination of
Federal deposit insurance and the appointment of a conservator or receiver.
Under the Illinois Savings Bank Act, a savings bank, such as Clover
Leaf Bank, must maintain minimum capital of 3% of total assets. The Illinois
Office of Banks and Real Estate may establish higher minimums based upon a
savings bank's history, management or earnings prospects.
The Office of the Comptroller of the Currency subjects national banks
to capital regulations that are identical to the FDIC regulations applicable to
Illinois-chartered savings banks and commercial banks.
Dividends. Under the Illinois Savings Bank Act, no dividends may be
declared when total capital of a savings bank is less than that required by
Illinois law. Stock dividends may be paid out of retained earnings at any time.
Written approval of the Illinois Office of Banks and Real Estate is required
where a savings bank has total capital of less than 6% of total assets and where
the dividends to be declared in any year exceed 50% of the savings bank's net
profits for the year. Illinois Office of Banks and Real Estate approval is
required before dividends may be declared that exceed a savings bank's net
profits in any year. Illinois-chartered commercial banks are subject to similar
restrictions.
At June 30, 2001, Clover Leaf Bank was deemed a well-capitalized
institution for purposes of the above regulations and as such is not subject to
the above mentioned restrictions.
Under statutes and regulations that would be applicable to Clover Leaf
Bank if it converted to a national bank, all dividends by a national bank must
be paid out of current or retained net profits, after deducting reserves for
losses and bad debts. The National Bank Act further restricts the payment of
dividends out of net profits by prohibiting a national bank from declaring a
dividend on its shares of common stock until the surplus fund equals the amount
of capital stock or, if the surplus fund does not equal the amount of capital
stock, until one-tenth of a bank's net profits for the preceding half year in
the case of quarterly or semi-annual dividends, or the preceding two half-year
periods in the case of annual dividends, are transferred to the surplus fund. In
addition, the prior approval of the Office of the Comptroller of the Currency is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
The Office of the Comptroller of the Currency has the authority to
prohibit the payment of dividends by a national bank when it determines the
payment to be an unsafe and unsound banking practice. In addition, a national
bank is prohibited by federal statute and regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the Office of the Comptroller of the
Currency's regulations.
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Clover Leaf Bank would not be able to pay dividends on its capital
stock if its capital were reduced below the remaining balance of the liquidation
account established in connection with the conversion.
Safety and Soundness Guidelines. The FDIC and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial standards, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
FDIC and the other agencies also have established guidelines regarding asset
quality and earnings standards for insured institutions. Clover Leaf Bank
believes that it is in compliance with these guidelines and standards.
Community Reinvestment Act and Fair Lending Laws. Savings banks, such
as Clover Leaf Bank, have a responsibility under the Community Reinvestment Act
and related regulations of the FDIC to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of Community Reinvestment Act could, at a
minimum, result in regulatory restrictions on its activities. Failure to comply
with the Fair Lending Laws could result in enforcement actions by the FDIC, as
well as the Department of Justice.
Federal Home Loan Bank System. Clover Leaf Bank is a member of the
Federal Home Loan Bank of Chicago, which is one of 12 regional Federal Home Loan
Banks that administers the home financing credit function of savings
institutions. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the Federal Home Loan Bank
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the Federal Home Loan
Bank. At June 30, 2001, Clover Leaf Bank had $1.5 million of Federal Home Loan
Bank advances. See the Notes to the Consolidated Financial Statements.
As a member, Clover Leaf Bank is required to purchase and maintain
stock in the Federal Home Loan Bank of Chicago in an amount equal to at least 1%
of its aggregate unpaid residential mortgage loans or similar obligations at the
beginning of each year. At June 30, 2001, Clover Leaf Bank had $2.0 million in
Federal Home Loan Bank stock, which was in compliance with this requirement.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid in the past and could do so in the future. These contributions
also could have an adverse effect on the value of Federal Home Loan Bank stock
in the future. The average dividend yield on Clover Leaf Bank's Federal Home
Loan Bank stock was 7.09% in 2000 and 6.77% in 1999.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
As of November 3, 1999, no reserves were required to be maintained on the first
$5.0 million of transaction accounts, reserves of 3% were required to be
maintained against the next $44.3 million of net transaction accounts, and a
reserve of $1.3 million plus 10% against net transaction accounts above this
amount. The above dollar amounts and percentages are subject to periodic
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets and constrain its ability to lend.
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TAXATION
Federal Taxation
For federal income tax purposes, Clover Leaf Financial and Clover Leaf
Bank will file a consolidated federal income tax return on a calendar year basis
using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions that would require recapture of the
pre-1988 tax bad debt reserve include redemption of Clover Leaf Bank's stock,
payment of dividends or distributions in excess of earnings and profits, or
failure by the institution to qualify as a bank for federal income tax purposes.
At June 30, 2001, Clover Leaf Bank had a balance of approximately $1.1 million
of pre-1988 bad debt reserves. A deferred tax liability has not been provided on
this amount as management does not intend to make distributions, redeem stock or
fail certain bank tests that would result in recapture of the reserve. See Note
8 of the Notes to Consolidated Financial Statements for a discussion of the
recapture of post-1988 bad debt reserves.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Clover Leaf Financial will
account for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred tax liabilities and assets will be adjusted to reflect
changes in the tax laws.
Clover Leaf Financial will be subject to the corporate alternative
minimum tax to the extent it exceeds Clover Leaf Financial's regular income tax
for the year. The alternative minimum tax will be imposed at the rate of 20% of
a specially computed tax base. Included in this base are a number of preference
items, including interest on certain tax-exempt bonds issued after August 7,
1986, and an "adjusted current earnings" computation which is similar to a tax
earnings and profits computation. In addition, for purposes of the alternative
minimum tax, the amount of alternative minimum taxable income that may be offset
by net operating losses is limited to 90% of alternative minimum taxable income.
Clover Leaf Bank's income tax returns have not been audited by the
Internal Revenue Service for the past five years.
State Taxation
Illinois State Taxation. Clover Leaf Financial will be, or, if a
holding company structure is not utilized, Clover Leaf Bank is and will be
required to file Illinois income tax returns and pay tax at an effective tax
rate of 7.18% of Illinois taxable income. For these purposes, Illinois taxable
income generally means federal taxable income subject to certain modifications,
the primary one of which is the exclusion of interest income on United States
obligations.
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Delaware Taxation. As a Delaware holding company not earning income in
Delaware, Clover Leaf Financial is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
MANAGEMENT
Directors and Executive Officers of Clover Leaf Financial
The Board of Directors of Clover Leaf Financial currently consists of
eight members, each of whom is also a director of Clover Leaf Bank. See
"--Directors and Executive Officers of Clover Leaf Bank." Each Director of
Clover Leaf Financial has served as such since Clover Leaf Financial's
incorporation in September 2001. Directors of Clover Leaf Financial will serve
three-year staggered terms. The terms of the current directors of Clover Leaf
Financial are the same as their terms as directors of Clover Leaf Bank. See
"--Directors and Executive Officers of Clover Leaf Bank."
The following individuals hold the following positions as executive
officers of Clover Leaf Financial:
Name Position
---- --------
Dennis M. Terry President and Chief Executive Officer
Lisa R. Fowler Senior Vice President
Darlene F. McDonald Vice President, Treasurer and Secretary
The executive officers of Clover Leaf Financial are elected annually
and hold office until their respective successors have been elected and
qualified or until death, resignation or removal by the Board of Directors.
It is not anticipated that the executive officers of Clover Leaf
Financial will receive any remuneration in this capacity as executive officers
of the holding company. For information regarding compensation of directors and
executive officers of Clover Leaf Bank, see "--Compensation of the Board of
Directors of Clover Leaf Bank" and "--Executive Compensation."
Committees of Clover Leaf Financial
Clover Leaf Financial formed standing Audit and Nominating Committees
in connection with its organization in September 2001. Clover Leaf Financial was
not incorporated in fiscal 2000 and therefore the committees did not meet during
that fiscal year.
The Audit Committee will review audit reports and related matters to
ensure effective compliance with regulations and internal policies and
procedures. This committee also will act on the recommendation by management of
an accounting firm to perform Clover Leaf Financial's annual audit, and acts as
a liaison between the auditors and the Board. The current members of this
committee are Directors Malench, Schwartz and Niebur.
The Nominating Committee will meet annually in order to nominate
candidates for membership on the Board of Directors. This committee consists of
the Board members who are not standing for election.
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Directors and Executive Officers of Clover Leaf Bank
Prior to the conversion, the direction and control of Clover Leaf Bank,
as a mutual savings institution, had been vested in its Board of Directors. Upon
conversion of Clover Leaf Bank to stock form, each of the directors of Clover
Leaf Bank will continue to serve as a director of the converted bank. The Board
of Directors of Clover Leaf Bank currently consists of eight directors.
Following the conversion to stock form, the directors will be divided into three
classes. One-third of the directors will be elected at each annual meeting of
stockholders. If we utilize the holding company structure, Clover Leaf Financial
will own all of the issued and outstanding shares of capital stock of the
converted bank after the conversion, and directors of Clover Leaf Financial will
elect the directors of Clover Leaf Bank. If we do not utilize the holding
company structure, purchasers of Clover Leaf Bank's common stock will elect the
directors of Clover Leaf Bank.
The following table sets forth certain information regarding the
directors and executive officers of Clover Leaf Bank and Clover Leaf Financial
following the conversion:
Position(s) Held with Director Director Term
Name Clover Leaf Bank Age(1) Since Expires
---- ---------------- ------ ----- -------
Philip H. Weber Chairman of the Board 73 1970 2002
Robert W. Schwartz Vice Chairman of the Board 61 1972 2001
Dennis M. Terry President, Chief Executive Officer and 54 2000 2003
Director
Joseph J. Gugger Director 51 2000 2003
Kenneth P. Highlander Director 47 1996 2003
Henry L. Malench Director 73 1967 2001
Gary D. Niebur Director 45 1992 2002
Charles W. Schmidt Director 74 1965 2002
Lisa R. Fowler Senior Vice President 35 N/A N/A
Darlene F. McDonald Vice President, Treasurer and Secretary 38 N/A N/A
(1) At June 30, 2001.
The business experience of each director and executive officer is set
forth below. All individuals have held their present position for at least the
past five years, except as otherwise indicated.
Philip H. Weber has served as Chairman of the Board of Directors of
Clover Leaf Bank since 2001. Mr. Weber is retired as the owner/operator of Weber
Funeral Home.
Robert W. Schwartz has served as Vice Chairman of the Board of
Directors of Clover Leaf Bank since 2000. Mr. Schwartz is the President of
Schwartz Ventures, Inc., a communications company founded by Mr. Schwartz.
Dennis M. Terry has served as President and Chief Executive Officer of
Clover Leaf Bank since 2000. Prior to joining Clover Leaf Bank, Mr. Terry served
as President of Mercantile Bank of Edwardsville. Mercantile Bank of Edwardsville
had acquired Mr. Terry's previous employer, Mark Twain Bank of Edwardsville, in
1998, where Mr. Terry had served as President since 1988.
Joseph J. Gugger has served as a partner of Fastechnology LLC, an
engineering company, since 1999; a partner of CBC LLC, a real estate company,
since 1999; and as the owner of Gugger Group, Inc., a manufacturing and
investment company, since 1993.
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Kenneth P. Highlander is the President of Ready-Mix Service, Inc., a
concrete manufacturer with plants in Hamel, Alton and Collinsville, Illinois.
Mr. Highlander has been employed by Ready-Mix Services since 1992.
Dr. Henry L. Malench is retired. Dr. Malench was previously a partner
of Malench, Malench and Malench, a general medical practice.
Gary D. Niebur has served as the mayor of Edwardsville, Illinois since
1993, and has served as the Executive Director of the Edwardsville YMCA since
1982.
Charles W. Schmidt served as Chairman of the Board of Directors of
Clover Leaf Bank from 1975 until 2001. Mr. Schmidt served as President and Chief
Executive Officer of Clover Leaf Bank prior to his retirement in 1995.
Lisa R. Fowler has served as Senior Vice President of Clover Leaf Bank
since June 2000. Ms. Fowler was previously the Vice President of Commercial
Lending at Mercantile Bank, where she had been employed since 1991.
Darlene F. McDonald joined Clover Leaf Bank in October 2000, and serves
as Vice President, Treasurer and Secretary. Previously, Ms. McDonald served as a
Controller of the Real Estate Division of Bank of America, which had acquired
her previous employer, NationsBank, in 1999. NationsBank had acquired her
previous employer, Boatmens Bank, in 1997, where Ms. McDonald had been employed
since 1989.
Meetings of the Board of Directors of Clover Leaf Bank
The Board of Directors met 12 times during the year ended December 31,
2000. During 2000, no director of Clover Leaf Bank attended fewer than 75% of
the aggregate of the total number of meetings of the Board of Directors and
committees thereof.
Compensation of the Board of Directors of Clover Leaf Bank
Fees. Directors were paid a monthly fee of $800 for the year ended
December 31, 2000. Members of the loan committee receive $100 per meeting
attended; members of the audit committee receive $200 per meeting attended; and
members of the executive committee receive $100 per meeting attended. For a
discussion of additional benefits that may be received by directors following
the conversion, see "--Benefit Plans--Stock Option Plan" and "--Recognition and
Retention Plan."
Amended and Restated Directors' Emeritus Plan. Clover Leaf Bank
maintains a directors' emeritus plan to compensate former members of the Board
of Directors who have attained age 75, have a minimum of 20 years of service as
directors, and perform emeritus services for Clover Leaf Bank. A director
emeritus is entitled to receive an annual fee equal to his annual director's fee
as of the date of retirement for a maximum of five years, provided he continues
to perform emeritus services for Clover Leaf Bank. A director emeritus must
retire at age 80, at which time no further fees will be paid by Clover Leaf
Bank. The Board of Directors may, in its discretion, appoint a retired director
emeritus as a consultant for a maximum of one year after termination as a
director emeritus.
Director's Deferred Compensation Agreements. We have entered into
non-qualified deferred compensation agreements with certain of our non-employee
directors under which a non-employee director can elect to defer all or a
portion of his fees earned in his capacity as a director. The amounts deferred
will earn interest at a rate equal to that paid on our one-year certificate of
deposit. In the event of a director's termination of service, the director's
account will be paid to him in a lump sum or equal installments over a period
not exceeding 5 years, in the sole discretion of Clover Leaf Bank. In the event
of a director's death, amounts under the agreement will be paid to his
beneficiary or his estate.
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The deferred compensation agreements, in the aggregate, constitute an
unfunded plan for tax purposes and for purposes of the Employee Retirement
Income Security Act ("ERISA"). All obligations arising under the non-qualified
plan are payable from the general assets of Clover Leaf Bank. As of November 1,
2001, Directors Henry L. Malench, Robert W. Schwartz, and Joseph J. Gugger had
account balances of $66,710, $208,662 and $15,705, respectively, under their
deferred compensation agreements.
Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to Clover Leaf Bank's Chief Executive Officer. No other
executive officer of Clover Leaf Bank had aggregate annual compensation in
excess of $100,000 in fiscal 2000.
Annual Compensation(1)
-----------------------------------------------
Other
Fiscal Annual All Other
Name and Principal Position Year(1) Salary Bonus Compensation Compensation(3)
------------------------------- -------------- ------------- -------------- ----------------- ----------------
Dennis M. Terry, President
and Chief Executive Officer 2000 $120,000 $10,000 $9,600(2) --
----------------------
(1) Summary compensation information is excluded for the years ended December
31, 1999 and 1998, as Clover Leaf Bank was not a public company during
these periods.
(2) Consists of director's fees.
(3) Does not include the aggregate amount of other personal benefits, which did
not exceed 10% of the total salary and bonus reported.
Benefit Plans
General. Clover Leaf Bank currently provides health care benefits,
including medical, disability and group life insurance, subject to certain
deductibles and copayments, for its full time employees.
Defined Benefit Pension Plan. Clover Leaf Bank maintains the Financial
Institutions Retirement Fund, which is a qualified, tax-exempt defined benefit
plan ("Retirement Plan"). All employees age 21 or older who have worked at
Clover Leaf Bank for a period of one year in which they have 1,000 or more hours
of service are eligible for membership in the Retirement Plan. Employees who are
compensated on an hourly basis, however, are not eligible to participate in the
Retirement Plan. Once eligible, an employee must have been credited with 1,000
or more hours of service with Clover Leaf Bank during the year in order to
accrue benefits under the Retirement Plan. Clover Leaf Bank annually contributes
an amount to the Retirement Plan necessary to satisfy the actuarially determined
minimum funding requirements in accordance with ERISA.
The regular type of all retirement benefits (i.e., normal, early or
disability) provides a retirement allowance plus a retirement death benefit. The
regular retirement allowance is payable in monthly installments for life. For a
married participant, the normal retirement allowance would be paid as a joint
and survivor annuity where, upon the participant's death, the participant's
spouse is entitled to receive a benefit equal to 50% of that paid during the
participant's lifetime. Other optional types of retirement allowance may be
selected instead of the normal form. These optional types include various
annuity forms.
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The regular retirement allowance payable at or after age 65, is an
amount equal to 2% multiplied by an employee's years of benefit service times
average compensation paid in the three consecutive years providing the highest
average. A reduced benefit is payable upon retirement at age 55 at or after
completion of five years of service. A member is fully vested in his account
upon completion of 5 or more years of employment or upon attaining normal
retirement age.
If a participant dies while in active service, his beneficiary would
receive a lump sum death benefit equal to the participant's last 12 months'
salary, plus 10% of such salary for each year of benefit service, up to 300% of
salary for 20 or more years, plus refund of his contributions, if any, with
interest. Death benefits may be paid in installments over a period of up to 10
years or a lifetime annuity. In the event the participant dies after he retires,
his beneficiary would receive a lump sum retirement death benefit equal to 12
times the annual retirement allowance, less the sum of such allowance payments
made before death.
The following table indicates the annual retirement allowance that
would be payable under the Retirement Plan upon retirement at age 65 in calendar
year 2001, expressed in the form of a single life annuity for the average salary
and benefit service classifications specified below.
Highest Three-Year Years of Service and Benefit Payable at Retirement
Average ------------------------------------------------------
Compensation 15 20 25 30
------------ ----------- ----------- ----------- ----------
$ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000
$ 75,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000
$ 100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000
$ 125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000
$ 150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000
$ 170,000 $ 51,000 $ 68,000 $ 85,000 $ 102,000
Employee Stock Ownership Plan and Trust. Clover Leaf Bank intends to
implement an employee stock ownership plan in connection with the conversion.
Employees with at least one year of employment with Clover Leaf Bank and who
have attained age 18 are eligible to participate. As part of the conversion, the
employee stock ownership plan intends to borrow funds from Clover Leaf Financial
and use those funds to purchase a number of shares equal to up to 8% of the
common stock to be issued in the conversion. In the event that we decide not to
utilize the holding company structure as part of the conversion, Clover Leaf
Bank would be required to obtain a third-party loan to fund the purchase of
shares by the employee stock ownership plan. Collateral for the loan will be the
common stock purchased by the employee stock ownership plan. The loan will be
repaid principally from Clover Leaf Bank's discretionary contributions to the
employee stock ownership plan over a period of up to 10 years, provided that the
loan documents will permit repayment over a shorter period, without penalty for
prepayments. It is anticipated that the interest rate for the loan will be a
floating rate equal to the prime rate. Shares purchased by the employee stock
ownership plan will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares released
from the suspense account in an amount proportional to the repayment of the
employee stock ownership plan loan will be allocated among employee stock
ownership plan participants on the basis of compensation in the year of
allocation. A participant who terminates employment for reasons other than
death, retirement, or disability prior to seven years of credited service under
the employee stock ownership plan will be vested at 20% per year, starting upon
completion of three years of service, with full vesting upon the completion of
seven years of service. Nonvested benefits will become fully vested upon a
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participant's death or disability or termination of the plan. Vested benefits
will be payable in the form of common stock and/or cash. Clover Leaf Bank's
contributions to the employee stock ownership plan are discretionary, subject to
the loan terms and tax law limits; therefore, benefits payable under the
employee stock ownership plan cannot be estimated. Pursuant to SOP 93-6, Clover
Leaf Bank is required to record compensation expense in an amount equal to the
fair market value of the shares released from the suspense account. In the event
of a change in control (as defined in the plan), the employee stock ownership
plan will terminate.
Clover Leaf Bank will establish a committee of nonemployee directors to
administer the employee stock ownership plan. Clover Leaf Bank will appoint an
independent financial institution or its outside directors to serve as trustee
of the employee stock ownership plan. The employee stock ownership plan trustee,
subject to its fiduciary duty, must vote all allocated shares held in the
employee stock ownership plan in accordance with the instructions of
participating employees. Under the employee stock ownership plan, nondirected
shares and shares held in the suspense account will be voted in a manner
calculated to most accurately reflect the instructions it has received from
participants regarding the allocated stock, so long as the vote is in accordance
with the provisions of ERISA.
Stock Option Plan. We expect to adopt a stock option plan for
directors, officers and employees of Clover Leaf Bank (and Clover Leaf
Financial, if we utilize the holding company structure as part of the
conversion) after the conversion, subject to any stockholder and regulatory
approvals that may be required. Applicable regulations prohibit us from
implementing this plan until six months after the conversion and, if implemented
within the first 12 months after the conversion, require the approval of a
majority of the outstanding shares of our common stock.
We expect that the stock option plan would authorize a committee of
non-employee directors or the full board of Clover Leaf Financial (or Clover
Leaf Bank if we do not utilize the holding company structure) to grant options
to purchase up to 10% of the shares issued in the stock offering over a period
of 10 years. The committee would decide which directors, officers and employees
would receive options and what the terms of those options will be. Awards under
the stock option plan would be made at no cost to the recipient. Generally, no
stock option would permit its recipient to purchase shares at a price that is
less than the fair market value of a share on the date the option is granted,
and no option would have a term that is longer than 10 years. If we implement a
stock option plan before the first anniversary of the conversion, current
regulations would require that we:
o Limit the total number of stock options to non-employee directors to
30% of the options authorized for the plan.
o Limit the number of stock options to any one non-employee director to
5% of the options authorized for the plan and the number of stock
options to any officer or employee to 25% of the options that are
authorized for the plan.
o Not permit the options to become vested at a more rapid rate than 20%
per year beginning on the first anniversary of stockholder approval of
the plan.
o Not permit accelerated vesting for any reason other than death or
disability.
We may obtain the shares needed to satisfy option exercises by issuing
additional shares or through stock repurchases. Stock repurchases may be subject
to regulatory restrictions and, if we do not utilize a holding company
structure, may also have detrimental tax implications.
75
Recognition and Retention Plan. We expect to implement a recognition
and retention plan for the directors, officers and employees of Clover Leaf Bank
(and Clover Leaf Financial, if we utilize the holding company structure as part
of the conversion) after the conversion, subject to any stockholder and
regulatory approvals that may be required. Applicable regulations prohibit us
from implementing this plan until six months after the conversion and, if
implemented within the first twelve months after the conversion, require the
approval of a majority of the outstanding shares of our common stock.
In the event the recognition and retention plan is implemented within
12 months after the conversion, we expect that the plan would authorize a
committee of non-employee directors or the full board of Clover Leaf Financial
(or Clover Leaf Bank if we do not utilize the holding company structure) to make
restricted stock awards of up to 4% of the shares issued in the stock offering.
The committee would decide which directors, officers and employees would receive
restricted stock and what the terms of those awards would be. Awards under the
recognition and retention plan would be made at no cost to the recipients. We
may obtain the shares needed for this plan by issuing additional shares or
through stock repurchases. Stock repurchases may be subject to regulatory
restrictions and, if we do not utilize a holding company structure, may also
have detrimental tax implications. If we implement a recognition and retention
plan before the first anniversary of the conversion, current regulations would
require that we:
o Limit the total number of shares that are awarded to non-employee
directors to 30% of the shares authorized for the plan.
o Limit the number of shares that are awarded to any one non-employee
director to 5% of the shares authorized for the plan and the number of
shares that are awarded to any officer or employee to 25% of the
shares that are authorized for the plan.
o Not permit the awards to become vested at a more rapid rate than 20%
per year beginning on the first anniversary of stockholder approval of
the plan.
o Not permit accelerated vesting for any reason other than death or
disability.
We have committed to the Federal Deposit Insurance Corporation that if
we implement the recognition and retention plan within one year following the
completion of the conversion, and if our Tier 1 capital ratio is less than 10%
following the conversion, the number of shares we will reserve for grant under
the recognition and retention plan will not exceed 3% of the total amount of
shares we issue in the offering, and the number of shares purchased by our
tax-qualified stock benefit plans, when combined with the number of shares
reserved for grant under the recognition and retention plan, will not exceed 10%
of the total amount of shares we issue in the offering. We have also committed
to the Federal Deposit Insurance Corporation that the recognition and retention
plan will comply with Office of Thrift Supervision regulations regarding non-tax
qualified stock benefit plans, as applied by the Federal Deposit Insurance
Corporation, if we implement the stock option plan within one year following the
completion of the conversion.
Restricted stock awards under this plan may feature employment
restrictions that require continued employment for a period of time for the
award to be vested. Awards are not vested unless the specified employment
restrictions are met. However, pending vesting, the award recipient may have
voting and dividend rights. When an award becomes vested, the recipient must
include the current fair market value of the vested shares in his income for
federal income tax purposes. Clover Leaf Bank and Clover Leaf Financial would be
allowed a federal income tax deduction in the same amount. Clover Leaf Bank and
Clover Leaf Financial would have to recognize a compensation expense for
accounting purposes ratably over the vesting period.
76
Officer's Deferred Bonus Compensation Agreement. We entered into a
non-qualified deferred compensation agreement with our former President and
Chief Executive Officer Charles W. Schmidt, a current Director, under which Mr.
Schmidt could elect to defer all or a portion of any bonuses he earned while
President and Chief Executive Officer. The amounts deferred earn interest at a
rate equal to that paid on our one-year certificate of deposit. The agreement
provides that upon Mr. Schmidt's termination of employment, his account will be
paid to him in a lump sum or equal installments over a period not exceeding five
years, in the discretion of the officer. In the event of Mr. Schmidt's death,
amounts under the agreement will be paid to his beneficiary or his estate.
Mr. Schmidt's deferred bonus compensation agreement constitutes an
unfunded plan for tax purposes and for purposes of ERISA. All obligations
arising under the deferred bonus compensation agreement are payable from the
general assets of Clover Leaf Bank. As of November 1, 2001, Mr. Schmidt had an
account balance of $126,778.
Transactions with Certain Related Persons
In the ordinary course of business, Clover Leaf Bank makes loans
available to its directors, officers and employees. These loans are made in the
ordinary course of business on the same terms, including interest rates and
collateral, as comparable loans to other borrowers. Loans made to directors or
officers, including any modification to such loans, must be approved by a
majority of disinterested members of the board of directors. Management believes
that these loans neither involve more than the normal risk of collectibility nor
present other unfavorable features.
At June 30, 2001, Clover Leaf Bank had outstanding loans to officers
and directors totaling $1.1 million. The largest commercial line of credit
available to any director or officer as of that date was a commercial line of
credit to director Joseph J. Gugger that was secured by securities maintained in
a brokerage account. Under the terms of this loan, the interest rate paid by Mr.
Gugger adjusts at 60 basis points below the prime interest rate. The loan is for
a one-year term, and expires in May 2002. At the time this loan was originated,
Clover Leaf Bank offered loans to unaffiliated borrowers at interest rates that
adjust at up to 100 basis points below the prime interest rate. Management of
Clover Leaf Bank was aware of one other financial institution in Edwardsville,
Illinois that offered loans at rates that were comparable to the rate of 100
basis points below the prime interest rate, as provided to unaffiliated
borrowers. Following the expiration of Mr. Gugger's loan, a renewal or extension
of Mr. Gugger's loan, if any, will be made at the then-prevailing market
interest rates for similarly qualified borrowers.
THE CONVERSION
The Board of Directors of Clover Leaf Bank and the Illinois Office of
Banks and Real Estate have approved the plan of conversion, subject to approval
by the members of Clover Leaf Bank entitled to vote on the matter and the
satisfaction of certain other conditions. Approval by the Illinois Office of
Banks and Real Estate, however, is not a recommendation or endorsement of the
plan. Certain terms used in the following summary are defined in the plan of
conversion, a copy of which may be obtained by contacting Clover Leaf Bank.
General
On June 26, 2001 the Board of Directors unanimously adopted the plan of
conversion. Pursuant to the plan, Clover Leaf Bank will convert from an
Illinois-chartered mutual savings bank to an Illinois-chartered stock savings
77
bank. The plan also provides for the concurrent formation of a holding company,
but the Board of Directors may determine not to utilize the holding company
structure as part of the conversion. The Illinois Office of Banks and Real
Estate has approved the plan, subject to its approval by the affirmative vote of
not less than a majority of the total number of votes eligible to be cast by
members of Clover Leaf Bank at a special meeting called for that purpose to be
held on December 18, 2001. In addition, the Federal Deposit Insurance
Corporation has issued its conditional non-objection to the plan of the
conversion. As of the date of this prospectus, the Federal Reserve has not
approved Clover Leaf Financial's application to become a bank holding company
and to acquire all of the common stock of Clover Leaf Bank.
The plan of conversion provides generally that Clover Leaf Bank will
convert from an Illinois-chartered mutual savings bank to an Illinois-chartered
stock savings bank. The common stock will be offered in the subscription
offering to persons having subscription rights. If necessary, shares of common
stock not subscribed for in the subscription offering will be offered in a
community offering to certain members of the general public, with preference
given to natural persons and trusts of natural persons residing in Madison
County, Illinois, and then to certain members of the general public in a
syndicated community offering through a syndicate of registered broker-dealers
under selected dealers agreements. If the holding company structure is utilized,
Clover Leaf Financial will purchase all of the capital stock of Clover Leaf Bank
to be issued in the conversion. The conversion will be completed only upon the
sale of at least $4,250,000 of common stock to be issued under the plan of
conversion.
As part of the conversion, we are making a subscription offering of our
common stock to holders of subscription rights in the following order of
priority. First, depositors of Clover Leaf Bank with $50.00 or more on deposit
as of the close of business on May 31, 2000. Second, our employee stock
ownership plan. Third, depositors of Clover Leaf Bank with $50.00 or more on
deposit as of the close of business on September 30, 2001. Fourth, other
depositors of Clover Leaf Bank as of the close of business on November 9, 2001,
the voting record date for the special meeting of members.
Shares of common stock not subscribed for in the subscription offering
may be offered for sale in the community offering. The community offering, if
one is held, is expected to begin immediately after the expiration of the
subscription offering, but may begin at any time during the subscription
offering. Shares of common stock not sold in the subscription and community
offerings may be offered in the syndicated community offering. Regulations
require that the community and syndicated community offerings be completed
within 45 days after completion of the fully extended subscription offering
unless extended by us with the approval of the regulatory authorities. If the
syndicated community offering is determined not to be feasible, our Board of
Directors will consult with the regulatory authorities to determine an
appropriate alternative method for selling the unsubscribed shares of common
stock.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering, unless the
plan of conversion is approved by the members of Clover Leaf Bank.
The completion of the offering, however, will also depend on market
conditions and other factors beyond our control. No assurance can be given as to
the length of time after approval of the plan of conversion at the special
meeting that will be required to complete the community or syndicated community
offerings or other sale of the common stock.
Orders for shares of common stock will not be filled until at least
425,000 shares of common stock have been subscribed for or sold and the Illinois
Office of Banks and Real Estate and the Federal Deposit Insurance Corporation
78
approve the final valuation and the conversion closes. If the conversion is not
completed within 45 days after the expiration date of the subscription offering
and the Illinois Office of Banks and Real Estate and Federal Deposit Insurance
Corporation consent to an extension of time to complete the conversion,
subscribers will be given the right to maintain, modify or rescind their
subscriptions. Unless an affirmative indication is received from subscribers
that they wish to continue to subscribe for shares, the funds will be returned
promptly, together with accrued interest at Clover Leaf Bank's passbook rate
from the date payment is received until the funds are returned to the
subscriber. If the period is not extended, or, in any event, if the conversion
is not completed, all withdrawal authorizations will be terminated and all funds
held will be promptly returned together with accrued interest at Clover Leaf
Bank's passbook rate from the date payment is received until the conversion is
terminated.
Purposes of Conversion
Our Board of Directors and management believe that the conversion is in
the best interests of Clover Leaf Bank, our members and the communities we
serve. We have formed Clover Leaf Financial to serve as a holding company, with
Clover Leaf Bank as its subsidiary. By converting to the stock form of
organization, Clover Leaf Financial and Clover Leaf Bank will be structured in
the form used by commercial banks, most business entities and by a growing
number of savings institutions. We believe that the conversion offers a number
of advantages that will be important to the future growth and performance of
Clover Leaf Bank. The capital raised in the conversion is intended to support
Clover Leaf Bank's current lending and investment activities and may also
support possible future expansion and diversification of operations, although
there are no current specific plans, arrangements or understandings, written or
oral, regarding any expansion or diversification. The conversion is also
expected to afford our management, members and others the opportunity to become
stockholders of Clover Leaf Financial and to participate more directly in, and
contribute to, any future growth of Clover Leaf Financial and Clover Leaf Bank.
The conversion will also enable us to raise additional capital in the public
equity or debt markets should the need arise, although there are no current
specific plans, arrangements or understandings, written or oral, regarding any
financing activities.
Effects of Conversion to Stock Form on Depositors and Borrowers of Clover Leaf
Bank
Voting Rights. Upon conversion, deposit account holders will not have
voting rights in Clover Leaf Bank or Clover Leaf Financial and, therefore, will
not be able to elect directors of either entity or to control their affairs.
Voting rights are currently accorded to deposit account holders of Clover Leaf
Bank. After the conversion is completed, and assuming the utilization of the
holding company structure, voting rights will be vested exclusively in Clover
Leaf Financial as the sole stockholder of Clover Leaf Bank. Voting rights as to
Clover Leaf Financial will be held exclusively by its stockholders. Each
purchaser of Clover Leaf Financial common stock will be entitled to vote on any
matters to be considered by Clover Leaf Financial stockholders. In the event
that we do not utilize the holding company structure, each purchaser of Clover
Leaf Bank common stock will be entitled to vote on any matters to be considered
by Clover Leaf Bank stockholders. A stockholder will be entitled to one vote for
each share of common stock owned, subject to certain limitations applicable to
holders of 10% or more of the shares of the common stock. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions." Clover Leaf
Financial (or Clover Leaf Bank, if the holding company structure is not
utilized) intends to supply each stockholder with annual reports and proxy
statements.
Deposit Accounts and Loans. The terms of Clover Leaf Bank's deposit
accounts, the balances of the individual accounts and the existing Federal
Deposit Insurance Corporation insurance coverage will not be affected by the
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conversion. Furthermore, the conversion will not affect the loan accounts, the
balances of these accounts, or the obligations of the borrowers under their
individual contractual arrangements with Clover Leaf Bank.
Tax Effects. We have received an opinion from Luse Lehman Gorman
Pomerenk & Schick, P.C. with regard to federal income taxation, and an opinion
from RSM McGladrey, Inc. with regard to Illinois taxation, to the effect that
the adoption and implementation of the plan of conversion will not be taxable
for federal or Illinois tax purposes to Clover Leaf Bank or Clover Leaf
Financial. See "--Income Tax Consequences."
Effect on Liquidation Rights. In the event of a complete liquidation of
Clover Leaf Bank, each holder of a deposit account in Clover Leaf Bank would
receive his pro rata share of any assets of Clover Leaf Bank remaining after
payment of claims of all creditors, including the claims of all depositors, in
the amount of the withdrawal value of the account. Each depositor's pro rata
share of the remaining assets would be in the same proportion as the balance in
his or her deposit account to the aggregate balance in all deposit accounts in
Clover Leaf Bank at the time of liquidation.
After the conversion, each deposit account holder, in the event of a
complete liquidation, would have a claim of the same general priority as the
claims of all other general creditors of Clover Leaf Bank. Except as described
below, the deposit account holder's claim would be solely in the amount of the
balance in his or her deposit account plus accrued interest, and the holder
would have no interest in the value of Clover Leaf Bank above that amount.
The plan of conversion provides that there shall be established, upon
the completion of the conversion, a special "liquidation account" for the
benefit of eligible account holders and supplemental eligible account holders in
an amount equal to the net worth of Clover Leaf Bank as of the date of its
latest consolidated statement of financial condition contained in the final
prospectus relating to the conversion. Each eligible account holder and
supplemental eligible account holder would have an initial interest in the
liquidation account for each qualifying deposit account held in Clover Leaf Bank
on the qualifying date. An eligible account holder's or supplemental eligible
account holder's interest as to each deposit account would be in the same
proportion as the balance in his or her account on the applicable eligibility
date was to the aggregate balance in all qualifying deposit accounts on that
date. For accounts in existence on both dates, separate subaccounts shall be
determined on the basis of the qualifying deposits in the accounts on the record
dates. However, if an eligible account holder or supplemental eligible account
holder should reduce the amount in the qualifying deposit account on any annual
closing date of Clover Leaf Bank to a level less than the lowest amount in the
account on the applicable eligibility date, and on any subsequent closing date,
then the account holder's interest in this special liquidation account would be
reduced by an amount proportionate to any such reduction, and the account
holder's interest would cease to exist if the qualifying deposit account were
closed.
The interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders' related
accounts after the conversion. The liquidation account is an off-balance sheet
memorandum account and will not be reflected on Clover Leaf Bank's or Clover
Leaf Financial's financial statements following the conversion.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders were satisfied would
be distributed to Clover Leaf Financial as the sole stockholder of Clover Leaf
Bank, or purchasers of Clover Leaf Bank's common stock if we do not utilize the
holding company structure.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether Clover
Leaf Bank, or another federally insured institution is the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the liquidation account. In any such transaction, the liquidation account
would be assumed by the surviving institution.
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Common Stock. For information as to the characteristics of the common
stock to be issued under the plan of conversion, see "Dividend Policy" and
"Description of Capital Stock." Common stock issued under the plan of conversion
cannot, and will not, be insured by the Federal Deposit Insurance Corporation or
any other government agency.
Offering of Common Stock
Under the plan of conversion, up to 575,000 shares of common stock will
be offered for sale, subject to certain restrictions described below, through a
subscription and community offering.
Subscription Offering. The subscription offering will expire at 12:00
noon, central time, on December 12, 2001, unless otherwise extended by Clover
Leaf Bank and Clover Leaf Financial. Regulations of the Illinois Office of Banks
and Real Estate and the Federal Deposit Insurance Corporation require that all
shares to be offered in the conversion be sold within a period ending not more
than 45 days after the expiration date of the subscription offering or a longer
period as may be approved by the Illinois Office of Banks and Real Estate and
the Federal Deposit Insurance Corporation or, despite approval of the plan of
conversion by members, the conversion will not be effected. This period expires
on January 28, 2002, unless extended with regulatory approval. If the conversion
is not completed by January 28, 2002, all subscribers will have the right to
modify or rescind their subscriptions and to have their subscription funds
returned promptly with interest. In the event of an extension of this type, all
subscribers will be notified in writing of the time period within which
subscribers must notify Clover Leaf Bank of their intention to maintain, modify
or rescind their subscriptions. If the subscriber rescinds or does not respond
in any manner to Clover Leaf Bank's notice, the funds submitted will be refunded
to the subscriber with interest at Clover Leaf Bank's current passbook savings
rate, and/or the subscriber's withdrawal authorizations will be terminated. In
the event that the conversion is not effected, all funds submitted and not
previously refunded pursuant to the subscription and community offering will be
promptly refunded to subscribers with interest at Clover Leaf Bank's current
passbook savings rate, and all withdrawal authorizations will be terminated.
Subscription Rights. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories described in
the plan of conversion. Subscription priorities have been established for the
allocation of stock to the extent that the common stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Subject to the maximum purchase
limitations, each depositor with $50.00 or more on deposit at Clover Leaf Bank
as of the close of business on May 31, 2000 will receive nontransferable
subscription rights to subscribe for up to the greater of the following:
(i) $150,000 of common stock;
(ii) one-tenth of one percent of the total offering of common stock; or
81
(iii)15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued
by a fraction, the numerator of which is the amount of qualifying
deposit of the eligible account holder and the denominator is the
total amount of qualifying deposits of all eligible account holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
eligible account holders so as to permit each one, to the extent possible, to
purchase a number of shares sufficient to make the person's total allocation
equal 100 shares or the number of shares actually subscribed for, whichever is
less. Thereafter, unallocated shares will be allocated among the remaining
subscribing eligible account holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of qualifying deposits of all remaining eligible account holders
whose subscriptions remain unfilled; however, no fractional shares shall be
issued. If the amount so allocated exceeds the amount subscribed for by any one
or more eligible account holders, the excess shall be reallocated, one or more
times as necessary, among those eligible account holders whose subscriptions are
still not fully satisfied on the same principle until all available shares have
been allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in
Clover Leaf Bank in the one-year period preceding May 31, 2000 are subordinated
to the subscription rights of other eligible account holders. In addition, in
the event of an oversubscription in this category, directors of Clover Leaf Bank
shall only be allowed to purchase, through their subscription rights as eligible
account holders, 20% of the common stock sold in the conversion.
Category 2: Tax-Qualified Employee Plans. The plan of conversion
provides that our tax-qualified employee plans, such as our employee stock
ownership plan, shall receive nontransferable subscription rights to purchase up
to 10% of the shares of common stock issued in the conversion. Our employee
stock ownership plan intends to purchase 8% of the shares of common stock issued
in the conversion. If the plan's subscription is not filled in its entirety, the
employee stock ownership plan may purchase shares in the open market or may
purchase shares directly from the holding company.
Category 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
eligible account holders and our employee stock ownership plan, and subject to
the maximum purchase limitations, each depositor with $50.00 or more on deposit
as of the close of business on September 30, 2001 will receive nontransferable
subscription rights to subscribe for up to the greater of the following:
(i) $150,000 of common stock;
(ii) one-tenth of one percent of the total offering of common stock; or
(iii)15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued
by a fraction, the numerator of which is the amount of qualifying
deposits of the supplemental eligible account holder and the
denominator is the total amount of qualifying deposits of all
supplemental eligible account holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
supplemental eligible account holders so as to permit each supplemental eligible
account holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation equal 100 shares or the number of
shares actually subscribed for, whichever is less. Thereafter, unallocated
shares will be allocated among subscribing supplemental eligible account holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all subscribing supplemental eligible
account holders.
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Category 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by eligible account
holders, our employee stock ownership plan and supplemental eligible account
holders, and subject to the maximum purchase limitations, each depositor of
Clover Leaf Bank as of the close of business on November 9, 2001 will receive
nontransferable subscription rights to purchase up to the greater of:
(i) $150,000 of common stock or
(ii) one-tenth of one percent of the total offering of common stock.
If there is an oversubscription in this category, the available shares
will be allocated proportionately based on the total number of votes of each
other member compared to the total number of votes of all subscribing other
members.
We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for
shares pursuant to the plan of conversion reside. However, no shares will be
offered or sold under the plan of conversion to any person who resides in a
foreign country or resides in a state of the United States in which a small
number of persons otherwise eligible to subscribe for shares under the plan of
conversion reside or as to which we determine that compliance with the
securities laws of the state would be impracticable for reasons of cost or
otherwise, including, but not limited to, a requirement that we or any of our
officers, directors or employees register, under the securities laws of the
state, as a broker, dealer, salesman or agent. No payments will be made in lieu
of the granting of subscription rights to any person.
Community Offering. Any shares of common stock which remain
unsubscribed for in the subscription offering will be offered in a community
offering to members of the general public to whom we deliver a copy of this
prospectus and a stock order form, with preference given to natural persons
residing in Madison County, Illinois. Subject to the maximum purchase
limitations, these persons, together with associates of and persons acting in
concert with these persons, may purchase up to $150,000 of common stock. The
community offering, if any, may be concurrent with, during or promptly after the
subscription offering, and may terminate at any time without notice, but may not
terminate later than January 28, 2002, unless extended with regulatory approval.
Subject to any required regulatory approvals, we will determine the advisability
of a community offering, the commencement and termination dates of any community
offering, and the methods of finding potential purchasers in such offering, in
its discretion based upon market conditions. The opportunity to subscribe for
shares of common stock in the community offering category is subject to our
right, in our sole discretion, to accept or reject these orders in whole or in
part either at the time of receipt of an order or as soon as practicable
thereafter.
If there are not sufficient shares available to fill orders in the
community offering, the stock will be allocated first to each natural person
residing in Madison County whose order is accepted by us, in an amount equal to
the lesser of 1,000 shares or the number of shares subscribed for by each
subscriber residing in Madison County, if possible. Thereafter, unallocated
shares will be allocated among the subscribers residing in Madison County, whose
orders remain unsatisfied, in the same proportion that the unfilled subscription
of each bears to the total unfilled subscriptions of all subscribers residing in
Madison County. If there are any shares remaining, shares will be allocated to
other members of the general public who subscribe in the community offering
applying the same allocation procedures described above for subscribers residing
in Madison County.
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Syndicated Community Offering. All shares of common stock not purchased
in the subscription and community offerings, if any, may be offered for sale to
the general public in a syndicated community offering through a syndicate of
registered broker-dealers to be formed and managed by Keefe, Bruyette & Woods,
Inc. We expect to market any shares which remain unsubscribed after the
subscription and community offerings through a syndicated community offering. We
have the right to reject orders in whole or part in our sole discretion in the
syndicated community offering. Neither Keefe, Bruyette & Woods nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of common stock in the syndicated community offering. However, in the
event Keefe, Bruyette & Woods agrees to participate in a syndicated community
offering, it will use its best efforts in the sale of shares in the syndicated
community offering.
The price at which common stock is sold in the syndicated community
offering will be the same price as in the subscription and community offerings.
Subject to the overall purchase limitations, no person by himself or herself or
persons together with an associate, and no group of persons acting in concert,
may subscribe for or purchase more than will be permitted to subscribe in the
syndicated community offering for more than $150,000 or 15,000 shares of common
stock.
Keefe, Bruyette & Woods may enter into agreements with selected dealers
to assist in the sale of the shares in the syndicated community offering. No
orders may be placed or filled by or for a selected dealer during the
subscription offering. After the close of the subscription offering, Keefe,
Bruyette & Woods will instruct selected dealers as to the number of shares to be
allocated to each selected dealer. Only after the close of the subscription
offering and upon allocation of shares to selected dealers may selected dealers
take orders from their customers. During the subscription and community
offerings, selected dealers may only solicit indications of interest from their
customers to place orders with Clover Leaf Financial or Clover Leaf Bank as of a
certain order date for the purchase of shares of common stock. When and if
Keefe, Bruyette & Woods believes that enough indications of interest and orders
have not been received in the subscription and community offerings to consummate
the conversion, it will request, as of the order date, selected dealers to
submit orders to purchase shares for which they have previously received
indications of interest from their customers. Selected dealers will send
confirmations of the orders to customers on the next business day after the
order date. Selected dealers will debit the accounts of their customers on the
settlement date which date will be three business days from the order date.
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
settlement date. On the settlement date, selected dealers will remit funds to
the account established by Clover Leaf Bank for each selected dealer. Each
customer's funds forwarded to Clover Leaf Bank, along with all other accounts
held in the same title, will be insured by the Federal Deposit Insurance
Corporation up to $100,000 in accordance with applicable regulations. After
payment has been received by Clover Leaf Bank from selected dealers, funds will
earn interest at Clover Leaf Bank's passbook rate until the consummation or
termination of the conversion. Funds will be promptly returned, with interest,
in the event the conversion is not consummated as described above.
The syndicated community offering will terminate no more than 45 days
following the subscription expiration date, unless extended by Clover Leaf
Financial and Clover Leaf Bank with regulatory approval.
Limitations on Purchase of Shares. The plan also provides for certain
additional limitations to be placed upon the purchase of shares in the
conversion. Specifically, the maximum purchase of common stock in the
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subscription offering by a person or group of persons acting through a single
account is the amount an individual acting through the same account could
purchase as an eligible account holder, supplemental eligible account holder or
other member. Moreover, no person, other than our employee stock ownership plan,
by himself or herself or with an associate, and no group of persons acting in
concert, may subscribe for or purchase more than $200,000 of common stock
offered in the conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 34% of the shares to be sold in the
conversion. For purposes of the plan, the members of our Board of Directors are
not deemed to be acting in concert solely by reason of their Board membership.
Moreover, any shares attributable to the officers and directors and their
associates, but held by a tax-qualified employee plan, other than that portion
of a plan which is self-directed, shall not be included in calculating the
number of shares which may be purchased under the limitations in this paragraph.
Shares purchased by employees who are not officers or directors of Clover Leaf
Bank, or their associates, are not subject to this limitation. The term
"associate" is used above to indicate any of the following relationships with a
person:
o any corporation or organization, other than Clover Leaf Financial or
Clover Leaf Bank or a majority-owned subsidiary of Clover Leaf
Financial or Clover Leaf Bank, of which a person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity security;
o any trust or other estate in which the person has a substantial
beneficial interest or as to which the person serves as trustee or in
a similar fiduciary capacity; and
o any relative or spouse of the person or any relative of the spouse who
has the same home as the person or who is a director or officer of
Clover Leaf Financial or Clover Leaf Bank or any subsidiary of Clover
Leaf Financial or Clover Leaf Bank.
As used above, the term "acting in concert" means:
o knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement;
o a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise; or
o a person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert
with any person or company who is also acting in concert with that
other party, except that any tax-qualified employee plan will not be
deemed to be acting in concert with its trustee or a person who serves
in a similar capacity solely for the purpose of determining whether
stock held by the trustee and stock held by the plan will be
aggregated.
Persons or companies who file jointly a statement on Form 13-D or Form
13-G with any regulatory agency regarding the ownership of securities of other
companies or financial institutions will be deemed to be acting in concert.
Our Boards of Directors may, in their sole discretion, decrease the
maximum purchase limitation referred to above or increase the maximum purchase
limitation up to 9.99% of the shares being offered in the conversion, provided
that orders for shares exceeding 5.0% of the shares being offered in the
conversion shall not exceed, in the aggregate, 10% of the shares being offered
in the conversion. Requests to purchase additional shares of common stock under
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this provision will be allocated by the Boards of Directors on a pro rata basis
giving priority in accordance with the priority rights set forth above.
Depending upon market and financial conditions, and subject to certain
regulatory limitations, our Boards of Directors, with the approval of the
Illinois Office of Banks and Real Estate and without further approval of our
members, may increase or decrease any of the above purchase limitations at any
time. To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common stock purchased in the conversion will be freely transferable
except for shares purchased by executive officers and directors of Clover Leaf
Bank or Clover Leaf Financial and except as described below. See "--Restrictions
on Transferability of Subscription Rights." In addition, under National
Association of Securities Dealers, Inc. ("NASD") guidelines, members of the NASD
and their associates are subject to certain restrictions on transfer of
securities purchased in accordance with subscription rights and to certain
reporting requirements upon purchase of these securities.
Restrictions on Transferability of Subscription Rights
Subscription rights are nontransferable. We may, and intend to, monitor
and reasonably investigate to determine compliance with this restriction.
Persons selling or otherwise transferring their rights to subscribe for common
stock in the subscription offering or subscribing for common stock on behalf of
another person may forfeit those rights and may face possible further sanctions
and penalties imposed by state and federal regulatory authorities. We will
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights and we will not honor orders known by us to
involve the transfer of these rights. Each person exercising subscription rights
will be required to certify that he or she is purchasing shares solely for his
or her own account and that he or she has no agreement or understanding with any
other person for the sale or transfer of the shares. Once tendered, subscription
orders cannot be revoked without our consent.
Marketing Arrangements
We have engaged Keefe, Bruyette & Woods, Inc., as a financial advisor
and marketing agent in connection with the offering of the common stock, and
Keefe, Bruyette & Woods has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of common stock in the offerings.
Because Keefe, Bruyette & Woods is acting on a best efforts basis, it is not
obligated to purchase any of the stock we sell in the offering. Keefe, Bruyette
& Woods is a member of the NASD and an SEC-registered broker-dealer. Keefe,
Bruyette & Woods will assist us in the conversion by:
o acting as marketing advisor with respect to the subscription offering
and representing us as placement agent on a best efforts basis in the
sale of the common stock in the community offering if one is held;
o conducting training sessions with our directors, officers and
employees regarding the conversion process;
o assisting in the establishment and supervision of our Stock
Information Center; and
o with management's input, training our staff to tabulate orders for the
purchase of common stock and to respond to customer inquiries.
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For its services, Keefe, Bruyette & Woods will receive a management fee
of $25,000 and a success fee of $50,000 if the conversion is completed. In the
event that a selected dealers agreement is entered into in connection with a
syndicated community offering, we will pay a to-be-determined fee to the
selected dealers for shares sold by an NASD member firm pursuant to a selected
dealers agreement. We have agreed to indemnify Keefe, Bruyette & Woods for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act.
Description of Sales Activities
Our directors and executive officers may, to a limited extent and
subject to applicable state law, participate in the solicitation of offers to
purchase common stock. Our other employees may participate in the subscription
and community offering in administrative capacities, providing clerical work in
effecting sales transactions or answering questions of potential purchasers
provided that the content of the employees' responses is limited to information
contained in the prospectus or other offering document. Other questions of
prospective purchasers will be directed to registered representatives of Keefe,
Bruyette & Woods. These other employees have been instructed not to solicit
offers to purchase common stock or provide advice regarding the purchase of
common stock. Sales of common stock by directors, executive officers and
registered representatives will be made from the Stock Information Center. We
will rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will
be conducted within the requirements of Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of common stock except in
some states where only registered broker-dealers may sell. None of our officers,
directors or employees will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the common stock.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in a conversion must be based on an appraised aggregate market
value of the institution as converted, as determined by an independent
valuation. Keller & Company, which is experienced in the valuation and appraisal
of business entities, including thrift institutions involved in the conversion
process, was retained by us to prepare an appraisal of the estimated pro forma
market value of the common stock.
Keller & Company will receive a fee of $16,500 plus reasonable expenses
for its appraisal, and $6,000 plus reasonable expenses for its assistance in the
preparation of our business plan. We have agreed to indemnify Keller & Company
under certain circumstances against liabilities and expenses, including legal
fees, arising out of, related to, or based upon the conversion.
Keller & Company has prepared an appraisal of the estimated pro forma
market value of Clover Leaf Financial and Clover Leaf Bank as converted taking
into account the formation of Clover Leaf Financial as the holding company for
Clover Leaf Bank. For its analysis, Keller & Company reviewed and analyzed
Clover Leaf Bank's business and operations. Management supplied financial
information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this information, Keller & Company reviewed Clover Leaf Bank's
Application for Conversion from a Mutual Savings Bank to a Stock Savings Bank
and Clover Leaf Financial's Form SB-2 Registration Statement. Furthermore,
Keller & Company visited our facilities and had discussions with our management
and our special conversion legal counsel, Luse Lehman Gorman Pomerenk & Schick,
P.C. No detailed individual analysis of the separate components of our assets
and liabilities was performed in connection with the evaluation.
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In estimating the pro forma market value of Clover Leaf Financial and
Clover Leaf Bank as converted, Keller & Company's analysis used three selected
valuation procedures, the Price/Book method, the Price/Earnings method, and the
Price/Assets method, all of which are described in its report. Keller & Company
placed the greatest emphasis on the Price/Earnings and the Price/Book methods in
estimating pro forma market value. In applying these procedures, Keller &
Company reviewed, among other factors, the economic make-up of our primary
market area, our financial performance and condition in relation to publicly
traded institutions that Keller & Company deemed comparable to us, the specific
terms of the stock offering, the pro forma impact of the additional capital
raised in the conversion, conditions of securities markets in general, and the
market for thrift institution common stock in particular. Keller & Company's
analysis provides an approximation of the pro forma market value of Clover Leaf
Financial and Clover Leaf Bank as converted based on the valuation methods
applied and the assumptions outlined in its report. Included in its report were
certain assumptions as to the pro forma earnings of Clover Leaf Financial after
the conversion that were used in determining the appraised value. These
assumptions included estimated expenses and an assumed after-tax rate of return
on the net conversion proceeds as described under "Pro Forma Data," purchases by
our employee stock ownership plan of 8% of the common stock issued in the
conversion and purchases in the open market by our recognition and retention
plan of a number of shares equal to 4% of the common stock issued in the
conversion at the $10.00 purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, Keller & Company has advised us that, in
its opinion, as of August 24, 2001, the aggregate estimated pro forma market
value of Clover Leaf Financial and Clover Leaf Bank, as converted was within the
valuation range of $4,250,000 to $5,750,000 with a midpoint of $5,000,000. After
reviewing the methodology and the assumptions used by Keller & Company in the
preparation of the appraisal, our Board of Directors established the estimated
valuation range which is equal to the valuation range of $4,250,000 to
$5,750,000 with a midpoint of $5,000,000. Assuming that the shares are sold at
$10.00 per share in the conversion, the estimated number of shares would be
between 425,000 and 575,000 with a midpoint of 500,000. The purchase price of
$10.00 was determined by discussion among our Board of Directors and Keefe,
Bruyette & Woods, taking into account, among other factors, the requirement
under the Illinois Office of Banks and Real Estate regulations that the common
stock be offered in a manner that will achieve the widest distribution of the
stock and the desired liquidity subsequent to the conversion. Since the outcome
of the offering relates in large measure to market conditions at the time of
sale, it is not possible to determine the exact number of shares that will be
issued by us at this time. The estimated valuation range may be amended, with
the approval of the Illinois Office of Banks and Real Estate, if necessitated by
developments following the date of the appraisal in, among other things, market
conditions, our financial condition or operating results, regulatory guidelines
or national or local economic conditions.
Keller & Company's appraisal report is filed as an exhibit to the
registration statement that Clover Leaf Financial has filed with the Securities
and Exchange Commission. See "Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, Keller & Company, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of Clover Leaf Financial and Clover Leaf
Bank as converted, as of the close of the subscription offering.
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No sale of the shares will take place unless prior thereto Keller &
Company confirms that, to the best of its knowledge and judgment, nothing of a
material nature has occurred that would cause it to conclude that the actual
total purchase price on an aggregate basis was incompatible with its estimate of
the total pro forma market value of Clover Leaf Financial and Clover Leaf Bank
as converted at the time of the sale. If, however, the facts do not justify that
statement, the offering or other sale may be canceled, a new estimated valuation
range and price per share set, and new subscription, direct community and
syndicated community offerings held. Under these circumstances, subscribers
would have the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest, and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares
sold may be more than 661,250 shares or less than 425,000 shares. If the total
amount of shares sold is less than 425,000 or more than 661,250 (15% above the
maximum of the estimated valuation range), for aggregate gross proceeds of less
than $4,250,000 or more than $6,612,500, subscription funds will be returned
promptly with interest to each subscriber unless he or she indicates otherwise.
If Keller & Company establishes a new valuation range, it must be approved by
the Illinois Office of Banks and Real Estate and the Federal Deposit Insurance
Corporation.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by our Board of Directors, if possible. Other purchase arrangements must be
approved by the Illinois Office of Banks and Real Estate and the Federal Deposit
Insurance Corporation and may provide for purchases for investment purposes by
our directors, officers, their associates and other persons in excess of the
limitations provided in the plan of conversion and in excess of the proposed
director purchases discussed earlier, although no purchases are currently
intended. If other purchase arrangements cannot be made, the plan of conversion
will terminate.
In formulating its appraisal, Keller & Company relied upon the
truthfulness, accuracy and completeness of all documents we furnished to it.
Keller & Company also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While Keller & Company believes this information to be reliable,
Keller & Company does not guarantee the accuracy or completeness of the
information, and did not independently verify the financial statements and other
data provided by us or independently value our assets or liabilities. The
appraisal by Keller & Company is not intended to be, and must not be interpreted
as, a recommendation of any kind as to the advisability of voting to approve the
plan of conversion or of purchasing shares of common stock. Moreover, because
the appraisal is necessarily based on many factors that change from time to
time, there is no assurance that persons who purchase shares in the conversion
will be able to sell shares thereafter at prices at or above the purchase price.
Procedure for Purchasing Shares in the Subscription and Community Offerings
To purchase shares in the subscription offering, an executed original
order form with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with Clover Leaf Bank, must
be received by Clover Leaf Bank by 12:00 Noon, Central time, on December 12,
2001. Order forms that are not received by that time or are executed defectively
or are received without full payment or without appropriate withdrawal
instructions will not be accepted. We have the right at our sole discretion to
waive or permit the correction of incomplete or improperly executed order forms.
Our interpretation of the terms and conditions of the plan of conversion and of
the order form will be final. In order to purchase shares in the direct
community offering, the order form, accompanied by the required payment for each
share subscribed for, must be received by Clover Leaf Bank prior to the time the
direct community offering terminates, which may be on or at any time subsequent
to the expiration date. Once received, an executed order form may not be
modified, amended or rescinded without the consent of Clover Leaf Bank unless
the conversion has not been completed within 45 days after the end of the
subscription offering, unless extended.
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In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the order form giving all names on each account, the account number and the
approximate account balance as of the appropriate eligibility date. Failure to
list an account could result in fewer shares allocated if there is an
oversubscription than if all accounts had been disclosed.
Full payment for subscriptions may be made in cash (only if delivered
in person at our Stock Information Center); by check, bank draft, or money
order; or by authorization of withdrawal from deposit accounts maintained with
Clover Leaf Bank. Appropriate means by which withdrawals may be authorized are
provided on the stock order form. No wire transfers will be accepted. Interest
will be paid on payments made by cash, check, bank draft or money order at
Clover Leaf Bank's current passbook savings rate from the date payment is
received at the Stock Information Center until the completion or termination of
the conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the conversion, unless the certificate matures after the date of
receipt of the order form but prior to closing, in which case funds will earn
interest at the passbook rate from the date of maturity until the conversion is
completed or terminated, but a hold will be placed on the funds, making them
unavailable to the depositor until completion or termination of the conversion.
When the conversion is completed, the funds received in the offering will be
used to purchase the shares of common stock ordered. The shares of common stock
issued in the conversion cannot and will not be insured by the Federal Deposit
Insurance Corporation or any other government agency. If the conversion is not
consummated for any reason, all funds submitted will be promptly refunded with
interest as described above.
If you authorize us to withdraw the amount of the aggregate purchase
price from your deposit account at Clover Leaf Bank, we will do so as of the
effective date of conversion, though the account must contain the full amount
necessary for payment at the time the subscription order is received. We will
waive any applicable penalties for early withdrawal from certificate accounts.
If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the authorization the certificate will be canceled at the time
of the withdrawal, without penalty, and the remaining balance will earn interest
at Clover Leaf Bank's passbook rate.
Our tax-qualified employee plans will not be required to pay for the
shares subscribed for at the time they subscribe, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price at the closing of or
after the conversion.
Individual retirement accounts maintained at Clover Leaf Bank do not
permit investment in the common stock. A depositor interested in using his or
her individual retirement account funds to purchase common stock must do so
through a self-directed individual retirement account. Since Clover Leaf Bank
does not offer those accounts, we will allow a depositor to make a
trustee-to-trustee transfer of the individual retirement account funds to a
trustee offering a self-directed individual retirement account program with the
agreement that the funds will be used to purchase Clover Leaf Financial's common
stock in the offering. There will be no early withdrawal or Internal Revenue
Service interest penalties for transfers. The new trustee would hold the common
stock in a self-directed account in the same manner as Clover Leaf Bank now
holds the depositor's individual retirement account funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
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using funds in an individual retirement account at Clover Leaf Bank to purchase
common stock should contact the Stock Information Center no later than December
3, 2001 so that the necessary forms may be forwarded for execution and returned
before the subscription offering ends. In addition, federal laws and regulations
require that officers, directors and 10% shareholders who use self-directed
individual retirement account funds to purchase shares of common stock in the
subscription offering, make purchases for the exclusive benefit of the
individual retirement accounts.
Certificates representing shares of common stock purchased, and any
refund due, will be mailed to purchasers at the address specified in properly
completed order forms as soon as practicable following the sale of all shares of
common stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law. Purchasers may not be able to sell the shares of
common stock which they purchased until certificates for the common stock are
available and delivered to them, even though trading of the common stock may
have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the expiration date on December 12, 2001, in accordance with Rule
15c2-8 under the Securities Exchange Act of 1934, as amended, no prospectus will
be mailed any later than five days prior to that date or hand delivered any
later than two days prior to that date. Execution of the order form will confirm
receipt or delivery in accordance with Rule 15c2-8. Order forms will only be
distributed with a prospectus. We will accept for processing only orders
submitted on original order forms. We are not obligated to accept orders
submitted on photocopied or telecopied order forms. Orders cannot and will not
be accepted without the execution of the certification appearing on the reverse
side of the order form.
Risk of Delayed Offering
In the event that all shares of the common stock are not sold in the
subscription offering and any concurrent community offering, we may extend the
community offering for a period of up to 45 days from the date of the expiration
of the subscription offering. Further extensions are subject to approval and may
be granted for successive periods, but not beyond 24 months from the date of the
special meeting.
A material delay in the completion of the sale of all unsubscribed
shares in the community offering may result in a significant increase in the
costs in completing the conversion. Significant changes in our operations and
financial condition, the aggregate market value of the shares to be issued in
the conversion and general market conditions may occur during a material delay.
In the event the conversion is not consummated within 24 months after the date
of the special meeting, and is therefore terminated, we would charge accrued
conversion costs to then-current period operations.
Potential Conversion to a Commercial Bank Charter
Following completion of our conversion to stock form, and consistent
with our business plan to emphasize commercial lending and commercial business
banking, Clover Leaf Bank may convert to either a national bank or an
Illinois-chartered commercial bank. Our board of directors, however, has not yet
determined whether to proceed with a conversion to a commercial bank charter (or
what type of commercial bank charter) after our conversion to stock form. A
conversion to a commercial bank charter would be a separate transaction from our
conversion to stock form, and would require separate corporate and regulatory
approvals.
Upon consummation of a charter conversion, the converted bank would
succeed to all of Clover Leaf Bank's assets and liabilities, and initially
continue to conduct business in substantially the same manner as currently
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conducted by Clover Leaf Bank. Over time, however, management anticipates that
Clover Leaf Bank would focus more on commercial lending and less on mortgage
lending consistent with a commercial bank charter. Currently, as an
Illinois-chartered savings bank, Clover Leaf Bank may only invest up to 15% of
its assets in commercial business, agricultural or overdraft loans or lines of
credit.
In the event Clover Leaf Bank converts to an Illinois-chartered
commercial bank, it would remain subject to regulation and supervision by the
Illinois Office of Banks and Real Estate and by the Federal Deposit Insurance
Corporation. In the event we convert to a national bank, the Office of the
Comptroller of the Currency would be the primary regulator of Clover Leaf Bank.
We would remain a member of the Federal Home Loan Bank of Chicago if we convert
to a commercial bank charter.
The factors the board of directors will consider in making its
determination include, but are not limited to, the following:
o the operating flexibility offered by each type of charter, including
restrictions on loans, investments, and deposits;
o the annual examination fees and insurance premiums associated with
each type of charter; and
o the regulation and supervision of a state-chartered institution by the
Federal Deposit Insurance Corporation and the Illinois Office of Banks
and Real Estate, compared to the regulation and supervision of a
national bank by the Office of the Comptroller of the Currency.
Management believes that a conversion to a national bank would be
completed approximately 120 days following the filing of an application with the
Office of the Comptroller of the Currency, and that a conversion to an
Illinois-chartered commercial bank would be completed approximately 90 to 120
days following the filing of an application with the Illinois Office of Banks
and Real Estate. Stockholders of Clover Leaf Financial will not be given the
opportunity to vote for or against a charter conversion. If the holding company
structure is not utilized as part of the conversion, then stockholders of Clover
Leaf Bank will be given the opportunity to vote for or against the charter
conversion.
Approval, Interpretation, Amendment and Termination
All interpretations of the plan of conversion, as well as the
completeness and validity of order forms, will be made by us and will be final,
subject to the authority of the Illinois Office of Banks and Real Estate and the
requirements of applicable law. The plan of conversion provides that, if deemed
necessary or desirable by our Board of Directors, the plan of conversion may be
substantively amended by our Board of Directors as a result of comments from
regulatory authorities or otherwise, at any time but only with the concurrence
of the Illinois Office of Banks and Real Estate. Moreover, if the plan of
conversion is amended, subscriptions which have been received prior to an
amendment will not be refunded if an amendment is not material to the
transaction or otherwise required by the Illinois Office of Banks and Real
Estate.
The plan of conversion will terminate if the sale of all shares is not
completed within 24 months after the date of the special meeting. The plan of
conversion may be terminated by our Board of Directors with the concurrence of
the Illinois Office of Banks and Real Estate at any time. A specific resolution
approved by a two-thirds vote of the Board of Directors would be required to
terminate the plan of conversion prior to the end of the 24-month period.
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Restrictions on Repurchase of Stock
Under Federal Deposit Insurance Corporation regulations, savings banks
and their holding companies may not, for a period of one year from the date of
an institution's mutual-to-stock conversion, repurchase any of its common stock
from any person, except in an offer made to all of its stockholders to
repurchase the common stock on a pro rata basis, approved by the Federal Deposit
Insurance Corporation, or the repurchase of qualifying shares of a director.
Where compelling and valid business reasons exist, the Federal Deposit Insurance
Corporation may approve the open market repurchase of up to 5% of a savings
bank's or its holding company's capital stock during the first year following
the conversion. To receive this approval, the savings bank must establish a
compelling and valid business purposes for the repurchase to the satisfaction of
the Federal Deposit Insurance Corporation.
Under Illinois Office of Banks and Real Estate regulations, a stock
savings bank generally may not, for a period of one year from the date of the
savings bank's mutual-to-stock conversion, repurchase any of its common stock.
The Illinois Office of Banks and Real Estate may approve the repurchase of up to
5% of a savings bank's capital stock during the first year following a
conversion if the repurchase would not adversely affect the financial condition
of the savings bank, the repurchase would not reduce the savings bank's capital
below levels required by state or federal law or regulation, the repurchase
would be equitable to shareholders, and the repurchase would be undertaken for
legitimate business reasons. Stock repurchases in excess of 10% or more of our
consolidated net worth in any 12-month period may require the non-objection of
the Board of Governors of the Federal Reserve System. Furthermore, repurchases
of common stock are prohibited if they would cause the bank's regulatory capital
to be reduced below the amount required for the liquidation account or the
regulatory capital requirements imposed by the Federal Reserve Board.
Clover Leaf Bank, as a financial institution, may be subject to a
significant tax liability if it repurchases its common stock. This restriction
would only be applicable to Clover Leaf Bank if it completed the conversion
without utilizing the holding company structure. See "Taxation--Federal
Taxation."
Restrictions on the Transfer of Common Stock
Shares of common stock purchased in the offering by our directors and
officers may not be sold for a period of one year following the conversion,
except upon the death of the stockholder or in any exchange of the common stock
in connection with a merger or acquisition of Clover Leaf Financial or Clover
Leaf Bank. Shares of common stock received by directors or officers through the
employee stock ownership plan or the recognition and retention plan or upon
exercise of options issued under the stock option plan or purchased subsequent
to the conversion are not subject to this restriction. Accordingly, shares of
common stock issued to directors and officers will bear a legend giving
appropriate notice of the restriction and, in addition, we will give appropriate
instructions to the transfer agent for our common stock with respect to the
restriction on transfers. Any shares issued to directors and officers as a stock
dividend, stock split or otherwise with respect to restricted common stock will
also be restricted.
Clover Leaf Financial has filed with the SEC a registration statement
under the Securities Act of 1933, as amended, for the registration of the common
stock to be issued in the conversion. The registration under the Securities Act
of shares of the common stock to be issued in the conversion does not cover the
resale of the shares. Shares of common stock purchased by persons who are not
affiliates of Clover Leaf Financial may be resold without registration. Shares
purchased by an affiliate of Clover Leaf Financial will have resale restrictions
under Rule 144 of the Securities Act. If Clover Leaf Financial meets the current
public information requirements of Rule 144 under the Securities Act, each
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affiliate of Clover Leaf Financial who complies with the other conditions of
Rule 144, including those that require the affiliate's sale to be aggregated
with those of certain other persons, would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of 1% of the outstanding shares of Clover Leaf Financial or
the average weekly volume of trading in the shares during the preceding four
calendar weeks. Provision may be made in the future by Clover Leaf Financial to
permit affiliates to have their shares registered for sale under the Securities
Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
face certain restrictions on the transfer of securities purchased in accordance
with subscription rights and must satisfy certain reporting requirements upon
the purchase of the securities.
Income Tax Consequences
Consummation of the conversion is expressly conditioned upon prior
receipt by us of either a ruling from the Internal Revenue Service or an opinion
of Luse Lehman Gorman Pomerenk & Schick, P.C. with respect to federal taxation,
and a ruling of the Illinois taxation authorities or an opinion with respect to
Illinois taxation, to the effect that consummation of the conversion will not be
taxable to the converted savings bank or Clover Leaf Financial.
Luse Lehman Gorman Pomerenk & Schick, P.C. has issued an opinion with
respect to the proposed conversion of Clover Leaf Bank to the effect that:
1. the conversion of Clover Leaf Bank, from an Illinois mutual savings
bank to an Illinois stock savings bank will constitute a reorganization
within the meaning of Code Section 368(a)(1)(F), and no gain or loss
will be recognized by Clover Leaf Bank in its mutual or stock form by
reason of the conversion;
2. no gain or loss will be recognized by Clover Leaf Bank's account
holders upon the issuance to them of accounts in Clover Leaf Bank
immediately after the conversion, in the same dollar amounts and on the
same terms and conditions as their accounts at Clover Leaf Bank in its
mutual form, plus, with respect to eligible account holders and
supplemental account holders, an interest in the liquidation account
formed in connection with the conversion;
3. provided that the amount to be paid for Clover Leaf Financial's stock
pursuant to the subscription rights is equal to the fair market value
of the stock, no gain or loss will be recognized by eligible account
holders and supplemental eligible account holders upon the distribution
to them of subscription rights to purchase shares of such stock;
4. any gain realized by eligible account holders and supplemental eligible
account holders on the distribution to them of subscription rights to
purchase shares of Clover Leaf Financial's stock will be recognized
only to the extent of the fair market value of such subscription
rights;
5. the basis of each account holder's account in Clover Leaf Bank
immediately after the conversion will be the same as the basis of the
account immediately before conversion;
6. the basis of each eligible account holder's and supplemental eligible
account holder's interests in the liquidation account of Clover Leaf
Bank in the stock form will be zero, that being the cost of such
property;
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7. the basis of the non-transferable subscription rights will be zero,
provided that such subscription rights are not deemed to have a fair
market value and that the subscription price of such stock issuable
upon exercise of such rights is equal to the fair market value of such
stock;
8. the basis of each stockholder's stock in Clover Leaf Financial
purchased in the conversion will be the amount paid, increased by the
basis, if any, of the subscription rights exercised, and the holding
period for the stock will begin upon the exercise of the subscription
rights.
The opinion from Luse Lehman Gorman Pomerenk & Schick, P.C. is based,
among other things, on certain assumptions, including the assumptions that the
exercise price of the subscription rights to purchase Clover Leaf Financial
common stock will be approximately equal to the fair market value of that stock
at the time of the completion of the proposed conversion. We have received an
opinion from Keller & Company stating that pursuant to Keller & Company's
valuation, subscription rights issued in connection with the conversion will
have no value. The opinion of Keller & Company and the federal and state tax
opinions, respectively, referred to in this prospectus are filed as exhibits to
the Registration Statement. See "Where You Can Find More Information."
If it is subsequently established that the subscription rights received
by these persons have an ascertainable fair market value, then, in such event,
the subscription rights will be taxable to the recipient in the amount of their
fair market value. In this regard, the subscription rights may be taxed
partially or entirely at ordinary income tax rates.
With respect to Illinois taxation, we have received an opinion from RSM
McGladrey, Inc. to the effect that, assuming the conversion does not result in
any federal taxable income, gain or loss to Clover Leaf Bank in its mutual or
stock form, Clover Leaf Financial, the account holders, borrowers, officers,
directors and employees and tax-qualified employee plans of Clover Leaf Bank,
the conversion should not result in any Illinois income tax liability to these
entities or persons.
Unlike a private letter ruling, the opinions of Luse Lehman Gorman
Pomerenk & Schick, P.C., RSM McGladrey, Inc. and Keller & Company have no
binding effect or official status, and no assurance can be given that the
conclusions reached in any of these opinions would be sustained by a court if
contested by the Internal Revenue Service or the Illinois tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although we are not aware of any effort that might be made to obtain
control of Clover Leaf Financial or Clover Leaf Bank after the conversion, our
Boards of Directors, as discussed below, believe that it is appropriate to
include certain provisions as part of Clover Leaf Financial's certificate of
incorporation and bylaws and Clover Leaf Bank's articles of incorporation and
bylaws to protect the interests of Clover Leaf Bank, Clover Leaf Financial and
our stockholders from takeovers which our Board of Directors might conclude are
not in the best interests of Clover Leaf Bank, Clover Leaf Financial or our
stockholders.
The following discussion is a general summary of the material
provisions of Clover Leaf Financial's certificate of incorporation and bylaws,
Clover Leaf Bank's articles of incorporation and bylaws and certain other
regulatory provisions that may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in Clover Leaf Financial's certificate of
incorporation and bylaws and Clover Leaf Bank's proposed articles of
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incorporation and bylaws, reference should be made in each case to the document
in question, each of which is part of Clover Leaf Bank's application to the
Illinois Office of Banks and Real Estate and Clover Leaf Financial's
Registration Statement filed with the SEC. See "Where You Can Find Additional
Information."
Provisions of Clover Leaf Financial's Certificate of Incorporation and Bylaws
Restrictions on Call of Special Meetings. The certificate of
incorporation provides that a special meeting of stockholders may be called by
the Chairman of the Board of Clover Leaf Financial or pursuant to a resolution
adopted by a majority of the board of directors. Stockholders are not authorized
to call a special meeting of stockholders.
Absence of Cumulative Voting. The certificate of incorporation provides
that there shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The certificate of incorporation
authorizes 250,000 shares of preferred stock, par value $0.10 per share. Clover
Leaf Financial is authorized to issue preferred stock from time to time in one
or more series subject to applicable provisions of law; and the board of
directors is authorized to fix the designations, and relative preferences,
limitations, voting rights, if any, including without limitation, offering
rights of these shares (which could be a multiple or as a separate class). In
the event of a proposed merger, tender offer or other attempt to gain control of
Clover Leaf Financial that the board of directors does not approve, it might be
possible for the board of directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The board of directors has
no present plans or understandings for the issuance of any preferred stock but
it may issue preferred stock on terms which the board deems to be in the best
interests of Clover Leaf Financial and its stockholders.
Limitation on Voting Rights. The certificate of incorporation provides
that (i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of equity security of Clover
Leaf Financial; and that (ii) shares beneficially owned in violation of the
stock ownership restriction described above shall not be entitled to vote and
shall not be voted by any person or counted as voting stock in connection with
any matter submitted to a vote of stockholders. For these purposes, a person
(including management) who has obtained the right to vote shares of the common
stock pursuant to revocable proxies shall not be deemed to be the "beneficial
owner" of those shares if that person is not otherwise deemed to be a beneficial
owner of those shares.
Restrictions on Removing Directors from Office. The certificate of
incorporation provides that directors may only be removed for cause, and only by
the affirmative vote of the holders of at least 80% of the voting power of all
of our then-outstanding stock entitled to vote (after giving effect to the
limitation on voting rights discussed above in "--Limitation on Voting Rights).
Amendments to Certificate of Incorporation and Bylaws. Amendments to
the certificate of incorporation must be approved by Clover Leaf Financial's
board of directors and also by a majority of the outstanding shares of Clover
Leaf Financial's voting stock; provided, however, that approval by at least 80%
of the outstanding voting stock is generally required to amend the following
provisions:
(i) The limitation on voting rights of persons who directly or indirectly
offer to acquire or acquire the beneficial ownership of more than 10%
of any class of equity security of Clover Leaf Financial;
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(ii) The inability of stockholders to act by written consent;
(iii)The inability of stockholders to call special meetings of
stockholders;
(iv) The division of the board of directors into three staggered classes;
(v) The ability of the board of directors to fill vacancies on the board;
(vi) The inability to deviate from the manner prescribed in the bylaws by
which stockholders nominate directors and bring other business before
meetings of stockholders;
(vii)The requirement that at least 80% of stockholders must vote to remove
directors, and can only remove directors for cause;
(viii) The ability of the board of directors to amend and repeal the
bylaws; and
(ix) The ability of the Board of Directors to evaluate a variety of factors
in evaluating offers to purchase or otherwise acquire Clover Leaf
Financial.
The bylaws may be amended by the affirmative vote of the total number
of directors of Clover Leaf Financial or the affirmative vote of at least 80% of
the total votes eligible to be voted at a duly constituted meeting of
stockholders.
The shares of common stock that our directors and officers intend to
purchase in the conversion, when combined with the shares that may be awarded to
participants under our employee stock ownership plan and other stock benefit
plans, could result in management and employees controlling in excess of 20% of
our outstanding stock. See "Proposed Management Purchases." That level would
enable management and employees as a group to defeat any stockholder matter that
requires an 80% vote, including amending the certificate of incorporation and
bylaws, or removing directors from office, discussed above in "--Restrictions on
Removing Directors from Office."
Restrictions in Clover Leaf Bank's Stock Articles of Incorporation and Bylaws
Although the Board of Directors of Clover Leaf Bank is not aware of any
effort that might be made to obtain control of Clover Leaf Bank after the
conversion, the Board of Directors believes that it is appropriate to adopt
provisions permitted by Illinois regulation to protect the interests of the
converted savings bank and its stockholders from any hostile takeover. These
provisions may, indirectly, inhibit a change in control of Clover Leaf
Financial, as Clover Leaf Bank's sole stockholder.
Clover Leaf Bank's articles of incorporation will contain a provision
whereby the acquisition of beneficial ownership of more than 10% of the issued
and outstanding shares of any class of equity securities of Clover Leaf Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate, will be prohibited for a period of five years following
the date of completion of the conversion. If shares are acquired in violation of
this provision of Clover Leaf Bank's articles of incorporation, all shares
beneficially owned by any person in excess of 10% will be considered "excess
shares" and will not be counted as shares entitled to vote and will not be voted
by any person or counted as voting shares in connection with any matters
submitted to the stockholders for a vote. If holders of revocable proxies for
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more than 10% of the shares of the common stock of Clover Leaf Financial seek,
among other things, to elect one-third or more of Clover Leaf Financial's Board
of Directors, to cause Clover Leaf Financial's stockholders to approve an
acquisition or corporate reorganization of Clover Leaf Financial or to exert a
controlling influence over a material aspect of the business operations of
Clover Leaf Financial, which actions could indirectly result in a change in
control of Clover Leaf Bank, the Board of Directors of Clover Leaf Bank will be
able to assert this provision of Clover Leaf Bank's articles of incorporation
against these holders. Although the Board of Directors of Clover Leaf Bank is
not currently able to determine when and if it would assert this provision of
Clover Leaf Bank's articles of incorporation, the Board, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of Clover Leaf Bank, Clover Leaf Financial and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of Clover Leaf Bank indirectly through a change in control of Clover
Leaf Financial.
In addition, stockholders will not be permitted to cumulate their votes
in the election of Directors. Furthermore, Clover Leaf Bank's bylaws provide for
the election of three classes of directors to staggered terms.
Finally, the articles of incorporation provides for the issuance of
shares of preferred stock on terms, including conversion and voting rights, as
may be determined by Clover Leaf Bank's Board of Directors without stockholder
approval. Although Clover Leaf Bank has no arrangements, understandings or plans
at the present time for the issuance or use of the shares of authorized
preferred stock, the Board believes that the availability of these shares will
provide Clover Leaf Bank with increased flexibility in structuring possible
future financings and acquisitions and in meeting other corporate needs that may
arise. If a proposed merger, tender offer or other attempt to gain control of
Clover Leaf Bank occurs of which management does not approve, the Board can
authorize the issuance of one or more series of preferred stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The Board does not intend to issue any preferred stock except
on terms that the Board deems to be in the best interest of Clover Leaf Bank and
its then existing stockholders.
Federal Restrictions
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a bank or bank holding company unless 60 days' prior written
notice has been given to the applicable regulatory authority. The Bank Holding
Company Act provides that no company may acquire "control" of a bank holding
company without the prior approval of the Federal Reserve Board. Any company
that acquires such control becomes a bank holding company subject to
registration, examination and regulation by the Federal Reserve Board. Pursuant
to Federal regulations, control of a bank holding company is conclusively deemed
to have been acquired by, among other things, the acquisition of more than 25%
of any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. The Federal Reserve
Board:
(i) may prohibit an acquisition if the acquisition would result in a
monopoly, or would be in furtherance of one, or substantially lessen
competition, or be in restraint of trade, unless it finds that the
anti-competitive effects are clearly outweighed in the public interest
by the probable effect of the transaction in meeting the convenience
and needs of the community to be served;
(ii) in every case, must take into consideration the financial and
managerial resources, including the competence, experience, and
integrity of the officers, directors, and principal shareholders of
the acquiring company, and the future prospects of Clover Leaf
Financial and Clover Leaf Bank, and the convenience and needs of the
community to be served; and
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(iii)must disapprove any application if the acquiring company fails to
assure the Federal Reserve Board that it will provide the information
necessary for the Federal Reserve Board to enforce banking laws
respecting the acquiror or, if the application involves a foreign
bank, the foreign bank is not subject to comprehensive supervision or
regulation on a consolidated basis by the appropriate authorities in
the foreign bank's home country.
Illinois Restrictions
The Illinois Savings Bank Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of 10% or more of an Illinois savings bank or an Illinois
savings bank holding company unless 60 days' prior written notice has been given
to the Illinois Office of Banks and Real Estate. The Illinois Office of Banks
and Real Estate must approve or deny the application for the change in control
within the later of 30 days of the filing of the application or the date of
receipt of any additional information requested by the Illinois Office of Banks
and Real Estate that is necessary for it make a decision.
DESCRIPTION OF CAPITAL STOCK OF CLOVER LEAF FINANCIAL
General
Clover Leaf Financial is authorized to issue 2,000,000 shares of common
stock, par value $0.10 per share, and 250,000 shares of preferred stock, par
value $0.10 per share. Clover Leaf Financial currently expects to issue up to
575,000 shares of common stock in the conversion, subject to adjustment. Clover
Leaf Financial does not intend to issue shares of preferred stock in the
conversion. Each share of Clover Leaf Financial common stock will have the same
relative rights as, and will be identical in all respects with, each other share
of common stock. Upon payment of the $10.00 per share subscription price for the
common stock, in accordance with the plan of conversion, all of the common stock
will be duly authorized, fully paid and nonassessable.
The common stock of Clover Leaf Financial will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
Common Stock
Dividends. Clover Leaf Financial can pay dividends out of statutory
surplus or from net profits if, as and when declared by its Board of Directors.
The payment of dividends by Clover Leaf Financial is subject to limitations that
are imposed by law and applicable regulation. The holders of common stock of
Clover Leaf Financial will be entitled to receive and share equally in dividends
as may be declared by the Board of Directors of Clover Leaf Financial out of
funds legally available therefor. If Clover Leaf Financial issues preferred
stock, the holders thereof may have a priority over the holders of the common
stock with respect to dividends.
Voting Rights. Upon the conversion, the holders of common stock of
Clover Leaf Financial will possess exclusive voting rights in Clover Leaf
Financial. They will elect Clover Leaf Financial's Board of Directors and act on
other matters as are required to be presented to them under Delaware law or as
are otherwise presented to them by the Board of Directors. Generally, each
holder of common stock will be entitled to one vote per share and will not have
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any right to cumulate votes in the election of Directors. The absence of
cumulative voting can prevent stockholders who do not control a majority of our
common stock from electing candidates to our Board of Directors. If Clover Leaf
Financial issues preferred stock, holders of the preferred stock may also
possess voting rights. Certain matters require an 80% stockholder vote.
As an Illinois stock savings bank, corporate powers and control of
Clover Leaf Bank are vested in its Board of Directors, who elect the officers of
Clover Leaf Bank and who fill any vacancies on the Board of Directors as it
exists upon the conversion. Voting rights of Clover Leaf Bank are vested
exclusively in the owners of the shares of capital stock of Clover Leaf Bank,
which, if the holding company structure is utilized, will be Clover Leaf
Financial, and voted at the direction of Clover Leaf Financial's Board of
Directors. Consequently, the holders of the common stock will not have direct
control of Clover Leaf Bank if the holding company structure is utilized.
Preemptive Rights. Holders of the common stock of Clover Leaf Financial
will not be entitled to preemptive rights with respect to any shares that may be
issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Clover Leaf Financial's authorized preferred
stock will be issued in the conversion. Preferred stock may be issued with
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
DESCRIPTION OF CAPITAL STOCK OF CLOVER LEAF BANK
General
Clover Leaf Bank is authorized to issue 2,000,000 shares of common
stock, par value $1.00 per share, and 1,000,000 shares of preferred stock, no
par value. If the holding company structure is not utilized as part of the
conversion, Clover Leaf Bank currently expects to issue up to 575,000 shares of
common stock in the conversion, subject to adjustment. Clover Leaf Bank does not
intend to issue shares of preferred stock in the conversion. Each share of
Clover Leaf Bank common stock will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. Upon payment
of the $10.00 per share subscription price for the common stock, in accordance
with the plan of conversion, all of the common stock will be duly authorized,
fully paid and nonassessable.
The common stock of Clover Leaf Bank, if issued, will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
Common Stock
Dividends. Under the Illinois Savings Bank Act, no dividends may be
declared when total capital of a savings bank is less than that required by
Illinois law. Stock dividends may be paid out of retained earnings at any time.
Written approval of the Illinois Office of Banks and Real Estate is required if
a savings bank has total capital of less than 6% of total assets and if the
dividends to be declared in any year exceed 50% of the savings bank's net
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profits for the year. The Illinois Office of Banks and Real Estate approval is
required before dividends may be declared that exceed a savings bank's net
profits in any year. The holders of common stock of Clover Leaf Bank would be
entitled to receive and share equally in dividends as may be declared by the
Board of Directors of Clover Leaf Bank out of funds legally available therefor.
If Clover Leaf Bank issues preferred stock, the holders thereof may have a
priority over the holders of the common stock with respect to dividends.
Voting Rights. Upon the conversion, the holders of common stock of
Clover Leaf Bank will possess exclusive voting rights in Clover Leaf Bank. They
will elect Clover Leaf Bank's Board of Directors and act on other matters as are
required to be presented to them under Illinois law or as are otherwise
presented to them by the Board of Directors. Generally, each holder of common
stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of Directors. The absence of cumulative voting
can prevent stockholders who do not control a majority of our common stock from
electing candidates to our Board of Directors. If Clover Leaf Bank issues
preferred stock, holders of the preferred stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of Clover Leaf Bank, the holders of Clover Leaf Bank's capital stock would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of Clover Leaf Bank, including all deposit accounts and accrued
interest thereon, and after distribution of the balance in the special
liquidation account to eligible account holders and supplemental eligible
account holders, all assets of Clover Leaf Bank available for distribution. If
preferred stock is issued, the holders thereof may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Clover Leaf Bank will
not be entitled to preemptive rights with respect to any shares that may be
issued. Clover Leaf Bank's common stock is not subject to redemption.
Preferred Stock
None of the shares of Clover Leaf Bank's authorized preferred stock
will be issued in the conversion. Preferred stock may be issued with preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors may, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
LEGAL AND TAX MATTERS
The legality of the common stock and the federal income tax
consequences of the conversion will be passed upon for Clover Leaf Bank and
Clover Leaf Financial by the firm of Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C. The Illinois state income tax consequences of the conversion
will be passed upon for Clover Leaf Bank and Clover Leaf Financial by RSM
McGladrey, Inc., Champaign, Illinois. Luse Lehman Gorman Pomerenk & Schick, P.C.
and RSM McGladrey, Inc. have consented to the references in this prospectus to
their opinions. Certain legal matters regarding the conversion will be passed
upon for Keefe, Bruyette & Woods by Elias, Matz, Tiernan & Herrick L.L.P.,
Washington, D.C.
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CHANGE IN ACCOUNTANTS
On April 4, 2001, Clover Leaf Bank's Board of Directors appointed
McGladrey & Pullen, LLP as Clover Leaf Bank's independent auditors and
determined not to reappoint Crowe, Chizek and Company LLP. The report of Crowe,
Chizek and Company LLP on the financial statements as of and for the two fiscal
years ended December 31, 1999 did not contain an adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. During Clover Leaf Bank's two most recent fiscal years
preceding such change in accountants and any subsequent interim period preceding
such change in accountants, there were no disagreements with Crowe, Chizek and
Company LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, nor were there any other
events that required reporting under SEC regulations.
EXPERTS
The consolidated financial statements of Clover Leaf Bank at December
31, 2000 and for the year then ended, appearing in this prospectus and
registration statement have been audited by McGladrey & Pullen LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Clover Leaf Bank at December
31, 1999, and for the year then ended, appearing in this prospectus and
registration statement have been audited by Crowe, Chizek and Company LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
Keller & Company has consented to the publication in this prospectus of
the summary of its report to Clover Leaf Bank and Clover Leaf Financial setting
forth its opinion as to the estimated pro forma market value of the common stock
upon the completion of the conversion and its valuation with respect to
subscription rights.
WHERE YOU CAN FIND MORE INFORMATION
Clover Leaf Financial has filed a registration statement with the SEC
under the Securities Act, with respect to the common stock offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus does not
contain all the information set forth in the registration statement. This
information can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549, and copies of
the material can be obtained from the SEC at prescribed rates. The registration
statement also is available through the SEC's world wide web site on the
internet at http://www.sec.gov. The statements contained in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete but do contain all material information regarding the
documents; each statement is qualified by reference to the contract or document.
Clover Leaf Bank's FFIEC call reports, which provide unaudited
quarterly financial and other information regarding Clover Leaf Bank, are also
available through the FDIC's world wide web site on the internet at
http://www.fdic.gov.
Clover Leaf Bank has filed an Application for Conversion with the
Illinois Office of Banks and Real Estate with respect to the conversion. This
prospectus omits certain information contained in that application. The
application may be examined at the principal office of the Illinois Office of
Banks and Real Estate, 310 S. Michigan Avenue, Suite 2130, Chicago, Illinois
60604-4278 and at 500 E. Monroe Street, Springfield, Illinois 62701-1532.
102
In connection with the conversion, Clover Leaf Financial will register
the common stock with the SEC (or, if the holding company structure is not
utilized, Clover Leaf Bank will register the common stock with the FDIC) under
Section 12(g) of the Exchange Act; and, upon this registration, Clover Leaf
Financial and the holders of its common stock will become subject to the proxy
solicitation rules, reporting requirements and restrictions on stock purchases
and sales by directors, officers and greater than 10% stockholders, the annual
and periodic reporting and certain other requirements of the Exchange Act. Under
the plan, Clover Leaf Financial and Clover Leaf Bank have undertaken that they
will not terminate this registration for a period of at least three years
following the conversion.
A copy of the certificate of incorporation and bylaws of Clover Leaf
Financial and articles of incorporation and bylaws of Clover Leaf Bank are
available without charge from Clover Leaf Bank by calling our stock information
center at (618) 655-9650 or by sending a written request to our stock
information center at 200 East Park Street, Edwardsville, Illinois 62025.
103
CLOVER LEAF BANK, SB
AND SUBSIDIARY
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORTS F - 2 and F - 3
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F - 4
Consolidated statements of income F - 5
Consolidated statements of changes in equity F - 6
Consolidated statements of cash flows F - 7 and F - 8
Notes to consolidated financial statements F- 9 - F - 20
--------------------------------------------------------------------------------
F-1
[McGladrey & Pullen, LLP Letterhead]
Independent Auditor's Report
Board of Directors
Clover Leaf Bank, SB
Edwardsville, Illinois
We have audited the accompanying consolidated balance sheet of Clover Leaf Bank,
SB and Subsidiary, as of December 31, 2000, and the related consolidated
statements of income, changes in equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Clover Leaf
Bank, SB as of December 31, 2000, and the results of its operations and its cash
flows for the year then ended, in conformity with auditing standards generally
accepted in the United States of America.
/s/McGladrey & Pullen, LLP
Champaign, Illinois
April 20, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Clover Leaf Bank, SB
Edwardsville, Illinois
We have audited the accompanying consolidated balance sheet of Clover Leaf Bank,
SB as of December 31, 1999 and the related consolidated statements of income,
changes in equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. 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 audit provides 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 Clover Leaf Bank, SB
as of December 31, 1999, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
\s\ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
February 25, 2000
F-3
CLOVER LEAF BANK, SB
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000 and 1999
December 31,
June 30, ----------------------------
2001 2000 1999
-------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from other financial institutions $ 1,501,046 $ 2,802,803 $ 1,598,120
Interest bearing deposits in other financial institutions 5,261,827 6,407,902 33,831
------------------------------------------------
Total cash and cash equivalents 6,762,873 9,210,705 1,631,951
Securities available-for-sale 15,303,634 15,383,824 9,876,644
Federal Home Loan Bank (FHLB) stock 1,968,400 451,500 422,500
Loans, net of allowance for loan losses of $636,475
in 2001, $625,513 in 2000 and $455,114 in 1999 59,926,223 56,859,028 55,494,281
Bank premises and equipment, net 2,679,651 2,752,362 2,842,314
Accrued interest receivable 577,491 562,419 435,482
Other assets 533,920 565,012 550,200
------------------------------------------------
Total assets $ 87,752,192 $ 85,784,850 $ 71,253,372
================================================
LIABILITIES AND EQUITY
Liabilities
Deposits:
Noninterest bearing $ 5,747,406 $ 5,414,472 $ 4,969,187
Interest bearing 73,645,313 70,621,170 55,634,962
------------------------------------------------
Total deposits 79,392,719 76,035,642 60,604,149
Federal Home Loan Bank advances 1,500,000 3,000,000 4,000,000
Accrued interest payable 67,189 111,925 73,419
Other liabilities 515,213 538,963 492,380
------------------------------------------------
Total liabilities 81,475,121 79,686,530 65,169,948
------------------------------------------------
Equity
Retained earnings - substantially restricted 6,142,726 6,088,635 6,259,733
Accumulated other comprehensive income (loss) 134,345 9,685 (176,309)
------------------------------------------------
Total equity 6,277,071 6,098,320 6,083,424
------------------------------------------------
Total liabilities and equity $ 87,752,192 $ 85,784,850 $ 71,253,372
================================================
See Notes to Consolidated Financial Statements.
F-4
CLOVER LEAF BANK, SB
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2001 and 2000 and Years Ended
December 31, 2000 and 1999
December 31,
June 30, June 30, -----------------------------
2001 2000 2000 1999
-------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Interest income:
Loans and fees on loans $ 2,291,046 $ 2,168,680 $ 4,429,378 $ 3,964,922
Taxable securities 490,328 301,747 695,433 652,198
Non-taxable securities 21,658 19,470 23,203 42,079
Interest bearing deposits in other
financial institutions and other 111,059 46,610 175,882 47,760
------------------------------------------------------------
Total interest income 2,914,091 2,536,507 5,323,896 4,706,959
------------------------------------------------------------
Interest expense:
Deposits 1,950,780 1,404,913 3,210,811 2,498,219
FHLB Advances 65,845 150,893 255,910 321,282
------------------------------------------------------------
Total interest expense 2,016,625 1,555,806 3,466,721 2,819,501
------------------------------------------------------------
Net interest income 897,466 980,701 1,857,175 1,887,458
Provision for loan losses 16,148 30,008 427,572 48,000
------------------------------------------------------------
Net interest income after
provision for loan losses 881,318 950,693 1,429,603 1,839,458
------------------------------------------------------------
Noninterest income:
Service charges on deposits accounts 37,427 25,723 87,881 33,518
Other service charges and fees 73,170 43,395 89,924 54,530
Loan servicing fees 6,153 3,852 10,856 9,443
Gain on sale of securities 10,552 2,676 2,676
Other 14,620 11,634 37,309 31,478
------------------------------------------------------------
141,922 87,280 228,646 128,969
------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 485,342 456,316 948,227 728,353
Occupancy 59,141 91,618 170,987 130,192
Equipment and data processing 165,761 149,630 298,154 256,419
Other 259,175 230,818 501,295 485,931
------------------------------------------------------------
969,419 928,382 1,918,663 1,600,895
------------------------------------------------------------
Net income (loss) before
income taxes 53,821 109,591 (260,414) 367,532
Income taxes expense (benefit) (270) 35,000 (89,316) 114,000
------------------------------------------------------------
Net income (loss) $ 54,091 $ 74,591 $ (171,098) $ 253,532
============================================================
See Notes to Consolidated Financial Statements.
F-5
CLOVER LEAF BANK, SB
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Six Months Ended June 30, 2001 (Unaudited) and Years Ended
December 31, 2000 and 1999
--------------------------------------------------------------------------------
Accumulated
Other
Retained Comprehensive Total
Earnings Income (Loss) Equity
----------------------------------------------
Balance at December 31, 1998 $ 6,006,201 $ 82,334 $ 6,088,535
Comprehensive income (loss)
Net income 253,532 - 253,532
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on securities
available-for-sale arising during the year, net
of tax benefit of $163,563 - (258,643) (258,643)
--------------
Comprehensive income (loss) (5,111)
-------------------------------------------
Balance at December 31, 1999 6,259,733 (176,309) 6,083,424
Comprehensive income
Net (loss) (171,098) - (171,098)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities
available-for-sale arising during the year, net
of tax of $117,523 - - 187,633
Reclassification adjustment, net of taxes
of $(1,037) - - (1,639)
--------------
Other comprehensive income, net of taxes
of $116,486 - 185,994 185,994
--------------
Comprehensive income 14,896
-------------------------------------------
Balance at December 31, 2000 6,088,635 9,685 6,098,320
Comprehensive income
Net income 54,091 - 54,091
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities
available-for-sale arising during the year, net
of tax of $67,807 - - 131,624
Reclassification adjustment, net of taxes
of $(3,588) (6,964)
--------------
Other comprehensive income, net of taxes
of $64,219 - 124,660 124,660
--------------
Comprehensive income 178,751
-------------------------------------------
Balance at June 30, 2001 (unaudited) $ 6,142,726 $ 134,345 $ 6,277,071
===========================================
See Notes to Consolidated Financial Statements.
F-6
CLOVER LEAF BANK, SB
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000 and Years Ended
December 31, 2000 and 1999
December 31,
June 30, June 30, -----------------------------
2001 2000 2000 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities
Net income (loss) $ 54,091 $ 74,591 $ (171,098) $ 253,532
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 82,898 93,708 176,274 120,561
Provision for loan losses 16,148 30,008 427,572 48,000
Deferred tax provision (25,393) (45,011) (80,182) (26,963)
Realized gain on sale of investments (10,552) (2,676) (2,676) -
Federal Home Loan Bank stock dividend (9,000) (7,300) (23,500) -
(Increase) in accrued interest receivable (15,072) (27,626) (126,937) (55,472)
(Increase) decrease in other assets (7,734) (42,454) (51,116) 17,059
Increase (decrease) in accrued interest
payable (44,736) 2,292 38,506 6,056
Increase (decrease) in other liabilities (23,750) (370,057) 46,583 69,307
---------------------------------------------------------------------
Net cash provided by (used in)
operating activities 16,900 (294,525) 233,426 432,080
---------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of securities available-for-sale (3,313,653) (1,000,000) (8,450,934) (5,266,975)
Proceeds of maturities of securities
available-for-sale and paydowns 3,593,274 1,019,590 3,248,910 4,702,128
Purchase of FHLB stock (1,507,900) (5,500) (5,500) (47,300)
(Increase) in loans, net (3,083,343) (2,086,843) (1,792,319) (7,739,685)
---------------------------------------------------------------------
Purchase of premises and equipment (10,187) (79,857) (86,322) (2,130,107)
Net cash used in investing
activities (4,321,809) (2,152,610) (7,086,165) (10,481,939)
---------------------------------------------------------------------
Cash Flows from Financing Activities
Increase in deposits 3,357,077 4,240,123 15,431,493 7,900,348
Proceeds from FHLB advances - 5,400,000 - 7,000,000
Repayments of FHLB advances (1,500,000) (4,400,000) (1,000,000) (6,000,000)
---------------------------------------------------------------------
Net cash provided by financing
activities 1,857,077 5,240,123 14,431,493 8,900,348
---------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (2,447,832) 2,792,988 7,578,754 (1,149,511)
Cash and cash equivalents:
Beginning 9,210,705 1,631,951 1,631,951 2,781,462
---------------------------------------------------------------------
Ending $ 6,762,873 $ 4,424,939 $ 9,210,705 $ 1,631,951
=====================================================================
(Continued)
F-7
CLOVER LEAF BANK, SB
STATEMENTS OF CASH FLOWS, Continued
Six Months Ended June 30, 2001 and 2000 and Years Ended
December 31, 2000 and 1999
December 31,
June 30, June 30, -----------------------------
2001 2000 2000 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 2,061,361 $ 1,553,514 $ 3,428,215 $ 2,813,445
Income taxes, net of (refunds) (4,942) 75,000 75,000 125,000
See Notes to Consolidated Financial Statements.
F-8
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Clover Leaf Bank, SB (the Bank) provides residential, commercial and installment
loans, deposits and other customer services to individuals and corporate
customers primarily in Madison County, Illinois. Clover Leaf Financial Services,
Inc., (a wholly owned subsidiary of the Bank) provides life and disability
insurance to loan customers of the Bank.
Basis of presentation:
In preparing the accompanying financial statements, management is required to
make estimates and assumptions that affect the amounts reported in the financial
statements. Significant estimates which are particularly susceptible to change
in a short period of time include the determination of the market value of
investment securities and the allowance for loan losses. Actual results could
differ significantly from those estimates.
Comprehensive income:
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for
sale, are reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of comprehensive
income.
Securities available-for-sale:
Securities classified as available for sale are those debt securities that the
Bank 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 Bank's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. The difference between fair value
and amortized cost (cost adjusted for amortization of premiums and accretion of
discounts, computed by the interest method of accrual over their contractual
lives) results in an unrealized gain or loss. Unrealized gains or losses are
reported as accumulated other comprehensive income (loss) in equity, net of the
related deferred tax effect. Realized gains or losses, determined using the
specific identification method, are included in earnings.
Federal Home Loan Bank Stock:
The Bank, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"), is
required to maintain an investment in common stock of the FHLB in an amount
equal to 1% of its outstanding home loans. No ready market exists for the FHLB
stock, and it has no quoted market value. For disclosure purposes, such stock is
assumed to have a market value which is equal to cost. Dividends received on
such stock are reflected as interest income in the consolidated statements of
income.
Loans:
Loans are stated at unpaid principal balances, less the allowance for loan
losses, deferred fees and costs. Interest income is credited to income as earned
using the simple interest method applied to the daily principal balance
outstanding and includes the amortization of net deferred loan fees and costs
over the loan term.
F-9
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accrual of interest on any loan is discontinued when, in the opinion of
management, there is reasonable doubt as to the collectibility of interest or
principal. Generally, the accrual of interest on loans is discontinued when the
loan is more than 90 days past due unless the loans are well collateralized or
in the process of collection. When the accrual of interest is discontinued, all
unpaid accrued interest is reversed against income. Interest income on these
loans is subsequently recognized to the extent interest payments are received
and principal is considered to be fully collectible.
A loan is impaired when it is probable the Bank will be unable to collect all
contractual principal and interest payments in accordance with the terms of the
loan. All installment and real estate loans are considered to be small balance
homogeneous loan pools for the purpose of evaluating impairment. Commercial
loans are specifically evaluated for impairment. For collateralized impaired
loans, loan balances in excess of net realizable value are deemed impaired. The
amount of impairment, if any, and any subsequent changes are included in the
allowance for loan losses.
Allowance for loan losses:
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that represents management's best estimate of probable
loan losses incurred as of the balance sheet date. This evaluation takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers' ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses, and may require the Bank to make additions to the allowance based on
their judgment about information available to them at the time of their
examination.
The Bank's policy is to charge off loans when the loan becomes 120 days
delinquent unless the loans are well collateralized or in the process of
collection.
Premises and equipment:
Land is carried at cost. Other premises and equipment are recorded at cost and
are depreciated on the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the respective assets.
Income taxes:
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future. The deferred tax
assets and liabilities are computed 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 an amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
F-10
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash flows:
For the purpose of reporting cash flows, cash and cash equivalents include cash
on hand and due from other financial institutions (including cash items in
process of clearing) and interest bearing deposits in other financial
institutions.
Reclassifications:
Certain amounts in 1999 and 2000 have been reclassified to conform with the 2001
presentation with no effect on net income.
Recently adopted accounting standards:
Accounting for Derivative Instruments and Hedging Activities
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued,
which originally required the Statement to be adopted in years beginning
after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Statement will
require the Bank to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized in
earnings. Management does not anticipate that the adoption of the new
Statement will have a significant effect on the Bank's earnings or
financial position. In July 1999, the Statement on Financial Accounting
Standards No. 137 was issued. This Statement delayed the implementation of
Statement No. 133 until fiscal years beginning after June 15, 2000. In June
2000, the Statement on Financial Accounting Standards No. 138 was issued to
modify and clarify various provisions of Statement No. 133. The Bank
adopted Statement No. 133, as amended by Statements No. 137 and 138,
effective January 1, 2001 without any significant impact on its financial
statements.
In September 2000, Statement on Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued to replace Statement on
Financial Accounting Standards No. 125 which was issued in June 1996.
Statement No. 125 addressed issues related to transfers of financial assets
in which the transferor has some continuing involvement with the
transferred assets or with the transferee. Statement No. 140 resolves
implementation issues which arose as a result of Statement No. 125, but
carries forward most of Statement No. 125's provisions. Statement No. 140
is effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Management does not believe
the adoption of Statement No. 140 will have a significant impact on its
financial statements.
F-11
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interim Financial Statements
The consolidated financial statements as of June 30, 2001 and for the six
months ended June 30, 2001 and 2000 are unaudited, but in the opinion of
management, reflect all adjustments, consisting only of a normal and
recurring nature, necessary for a fair presentation. These interim
financial statements are condensed, and do not include all disclosures
required by accounting principles generally accepted in the United States
of America.
Note 2. Cash and Due from Banks
The Bank is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank. The total of those reserve balances were approximately
$81,000 and $79,000, respectively, at December 31, 2000 and 1999.
The nature of the Bank's business requires that it maintain amounts due from
banks which, at times, may exceed federally insured limits. The Bank does not
anticipate experiencing any losses in such accounts.
Note 3. Securities Available for Sale
Amortized costs and fair values of securities available-for-sale are summarized
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
December 31, 2000
--------------------------------------------------------------------------
U.S. Agencies $ 12,375,755 $ 78,397 $ 36,174 $ 12,417,978
Mortgage backed securities 1,548,537 2,146 29,237 1,521,446
State and municipal securities 945,809 4,886 1,295 949,400
Corporate securities 499,048 - 4,048 495,000
--------------------------------------------------------------------------
$ 15,369,149 $ 85,429 $ 70,754 $ 15,383,824
==========================================================================
December 31, 1999
--------------------------------------------------------------------------
U.S. Treasury and agency
securities $ 7,001,677 $ 11,891 $ 194,818 $ 6,818,750
Mortgage backed securities 1,753,103 - 92,115 1,660,988
State and municipal securities 911,889 5,781 6,389 911,281
Corporate securities 497,780 - 12,155 485,625
--------------------------------------------------------------------------
$10,164,449 $ 17,672 $ 305,477 $ 9,876,644
==========================================================================
F-12
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales of investments during 2000 resulted in gross gains of $2,676. There were
no sales in 1999.
The following is a summary of maturities of securities available-for-sale as of
December 31, 2000:
December 31, 2000
------------------------------
Amortized Fair
Cost Value
------------------------------
Amounts maturing in:
One year or less $1,517,627 $ 1,517,938
After one year through five years 8,790,166 8,812,140
After five years through ten years 3,512,819 3,532,300
Mortgage backed securities 1,548,537 1,521,446
------------------------------
$15,369,149 $15,383,824
==============================
Securities with a carrying amount of approximately $1,513,000 and $15,000 were
pledged to secure deposits as required or permitted by law at December 31, 2000
and 1999, respectively.
Note 4. Loans
Major classifications of loans follow:
December 31,
------------------------------
2000 1999
------------------------------
Commercial $ 9,251,704 $ 3,819,837
Residential real estate 38,113,105 40,267,338
Construction and land 749,313 1,320,125
Home equity 1,281,922 1,159,319
Consumer 7,431,122 8,891,220
Overdraft 683,585 520,677
------------------------------
57,510,751 55,978,516
Net deferred loan fees and costs (26,210) (29,121)
Allowance for loan losses (625,513) (455,114)
------------------------------
Net loans $56,859,028 $55,494,281
==============================
Nonaccrual loans and loans past due ninety days or more were $143,000 and
$575,000 as of December 31, 2000 and 1999, respectively. Of the loans past due
ninety days or more, $41,000 and $539,000 were still accruing interest as of
December 31, 2000 and 1999, respectively. The reduction in interest income
associated with nonaccrual loans, based on their original contractual terms, was
approximately $36,000 for the year ended December 31, 2000.
F-13
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of the activity in the allowance for loan losses is as follows:
December 31,
June 30, ------------------------
2000 2000 1999
---------------------------------------
(Unaudited)
Balance, beginning of year $ 455,114 $ 455,114 $ 458,205
Provision for loan losses 30,008 427,572 48,000
Loans charged off (32,955) (272,674) (88,042)
Recoveries 6,782 15,501 36,951
---------------------------------------
Balance, end of year $ 458,949 $ 625,513 $ 455,114
=======================================
The amount of loans serviced by the Bank for the benefit of others is not
included in the accompanying consolidated balance sheets. The unpaid principal
balance of these loans was approximately $4,977,000 and $3,089,000 at December
31, 2000 and 1999, respectively.
Related parties include executive directors, directors, and their affiliates.
Loans to related parties at December 31, 2000 and 1999 were approximately
$1,707,000 and $618,000, respectively.
Note 5. Bank Premises and Equipment
Bank premises and equipment consist of:
December 31,
------------------------------
2000 1999
------------------------------
Land and land improvements $ 1,084,470 $ 1,084,470
Buildings and improvements 1,977,005 1,921,748
Furniture and fixtures 755,805 722,927
Construction in progress - 1,813
------------------------------
3,817,280 3,730,958
Accumulated depreciation (1,064,918) (888,644)
------------------------------
$ 2,752,362 $ 2,842,314
==============================
F-14
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposits
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $10,293,000 and $4,889,000 at December 31, 2000 and
1999, respectively.
Scheduled maturities of time deposits at December 31, 2000 are as follows:
One year or less $38,389,037
One year - two years 11,778,730
Two years - three years 6,844,167
Three years - four years 2,130,730
Four years - five years 177,967
------------------
$59,320,631
==================
Note 7. FHLB Advances
FHLB advances at year-end were:
December 31,
------------------------------
2000 1999
------------------------------
5.97% advance, due February 2000 $ - $ 2,500,000
6.65% advance, due March 2001 1,500,000 -
5.49% advance, due February 2004 1,000,000 1,000,000
5.96% advance, due February 2009 500,000 500,000
------------------------------
$ 3,000,000 $ 4,000,000
==============================
At December 31, 2000 and 1999, in addition to FHLB stock, the Bank had a blanket
lien on eligible residential real estate loans which were pledged to the FHLB to
secure advances outstanding.
F-15
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes
Income tax expense (benefit) consisted of:
Year Ended
December 31,
----------------------------
2000 1999
----------------------------
Federal:
Current $ (9,134) $ 140,963
Deferred (80,182) (26,963)
$ (89,316) $ 114,000
============================
The provision for income taxes differs from that computed by applying the
maximum federal statutory rate of 35% in 2000 and 34% in 1999 as follows:
Year Ended
December 31,
----------------------------
2000 1999
----------------------------
Tax expense at statutory rate $ (91,145) $ 124,961
Tax exempt interest (17,687) (14,307)
Nondeductible expenses 4,573 3,976
Other 14,943 (630)
$ (89,316) $ 114,000
============================
Net deferred taxes, included in other assets on the accompanying balance sheet,
include the following amounts of deferred tax assets and liabilities:
December 31,
------------------------
2000 1999
------------------------
Deferred tax assets $ 485,765 $ 519,325
Deferred tax liability (34,145) (35,853)
Valuation on allowance for deferred tax assets (156,845) (80,000)
------------------------
$ 294,775 $ 403,472
========================
F-16
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax assets in the accompanying balance sheet include the
following components:
December 31,
----------------------------
2000 1999
----------------------------
Assets:
Allowance for loan losses $ 216,517 $ 142,203
Deferred compensation 162,097 165,639
Premises and equipment 1,652 -
Unrealized loss on securities available for sale - 111,496
Illinois net operating loss 92,899 80,000
Other 12,600 19,987
----------------------------
Total deferred tax assets 485,765 519,325
Valuation allowance 156,845 80,000
----------------------------
Net deferred tax assets 328,920 439,325
----------------------------
Liabilities:
Premises and equipment - 17,902
Unrealized gain on securities available for sale 4,990 -
FHLB stock dividend 29,155 17,951
----------------------------
Total deferred tax liabilities 34,145 35,853
----------------------------
$ 294,775 $ 403,472
============================
The Bank has recorded a valuation allowance due to the uncertainty of the
utilization of an Illinois state income tax net operating loss carryforward of
$1,977,000 and $1,644,000 as of December 31, 2000 and 1999, expiring in
2001-2011.
Federal income tax laws provided savings banks with additional bad debt
deductions through 1995, totaling $1,076,000 for the Bank. Accounting standards
do not require a deferred tax liability to be recorded on this amount, which
liability would otherwise total $366,000 at December 31, 2000 and 1999. If the
Bank were liquidated or otherwise ceases to be a bank or if tax laws change, the
$366,000 would be recorded as expense. Tax legislation passed in August 1996 now
requires the Bank to deduct a provision for bad debts for tax purposes based on
actual loss experience and to recapture the excess bad debt reserve accumulated
in tax years after 1986. The related amount of deferred tax liability which must
be recaptured was approximately $45,000 and is payable over a six year period
beginning in 1998.
F-17
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Capital Requirements
A Bank is 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 a Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, a Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. A Bank'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 a Bank to maintain minimum amounts and ratios of total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined). Management
believes, as of December 31, 2000, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Federal
regulatory agencies categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a Bank must maintain minimum Total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
As of December 31, 2000:
Total Capital (to Risk Weighted
Assets) $6,695,000 13.82% $3,875,000 8.0% $4,844,000 10.0%
Tier I Capital (to Risk Weighted
Assets) $6,089,000 12.57% $1,937,500 4.0% $2,906,000 6.0%
Tier I Capital (to Average Assets) $6,089,000 7.33% $3,324,000 4.0% $4,156,000 5.0%
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets) $6,715,000 16.20% $3,316,000 8.0% $4,145,000 10.0%
Tier I Capital (to Risk Weighted
Assets) $6,260,000 15.10% $1,658,000 4.0% $2,487,000 6.0%
Tier I Capital (to Average Assets) $6,260,000 8.80% $2,859,000 4.0% $3,574,000 5.0%
F-18
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments, Contingency and Credit Risk
The Bank is a party to legal actions which are in the normal course of business
activities. In the opinion of management, the ultimate resolution of these
matters is not expected to have a material effect on the financial position or
the results of operations of the Bank.
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing 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 statements of
financial condition.
The Bank'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 Bank 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 valuable rate, with off-balance-sheet risk at year-end follows:
December 31, 2000:
Commitments to extend credit $4,741,000
Standby letters of credit 17,000
December 31, 1999:
Commitments to extend credit $3,675,000
Standby letters of credit 125,000
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 Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank 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 Bank 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 Bank's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
The Bank does not engage in the use of interest rate swaps, futures, forwards,
or option contracts.
F-19
CLOVER LEAF BANK, SB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Retirement Plan
The Bank participates in a multiemployer, defined benefit retirement plan which
covers substantially all employees. Since this is a multiemployer plan, the
plan's administrators are unable to determine the actuarial present value of
benefits attributable to the Bank's participants in the plan.
Total pension expense for the years ended December 31, 2000 and 1999 was $32,953
and $630, respectively.
Note 12. Regulatory Agreement
On October 13, 2000, the Bank entered into a formal agreement with the Federal
Deposit Insurance Corporation and the Office of Banks and Real Estate. The terms
of the agreement provide generally that (a) the Bank shall revise and adopt its
written lending policy; (b) the Bank shall require complete loan documentation,
realistic repayment terms and current financial information adequate to support
the outstanding indebtedness of each borrower; (c) the Bank shall formulate and
implement a written, three-year Strategic Plan; (d) the Bank shall adopt
procedures for placement of delinquent loans on nonaccrual status; (e) the Bank
shall formulate, adopt and submit a plan of action for the collection of
delinquent loans; (f) the Bank shall formulate and implement a written Profit
Plan; (g) the Bank shall make a provision for loan losses which will replenish
the allowance for loan and lease losses for the loans charged off as a result of
the regulatory examination and, reflect the potential for further losses in the
remaining classified loans and other loans in its portfolio; (h) the Bank shall
review the adequacy of the Bank's allowance for loan and lease losses, shall
provide an adequate allowance, and shall report such allowance on the Bank's
Reports of Condition and Income; (i) the Bank shall not increase its total
assets by more than 5 percent during any consecutive three month period without
first providing at least 30 days advance written notice to the Regional Director
and the Commissioner; (j) the Bank shall prepare a written growth plan every
third month; (k) the Bank shall implement and enforce an effective system of
internal and external audit, and internal controls.
The Federal Deposit Insurance Corporation and Illinois Office of Banks and Real
Estate terminated the Memorandum of Understanding on October 23, 2001 and
accordingly, the Bank is no longer subject to the Memorandum of Understanding.
F-20
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information that is different. If
the laws of your state or other jurisdiction prohibit us from offering our
common stock to you, then this
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of our common stock. Neither the delivery of this prospectus nor any
sale hereunder shall imply that there has been no change in our affairs since
any of the dates as of which
information is furnished in this prospectus since the date hereof.
Our Table of Contents
is located on the inside of the
front cover page of this document.
575,000 Shares
(Anticipated Maximum)
(Subject to Increase to Up to 661,250 Shares)
Clover Leaf Financial Corp.
(Proposed Holding Company for
Clover Leaf Bank, SB)
COMMON STOCK
---------------------
PROSPECTUS
---------------------
Keefe, Bruyette & Woods
November 13, 2001
Until January 28, 2002 or 90 days after commencement of the syndicated
community offering, if any, whichever is later, all dealers effecting
transactions in our common stock may be required to deliver a prospectus. This
is in addition to the obligation of dealers to deliver a prospectus when acting
as underwriters and with respect to any unsold allotments or subscriptions.