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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission File Number: 0-28846
CENTRUE FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
122 West Madison Street, Ottawa, Illinois 61350
(Address of principal executive offices, including zip code)
(815) 431-2720
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
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Common Stock ($1.00 par value) The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as
defined in Rule 403 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b of the Exchange Act). Yes [ ] No [X].
As of March 1, 2007, the Registrant had issued and outstanding 6,470,840 shares
of the Registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of June 30, 2006, the last business
day of the Registrant's most recently completed second quarter, was
$61,506,161.*
* Based on the last reported price of $20.10 of an actual transaction in the
Registrant's Common Stock on June 30, 2006, and reports of beneficial
ownership filed by directors and executive officers of the Registrant and
by beneficial owners of more than 5% of the outstanding shares of Common
Stock of the Registrant. Shares of Common Stock held by any executive
officer or director of the Registrant and any person who beneficially owns
5% or more of the outstanding Common Stock have been excluded from the
foregoing computation because such persons may be deemed to be affiliates;
provided, however, such determination of shares owned by affiliates does
not constitute an admission of affiliate status or beneficial interest in
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the 2007 Annual Meeting of
Stockholders (the "2007 Proxy Statement") are incorporated by reference into
Part III of this Form 10-K.
As used in this report, the terms "we," "us," "our," "Centrue" and the "Company"
mean Centrue Financial Corporation and its subsidiary, unless the context
indicates another meaning, and the term "Common Stock" means our common stock,
par value $1.00 per share.
CENTRUE FINANCIAL CORPORATION
Form 10-K Index
Page
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PART I
Item 1. Business ......................................................... 1
Item 1A. Risk Factors.......................................................11
Item 1B. Unresolved Staff Comments..........................................15
Item 2. Properties.........................................................15
Item 3. Legal Proceedings..................................................16
Item 4. Submission of Matters to a Vote of Security Holders................16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 16
Item 6. Selected Consolidated Financial Data.............................. 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 47
Item 8. Financial Statements and Supplementary Data....................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 91
Item 9A. Controls and Procedures............................................91
Item 9B. Other Information..................................................91
PART III
Item 10. Directors, Executive Officers and Corporate Governance............ 91
Item 11. Executive Compensation............................................ 91
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................. 91
Item 13. Certain Relationships and Related Transactions, and Director
Independence.................................................92
Item 14. Principal Accountant Fees and Services.............................92
Item 15. Exhibits and Financial Statement Schedules.........................92
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PART I
Item 1. Business
THE COMPANY
Centrue Financial Corporation
Centrue Financial Corporation (the "Company") is a bank holding company
incorporated in Delaware in 1982 for the purpose of becoming a holding company
registered under the Bank Holding Company Act of 1956, as amended (the "Act").
The Company is a publicly traded banking company with assets of $1.3 billion at
year-end 2006 and is headquartered in Ottawa, Illinois. On November 13, 2006,
the Company (formerly known as UnionBancorp, Inc. now known as Centrue Financial
Corporation) merged with Centrue Financial Corporation (former Centrue), parent
of Centrue Bank with the Company being the surviving entity in the merger.
Operating results of former Centrue are included in the consolidated financial
statements since the date of the acquisition. As a result of this merger, the
Company expects to further solidify its market share in the northern and central
Illinois markets, expand its customer base to enhance deposit fee income,
provide an opportunity to market additional products and services to new
customers and reduce operating costs through economies of scale.
The Company operates one wholly owned subsidiary: Centrue Bank (the "Bank"),
employing 398 full-time equivalent employees at December 31, 2006.
The Company has responsibility for the overall conduct, direction, and
performance of its subsidiary. The Company provides various services,
establishes Company-wide policies and procedures, and provides other resources
as needed, including capital.
Subsidiary
At December 31, 2006, the Bank had $1.3 billion in total assets, $1.0 billion in
total deposits, and 35 banking offices located in markets extending from the far
western and southern suburbs of the Chicago metropolitan area across Central and
Northern Illinois down to the metropolitan St. Louis area.
The Bank is engaged in commercial and retail banking and offers a broad range of
lending, depository, and related financial services, including accepting
deposits; commercial and industrial, consumer, and real estate lending; trust
and asset management services; and other banking services tailored for consumer,
commercial and industrial, and public or governmental customers.
Competition
The Company's market area is highly competitive with numerous commercial banks,
savings and loan associations and credit unions. In addition, financial
institutions, based in surrounding communities and in the southern and western
metro area of Chicago and the suburban metro area of St. Louis, actively compete
for customers within the Company's market area. The Company also faces
competition from finance companies, insurance companies, mortgage companies,
securities brokerage firms, money market funds, loan production offices and
other providers of financial services.
The Company competes for loans principally through the range and quality of the
services it provides and through competitive interest rates and loan fees. The
Company believes that its long-standing presence in the communities it serves
and personal service philosophy enhance its ability to compete favorably in
attracting and retaining individual and business customers. The Company actively
solicits deposit-related customers and competes for deposits by offering
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customers personal attention, professional service and competitive interest
rates.
Under the Gramm-Leach-Bliley Act of 1999, effective March 2000, securities firms
and insurance companies that elect to become financial holding companies may
acquire banks and other financial institutions. The Gramm-Leach-Bliley Act, and
future action stemming from the Act, is expected to continue to significantly
change the competitive environment in which the Company and Centrue Bank conduct
business. The financial services industry is also likely to become more
competitive as further technological advances enable more companies to provide
financial services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.
SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance of
the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Illinois Department of Financial and
Professional Regulation (the "DFPR"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Internal Revenue Service and state taxing
authorities and the Securities and Exchange Commission (the "SEC"). The effect
of applicable statutes, regulations and regulatory policies can be significant,
and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiary, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiary
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
its subsidiaries, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
The Company
General. The Company, as the sole stockholder of Centrue Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to Centrue Bank and
to commit resources to support Centrue Bank in circumstances where the Company
might not do so absent such policy. Under the BHCA, the Company is subject to
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periodic examination by the Federal Reserve and is required to file with the
Federal Reserve periodic reports of operations and such additional information
as the Federal Reserve may require. The Company is also subject to regulation by
the DFPR under the Illinois Bank Holding Company Act, as amended.
Investments and Activities. Under the BHCA, a bank holding company must obtain
Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the law of the state
in which the target bank is located. In approving interstate acquisitions,
however, the Federal Reserve is required to give effect to applicable state law
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository institution affiliates
in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the Federal Reserve, the Company is permitted to
engage in a variety of banking-related businesses, including the operation of a
thrift, consumer finance or equipment leasing business, the operation of a
computer service bureau (including software development), and the operation of
mortgage banking and brokerage businesses. The BHCA generally does not place
territorial restrictions on the domestic activities of non-bank subsidiaries of
bank holding companies.
In November, 1999, the Gramm-Leach-Bliley Act ("GLB Act") was signed into law.
Under the GLB Act, bank holding companies that meet certain standards and elect
to become "financial holding companies" are permitted to engage in a wider range
of activities than those permitted for bank holding companies, including
securities and insurance activities. Specifically, a bank holding company that
elects to become a financial holding company may engage in any activity that the
Federal Reserve Board, in consultation with the Secretary of the Treasury,
determines is (i) financial in nature or incidental thereto, or (ii)
complementary to any such financial-in-nature activity, provided that such
complementary activity does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. A bank
holding company may elect to become a financial holding company only if each of
its depository institution subsidiaries is well-capitalized, well-managed, and
has a Community Reinvestment Act rating of "satisfactory" or better at their
most recent examination.
The GLB Act specifies many activities that are financial in nature, including
lending, exchanging, transferring, investing for others, or safeguarding money
or securities; underwriting and selling insurance; providing financial,
investment or economic advisory services; underwriting, dealing in, or making a
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market in securities; and those activities currently permitted for bank holding
companies that are so closely related to banking or managing or controlling
banks, as to be a proper incident thereto.
The GLB Act changed federal laws to facilitate affiliation between banks and
entities engaged in securities and insurance activities. The law also
established a system of functional regulation under which banking activities,
securities activities, and insurance activities conducted by financial holding
companies and their subsidiaries and affiliates will be separately regulated by
banking, securities, and insurance regulators, respectively.
Federal law also prohibits any person or company from acquiring "control" of a
bank or bank holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the acquisition of 10%
or more of the outstanding shares of a bank or bank holding company.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or by the risk profiles of individual banking organizations. For
example, the Federal Reserve's capital guidelines contemplate that additional
capital may be required to take adequate account of, among other things,
interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels.
As of December 31, 2006, the Company had regulatory capital as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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Company 11.9% 7.9%
The risk-based capital ratio and the leverage capital ratio are each 3.9% in
excess of the Federal Reserve's minimum requirements. See Note 16 in the Notes
in Consolidated Financial Statements for further information.
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Dividends. The Company is organized under the Delaware General Corporation Law
(the "DGCL"). The DGCL allows the Company to pay dividends only out of its
surplus (as defined and computed in accordance with the provisions of the DGCL)
or if the Company has no such surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Additionally, the Federal Reserve has issued a policy statement with regard to
the payment of cash dividends by bank holding companies. The policy statement
provides that a bank holding company should not pay cash dividends which exceed
its net income or which can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. The Federal Reserve also
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The SEC and the NASDAQ have adopted regulations and policies under the
Sarbanes-Oxley Act of 2002 that will apply to Centrue Financial Corporation as a
registered company under the Securities Exchange Act of 1934 and a
NASQDAQ-traded company. The stated goals of these Sarbanes-Oxley requirements
are to increase corporate responsibility, provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The SEC and NASDAQ
Sarbanes-Oxley-related regulations and policies include very specific additional
disclosure requirements and new corporate governance rules.
The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns
regarding corporate accountability in connection with recent accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The Sarbanes-Oxley Act generally applies to all companies that
file or are required to file periodic reports with the SEC, under Securities
Exchange Act of 1934.
The Sarbanes-Oxley Act includes very specific additional disclosure requirements
and new corporate governance rules requiring the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules, and mandates further studies of certain issues by the SEC. The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees. Recently, the SEC created a committee to evaluate Sarbanes-Oxley
issues that may affect small public companies. Specifically being reviewed are
the requirements under Sarbanes-Oxley section 404, which requires significant
oversight of a public company's internal control over the financial statements.
On December 15, 2006 the SEC issued a final rule to further extend the
Sarbanes-Oxley Section 404 compliance dates for nonaccelerated filers. The final
rule now requires nonaccelerated filers to provide management's report on
internal control over financial reporting for the first fiscal year ending on or
after December 15, 2007. The rule further extends the deadline for the external
auditor's attestation report on internal control over financial reporting to be
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required for the first year ending on or after December 15, 2008. The Company
cannot accurately predict what additional expenses may be incurred in complying
with the provisions of the Sarbanes-Oxley Act.
Centrue Bank
Centrue Bank is an Illinois-chartered bank, the deposit accounts of which are
insured by the FDIC. Centrue Bank is also a member of the Federal Reserve System
("member bank"). As an Illinois-chartered, FDIC-insured member bank, Centrue
Bank is subject to the examination, supervision, reporting and enforcement
requirements of the DFPR, as the chartering authority for Illinois banks, the
Federal Reserve, as the primary federal regulator of member banks, and the FDIC,
as administrator of deposit insurance.
Deposit Insurance. As an FDIC-insured institution, Centrue Bank is required to
pay deposit insurance premium assessments to the FDIC.
Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the "FDIRA") in
2006, the previously separate deposit insurance funds for banks and savings
associations were merged into a single deposit insurance fund administered by
the FDIC. Centrue Bank's deposits are insured up to applicable limitations by
that deposit insurance fund.
Following the adoption of the FDIRA, the FDIC has the opportunity, through its
rulemaking authority, to better price deposit insurance for risk than was
previously authorized. The FDIC adopted regulations effective January 1, 2007
that create a new system of risk-based assessments, set assessments rates
beginning January 1, 2007 and establish a new system of risk-based assessments.
Under the new regulations, there are four risk categories, and each insured
institution will be assigned to a risk category based on capital levels and
supervisory ratings. Well-capitalized institutions with CAMELS composite ratings
of 1 or 2 will be placed in Risk Category I while other institutions will be
placed in Risk Categories II, III or IV depending on their capital levels and
CAMEL composite ratings. The new regulations also established assessment rates
beginning January 1, 2007, with the highest rated institutions, those in Risk
Category I, paying premiums of between .05% and .07% of deposits and the lowest
rated institutions, those in Risk Category IV, paying premiums of .43% of
deposits. The assessment rates may be changed by the FDIC as necessary to
maintain the insurance fund at the reserve ratio designated by the FDIC, which
currently is 1.25% of insured deposits. Deposit insurance assessments will be
collected for a quarter, except for institutions with $1 billion or more in
assets, such as Centrue Bank, and any institution that becomes insured on or
after January 1, 2007 which will have their assessment base determined using
average daily balances of insured deposits.
In 2006, the FDIC adopted a final rule allocating a one-time assessment credit
among insured financial institutions. This credit may be used to offset deposit
insurance assessments (not to include FICO assessments) beginning in 2007.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance,
if the institution has no tangible capital. Management of the Company is not
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aware of any activity or condition that could result in termination of the
deposit insurance of Centrue Bank.
FICO Assessments. FDIC insured institutions are also subject to assessments to
cover interest payments due on the outstanding obligations of the Financing
Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization
of the Federal Savings and Loan Insurance Corporation. These FICO assessments
are in addition to amounts assessed by the FDIC for deposit insurance until the
final maturity of the outstanding FICO obligations in 2019. FDIC insured
institutions will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 2006, the FICO assessment rate for
both SAIF and BIF members ranged between approximately 0.0124% of deposits and
approximately 0.0132% of deposits. During the year ended December 31, 2006,
Centrue Bank paid FICO assessments totaling $66,333. For the first quarter of
2007, the rate established by the FDIC for the FICO assessment is 0.0122% of
deposits.
Supervisory Assessments. All Illinois banks are required to pay supervisory
assessments to the DFPR to fund the operations of the DFPR. The amount of the
assessment is calculated based on the institution's total assets, including
consolidated subsidiaries, as reported to the DFPR. During the year ended
December 31, 2006, Centrue Bank paid supervisory assessments to the DFPR
totaling $150,817.
Capital Requirements. The Federal Reserve has established the following minimum
capital standards for state-chartered Federal Reserve System member banks, such
as Centrue Bank: a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with a minimum
requirement of at least 4% for all others, and a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. For purposes of these
capital standards, Tier 1 capital and total capital consist of substantially the
same components as Tier 1 capital and total capital under the Federal Reserve's
capital guidelines for bank holding companies (see "--The Company--Capital
Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
Federal Reserve provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
During the year ended December 31, 2006, Centrue Bank was not required by the
Federal Reserve to increase its capital to an amount in excess of the minimum
regulatory requirement. As of December 31, 2006, Centrue Bank as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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Centrue Bank 12.4% 8.3%
The risk-based capital ratio and the leverage capital ratio are 4.4% and 4.3% in
excess of the Federal Reserve's minimum requirements. See Note 16 in the Notes
in Consolidated Financial Statements for further information.
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Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 2006, Centrue Bank was considered well
capitalized.
Additionally, institutions insured by the FDIC may be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of commonly controlled FDIC insured depository institutions or
any assistance provided by the FDIC to commonly controlled FDIC insured
depository institutions in danger of default.
Dividends. Under the Illinois Banking Act, Illinois-chartered banks may not pay
dividends in excess of their net profits then on hand, after deducting losses
and bad debts. The Federal Reserve Act also imposes limitations on the amount of
dividends that may be paid by state member banks, such as Centrue Bank.
Generally, a member bank may pay dividends out of its undivided profits, in such
amounts and at such times as the bank's board of directors deems prudent.
Without prior Federal Reserve approval, however, a state member bank may not pay
dividends in any calendar year which, in the aggregate, exceed such bank's
calendar year-to-date net income plus such bank's retained net income for the
two preceding calendar years.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, Centrue Bank
exceeded its minimum capital requirements under applicable guidelines and had
approximately $1.95 million available to be paid as dividends to the Company as
of December 31, 2006. Notwithstanding the availability of funds for dividends,
however, the Federal Reserve may prohibit the payment of any dividends by
Centrue Bank if the Federal Reserve determines such payment would constitute an
unsafe or unsound practice.
Insider Transactions. Centrue Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of the stock or other
securities of the Company as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by Centrue Bank
to its directors and officers, to directors and officers of the Company, to
principal stockholders of the Company, and to "related interests" of such
directors, officers and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person becoming a director or
officer of the Company or a principal stockholder of the Company may obtain
credit from the banks with which Centrue Bank maintains a correspondent
relationship.
8.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Illinois banks, such as Centrue Bank, have the authority
under Illinois law to establish branches anywhere in the State of Illinois,
subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), both state and national banks are allowed to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. Illinois law permits interstate mergers,
subject to certain conditions, including a prohibition against interstate
mergers involving an Illinois bank that has been in existence and continuous
operation for fewer than five years.
The establishment of new interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if
specifically authorized by state law. Certain states permit out-of-state banks
to establish de novo branches or acquire branches from another bank although the
laws of some of these states require a reciprocal provision under the law of the
state where the bank establishing or acquiring the branch is chartered. Illinois
law permits out-of-state banks to establish branches in Illinois in this manner,
and Illinois-chartered banks may branch into other states in this manner if the
law of the state in which the branch will be established or acquired so
authorizes even if the law of such state requires a reciprocal provision under
Illinois law.
State Bank Activities. Under federal law and FDIC regulations, FDIC insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member.
9.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
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The GLB Act also authorizes insured state banks to engage in financial
activities, through subsidiaries, similar to the activities permitted for
financial holding companies. If a state bank wants to establish a subsidiary
engaged in financial activities, it must meet certain criteria, including that
it and all of its affiliated insured depository institutions are
well-capitalized and have a Community Reinvestment Act rating of at least
"satisfactory" and that it is well-managed. There are capital deduction and
financial statement requirements and financial and operational safeguards that
apply to subsidiaries engaged in financial activities. Such a subsidiary is
considered to be an affiliate of the bank and there are limitations on certain
transactions between a bank and a subsidiary engaged in financial activities of
the same type that apply to transactions with a bank's holding company and its
subsidiaries.
Reserve Requirement. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows:
o for the first $8.5 million of net transaction accounts, there
is no reserve;
o for net transaction accounts totaling over $8.5 million and up
to and including $45.8 million, a reserve of 3%; and
o for net transaction accounts totaling in excess of $45.8
million, a reserve requirement of $1.119 million plus 10%
against that portion of the total transaction accounts greater
than $45.8 million
The dollar amounts and percentages reported here are all subject to adjustment
by the Federal Reserve. The effect of maintaining the required non-interest
earning reserves is to reduce Centrue Bank's interest earning assets.
Wealth Management Division
Centrue Bank, through its wealth management division, conducts a full service
trust business in the State of Illinois, pursuant to a certificate of authority
issued to the Commissioner under the Illinois Corporate Fiduciaries Act (the
"Fiduciaries Act"). The wealth management division is subject to periodic
examination by the DFPR and the DFPR has the authority to take action against it
to enforce compliance with the laws applicable to its operations.
EXECUTIVE OFFICERS
The term of office for the executive officers of the Company is from the date of
election until the next annual organizational meeting of the Board of Directors.
In addition to the information provided in the 2007 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2006, as
well as the offices of the Company and the Subsidiary held by these officers on
that date, and principal occupations for the past five years are set forth
below.
Thomas A. Daiber, 49, is the President & Chief Executive Officer of Centrue
Financial Corporation and Centrue Bank. Mr. Daiber joined the former Centrue
Financial in October of 2003 as its President and Chief Executive Officer. Mr.
Daiber had previously served as Chairman, President and Chief Executive Officer
of Aviston Financial Corporation and Chairman and Chief Executive Officer of the
State Bank of Aviston from October 2002 to October 2003. Mr. Daiber served as
Allegiant Bancorp, Inc.'s Chief Financial Officer from May of 1999 until March
of 2003. Mr. Daiber was employed by Allegiant Bancorp in St. Louis, Missouri
beginning in March of 1997 and served as its Director of Internal Auditing prior
to becoming Chief Financial Officer.
10.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
Kurt R. Stevenson, 40, is the Senior Executive Vice President, Chief Financial
Officer and Chief Operating Officer of Centrue Financial Corporation and Centrue
Bank. Mr. Stevenson had previously served as the Company's Senior Vice President
and Chief Financial Officer since 2003. Prior to that, Mr. Stevenson served as
the Company's Vice President and Chief Financial Officer since June of 2000.
Before stepping into this role, he had been acting as the Company's Vice
President and Controller since 1996 and had served in various operational
capacities since joining the organization in 1987.
J. David Conterio, 44, joined the Company in January of 2005 as the Head of
Financial Services of the former UnionFinancial Services & Trust Company,
overseeing the trust, investment, asset management and the former insurance
division of the Company. In 2006, Mr. Conterio was promoted to Executive Vice
President of UnionBank and today continues to serve in that capacity, as well as
its Head of Wealth Management. Prior to joining the Company, Mr. Conterio served
as the President of Bekan Financial Corp in Schrererville, Indiana from August
of 2003 until he joined the organization. He had previously served as the Senior
Vice President of Great Lakes Trust Company in Blue Island, Illinois from August
of 1998 through July of 2003.
Everett J. Solon, 54, is the Market President for the Company's Streator, Ottawa
and Peru locations and was appointed the Company's Head of Mortgage in 2007.
Before consolidating into one bank charter in 2003, Mr. Solon had served as the
President and Chief Executive Officer of UnionBank since 1994. Mr. Solon joined
Union National Bank in 1982 as the Assistant Vice President & Assistant Farm
Manager and later served as the Vice President of Retail Banking before becoming
the President of the Streator Banking Center in 1991.
Ricky R. Parks, 41, is the Market President for the Company's Fairview Heights,
Aviston, Belleville, Effingham and St. Rose locations. Mr. Parks joined the
former Centrue Bank in January of 2004 as a Senior Vice President and Senior
Lender and in October of 2004 was named its Regional Bank President. Prior to
joining Centrue, Mr. Parks worked for Union Planters Bank from September of 1991
until January of 2004 in the Metro-East St. Louis market and held the position
of Senior Vice President & Commercial Team Leader prior to his departure.
Item 1A. Risk Factors
An investment in the Company's common stock is subject to risks inherent to the
Company's business. The material risk and uncertainties that management believes
affect the Company are described below. Before making an investment decision,
you should carefully consider the risks and uncertainties described below,
together with all of the other information included or incorporated by reference
in this report. The risks and uncertainties described below are not the only
ones facing the Company. Additional risks and uncertainties that management is
not aware of or focused on or that management currently deems immaterial may
also impair the Company's business operations. This report is qualified in its
entirety by these risk factors. See also, "Special Note Regarding
Forward-Looking Statements."
If any of the following risks actually occur, the Company's financial condition
and results of operations could be materially and adversely affected. If this
were to happen, the value of the Company's common stock could decline
significantly, and you could lose all or part of your investment.
References to "we," "us," and "our" in this section refer to the Company and its
subsidiary, unless otherwise specified or unless the context otherwise requires.
11.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
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Risks Related to the Company's Business
We are subject to interest rate risk.
The Company's earnings and cash flows are largely dependent upon its net
interest income. Interest rates are highly sensitive to many factors that are
beyond the Company's control, including general economic conditions and policies
of various governmental and regulatory agencies and, in particular, the Federal
Reserve. Changes in monetary policy, including changes in interest rates, could
influence not only the interest the Company receives on loans and securities and
the amount of interest it pays on deposits and borrowings, but such changes
could also affect (i) the Company's ability to originate loans and obtain
deposits, (ii) the fair value of the Company's financial assets and liabilities,
and (iii) the average duration of the Company's mortgage-backed securities
portfolio and other interest-earning assets. If the interest rates paid on
deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, the Company's net interest income, and
therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability
management strategies to reduce the potential effects of changes in interest
rates on the Company's results of operations, any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect
on the Company's financial condition and results of operations. Also, the
Company's interest rate risk modeling techniques and assumptions likely may not
fully predict or capture the impact of actual interest rate changes on the
Company's balance sheet. See Part II sections "Net Interest Income" and
"Interest Rate Risk" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for further discussion related to the
Company's management of interest rate risk.
We are subject to lending risk.
As of December 31, 2006 approximately 69.7% of the Company's loan portfolio
consisted of commercial, financial, and agricultural, real estate construction,
and commercial real estate loans (collectively, "commercial loans"). Commercial
loans are generally viewed as having more inherent risk of default than
residential mortgage loans or retail loans. Also, the commercial loan balance
per borrower is typically larger than that for residential mortgage loans and
retail loans, inferring higher potential losses on an individual loan basis.
Because the Company's loan portfolio contains a number of commercial loans with
large balances, the deterioration of one or a few of these loans could cause a
significant increase in nonperforming loans. An increase in nonperforming loans
could result in a net loss of earnings from these loans, an increase in the
provision for loan losses, and in increase in loan charge offs, all of which
could have a material adverse effect on the Company's financial condition and
results of operations. See Part II "Loans" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for further
discussion of credit risks related to different loan types.
We are subject to economic conditions of our geographic market.
The Company's success depends to a large degree on the general economic
conditions of the geographic markets served by the Bank in the State of Illinois
and, to a lesser extent, contiguous states. The local economic conditions on
these areas have a significant impact on the generation of the Bank's
commercial, real estate commercial, and real estate construction loans; the
ability of borrowers to repay these loans; and the value of the collateral
securing these loans. Adverse changes in the economic conditions of the counties
in which we operate could also negatively impact the financial results of the
Company's operations and have a negative effect on its profitability. For
12.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
example, these factors could lead to reduced interest income and an increase in
the provision for loan losses.
A portion of the loans in the Company's portfolio is secured by real estate.
Most of these loans are secured by properties located in the north central,
north west, east central, south central and St. Louis's suburban east counties
of Illinois. Negative conditions in the real estate markets where collateral for
a mortgage loan is located could adversely affect the borrower's ability to
repay the loan and the value of the collateral securing the loan. Real estate
values are affected by various factors, including changes in general or regional
economic conditions, supply and demand for properties and governmental rules or
policies.
Our allowance for loan losses may be insufficient.
Managing the Company's reserve for loan losses is based upon, among other
things, (1) historical experience, (2) an evaluation of local and national
economic conditions, (3) regular reviews of delinquencies and loan portfolio
quality, (4) current trends regarding the volume and severity of past due and
problem loans, (5) the existence and effect of concentrations of credit and (6)
results of regulatory examinations. Based upon such factors, management makes
various assumptions and judgments about the ultimate collectibility of the
respective loan portfolios. Although the Company believes that the reserve for
loan losses is adequate, there can be no assurance that such reserve will prove
sufficient to cover future losses. Future adjustments may be necessary if
economic conditions change or adverse developments arise with respect to
nonperforming or performing loans or if regulatory supervision changes. Material
additions to the reserve for loan losses would result in a material decrease in
the Company's net income, and possibly its capital, and could result in the
inability to pay dividends, among other adverse consequences.
Mergers and Acquisitions may disrupt our business and dilute stockholder value.
The Company regularly evaluates mergers and acquisition opportunities and
conducts due diligence activities related to possible transactions with other
financial institutions and financial services companies. As a result,
negotiations may take place and future mergers or acquisitions involving cash,
debt, or equity securities may occur at any time. The Company seeks merger or
acquisition partners that are culturally similar, have experienced management,
and possess either significant market presence or have potential for improved
profitability through financial management, economies of scale, or expanded
services.
13.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
Acquiring or merging with other banks, businesses, and acquiring branches
involves potential adverse impact to the Company's financial results and various
other risks commonly associated with mergers and acquisitions, including, among
other things:
o Difficulty in estimating the value of the target company
o Payment of a premium over book and market values that may
dilute the Company's tangible book value and earnings per
share in the short and long term
o Potential exposure to unknown or contingent liabilities of the
target company
o Exposure to potential asset quality issues of the target
company
o There may be volatility in reported income as goodwill
impairment losses could occur irregularly and in varying
amounts
o Difficulty and expense of integrating the operations and
personnel of the target company
o Inability to realize the expected revenue increases, cost
savings, increases in geographic or product presence, and/or
other projected benefits
o Potential disruption to the Company's business
o Potential diversion of the Company's management's time and
attention
o The possible loss of key employees and customers of the target
company
o Potential changes in banking or tax laws or regulations that
may affect the target company
Details of the Company's recent acquisition activity is presented in Note 2,
"Business Combinations," of the notes to consolidated financial statements
within Part II, Item 8.
Our information systems may experience an interruption of breach in security.
The Company relies heavily on communications and information systems to conduct
its business. Any failure, interruption, or breach in security of these systems
could result in failures or disruptions in the Company's customer relationship
management, general ledger, deposit, loan, and other systems. While the Company
has policies and procedures designed to prevent or limit the effect of the
failure, interruption, or security breach of its information systems, we cannot
assure you that any such failures, interruptions, or security breaches will not
occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures, interruptions, or security breaches of the Company's
information systems could damage the Company's reputation, result in a loss of
customer business, subject the Company to additional regulatory scrutiny, or
expose the Company to civil litigation and possible financial liability, any of
which could have a material adverse effect on the Company's financial condition
and results of operations.
Risks Associated With The Company's Industry
We operate in a highly regulated industry.
The banking industry is heavily regulated. The banking business of the Company
and the Bank are subject, in certain respects, to regulation by the Federal
Reserve, the FDIC, the Office of the Comptroller of the Currency, the IDFPR and
the SEC. The Company's success depends not only on competitive factors but also
on state and federal regulations affecting banks and bank holding companies. The
regulations are primarily intended to protect depositors, not stockholders or
other security holders. The ultimate effect of recent and proposed changes to
the regulation of the financial institution industry cannot be predicted.
Regulations now affecting the Company may be modified at any time, and there is
no assurance that such modifications, if any, will not adversely affect the
Company's business. We operate in an industry that is significantly affected by
general business and economic conditions.
14.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
The Company's operations and profitability are impacted by general business and
economic conditions in the United States and abroad. These conditions include
short-term and long-term interest rates, inflation, money supply, political
issues, legislative and regulatory changes, fluctuations in both debt and equity
capital markets, broad trends in industry and finance, and the strength of the
U. S. economy and the local economies in which the Company operates, all of
which are beyond the Company's control. A deterioration in economic conditions
could result in an increase in loan delinquencies and nonperforming assets,
decreases in loan collateral values, and a decrease in demand for the Company's
products and services among other things, any of which could have a material
adverse impact on the Company's financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2006, the Company operated thirty-seven offices in Illinois and
one in Missouri. The principal offices of the Company are located in Ottawa,
Illinois. All of the Company's offices are owned by Centrue Bank and are not
subject to any mortgage or material encumbrance, with the exception of three
offices that are leased: one is located in LaSalle County in Illinois, one in
Will County in Illinois and one in St. Louis County in Missouri. The Company
believes that its current facilities are adequate for its existing business.
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
--------- -------------- ----------------------
The Company Administrative Office: Ottawa, IL
Centrue Bank Bureau, Champaign, Main Office: Streator, IL
Clinton, DeKalb,
Effingham, Grundy, Thirty-five banking offices and
Iroquois, Jo Daviess, three non-banking offices located
Kane, Kankakee, Kendall, in markets served.
LaSalle, Livingston, St.
Clair, Whiteside and Will
Counties in Illinois and
St. Louis County in
Missouri
In addition to the banking locations listed above, Centrue Bank owns forty-five
automated teller machines, some of which are housed within banking offices and
some of which are independently located.
At December 31, 2006, the properties and equipment of the Company had an
aggregate net book value of approximately $35.4 million.
15.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
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Item 3. Legal Proceedings
Neither the Company nor its subsidiary are involved in any pending legal
proceedings other than routine legal proceedings occurring in the normal course
of business, which, in the opinion of management, in the aggregate, are not
material to the Company's consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
On November 9, 2006, a proposal was submitted to security holders of
UnionBancorp, Inc. and Centrue Financial Corporation to vote on the adoption of
the Agreement and Plan of Merger dated June 30, 2006 between UnionBancorp, Inc.
and Centrue Financial Corporation, and approve the transactions it contemplates,
including the merger of Centrue Financial with UnionBancorp, and the adoption of
an amended and restated certificate of incorporation. The results of the vote
were as follows:
For Against Abstain
UnionBancorp, Inc. 2,948,068 68,501 4,403
Centrue Financial Corp 1,621,947 99,524 4,008
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
The Company's Common Stock was held by approximately 1,154 stockholders of
record as of March 1, 2007, and is traded on The NASDAQ Stock Market under the
symbol "TRUE." The table below indicates the high and low sales prices of the
Common Stock as reported by NASDAQ for transactions of which the Company is
aware, and the dividends declared per share for the Common Stock during the
periods indicated. Because the Company is not aware of the price at which
certain private transactions in the Common Stock have occurred, the prices shown
may not necessarily represent the complete range of prices at which transactions
in the Common Stock have occurred during such periods.
16.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
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Stock Sales
-----------------------
Cash
High Low Dividends
---------- ---------- ----------
2006
First Quarter.............................. $ 21.48 $ 20.12 $ 0.11
Second Quarter............................. 21.12 19.44 0.12
Third Quarter.............................. 20.17 17.44 0.12
Fourth Quarter............................. 20.00 18.30 0.12
2005
First Quarter.............................. $ 21.50 $ 20.75 $ 0.10
Second Quarter............................. 22.00 20.26 0.11
Third Quarter.............................. 21.98 20.84 0.11
Fourth Quarter............................. 22.00 20.25 0.11
The holders of the Common Stock are entitled to receive dividends as declared by
the Board of Directors of the Company, which considers payment of dividends
quarterly. Upon the consummation of the acquisition of Prairie in 1996,
preferential dividends were required to be paid or accrued quarterly, with
respect to the outstanding shares of Preferred Stock. The ability of the Company
to pay dividends in the future will be primarily dependent upon its receipt of
dividends from Centrue Bank. In determining cash dividends, the Board of
Directors considers the earnings, capital requirements, debt and dividend
servicing requirements, financial ratio guidelines it has established, financial
condition of the Company and other relevant factors. Centrue Bank's ability to
pay dividends to the Company and the Company's ability to pay dividends to its
stockholders are also subject to certain regulatory restrictions.
The Company has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. There can be no assurance, however, that any such
dividends will be paid by the Company or that such dividends will not be reduced
or eliminated in the future. The timing and amount of dividends will depend upon
the earnings, capital requirements and financial condition of the Company and
Centrue Bank, as well as the general economic conditions and other relevant
factors affecting the Company and its subsidiaries. In 1996, the Company entered
into a new loan agreement in connection with the acquisition of Prairie and
Country, replacing the Company's prior loan agreement. The loan agreement
contains no direct prohibitions against the payment by the Company of dividends,
but indirectly restricts such dividends through the required maintenance of
minimum capital ratios. In addition, the terms of the Series A Preferred Stock,
and the Series B Preferred Stock issued to certain of Prairie's preferred
stockholders prohibit the payment of dividends by the Company on the Common
Stock during any period for which dividends on the respective series of
Preferred Stock are in arrears.
The Company has not issued any securities in the past three years which were not
registered for sale under the Securities Act of 1933, as amended.
17.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
The following graph shows a comparison of cumulative total returns for Centrue
Financial Corporation, the Nasdaq Stock Market (US Companies) and an index of
SNL Midwest Bank Stocks for the five-year period beginning January 1, 2002 and
ending on December 31, 2006. The graph was prepared at our request by SNL
Financial LC, Charlottesville, Virginia.
COMPARISON OF CUMULATIVE TOTAL RETURN
(ASSUMES $100 INVESTED ON JANUARY 1,2002)
[GRAPHIC CHART OMITTED]
Total Return Performance
----------------------------------------------------------------------------------------------------
Period Ending
----------------------------------------------------------------------------------------------------
Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
----------------------------------------------------------------------------------------------------
Centrue Financial Corporation 100.00 111.57 163.43 161.98 165.68 155.04
----------------------------------------------------------------------------------------------------
SNL Midwest Bank 100.00 96.47 123.48 139.34 134.26 155.19
----------------------------------------------------------------------------------------------------
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
----------------------------------------------------------------------------------------------------
18.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
The following table provides information about purchases of the Company's common
stock by the Company during 2006:
------------------------------------------------------------------------------------------------------
Total Number of Shares
Total Number Average Purchased as Part of Maximum Number of Shares
of Shares Price Paid Publicly Announced Plans that May Yet Be Purchased
Period Purchased per Share or Programs Under the Plans or Programs
------------------------------------------------------------------------------------------------------
10/01/06 -- -- -- 219,282
-10/31/06
------------------------------------------------------------------------------------------------------
11/01/06 2,000 19.61 2,000 368,000
-11/30/06
------------------------------------------------------------------------------------------------------
12/01/06 -- -- -- 368,000
-12/31/06
------------------------------------------------------------------------------------------------------
Total (1) 2,000 19.61 2,000 368,000
------------------------------------------------------------------------------------------------------
(1) The Company repurchased 2,000 shares of stock during the quarter ended
December 31, 2006 at an average price of $19.61. The current repurchase
program approved on November 13, 2006 provides for the repurchase by us of
an additional 5% of the outstanding shares of our common stock. The
expiration date of this program is May 13, 2008. Unless terminated earlier
by resolution of our board of directors, the program will expire on the
earlier of such expiration date or when we have repurchased all shares
authorized for repurchase under the program.
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FORM 10-K
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Item 6. Selected Financial Data
The following table presents selected consolidated financial data for the five
years ended December 31, 2006:
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
Statement of Income Data
Interest income $ 43,858 $ 34,697 $ 34,898 $ 41,075 $ 45,501
Interest expense 21,351 13,704 13,231 15,946 20,175
------------ ------------ ------------ ------------ ------------
Net interest income 22,507 20,993 21,667 25,129 25,326
Provision for loan losses (1,275) 250 1,924 8,236 3,574
------------ ------------ ------------ ------------ ------------
Net interest income after provision 23,782 20,743 19,743 16,893 21,752
for loan losses
Noninterest income 6,688 6,298 12,378 11,971 10,641
Noninterest expense 22,723 21,343 24,860 26,306 26,844
------------ ------------ ------------ ------------ ------------
Income before income taxes 7,747 5,698 7,261 2,558 5,549
Provision (benefit) for income taxes 2,145 1,319 2,173 67 1,266
------------ ------------ ------------ ------------ ------------
Income from continuing operations
(after taxes) 5,602 4,379 5,088 2,491 4,283
Loss on discontinued operations (415) (206) (285) (361) (239)
------------ ------------ ------------ ------------ ------------
Net income $ 5,187 $ 4,173 $ 4,803 $ 2,130 $ 4,044
Preferred stock dividends 207 207 207 193 257
------------ ------------ ------------ ------------ ------------
Net income for common stockholders $ 4,980 $ 3,966 $ 4,596 $ 1,937 $ 3,787
============ ============ ============ ============ ============
Per Share Data
Basic earnings per common shares from
continuing operations 1.31 1.06 1.21 0.57 1.01
Basic earnings per common share $ 1.21 $ 1.01 $ 1.14 $ 0.48 $ 0.95
Diluted earnings per common share from
continuing operations 1.30 1.04 1.19 0.56 1.00
Diluted earnings per common share 1.20 0.99 1.12 0.48 0.94
Dividends per common stock 0.48 0.44 0.40 0.35 0.31
Dividend payout ratio for common
stock 27.05% 43.39% 35.10% 74.39% 32.59%
Book value per common stock $ 18.23 $ 17.23 $ 17.30 $ 16.77 $ 16.97
Basic weighted average common
shares outstanding 4,119,235 3,943,741 4,033,608 3,997,464 3,979,750
Diluted weighted average common
share outstanding 4,163,836 4,002,908 4,109,999 4,069,220 4,027,441
Period-end common shares
outstanding 6,455,068 3,806,876 4,032,144 4,026,850 3,980,946
Balance Sheet Data
Securities $ 298,692 $ 196,440 $ 191,661 $ 252,248 $ 227,229
Loans 836,944 417,525 419,275 476,812 483,229
Allowance for loan losses 10,835 8,362 9,732 9,011 6,450
Total assets 1,283,025 676,222 669,546 793,422 791,616
Total deposits 1,026,610 543,841 512,477 638,032 641,958
Stockholders' equity 118,191 66,075 70,247 68,047 68,064
Earnings Performance Data
Return on average total assets 0.69% 0.63% 0.65% 0.28% 0.53%
Return on average stockholders' equity 6.69 6.06 7.06 3.16 6.11
Net interest margin ratio 3.41 3.56 3.34 3.65 3.74
Efficiency ratio (1) 76.81 77.78 82.90 72.25 71.73
Asset Quality Ratios
Nonperforming assets to total end
of period assets 1.08% 0.62% 0.69% 1.10% 0.80%
Nonperforming loans to total end
of period loans 1.40 0.96 1.00 1.78 0.99
Net loan charge-offs to total
average loans 0.22 0.39 0.23 1.18 0.70
Allowance for loan losses to total
loans 1.29 2.00 2.32 1.89 1.33
Allowance for loan losses to
nonperforming loans 92.14 208.84 231.60 106.30 135.50
Capital Ratios
Average equity to average assets 10.35% 10.39% 9.27% 8.87% 8.71%
Total capital to risk adjusted
assets 11.94 13.33 14.30 12.15 11.84
Tier 1 leverage ratio 7.90 9.03 9.54 7.60 7.48
(1) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provisions for loan losses and total noninterest
income excluding securities gains and losses and gains on sale of assets.
20.
CENTRUE FINANCIAL CORPORATION
SECRURITIES AND EXCHANGE COMMISSION
FORM 10-K
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides an analysis of the Company's results of
operations and financial condition of Centrue Financial Corporation for the
three years ended December 31, 2006. Management's discussion and analysis (MD&A)
should be read in conjunction with "Selected Consolidated Financial Data," the
consolidated financial statements of the Company, and the accompanying notes
thereto. Unless otherwise stated, all earnings per share data included in this
section and throughout the remainder of this discussion are presented on a fully
diluted basis. All financial information is in thousands (000's), except per
share data.
21.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934 as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identified by the use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "planned" or "potential" or similar
expressions. The Company's ability to predict results, or the actual effect of
future plans or strategies, is inherently uncertain. Factors which could have a
material adverse effect on the operations and future prospects of the Company
and the subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory changes; monetary and
fiscal policies of the U.S. government, including policies of the U.S. Treasury
and the Federal Reserve Board; the quality and composition of the loan or
securities portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market areas; the Company's
implementation of new technologies; the Company's ability to develop and
maintain secure and reliable electronic systems; and accounting principles,
policies, and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
Critical Accounting Policies and Estimates
Note 1 to our Consolidated Financial Statements for the year ended December 31,
2006 contains a summary of our significant accounting policies. Various elements
of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective assessments.
Our policy with respect to the methodologies used to determine the allowance for
loan losses is our most critical accounting policy. The policy is important to
the presentation of our financial condition and results of operations, and it
involves a higher decree of complexity and requires management to make difficult
and subjective judgments, which often require assumptions or estimates about
highly uncertain matters. The use of different judgments, assumptions and
estimates could result in material differences in our results of operations or
financial condition.
The following is a description of our critical accounting policy and an
explanation of the methods and assumptions underlying its application.
Allowance for Loan Losses: The allowance for loan losses represents management's
estimate of probable credit losses inherent in the loan portfolio. Estimating
the amount of the allowance for loan losses requires significant judgment and
the use of estimates related to the amount and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends and
conditions, all of which may be susceptible to significant change. The loan
portfolio also represents the largest asset type on the consolidated balance
sheet. Loan losses are charged off against the allowance, while recoveries of
amounts previously charged off are credited to the allowance. A provision for
loan losses is charged to operations based on management's periodic evaluation
of the factors previously mentioned, as well as other pertinent factors.
The allowance for loan losses is based on an estimation computed pursuant to the
requirements of Financial Accounting Standards Board ("FASB") Statement No. 5,
"Accounting for Contingencies" and FASB Statements Nos. 114 and 118, "Accounting
by Creditors for Impairment of a Loan," the analysis of the allowance for loan
losses consists of three components: (i) specific credit allocation established
22.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
for expected losses resulting from analysis developed through specific credit
allocations on individual loans for which the recorded investment in the loan
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for each loan category; and (iii) subjective reserves based
on general economic conditions as well as specific economic factors in markets
in which the Company operates.
The specific credit allocation component of the allowances for loan losses is
based on an analysis of individual loans and historical loss experience for each
loan category. The specific credit allocations are based on regular analysis of
all loans over a fixed-dollar amount where the internal credit rating is at or
below a predetermined classification. These analyses involve a high degree of
judgment in estimating the amount of loss associated with specific loans,
including estimating the amount and timing of future cash flows and collateral
values.
The general portfolio allocation component of the allowance for loan losses is
determined statistically using a loss analysis that examines historical loan
loss experience. The loss analysis is performed quarterly and loss factors are
updated regularly based on actual experience. The general portfolio allocation
element of the allowance for loan losses also includes consideration of the
amounts necessary for concentrations and changes in portfolio mix and volume.
There are many factors affecting the allowance for loan losses; some are
quantitative while others require qualitative judgment. The process for
determining the allowance (which management believes adequately considers all of
the potential factors which might possibly result in credit losses) includes
subjective elements and, therefore, may be susceptible to significant change. To
the extent actual outcomes differs from management estimates, additional
provision for credit losses could be required that could adversely affect the
Company's earnings or financial position in future periods.
Goodwill: Costs in excess of the estimated fair value of identified assets
acquired through purchase transactions are recorded as an asset of the Company.
As per Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", an annual impairment analysis is required to be performed to
determine if the asset is impaired and needs to be written down to its fair
value. This assessment is conducted as of December 31 of each year or more
frequently if conditions warrant. Per the December 31, 2006 analysis, no
impairment was identified as a result of these tests. In making these impairment
analyses, management must make subjective assumptions regarding the fair value
of the Company's assets and liabilities. It is possible that these judgments may
change over time as market conditions or Company strategies change, and these
changes may cause the Company to record impairment changes to adjust the
goodwill to its estimated fair value.
Mortgage Servicing Rights: The Company recognizes as a separate asset the right
to service mortgage loans for others. The value of mortgage servicing rights is
amortized in relation to the servicing revenue expected to be earned. Mortgage
servicing rights are periodically evaluated for impairment based upon the fair
value of those rights. Annually, in November, the Company obtains a valuation
from an independent appraiser as to the valuation of these rights. Estimating
the fair value of the mortgage servicing rights involves judgment, particularly
of estimating prepayment speeds of the underlying mortgages serviced. Net income
could be affected if management's assumptions and estimated differ from actual
prepayments.
Deferred Income Taxes: Deferred income tax assets and liabilities are computed
for differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax assets are also
recognized for operating loss and tax credit carryforwards. Valuation allowances
are established when necessary to reduce deferred tax assets to an amount
23.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
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.
General
Centrue Financial Corporation is the holding company for Centrue Bank (the
Bank). The Company is organized under the laws of the State of Delaware. The
Company derives most of its revenues and income from the banking operations of
its bank subsidiary, but also derives revenue from the Wealth Management
Division of its bank subsidiary. The Company provides a full range of products
and services to individual and corporate customers located in the north central,
east central, south central, suburban west area of Chicago, suburban metro east
area of St. Louis, and northwest Illinois areas. These products and services
include demand, time, and savings deposits; lending; mortgage banking; brokerage
services; asset management; and trust services. The Company is subject to
competition from other financial institutions, including banks, thrifts and
credits unions, as well as nonfinancial institutions providing financial
services. Additionally, the Company and the Bank are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
Merger, Acquisition and Divestiture Activity
Completed Transactions
On November 13, 2006, the Company completed the merger with Centrue Financial
Corporation, a single bank holding company, in a stock transaction valued at
$49,316. The transaction was accounted for under the purchase method of
accounting, which provides for the establishment of goodwill equal to the excess
of the purchase price over the fair value of the identifiable net assets. As a
result, the Company recognized goodwill of $19,086 and other intangible assets
of $13,035. The goodwill is not amortized but is subject to impairment tests on
at least an annual basis. The other intangibles will be amortized over a
weighted average life of 10 years. Only 49 days of the former Centrue
Financial's results of operations are included in the Company's Consolidated
Statements of Income. See Note 23 for additional information for this
transaction.
The Company incurred approximately $767 in pre-tax expenses during the fourth
quarter of 2006 that were recorded as part of the merger and integration of the
former Centrue Bank. Approximately $216 of the total represented share-based
compensation expense with the remainder representing direct costs and employee
bonus payments, contract termination costs, marketing related advertising and
promotional items, and accelerated depreciation expense for assets being phased
out. The impact to earnings, net of taxes, was approximately $0.11 per diluted
share.
On September 29, 2006, the Company completed the sale of its insurance business
line. In accordance with FASB Statement No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("FAS 144") the results of operations of the
insurance division are reflected in the Company's statements of income as
"discontinued operations." The loss on sale of the insurance unit of $452 and
related tax benefit of $175 are included in discontinued operations as of
December 31, 2006. The total impact to earnings for the discontinued operations
for the insurance unit for 2006, net of taxes, was approximately $0.10 per
diluted share. Additionally, approximately $1,030 of goodwill and intangibles
attributed to the Insurance unit on the Company's balance sheet were written off
as a result of this transaction and factored into the loss on the sale of the
discontinued operations. See Note 22 for additional information for this
transaction.
24.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
On March 31, 2006, the Company completed the sale of one retail branch office
located in Mendota, Illinois, which had approximately $6,100 in deposits.
Results of Operations
Net Income
2006 compared to 2005. Net income equaled $5,187 or $1.20 per diluted
share for the year ended December 31, 2006 as compared to net income of $4,173
or $0.99 per diluted share for the year ended December 31, 2005. During the
period, the Company reported a net loss of $415 or $0.10 per diluted share for
discontinued operations related to the sale of the insurance line as compared to
a net loss of $206 or $0.05 per diluted share for 2005.
Net income for continuing operations equaled $5,602 or $1.30 per diluted share
as compared to net income of $4,379 or $1.04 per diluted share. This represents
a 24.3% increase in net income and a 21.2% increase in diluted per share
earnings in the current fiscal year over fiscal 2005.
The Company's annual results for continuing operations were higher in 2006
versus 2005 due primarily due to several key issues. First, due to general
improvement in asset quality, the Company decreased the provision for loan
losses. Second, volume related increases in net interest income and other fee
based revenue largely related to operating results from the Centrue merger being
recorded for the last 49 days of the year. Finally, salaries and benefit costs
were lower due to a reduction in force implemented in the fourth quarter of
2005. These were partially offset by increases in occupancy, furniture and
equipment expenses related to operations for the last 49 days from the Centrue
merger. In addition, performance for the full year of 2006 was negatively
impacted by integration and related costs recorded in the fourth quarter
specific to the Centrue merger.
Return on average assets was 0.69% for the year ended December 31, 2006 compared
to 0.63% for the same period in 2005. Return on average stockholders' equity was
6.69% for the year ended December 31, 2006 compared to 6.06% for the same period
in 2005.
2005 compared to 2004. Net income equaled $4,173 or $0.99 per diluted
share for the year ended December 31, 2005 as compared to net income of $4,803
or $1.12 per diluted share for the year ended December 31, 2004. This represents
a 13.1% decrease in net income and an 11.6% decrease in diluted per share
earnings in the current fiscal year over fiscal 2004.
The Company's annual results were lower in 2005 versus 2004 due to the $1,700
net gain on sale (after allocating a portion of the intangible assets and
goodwill, taxes and applicable expenses) associated with the Company's
divestiture of five western Illinois sales and service center locations recorded
in the third quarter of 2004. Also contributing to the change were volume
related decreases in net interest income and other fee based revenue largely
related to the sale of the West region. Positively impacting earnings were
decreases in the provision for loan losses due to continued improvement in asset
quality levels and volume related decreases in noninterest expense categories
due to the sale of the West region.
Return on average assets was 0.63% for the year ended December 31, 2005 compared
to 0.65% for the same period in 2004. Return on average stockholders' equity was
6.06% for the year ended December 31, 2005 compared to 7.06% for the same period
in 2004.
25.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Net Interest Income/ Margin
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred for the funding sources used to finance
these assets. Changes in net interest income generally occur due to fluctuations
in the volume of earning assets and paying liabilities and rates earned and
paid, respectively, on those assets and liabilities. The net yield on total
interest-earning assets, also referred to as net interest margin, represents net
interest income divided by average interest-earning assets. Net interest margin
measures how efficiently the Company uses its earning assets and underlying
capital. The Company's long-term objective is to manage those assets and
liabilities to provide the largest possible amount of income while balancing
interest rate, credit, liquidity and capital risks. For purposes of this
discussion, both net interest income and margin have been adjusted to a fully
tax equivalent basis for certain tax-exempt securities and loans.
2006 compared to 2005. Net interest income, on a tax equivalent basis,
was $23,104 for the year ended December 31, 2006, compared with $21,587 earned
during the same period in 2005. This represented an increase of $1,517 or 7.0%.
The increase in net interest income is attributable to the year-over-year
improvement in income earned on interest earning assets totaling $9,156
exceeding the year-over-year increase of interest expense paid on interest
bearing liabilities totaling $7,645.
The $9,156 increase in interest income resulted from improvements of $4,066
related to volume and $5,090 due to rates. The majority of the change in
interest income was related to yield increases of 63 basis points in the loan
portfolio and 89 basis points in the security portfolio. Also, contributing was
the $53,185 improvement in earning-assets largely related to the merger with
Centrue in the fourth quarter.
The $7,200 increase in interest expense resulted from increases of $4,906
associated with rate and $2,294 due to volume. The majority of the change was
attributable to a 106 basis point increase in rates paid on total time deposits
due to repricing of short-term instruments in a higher interest rate
environment. Also contributing to the increase was higher expense caused by the
addition of interest-bearing liabilities largely related to the merger with
Centrue in the fourth quarter.
The net interest margin decreased 9 basis points to 3.47% for the year ended
December 31, 2006 from 3.56% during the same period in 2005. The decrease
resulted primarily from the result of an inverted yield curve and competitive
pressures in pricing loans and deposits.
2005 compared to 2004. Net interest income, on a tax equivalent basis,
was $21,587 for the year ended December 31, 2005, compared with $22,376 earned
during the same period in 2004. This represented a decrease of $789 or 3.5%. The
decrease in net interest income is attributable to the year-over-year reduction
of income earned on interest earning assets totaling $328 combined with the
year-over-year increase of interest expense paid on interest bearing liabilities
totaling $461.
The $328 reduction in interest income resulted from a decrease of $3,748 related
to volume partially offset by $3,420 improvement due to rates. The majority of
the change in interest income was related to a decline in the average loan
balance caused by the sale of the West region, as well as the loan portfolio
declining due to normal paydowns, softening of loan demand, and exiting of
high-balance, high-risk credits from portfolio. This loss in volume overcame a
44 basis point increase in yields earned on average loans.
The $461 increase in interest expense resulted from an increase of $2,055
associated with rate partially offset by a $1,594 decrease due to volume. The
majority of the change was attributable to a 34 basis point increase in rates
paid on deposits due to the higher interest rate environment. This increase was
slightly offset by the lower expense caused by a decline in average deposit
balances related to the sale of the West region's branches.
26.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The net interest margin increased 22 basis points to 3.56% for the year ended
December 31, 2005 from 3.34% during the same period in 2004. The increase
resulted primarily from the result of the overall rising interest rate
environment and a more disciplined approach to pricing.
The following table sets forth for each category of interest-earning assets and
interest-bearing liabilities the average amounts outstanding, the interest
earned or paid on such amounts, and the average rate paid during 2006, 2005 and
2004. The table also sets forth the average rate earned on all interest-earning
assets, the average rate paid on all interest-bearing liabilities, and the net
yield on average interest-earning assets for the same period. For purposes of
this discussion, both net interest income and margin have been adjusted to a
fully tax equivalent basis for certain tax-exempt securities and loans.
27.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Years Ended December 31,
------------------------------------------------------------------------------------------------
2006 2005 2004
----------------------------- ------------------------------ -----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------ -------- -------- ------- -------- --------- ------
ASSETS
Interest-earning assets
Interest-earning deposits $ 736 $ 16 2.17% $ 147 $ 7 4.65% $ 137 $ 2 1.46%
Securities (1)
Taxable 183,443 8,784 4.79 169,468 6,331 3.73 192,835 5,925 3.06
Nontaxable (2) 21,711 1,479 6.81 21,076 1,504 7.14 26,066 1,848 7.07
-------- -------- ------ -------- -------- ------- -------- --------- ------
Total securities (tax equivalent) 205,154 10,263 5.00 190,544 7,835 4.11 218,901 7,773 3.54
-------- -------- ------ -------- -------- ------- -------- --------- ------
Federal funds sold 6,846 363 5.30 3,785 115 3.23 3,433 46 1.39
-------- -------- ------ -------- -------- ------- -------- --------- ------
Loans (3)(4)
Commercial 120,328 8,958 7.44 117,571 8,131 6.92 130,436 7,467 5.71
Real estate 334,119 23,529 7.04 277,267 17,640 6.36 286,280 17,499 6.10
Installment and other 10,521 1,326 12.60 16,945 1,571 9.27 30,889 2,840 9.17
-------- -------- ------ -------- -------- ------- -------- --------- ------
Gross loans
(tax equivalent) 464,968 33,813 7.27 411,783 27,342 6.64 447,605 27,806 6.20
-------- -------- ------ -------- -------- ------- -------- --------- ------
Total interest-
earning assets 677,704 44,455 6.56 606,259 35,299 5.82 670,076 35,627 5.30
-------- -------- ------ -------- -------- ------- -------- --------- ------
Noninterest-earning assets
Cash and cash equivalents 18,818 18,874 21,497
Premises and equipment, net 16,810 13,782 15,533
Other assets 35,631 24,138 24,879
-------- -------- --------
Total non-interest-earning
assets 71,259 56,794 61,909
-------- -------- --------
Total assets $748,963 $663,053 $731,985
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 74,328 $ 1,313 1.77% $ 72,722 $ 915 1.26% $ 57,887 $ 319 0.55%
Money market accounts 62,778 1,876 2.99 59,160 1,080 1.83 94,074 1,166 1.24
Savings deposits 45,343 315 0.69 42,122 212 0.50 47,337 265 0.56
Time $100,000 and over 209,030 8,865 4.11 148,238 4,522 3.05 148,701 3,836 2.57
Other time deposits 137,470 5,835 4.12 136,745 4,181 3.06 156,198 4,323 2.76
Federal funds purchased and
repurchase agreements 9,947 407 4.09 6,243 197 3.16 5,099 98 1.92
Advances from FHLB 46,499 1,824 3.92 54,571 2,128 3.91 70,359 2,887 4.09
Notes payable and other 11,303 916 8.15 9,176 477 5.20 8,033 357 4.43
-------- -------- ------ -------- -------- ------- -------- --------- ------
Total interest-bearing
liabilities 596,698 21,351 3.50 528,977 13,712 2.59 587,688 13,251 2.25
-------- -------- ------ -------- -------- ------- -------- --------- ------
Noninterest-bearing liabilities
Non-interest-bearing deposits 68,650 61,040 71,912
Other liabilities 6,104 4,133 4,503
-------- -------- --------
Total non-interest-bearing
liabilities 74,754 65,173 76,415
-------- -------- --------
Stockholders' equity 77,511 68,903 67,882
-------- -------- --------
Total liabilities and
stockholders' equity $748,963 $663,053 $731,985
======== ======== ========
Net interest income
(tax equivalent) $ 23,104 $ 21,587 $ 22,376
======== ======== =========
Net interest income
(tax equivalent) to
total earning assets 3.47% 3.56% 3.34%
====== ======= ======
Interest-bearing liabilities
to earning assets 88.05% 87.25% 87.70%
======== ======== ========
----------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale are based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
28.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as
"volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table reflects the
changes in net interest income stemming from changes in interest rates and from
asset and liability volume, including mix. Any variance attributable jointly to
volume and rate changes is allocated to the volume and rate variances in
proportion to the relationship of the absolute dollar amount of the change in
each.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
For the Years Ended December 31,
-------------------------------------------------------------------------------------
2006 Compared to 2005 2005 Compared to 2004
---------------------------------------- ----------------------------------------
Change Due to Change Due to
---------------------------------------- ----------------------------------------
Volume Rate Net Volume Rate Net
---------- ---------- ---------- ---------- ---------- ----------
Interest income:
Interest-earning deposits $ 14 $ (5) $ 9 $ -- $ 5 $ 5
Investment securities:
Taxable 552 1,901 2,453 (778) 1,184 406
Nontaxable 83 (108) (25) (310) (34) (344)
Federal funds sold 138 110 248 4 65 69
Loans 3,279 3,192 6,471 (2,664) 2,200 (464)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 4,066 5,090 9,156 (3,748) 3,420 (328)
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
NOW accounts 21 377 398 99 497 596
Money market accounts 70 726 796 (524) 438 (86)
Savings deposits 17 86 103 (27) (26) (53)
Time, $100,000 and over 2,022 2,223 4,245 (12) 698 686
Other time 21 1,733 1,754 (576) 434 (142)
Federal funds purchased and
repurchase agreements 140 70 210 26 73 99
Advances from FHLB (311) 6 (305) (634) (125) (759)
AG & Comm Participations -- -- -- -- -- --
Notes payable 129 315 444 54 66 120
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 2,109 5,536 7,645 (1,594) 2,055 461
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $ 1,957 $ (446) $ 1,511 $ (2,154) $ 1,365 $ (789)
========== ========== ========== ========== ========== ==========
Provision for Loan Losses. The amount of the provision for loan losses
is based on management's evaluations of the loan portfolio, with particular
attention directed toward nonperforming, impaired and other potential problem
loans. During these evaluations, consideration is also given to such factors as
management's evaluation of specific loans, the level and composition of impaired
loans, other nonperforming loans, other identified potential problem loans,
historical loss experience, results of examinations by regulatory agencies,
results of the independent asset quality review process, the market value of
collateral, the estimate of discounted cash flows, the strength and availability
of guarantees, concentrations of credits, and various other factors, including
concentration of credit risk in various industries and current economic
conditions.
2006 compared to 2005. The 2006 provision for loan losses charged to
operating expense totaled ($1,275), a decrease of $1,525 in comparison to the
$250 recorded during the same period for 2005. The decrease in the provision for
loan losses was largely based on the pay-off of one $4,400 loan relationship
that was classified as impaired as of year-end 2005 with a specific reserve
allocation of $1,500. Also contributing to management's decision to make the
29.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
reverse provision were continued improvements in the quality of the loan
portfolio, and favorable loan loss experience. Furthermore, this was positively
impacted by loan resolutions, either through charge-off of nonbankable assets or
through successful workout strategies that were executed throughout 2006. Net
charge-offs for the year ended December 31, 2006 were $1,020 compared with
$1,620 in the same period of 2005. Annualized net charge-offs decreased to 0.22%
of average loans for 2006 compared to 0.39% in the same period in 2005.
Management remains watchful of credit quality issues. Should the economic
climate deteriorate from current levels, borrowers may experience difficulty,
and the level of nonperforming loans, charge-offs and delinquencies could rise
and require further increases in the provision.
2005 compared to 2004. The 2005 provision for loan losses charged to
operating expense totaled $250, a decrease of $1,674 in comparison to the $1,924
recorded during the same period for 2004. The decrease in the provision for loan
losses was due to the continued improvement in the management of the
nonperforming and action/watch list loans from year-end 2004 to year-end 2005,
including improved problem asset identification. Furthermore, this was
positively impacted by loan resolutions, either through charge-off of
nonbankable assets or through successful workout strategies that were executed
throughout 2005. Net charge-offs for the year ended December 31, 2005 were
$1,620 compared with $1,029 in the same period of 2004. Annualized net
charge-offs increased to 0.39% of average loans for 2005 compared to 0.23% in
the same period in 2004.
Noninterest Income. Noninterest income consists of a wide variety of fee-based
revenues from bank-related service charges on deposits and mortgage revenues.
Also included in this category are revenues generated by the Company's
brokerage, trust and asset management services as well as increases in cash
surrender value on bank-owned life insurance. The following table summarizes the
Company's noninterest income:
NONINTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Service charges $ 2,473 $ 1,996 $ 2,866
Merchant fee income -- -- 56
Trust income 858 811 740
Mortgage banking income 1,113 1,350 2,020
Brokerage commissions and fees 326 513 525
Bank owned life insurance (BOLI) 628 545 573
Securities gains (losses), net (104) (79) 123
Gain on sale of assets (14) 4 4,263
Other income 1,408 1,158 1,212
---------- ---------- ----------
Total noninterest income from continuing operations $ 6,688 $ 6,298 $ 12,378
Amounts reclassed to discontinued operations -- 1,304 1,724
---------- ---------- ----------
Previously reported noninterest income levels $ 6,688 $ 7,602 $ 14,102
========== ========== ==========
2006 compared to 2005. Noninterest income for continuing operations
totaled $6,688 for the year ended December 31, 2006, as compared to $6,298 for
the same timeframe in 2005. This represented an increase of $390 or 6.2% in 2006
over the prior period. Excluding net securities losses and the gains on sale of
other assets, noninterest income shows a year-over-year increase of $433 or
6.8%.
30.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The increase reflected higher service charges and fees received on items drawn
on customer accounts with insufficient funds (included in service charges), and
variable-related improvement in electronic banking card-based fees. Also
contributing to the change was the recognition of revenue generated from the
Centrue merger for 49 days.
These improvements were partially offset by declines in revenue generated from
the brokerage product line due to a change in the mix of products sold during
the year and the mortgage banking division. The decrease in mortgage banking
income, which includes gains generated from the sale of loans and net servicing
revenue (after amortization of mortgage servicing rights), was due to a
shortfall in the production of new mortgage loans originated. The remaining
categories remained relatively stable with only slight year-over-year changes.
2005 compared to 2004. Noninterest income totaled $7,602 for the year
ended December 31, 2005, as compared to $14,102 for the same timeframe in 2004.
This represented a decrease of $6,500 or 46.1% in 2005 over the prior period.
Excluding net securities gains and the gains on sale of branches and the
Company's credit card portfolio, noninterest income shows a year-over-year
decrease of $2,039 or 21.0%.
Excluding net securities gains and gains on sale of the branches and the credit
card portfolio, the decrease in noninterest income was related to a $670 decline
in mortgage banking income, an $870 decrease in service charges and $416 decline
in insurance commissions. Decreases in service charges and other fee based
revenue were largely due to volume associated with the sale of the West region's
branches in 2004. The decrease in insurance commission fees was due to account
retention issues and lower than anticipated new account production. The
remaining categories remained relatively stable with only slight year-over-year
changes.
Mortgage banking income, which includes gains generated from the sale of loans
and net servicing revenue (after amortization of mortgage servicing rights), was
lower in 2005 due to a decrease in mortgage origination volume slightly offset
by an increase in revenue generated by the servicing rights portfolio due to the
slowdown in refinancing activity.
Noninterest Expense. Noninterest expense for continuing operations is
comprised primarily of compensation and employee benefits, occupancy and other
operating expense. The following table summarizes the Company's noninterest
expense:
31.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
NONINTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Salaries and employee benefits $ 12,181 $ 12,546 $ 13,841
Occupancy expense, net 1,714 1,488 2,333
Furniture and equipment expenses 2,276 1,852 2,103
Marketing 697 491 604
Supplies and printing 421 343 422
Telephone 490 425 523
Other real estate expense 16 59 8
Amortization of intangible assets 416 120 241
Other expense 4,512 4,019 4,785
---------- ---------- ----------
Total noninterest expense for continuing operations $ 22,723 $ 21,343 $ 24,860
Amounts reclassed to discontinued operations -- 1,622 2,121
---------- ---------- ----------
Previously reported noninterest expense levels $ 22,723 $ 22,965 $ 26,981
========== ========== ==========
2006 compared to 2005. Noninterest expense for continuing operations
totaled $22,723 for the year ended December 31, 2006, as compared to $21,343 for
the same timeframe in 2005. This represented an increase of $1,380 or 6.5% in
2006 from 2005.
Adversely impacting expense levels was approximately $767 in acquisition and
integration costs related to accelerated share-based compensation, employee
bonus and severance payments, contract termination costs, marketing related
advertising and promotional items, and accelerated depreciation expense for
assets being phased out. Also contributing to the increase were costs associated
with the operation of 21 additional branches resulting from the Centrue merger.
These increased costs were offset by $1,608 in savings from salaries and
employee benefits expense related to a reduction in force plan implemented
during the fourth quarter of 2005 intended to realign expense levels with
revenue levels. The remaining categories remained relatively stable with only
slight year-over-year changes.
2005 compared to 2004. Noninterest expense totaled $22,965 for the year
ended December 31, 2005, as compared to $26,981 for the same timeframe in 2004.
This represented a decrease of $4,016 or 14.9% in 2005 from 2004. Approximately
40% of the improvement in noninterest expense levels was due to $1,621 in cost
savings from salaries and employee benefits expense related to the sale of the
West region's branches. Also contributing to the change were volume related
decreases in occupancy expense of $890, furniture and equipment of $280 and
other expense of $798 related to the branch sales in 2004.
Applicable Income Taxes. Income tax expense for the periods included
benefits for tax-exempt income, tax-advantaged investments and general business
tax credits offset by the effect of nondeductible expenses. The following table
shows the Company's income before income taxes, as well as applicable income
taxes and the effective tax rate for each of the past three years:
32.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Income from continuing operations before income taxes $ 7,747 $ 5,698 $ 7,195
Applicable income taxes 2,145 1,319 2,173
Effective tax rates 27.7% 23.2% 30.2%
The Company recorded income tax expense of $2,145 and $1,319 for 2006 and 2005,
respectively. Effective tax rates equaled 27.7% and 23.2% respectively, for such
periods. During the second quarter of 2005, the Company recorded a $251
reduction in state income taxes due to the receipt of a tax refund related to
amended tax returns outstanding from prior years. Excluding this refund, the
effective tax rate for 2005 would have been 27.0%.
The Company's effective tax rate was lower than statutory rates due to several
factors. First, the Company derives interest income from municipal securities
and loans, which are exempt from federal tax and certain U. S. government agency
securities, which are exempt from Illinois State tax. Second, the level of
tax-exempt income has increased as a percentage of taxable income. Third, state
income taxes were lower due to a refund from amended tax returns for prior
years. Finally, the Company has reduced tax expense through various tax planning
initiatives.
Preferred Stock Dividends. The Company paid $207 of preferred stock
dividends in 2006, 2005 and 2004.
Interest Rate Sensitivity Management
The business of the Company and the composition of its balance sheet consist of
investments in interest-earning assets (primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
All of the financial instruments of the Company are for other than trading
purposes. Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. The operating income and net income of
Centrue Bank depends, to a substantial extent, on "rate differentials," i.e.,
the differences between the income Centrue Bank receives from loans, securities,
and other earning assets and the interest expense they pay to obtain deposits
and other liabilities. These rates are highly sensitive to many factors that are
beyond the control of Centrue Bank, including general economic conditions and
the policies of various governmental and regulatory authorities.
The Company measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of changes in net interest income in the event
of a sudden and sustained 100 to 200 basis point increase in market interest
rates or a 100 to 200 basis point decrease in market rates. The interest rates
scenarios are used for analytical purposes and do not necessarily represent
management's view of future market movements.
33.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The tables below present the Company's projected changes in net interest income
for 2006 and 2005 for the various rate shock levels.
December 31, 2006 Net Interest Income
----------------- ----------------------------------------
Amount Change Change
---------- ---------- ----------
(Dollars in Thousands)
+200 bp $ 42,539 $ 2,215 5.49%
+100 bp 41,482 1,157 2.87
Base 40,325 -- --
-100 bp 38,795 (1,529) (3.79)
-200 bp 35,980 (4,345) (10.77)
Based on the Company's model at December 31, 2006, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by 5.49% or approximately $2,215. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $4,345 or 10.77%.
December 31, 2005 Net Interest Income
----------------- ----------------------------------------
Amount Change Change
---------- ---------- ----------
(Dollars in Thousands)
+200 bp $ 23,043 $ 959 4.34%
+100 bp 22,629 545 2.47
Base 22,084 -- --
-100 bp 21,314 (770) (3.49)
-200 bp 19,744 (2,340) (10.59)
Based on the Company's model at December 31, 2005, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by 4.34% or approximately $959. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $2,340 or 10.59%.
Financial Condition
Loans and Asset Quality. Total loans increased $419,419 primarily due
to loans acquired as part of the Centrue merger, which included $47,716 of
commercial, $4,099 of agriculture, $379,233 of real estate, and $5,411 of
installment loans. The largest impact on the overall loan portfolio mix due to
the merger in relative percentage was an increase in 1-4 family loans from 13.9%
to 27.1% of total loans.
The Company offers a broad range of products, including agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company's loans are diversified by borrower and
industry group.
34.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The following table describes the composition of loans by major
categories outstanding:
(Dollars in Thousands)
LOAN PORTFOLIO
Aggregate Principal Amount
----------------------------------------------------------------------
December 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Commercial $ 154,829 $ 91,537 $ 91,941 $ 105,767 $ 100,189
Agricultural 23,118 26,694 28,718 33,766 36,467
Real estate:
Commercial mortgages 274,909 126,503 129,597 134,985 147,253
Construction 116,608 68,508 38,882 30,674 24,486
Agricultural 27,624 33,033 30,601 37,092 34,688
1-4 family mortgages 226,884 57,920 77,566 94,163 87,411
Installment 11,998 12,747 21,502 37,415 49,949
Other 974 583 468 2,950 2,786
---------- ---------- ---------- ---------- ----------
Total loans 836,944 417,525 419,275 476,812 483,229
Allowance for loan losses (10,835) (8,362) (9,732) (9,011) (6,450)
---------- ---------- ---------- ---------- ----------
Loans, net $ 826,109 $ 409,163 $ 409,543 $ 467,801 $ 476,779
========== ========== ========== ========== ==========
Aggregate Principal Amount
----------------------------------------------------------------------
Percentage of Total Loan Portfolio
----------------------------------------------------------------------
December 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Commercial 18.50% 21.92% 21.93% 22.18% 20.73%
Agricultural 2.76 6.39 6.85 7.08 7.55
Real estate:
Commercial mortgages 32.85 30.31 30.91 28.31 30.47
Construction 13.93 16.41 9.27 6.43 5.07
Agricultural 3.30 7.91 7.30 7.78 7.18
1-4 family mortgages 27.11 13.87 18.50 19.75 18.08
Installment 1.43 3.05 5.13 7.85 10.34
Other loans 0.12 0.14 0.11 0.62 0.58
---------- ---------- ---------- ---------- ----------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
========== ========== ========== ========== ==========
As of December 31, 2006 and 2005, commitments of Centrue Bank (and its
predecessors) under standby letters of credit and unused lines of credit totaled
approximately $203,745 and $87,510, respectively.
35.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Stated loan maturities (including rate loans reset to market interest rates) of
the total loan portfolio, net of unearned income, at December 31, 2006 were as
follows:
STATED LOAN MATURITIES (1)
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- ---------- ----------
Commercial $ 77,060 $ 56,319 $ 17,265 $ 150,644
Agricultural 20,016 5,203 1,714 26,933
Real estate 123,611 210,420 312,547 646,578
Installment 2,802 9,473 514 12,789
---------- ---------- ---------- ----------
Total $ 223,489 $ 281,415 $ 332,040 $ 836,944
========== ========== ========== ==========
--------------------
(1) Maturities based upon contractual maturity dates
The maturities presented above are based upon contractual maturities. Many of
these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
Rate sensitivities of the total loan portfolio, net of unearned income, at
December 31, 2006 were as follows:
LOAN REPRICING
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- ---------- ----------
Fixed rate $ 57,010 $ 188,743 $ 138,527 $ 384,280
Variable rate 310,947 122,630 7,328 440,905
Nonaccrual 9,831 1,241 687 11,759
---------- ---------- ---------- ----------
Total $ 377,788 $ 312,614 $ 146,542 $ 836,944
========== ========== ========== ==========
Nonperforming Assets. The Company's financial statements are prepared
on the accrual basis of accounting, including the recognition of interest income
on its loan portfolio, unless a loan is placed on nonaccrual status. Loans are
placed on nonaccrual status when there are serious doubts regarding the
collectibility of all principal and interest due under the terms of the loans.
Amounts received on nonaccrual loans generally are applied first to principal
and then to interest. It is the policy of the Company not to renegotiate the
terms of a loan because of a delinquent status. Rather, a loan is generally
transferred to nonaccrual status if it is not in the process of collection and
is delinquent in payment of either principal or interest beyond 90 days. Loans
which are 90 days delinquent but are well secured and in the process of
collection are not included in nonperforming assets. Other nonperforming assets
consist of real estate acquired through loan foreclosures or other workout
situations and other assets acquired through repossessions.
The classification of a loan as nonaccrual does not necessarily indicate that
the principal is uncollectible, in whole or in part. Centrue Bank makes a
determination as to collectibility on a case-by-case basis. Centrue Bank
considers both the adequacy of the collateral and the other resources of the
36.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
borrower in determining the steps to be taken to collect nonaccrual loans. The
final determination as to the steps taken is made based upon the specific facts
of each situation. Alternatives that are typically considered to collect
nonaccrual loans are foreclosure, collection under guarantees, loan
restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired, and past due loans to prevent further deterioration of
these loans. The Company has an independent loan review function which is
separate from the lending function and is responsible for the review of new and
existing loans.
The following table sets forth a summary of nonperforming assets:
NONPERFORMING ASSETS
(Dollars in Thousands)
December 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 11,759 $ 3,082 $ 3,649 $ 8,149 $ 3,931
Loans 90 days past due and still
accruing interest -- 922 553 328 829
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 11,759 4,004 4,202 8,477 4,760
Other real estate owned 2,136 203 420 227 1,557
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 13,895 $ 4,207 $ 4,622 $ 8,704 $ 6,317
========== ========== ========== ========== ==========
Nonperforming loans to total loans 1.40% 0.96% 1.00% 1.78% 0.99%
Nonperforming assets to total loans 1.66 1.01 1.10 1.83 1.31
Nonperforming assets to total assets 1.08 0.62 0.69 1.10 0.80
The level of nonperforming loans at December 31, 2006 increased to $11,759
versus the $4,004 that existed as of December 31, 2005. The increase of $7,755
was largely related to $10,230 that was added to nonaccrual loans as part of the
Centrue merger and offset by a decrease of $2,475 related to resolutions of
nonbankable loans or through successful workout strategies executed throughout
2006. The level of nonperforming loans to total end of period loans was 1.40% at
December 31, 2006, as compared to 0.96% at December 31, 2005. The reserve
coverage ratio (allowance to nonperforming loans) was reported at 92.14% as of
December 31, 2006 as compared to 208.84% as of December 31, 2005.
Other Potential Problem Loans. The Company has other potential problem
loans that are currently performing and do not meet the criteria for impairment,
but where some concern exists. Excluding nonperforming loans and loans that
management has classified as impaired, these other potential problem loans
totaled $1,757 at December 31, 2006 as compared to $2,879 at December 31, 2005.
The classification of these loans, however, does not imply that management
expects losses on each of these loans. Rather, management believes that a higher
level of scrutiny and close monitoring is prudent under the circumstances. Such
classifications relate to specific concerns for each individual borrower and do
not relate to any concentration risk common to all loans in this group.
37.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The following table sets forth a summary of other real estate owned and other
collateral acquired at December 31, 2006:
OTHER REAL ESTATE OWNED
(Dollars in Thousands)
Number Net Book
of Carrying
Parcels Value
---------- ----------
Developed property 11 $ 1,980
Vacant land or unsold lots 2 156
---------- ----------
Total other real estate owned 13 $ 2,136
========== ==========
Allowance for Loan Losses. In conjunction with the Centrue merger, the
Company acquired $436,459 in net loans. Centrue's allowance for loan losses at
the acquisition date, not allocated to impaired loans, was $4,767. The Company
applied the guidance required under the American Institute of Certified Public
Accountants Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer ("SOP 03-3") and determined that certain loans
acquired in the merger had evidence of deterioration of credit quality since
origination and were probable that all contractual required payments would not
be collected on these loans. The Company determined that 54 loans with a book
value totaling approximately $11,796 and a fair value of $9,379 were within the
guidelines set forth under SOP 03-3. The Company recorded these at their fair
value and reduced the allowance for loan losses by $2,416. Accordingly, the
Company recorded $4,767 of allowance for loan losses on loans not subject to SOP
03-3.
At December 31, 2006, the allowance for loan losses was $10,835 or 1.29% of
total loans as compared to $8,362 or 2.00% at December 31, 2005. The Company
recorded a negative provision of ($1,275) to the allowance for loan losses
largely based on the pay-off of one $4,400 loan relationship that was classified
as impaired as of year-end with a specific reserve allocation of $1,500. Also
contributing to management's decision to make the reverse provision were
continued improvements in the quality of the loan portfolio and favorable loan
loss experience.
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things: general
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and, in the case of a collateralized loan,
the quality of the collateral for such a loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
feedback provided by internal loan staff, the independent loan review function,
and information provided by examinations performed by regulatory agencies. The
Company makes an ongoing evaluation as to the adequacy of the allowance for loan
losses.
On a quarterly basis, management reviews the adequacy of the allowance for loan
losses. Commercial credits are graded by the loan officers and the loan review
function validates the officers' grades. In the event that the loan review
function downgrades the loan, it is included in the allowance analysis at the
lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation computed pursuant to the requirements of Financial
Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components: (i) specific credit allocation established for
38.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
expected losses resulting from analysis developed through specific credit
allocations on individual loans for which the recorded investment in the loan
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for each loan category; and (iii) subjective reserves based
on general economic conditions as well as specific economic factors in the
markets in which the Company operates.
The specific credit allocation component of the allowance for loan losses is
based on a regular analysis of loans over a fixed-dollar amount where the
internal credit rating is at or below a predetermined classification. The fair
value of the loan is determined based on either the present value of expected
future cash flows discounted at the loan's effective interest rate, the market
price of the loan, or, if the loan is collateral dependent, the fair value of
the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan losses is
determined statistically using a loss analysis that examines historical loan
loss experience. The loss analysis is performed quarterly and loss factors are
updated regularly based on actual experience. The general portfolio allocation
element of the allowance for loan losses also includes consideration of the
amounts necessary for concentrations and changes in portfolio mix and volume.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed quarterly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years, and there were no reallocations.
Management remains watchful of credit quality issues. Should the economic
climate deteriorate from current levels, borrowers may experience difficulty,
and the level of nonperforming loans, charge-offs and delinquencies could rise
and require further increases in the provision.
39.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The following table presents a detailed analysis of the Company's allowance for
loan losses:
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
December 31,
--------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Beginning balance $ 8,362 $ 9,732 $ 9,011 $ 6,450 $ 6,295
Charge-offs:
Commercial 552 342 1,497 4,791 2,561
Real estate mortgages 1,044 1,611 389 626 683
Installment and other loans 88 367 578 812 634
---------- ---------- ---------- ---------- ----------
Total charge-offs 1,684 2,320 2,464 6,229 3,878
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial 223 394 1,021 415 354
Real estate mortgages 357 208 230 46 41
Installment and other loans 85 98 184 93 64
---------- ---------- ---------- ---------- ----------
Total recoveries 665 700 1,435 554 459
---------- ---------- ---------- ---------- ----------
Net charge-offs 1,019 1,620 1,029 5,675 3,419
---------- ---------- ---------- ---------- ----------
Provision for loan losses (1,275) 250 1,924 8,236 3,574
Reduction due to sale of loans -- -- 174 -- --
Increase due to merger 4,767 -- -- -- --
---------- ---------- ---------- ---------- ----------
Ending balance $ 10,835 $ 8,362 $ 9,732 $ 9,011 $ 6,450
========== ========== ========== ========== ==========
Period end total loans $ 836,944 $ 417,525 $ 419,275 $ 476,812 $ 483,229
========== ========== ========== ========== ==========
Average loans $ 464,968 $ 411,783 $ 447,605 $ 482,343 $ 490,360
========== ========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.22% 0.39% 0.23% 1.18% 0.70%
Ratio of provision for loan losses
to average loans (0.27) 0.06 0.43 1.71 0.73
Ratio of allowance for loan losses
to ending total loans 1.29 2.00 2.32 1.89 1.33
Ratio of allowance for loan losses
to total nonperforming loans 92.14 208.84 231.60 106.30 135.50
Ratio of allowance at end of period
to average loans 2.33 2.03 2.17 1.87 1.32
40.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The following table sets forth an allocation of the allowance for loan losses
among the various loan categories:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
December 31,
------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
---------------- ---------------- ---------------- ---------------- ----------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
to Gross to Gross to Gross to Gross To Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial $ 4,888 21.84% $ 7,386 28.32% $ 6,035 28.78% $ 4,935 29.26% $ 2,863 28.28%
Real estate 5,668 76.61 773 68.49 3,311 65.98 2,846 62.27 2,110 60.80
Installment and other loans 279 1.55 203 3.19 386 5.24 593 8.47 719 10.92
Unallocated -- -- -- -- -- -- 637 -- 758 --
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $10,835 100.00% $ 8,362 100.00% $ 9,732 100.00% $ 9,011 100.00% $ 6,450 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Securities Activities. The Company's consolidated securities portfolio,
which represented 28.7% of the Company's average earning asset base as of
December 31, 2006, as compared to 31.4% as of December 31, 2005, is managed to
minimize interest rate risk, maintain sufficient liquidity, and maximize return.
The portfolio includes several callable agency debentures, adjustable rate
mortgage pass-throughs, and collateralized mortgage obligations. Corporate bonds
consist of investment grade obligations of public corporations. Equity
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
trust preferred stock. The Company's financial planning anticipates income
streams generated by the securities portfolio based on normal maturity and
reinvestment. Securities classified as available-for-sale, carried at fair
value, were $298,692 at December 31, 2006 compared to $196,440 at December 31,
2005 primarily resulting from $125,756 in securities added as a result of the
Centrue merger. The Company does not have any securities classified as trading
or held-to-maturity.
The following table describes the composition of securities by major category
and maturity:
SECURITIES PORTFOLIO
(Dollars in Thousands)
December 31,
----------------------------------------------------------------------------
2006 2005 2004
----------------------- ----------------------- -----------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
---------- ---------- ---------- ---------- ---------- ----------
Available-for-Sale
U.S. government agencies 126,039 42.21 30,858 15.71 20,924 10.92
U.S. government agency
mortgage backed securities 69,579 23.29 101,022 51.43 117,500 61.30
States and political
subdivisions 41,471 13.88 18,400 9.37 24,647 12.86
Collateralized mortgage
obligations 27,237 9.12 20,937 10.66 2,486 1.30
Corporate bonds 8,764 2.93 6,907 3.52 8,239 4.30
Other securities 25,602 8.57 18,316 9.32 17,865 9.32
---------- ---------- ---------- ---------- ---------- ----------
Total $ 298,692 100.00% $ 196,440 100.00% $ 191,661 100.00%
========== ========== ========== ========== ========== ==========
The following table sets forth the contractual, callable or estimated maturities
and yields of the debt securities portfolio as of December 31, 2006. Mortgage
backed and collateralized mortgage obligation securities are included at
estimated maturity.
41.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
MATURITY SCHEDULE
(Dollars in Thousands)
Maturing
---------------------------------------------------------------------------------------
After 1 but After 5 but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
---------------- ---------------- ---------------- ---------------- --------
Amount Yield Amount Yield Amount Yield Amount Yield Amount
-------- ----- -------- ----- -------- ----- -------- ----- --------
Available-for-Sale
U.S. government
agencies and
corporations $ 19,220 4.770% $103,709 5.011% $ 3,110 6.000% $ -- --% $126,039
U.S. government
agency mortgage
backed securities -- -- 2,913 5.434 7,602 5.040 59,064 5.207 69,579
States and political
subdivisions (1) 3,724 6.126 24,918 5.736 8,983 6.338 3,846 5.719 41,471
Collateralized
mortgage obligations 59 4.241 -- -- -- -- 27,178 5.500 27,237
Corporate bonds 6,030 5.778 2,734 4.980 -- -- -- 8,764
-------- ----- -------- ----- -------- ----- -------- ----- --------
Total $ 29,033 $134,274 $ 19,695 $ 90,088 $273,090
======== ======== ======== ======== ========
-----------------------
(1) Rates on obligations of states and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate
Deposit Activities. Deposits are attracted through the offering of a
broad variety of deposit instruments, including checking accounts, money market
accounts, regular savings accounts, term certificate accounts (including "jumbo"
certificates in denominations of $100,000 or more), and retirement savings
plans. The Company's average balance of total deposits was $597,599 for 2006,
representing an increase of $77,572 or 13.0% compared with the average balance
of total deposits for 2005 primarily resulting from $523,630 in deposits added
as a result of the Centrue merger.
The following table sets forth certain information regarding Centrue Bank's
average deposits:
AVERAGE DEPOSITS
(Dollars in Thousands)
For the Years Ended December 31,
-----------------------------------------------------------------------------------------
2006 2005 2004
--------------------------- --------------------------- ---------------------------
% Average % Average % Average
Average of Rate Average of Rate Average of Rate
Amount Total Paid Amount Total Paid Amount Total Paid
-------- ------ ------ -------- ------ ------ -------- ------ ------
Non-interest-bearing
demand deposits $ 68,650 11.49% --% $ 61,040 11.74% --% $ 71,912 12.48% --%
Savings accounts 45,343 7.59 0.69 42,122 8.10 0.50 47,337 8.22 0.56
Interest-bearing
demand deposits 137,106 22.94 2.33 131,882 25.36 1.51 151,961 26.38 0.98
Time, less than $100,000 137,470 23.00 4.12 136,745 26.30 3.06 156,198 27.11 2.76
Time, $100,000 or more 209,030 34.98 4.11 148,238 28.50 3.05 148,701 25.81 2.57
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total deposits $597,599 100.00% 2.97% $520,027 100.00% 2.10% $576,109 100.00% 1.72%
======== ====== ====== ======== ====== ====== ======== ====== ======
As of December 31, 2006, average time deposits over $100,000 represented 34.98%
of total average deposits, compared with 28.5% of total average deposits as of
December 31, 2005. The Company's large denomination time deposits are generally
from customers within the local market areas of its subsidiary bank and provide
a greater degree of stability than is typically associated with brokered deposit
customers with limited business relationships.
42.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The following table sets forth the remaining maturities for time deposits of
$100,000 or more at December 31, 2006:
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in Thousands)
Maturity Range
Three months or less $ 120,744
Over three months through six months 37,826
Over six months through twelve months 22,081
Over twelve months 50,750
----------
Total $ 231,401
==========
Return on Equity and Assets. The following table presents various
ratios for the Company:
RETURN ON EQUITY AND ASSETS
For the Years Ended
December 31,
------------------------------------
2006 2005 2004
---------- ---------- ----------
Return on average assets 0.69% 0.63% 0.65%
Return on average equity 6.69 6.06 7.06
Average equity to average assets 10.35 10.39 9.27
Dividend payout ratio for common stock 27.05 43.39 36.42
Liquidity
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth together with repayments and maturities
of loans and investments, the Company utilizes other short-term funding sources
such as brokered time deposits, securities sold under agreements to repurchase,
overnight federal funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities, and Federal Home Loan Bank advances.
The Company monitors and manages its liquidity position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls, and anticipated depository
buildups or runoffs.
The Company classifies all of its securities as available-for-sale, thereby
maintaining significant liquidity. The Company's liquidity position is further
enhanced by structuring its loan portfolio interest payments as monthly and by
the significant representation of retail credit and residential mortgage loans
in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
43.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
The Company's cash flows are comprised of three classifications: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. Cash flows provided by operating activities and investing
activities offset by cash flows used in financing activities resulted in a net
increase in cash and cash equivalents of $15,837 from December 31, 2005 to
December 31, 2006.
During 2006, the Company experienced net cash inflows of $53,963 in investing
activities primarily due to proceeds from maturities, paydowns, and sales of
securities and cash acquired in merger and $7,411 from operating activities
largely due to net income and proceeds from net loans sales and net income. In
contrast, net cash outflows of $45,500 were used in financing activities due to
decreases in deposits and advances from the Federal Home Loan Bank.
Centrue Bank's securities portfolio, federal funds sold, and cash and due from
bank deposit balances serve as the primary sources of liquidity for the Company.
At December 31, 2006, 25.68% of Centrue Bank's interest-bearing liabilities were
in the form of time deposits of $100,000 and over. Management believes these
deposits to be a stable source of funds. However, if a large number of these
time deposits matured at approximately the same time and were not renewed,
Centrue Bank's liquidity could be adversely affected. Currently, the maturities
of Centrue Bank's large time deposits are spread throughout the year, with 52.2%
maturing in the first quarter of 2007, 16.4% maturing in the second quarter of
2007, 9.5% maturing in the third and fourth quarters of 2007, and the remaining
21.9% maturing thereafter. Centrue Bank monitors those maturities in an effort
to minimize any adverse effect on liquidity.
The Company's borrowings included trust preferred securities and notes payable
at December 31, 2006 in the principal amount of $10,000 each for Kankakee
Capital Trust and Centrue Statutory Trust, $7,850 payable to the Company's
principal correspondent bank, shareholder note for $1,200 related to the
purchase of Parrish Bank and $149 payable to individuals related to the purchase
of the Howard Marshall Agency. The note to the Company's principal correspondent
bank is renewable annually, requires quarterly interest payments, and is
collateralized by the Company's stock in the Bank. The note related to the
purchase of the Howard Marshall Agency requires monthly principal and interest
payments. The shareholder note requires bi-annual payments of $500 at an imputed
interest rate.
The Company's principal source of funds for repayment of the indebtedness is
dividends from Centrue Bank. At December 31, 2006, approximately $1,946 was
available for dividends without regulatory approval.
Contractual Obligations
The Company has entered into contractual obligations and commitments and
off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off-balance
sheet instruments as of December 31, 2006:
44.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------------------------------
Within 1 After
Contractual Obligations Year 1-3 Years 4-5 Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Short-term debt $ 7,850 $ -- $ -- $ -- $ 7,850
Long-term debt -- 149 -- 1,016 1,165
Certificates of deposit 432,188 123,474 15,255 723 571,640
Operating leases 429 891 949 480 2,749
Severance payments 97 -- -- -- 97
Series B Mandatory redeemable
preferred stock -- 831 -- -- 831
Subordinated Debentures -- -- -- 20,620 20,620
FHLB Advances 31,530 18,352 8,200 5,065 63,147
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 472,094 $ 143,697 $ 24,404 $ 27,904 $ 668,099
========== ========== ========== ========== ==========
Commitments, Contingencies, and Off-Balance Sheet Financial Instruments
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, often including obtaining collateral at
exercise of the commitment. At December 31, 2006, the Company had $192,808 in
outstanding loan commitments including outstanding commitments for various lines
of credit. The Company also has $10,937 of standby letters of credit as of
December 31, 2006. See Note 18 of the Notes to the Consolidated Financial
Statements for additional information on loan commitments and standby letters of
credit.
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors. Stockholders' equity
at December 31, 2006 was $118,191, an increase of $52,116 or 78.9%, from
December 31, 2005. The increase in stockholders' equity was largely the result
of the issuance of common stock related to the Centrue merger and net income for
the period partially offset by dividends paid to shareholders. These increases
were partially offset by cash outlays of common stock and preferred stock
dividends, and purchase of treasury stock. Average equity as a percentage of
average assets was 10.35% at December 31, 2006, compared to 10.39% at December
31, 2005. Book value per common share equaled $18.23 at December 31, 2006, an
increase from $17.23 reported at the end of 2005.
Stock Repurchase Programs
Following the closing of the Centrue merger, the Company's board voted to
terminate the former UnionBancorp, Inc. stock repurchase plan. In its place, the
Company adopted a new stock repurchase plan, providing for the repurchase of up
to 5%, or approximately 370,000 shares, of the combined company's common stock
outstanding over the next 18 months in the open market or in privately
negotiated transactions.
45.
CENTRUE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Capital Measurements
Centrue Bank is expected to meet a minimum risk-based capital to risk-weighted
assets ratio of 8%, of which at least one-half (or 4%) must be in the form of
Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of Tier
1 (core) or Tier 2 (supplementary) capital. The amount of loan loss allowance
that may be included in capital is limited to 1.25% of risk-weighted assets. The
ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2
(supplementary) capital to risk-weighted assets for the Company was 10.8% and
11.9%, respectively, at December 31, 2006. The decline in the respective capital
ratios was primarily due to an increase in goodwill and other intangible assets
in connection with the Centrue merger. The Company is currently, and expects to
continue to be, in compliance with these guidelines.
As of December 31, 2006, the Tier 2 risk-based capital was comprised of $10,835
in allowance for loan losses (limited to 1.25% of risk-weighted assets). The
Series A Preferred Stock is convertible into common stock, subject to certain
adjustments intended to offset the amount of losses incurred by the Company upon
the post-closing sale of certain securities acquired in conjunction with the
1996 acquisition of Prairie.
The following table sets forth an analysis of the Company's capital ratios:
RISK-BASED CAPITAL RATIOS
(Dollars in Thousands)
December 31, Minimum Well
---------------------------------------- Capital Capitalized
2006 2005 2004 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 99,869 $ 60,546 $ 63,347
Tier 2 risk-based capital 10,835 6,266 6,067
---------- ---------- ----------
Total capital 110,704 66,812 69,414
Risk-weighted assets 926,874 501,342 485,325
Capital ratios
Tier 1 risk-based capital 10.8% 12.1% 13.0% 4.0% 6.0%
Tier 2 risk-based capital 11.9 13.3 14.3 8.0 10.0
Leverage ratio 7.9 9.0 9.5 4.0 5.0
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Company, including the influence of domestic and foreign economic
conditions and the monetary and fiscal policies of the United States government
and federal agencies, particularly the FRB.
46.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The discussion under the caption "Interest Rate Sensitivity Management"
contained in Item 7 of this Form 10-K is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Report of Independent Registered Public Accounting Firm......................48
Consolidated Balance Sheets (December 31, 2006 and 2005) ....................49
Consolidated Statements of Income
(For the years ended December 31, 2006, 2005 and 2004)...............50
Consolidated Statements of Stockholders' Equity
(For the years ended December 31, 2006, 2005 and 2004)...............52
Consolidated Statements of Cash Flows
(For the years ended December 31, 2006, 2005 and 2004)...............54
Notes ......................................................................56
Supplementary Data
The Supplementary Financial Information required to be included in this Item 8
is hereby incorporated by reference by Note 24 to the Notes to Consolidated
Financial Statements contained herein.
47.
[GRAPHIC OMITTED]
Crowe (TM)
Crowe Chizek and Company LLC
Member Horwath International
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Centrue Financial Corporation
Ottawa, Illinois
We have audited the accompanying balance sheets of Centrue Financial Corporation
as of December 31, 2006 and 2005, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Centrue Financial Corporation
at December 31, 2006 and 2005, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
/s/ Crowe Chizek and Company LLC
-----------------------------------
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 19, 2007
48.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005 (In Thousands, Except Share and Per Share Data)
2006 2005
------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 40,195 $ 24,358
Securities available-for-sale 298,692 196,440
Loans 836,944 417,525
Allowance for loan losses (10,835) (8,362)
------------ ------------
Net loans 826,109 409,163
Cash value of life insurance 25,904 15,498
Mortgage servicing rights 3,510 2,533
Premises and equipment, net 35,403 13,908
Goodwill 25,396 6,963
Intangible assets, net 12,733 533
Other real estate 2,136 203
Other assets 12,947 6,623
------------ ------------
Total assets $ 1,283,025 $ 676,222
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 125,585 $ 57,832
Interest-bearing 901,025 486,009
------------ ------------
Total deposits 1,026,610 543,841
Securities sold under agreements to repurchase 36,319 612
Federal Home Loan Bank advances 63,147 50,000
Notes payable 9,015 9,468
Series B mandatory redeemable preferred stock 831 831
Subordinated debentures 20,620 --
Other liabilities 8,292 5,395
------------ ------------
Total liabilities 1,164,834 610,147
Stockholders' equity
Preferred stock
Series A Convertible Preferred Stock (aggregate liquidation
preference of 2,762) 500 500
Common stock, $1 par value, 15,000,000 shares authorized;
7,412,210 and 4,684,393 shares issued in 2006 and 2005 7,412 4,684
Surplus 70,460 23,167
Retained earnings 52,469 48,837
Accumulated other comprehensive income 235 95
------------ ------------
131,076 77,283
Treasury stock, at cost, 957,142 shares - 2006
and 877,517 shares - 2005 (12,885) (11,208)
------------ ------------
Total stockholders' equity 118,191 66,075
------------ ------------
Total liabilities and stockholders' equity $ 1,283,025 $ 676,222
============ ============
See Accompanying Notes to Consolidated Financial Statements.
(Continued)
49.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005, and 2004 (In Thousands, Except Per Share Data)
2006 2005 2004
------------------------------------------------------------------------------------------------
Interest income
Loans $ 33,717 $ 27,251 $ 27,718
Securities
Taxable 8,785 6,331 5,925
Exempt from federal income taxes 976 993 1,221
Federal funds sold and other 380 122 34
------------ ------------ ------------
Total interest income 43,858 34,697 34,898
Interest expense
Deposits 18,204 10,910 9,909
Federal funds purchased and securities sold
under agreements to repurchase 407 197 98
Advances from the Federal Home Loan Bank 1,824 2,128 2,887
Series B Mandatory Redeemable preferred stock 50 50 50
Subordinated debentures 242 -- --
Notes payable and other 624 419 287
------------ ------------ ------------
Total interest expense 21,351 13,704 13,231
------------ ------------ ------------
Net interest income 22,507 20,993 21,667
Provision for loan losses (1,275) 250 1,924
------------ ------------ ------------
Net interest income after provision for loan losses 23,782 20,743 19,743
Noninterest income
Service charges 2,473 1,996 2,866
Trust income 858 811 740
Mortgage banking income 1,113 1,350 2,020
Brokerage commissions and fees 326 513 525
Bank Owned Life Insurance (BOLI) 628 545 573
Securities (losses) gains, net (104) (79) 123
Gain on sale of other assets (14) 4 4,263
Other income 1,408 1,158 1,268
------------ ------------ ------------
6,688 6,298 12,378
Noninterest expenses
Salaries and employee benefits 12,181 12,546 13,841
Occupancy, net 1,714 1,488 2,333
Furniture and equipment 2,276 1,852 2,103
Marketing 697 491 604
Supplies and printing 421 343 422
Telephone 490 425 523
Other real estate owned 16 59 8
Amortization of intangible assets 416 120 241
Other expenses 4,512 4,019 4,785
------------ ------------ ------------
22,723 21,343 24,860
------------ ------------ ------------
Income from continuing operations
before income taxes 7,747 5,698 7,261
Income taxes 2,145 1,319 2,173
------------ ------------ ------------
Income from continuing operations $ 5,602 $ 4,379 $ 5,088
See Accompanying Notes to Consolidated Financial Statements.
(Continued)
50.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005, and 2004 (In Thousands, Except Per Share Data)
2006 2005 2004
------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations of discontinued
insurance unit (including loss on
disposal of $452 in 2006) (677) (326) (402)
Income tax benefit (262) (120) (117)
------------ ------------ ------------
Loss on discontinued operations (415) (206) (285)
------------ ------------ ------------
Net income 5,187 4,173 4,803
Preferred stock dividends 207 207 207
------------ ------------ ------------
Net income for common stockholders $ 4,980 $ 3,966 $ 4,596
============ ============ ============
Basic earnings per common share
from continuing operations $ 1.31 $ 1.06 $ 1.21
Basic earnings per common share
from discontinued operations (0.10) (0.05) (0.07)
------------ ------------ ------------
Basic earnings per common share $ 1.21 $ 1.01 $ 1.14
============ ============ ============
Diluted earnings per common share
from continuing operations $ 1.30 $ 1.04 $ 1.19
Diluted earnings per common share
from discontinued operations (0.10) (0.05) (0.07)
------------ ------------ ------------
Diluted earnings per common share $ 1.20 $ 0.99 $ 1.12
============ ============ ============
Dividends per common share $ 0.48 $ 0.44 $ 0.40
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
(Continued)
53.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2006, 2005, and 2004 (In Thousands, Except Share Data)
------------------------------------------------------------------------------------------------------------------------------
Unearned
Compensation
Series A Accumulated Under
Convertible Other Stock
Preferred Common Retained Comprehensive Option Treasury
Stock Stock Surplus Earnings Income Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
January 1, 2004 500 4,628 22,484 43,609 2,141 (2) (5,313) 68,047
Common stock dividends -- -- -- (1,613) -- -- -- (1,613)
Preferred stock dividends -- -- -- (207) -- -- -- (207)
Exercise of stock options
(13,294 shares) -- 13 148 -- -- -- -- 161
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 2 -- 2
Purchase of 8,000 shares
of treasury stock -- -- -- -- -- -- (156) (156)
Comprehensive income
Net income -- -- -- 4,803 -- -- -- 4,803
Net decrease in fair value-
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (790) -- -- (790)
--------
Total comprehensive
income 4,013
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2004 $ 500 $ 4,641 $ 22,632 $ 46,592 $ 1,351 $ -- $ (5,469) $ 70,247
Common stock dividends -- -- -- (1,721) -- -- -- (1,721)
Preferred stock dividends -- -- -- (207) -- -- -- (207)
Exercise of stock options
(43,486 shares) -- 43 535 -- -- -- -- 578
Purchase of 268,754 shares
of treasury stock -- -- -- -- -- -- (5,739) (5,739)
Comprehensive income
Net income -- -- -- 4,173 -- -- -- 4,173
Net decrease in fair value-
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (1,256) -- -- (1,256)
--------
Total comprehensive
income 2,917
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2005 $ 500 $ 4,684 $ 23,167 $ 48,837 $ 95 $ -- $(11,208) $ 66,075
======== ======== ======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
52.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2006, 2005, and 2004 (In Thousands, Except Share Data)
-----------------------------------------------------------------------------------------------------------------
Series A Accumulated
Convertible Other
Preferred Common Retained Comprehensive Treasury
Stock Stock Surplus Earnings Income Stock Total
-------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2005 $ 500 $ 4,684 $ 23,167 $ 48,837 $ 95 $(11,208) $ 66,075
Common stock dividends -- -- -- (1,348) -- -- (1,348)
Preferred stock dividends -- -- -- (207) -- -- (207)
Exercise of stock options
(27,300 shares) -- 27 329 -- -- -- 356
Issuance of 2,700,517
shares of common stock
related to merger -- 2,701 46,611 -- -- -- 49,312
Stock-based compensation -- -- 353 -- -- -- 353
Purchase of 79,625 shares
of treasury stock -- -- -- -- -- (1,677) (1,677)
Comprehensive income
Net income -- -- -- 5,187 -- -- 5,187
Net decrease in fair value-
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- 140 -- 140
--------
Total comprehensive
income 5,327
-------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2006 $ 500 $ 7,412 $ 70,460 $ 52,469 $ 235 $(12,885) $118,191
======== ======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
53.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005, and 2004 (In Thousands)
2006 2005 2004
----------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 5,187 $ 4,173 $ 4,803
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 2,149 1,839 2,455
Amortization of intangible assets 457 170 337
Amortization of mortgage servicing rights 473 535 722
Amortization of unearned compensation under
stock option plans -- -- 2
Amortization of bond premiums, net 165 1,114 1,739
Stock option expense 353 -- --
Federal Home Loan Bank stock dividend -- (191) (350)
Provision for loan losses (1,275) 250 1,924
Provision for deferred income taxes 2,460 30 464
Net change in BOLI (637) (545) (574)
Net change in OREO -- (655) (619)
Securities losses/(gains), net 104 79 (123)
Gain on sale of assets, net (14) (4) (4,263)
Gain (loss) on sale of real estate acquired in
settlement of loans (68) (42) (44)
Gain on sale of loans (762) (1,034) (1,877)
Proceeds from sale of loans held for sale 49,039 51,838 86,828
Origination of loans held for sale (47,855) (50,378) (83,273)
Change in assets and liabilities
(Increase) decrease in other assets (5,365) (679) 1,053
Increase (decrease) in other liabilities 2,963 2,235 606
------------ ------------ ------------
Net cash provided by operating activities 7,374 8,735 9,810
Cash flows from investing activities
Securities available for sale
Proceeds from maturities and paydowns 39,380 56,414 104,192
Proceeds from sales 19,377 10,885 19,584
Purchases (38,908) (74,972) (66,070)
Redemption of FHLB stock 1,730 -- --
Purchase of loans (19,513) (3,275) --
Net decrease (increase) in loans 32,371 2,730 11,745
Purchase of premises and equipment (2,761) (2,979) (2,197)
Proceeds from sale of real estate acquired in
settlement of loans 979 914 470
Cash acquired, net of cash (paid) for acquisitions 26,506 -- --
Sale of insurance unit 856
Sale of branches, net of premium received (6,054) -- (50,835)
------------ ------------ ------------
Net cash provided by (used in) investing activities 53,963 (10,283) 16,889
See Accompanying Notes to Consolidated Financial Statements.
54.
CENTRUE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004, and 2003 (In Thousands)
2006 2005 2004
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits $ (34,853) $ 31,364 $ (24,419)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 7,202 (12,110) 11,189
Net increase (decrease) in advances from the
Federal Home Loan Bank (13,504) (11,900) (10,550)
Payments on notes payable (2,869) (2,586) (1,000)
Proceeds from notes payable 1,400 5,425 500
Dividends on common stock (1,348) (1,721) (1,613)
Dividends on preferred stock (207) (207) (207)
Proceeds from exercise of stock options 356 578 161
Purchase of treasury stock (1,677) (5,739) (156)
------------ ------------ ------------
Net cash provided by (used in) financing activities (45,500) 3,104 (26,095)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,837 1,556 604
Cash and cash equivalents
Beginning of year 24,358 22,802 22,198
------------ ------------ ------------
End of year $ 40,195 $ 24,358 $ 22,802
============ ============ ============
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 21,932 $ 12,980 $ 13,219
Income taxes 1,386 862 346
Transfers from loans to other real estate owned 2,743 675 619
Business Combinations (see Note 23)
See Accompanying Notes to Consolidated Financial Statements.
55.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Centrue Financial Corporation (the "Company") is a bank holding company
organized under the laws of the State of Delaware. During the 4th quarter of
2006, the former UnionBancorp completed its merger with Centrue Financial
Corporation. Immediately following the merger, UnionBancorp changed its name to
Centrue Financial Corporation. The Company provides a full range of banking
services to individual and corporate customers located in markets extending from
the far western and southern suburbs of the Chicago metropolitan area across
Central and Northern Illinois down to the metropolitan St. Louis area. These
services include demand, time, and savings deposits; lending; mortgage banking,
brokerage, asset management, and trust services. The Company is subject to
competition from other financial institutions and nonfinancial institutions
providing financial services. Additionally, the Company and its subsidiary
Centrue Bank are subject to regulations of certain regulatory agencies and
undergo periodic examinations by those regulatory agencies.
Basis of presentation
---------------------
The consolidated financial statements include the accounts of the Company and
Centrue Bank. Intercompany balances and transactions have been eliminated in
consolidation.
The accompanying financial statements have been prepared in conformity with U.
S. generally accepted accounting principles and with general practice in the
banking industry. In preparing the financial statements, management makes
estimates and assumptions based on available information that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period, and actual results could
differ. The allowance for loan losses, value of mortgage servicing rights,
deferred taxes, and fair values of financial instruments are particularly
subject to change.
Assets held in an agency or fiduciary capacity, other than trust cash on deposit
with Centrue Bank, are not assets of the Company and, accordingly, are not
included in the accompanying consolidated financial statements.
Cash flows
----------
Cash and cash equivalents includes cash, deposits with other financial
institutions under 90 days, and federal funds sold. Loan disbursements and
collections, repurchase agreements, federal funds purchased, Federal Home Loan
Bank advances, bank owned life insurance and transactions in deposit accounts
are reported, net.
Securities
----------
Securities classified as available-for-sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value with unrealized gains or losses,
net of the related deferred income tax effect, reported in other comprehensive
income. Securities such as Federal Home Loan Bank stock and Federal Reserve Bank
stock are carried at cost. Declines in the fair value of securities below their
cost that are other than temporary are reflected as realized
(Continued)
56.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
losses. In estimating other-than-temporary losses, management considers: (1) the
length of time and extent that fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer, and (3) the Company's
ability and intent to hold the security for a period sufficient to allow for any
anticipated recovery in fair value.
Interest income is reported net of amortization of premiums and accretion of
discounts. Gains or losses from the sale of securities are determined using the
specific identification method. Securities are written down to fair value when a
decline in fair value is not temporary.
Loan commitments and related financial instruments
--------------------------------------------------
Financial instruments include off-balance-sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet
customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay.
Such financial instruments are recorded when they are funded.
Loans
-----
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance
outstanding, net of unearned interest, deferred loan fees and costs, and an
allowance for loan losses. Interest income is accrued on the unpaid principal
balance.
Interest income on mortgage and commercial loans is discontinued at the time the
loan is 90 days delinquent unless the loan is well-secured and in the process of
collection. Consumer and credit card loans are typically charged off no later
than 120 days past due. Past due status is based on the contractual terms of the
loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual are
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market, as determined by outstanding
commitments from investors. Net unrealized losses, if any, are recorded as a
valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained.
The carrying value of mortgage loans sold is reduced by the cost allocated to
the servicing right. Gains and losses on sales of mortgage loans are based on
the difference between the selling price and the carrying value of the related
loan sold.
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management
believes and confirms the loan balance to be uncollectible. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
(Continued)
57.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and commercial real estate loans
by either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. Large groups of
smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures.
Mortgage servicing rights
-------------------------
Servicing assets represent purchased rights and the allocated value of retained
servicing rights on loans sold. Servicing assets are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the assets, using groupings of the
underlying loans as to interest rates and then, secondarily, to prepayment
characteristics. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance, to the extent that fair value is less than the capitalized
amount for a grouping.
Premises and equipment
----------------------
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Building and related components are depreciated using
the straight-line method with useful lives ranging from 15 to 39 years.
Furniture, fixtures, and equipment are depreciated using the straight-line (or
accelerated) method with useful lives ranging from 3 to 10 years. The cost of
maintenance and repairs is charged to income as incurred; significant
improvements are capitalized.
(Continued)
58.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Foreclosed assets
-----------------
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value when acquired, establishing a new cost basis. If fair value declines,
a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
Bank-owned life insurance
-------------------------
The Company has invested in bank-owned life insurance policies, for which the
Company is also the beneficiary, on certain members of management. Bank-owned
life insurance is recorded at its cash surrender value or the amount that can be
realized. These policies have an approximate cash surrender value of $25,907 and
$15,498 at December 31, 2006 and 2005, respectively.
Goodwill and other intangible assets
------------------------------------
Goodwill results from business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities
and identifiable intangible assets. Goodwill is assessed at least annually for
impairment and any such impairment will be recognized in the period identified.
Other intangible assets consist of core deposit and acquired customer
relationship intangible assets arising from whole bank, and branch company
acquisitions. They are initially measured at fair value and then are amortized
over their estimated useful lives, which is ten years.
Long-term assets
----------------
Premises and equipment, core deposit, and other intangible assets, and other
long-term assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at fair value.
Repurchase agreements
---------------------
Substantially all repurchase agreement liabilities represent amounts advanced by
various customers. Securities are pledged to cover these liabilities, which are
not covered by federal deposit insurance.
Income taxes
------------
Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable based on enacted tax laws. Changes in enacted
tax rates and laws are reflected in the financial statements in the periods they
occur.
(Continued)
59.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Earnings per share
------------------
Basic earnings per share is based on weighted-average common shares outstanding.
Diluted earnings per share assumes the issuance of any dilutive potential common
shares under stock options and Series A convertible preferred shares using the
treasury stock method.
Stock Based Compensation
------------------------
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Share-based Payment, using the modified
prospective transition method. Accordingly, the Company has recorded stock-based
employee compensation cost using the fair value method starting in 2006. For
2006, adopting this standard resulted in a reduction of income before income
taxes of $353, a reduction in net income of $216, a decrease in basic and
diluted earnings per share of $0.52 and $0.52.
Prior to January 1, 2006, employee compensation expense under stock options was
reported using the intrinsic value method; therefore, no stock-based
compensation cost is reflected in net income for 2005 and 2004, as all options
granted had an exercise price equal to or greater than the market price of the
underlying common stock at date of grant.
The following table illustrates the effect on net income and earnings per share
if expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, for 2005 and 2004.
The Black-Scholes option pricing model was used to estimate the grant date fair
value of option grants.
2005 2004
---------- ----------
Net income as reported for common stockholders $ 3,966 $ 4,596
Deduct: Stock-based compensation expense
determined under fair value based method 106 96
---------- ----------
Pro forma net income $ 3,860 $ 4,500
========== ==========
Basic earnings per share as reported $ 1.01 $ 1.14
Pro forma basic earnings per share 0.98 1.12
Diluted earnings per share as reported 0.99 1.12
Pro forma diluted earnings per share 0.96 1.09
(Continued)
60.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Stockholders' Equity:
--------------------
Preferred stock
---------------
The Company's Certificate of Incorporation authorizes its Board of Directors to
fix or alter the rights, preferences, privileges, and restrictions of 200,000
shares of preferred stock.
The Company has the following classes of preferred stock issued or authorized:
Series A Convertible Preferred Stock: The Company has authorized 2,765
shares of Series A Convertible Preferred Stock. There were 2,762.24 shares
of Series A Convertible Preferred Stock issued at December 31, 2006 and
2005. Preferential cumulative cash dividends are payable quarterly at an
annual rate of $75.00 per share. Dividends accrue on each share of Series A
Preferred Stock from the date of issuance and from day to day thereafter,
whether or not earned or declared. The shares of Series A Preferred Stock
are convertible into 172,042 common shares. Series A Preferred Stock is not
redeemable for cash. Upon dissolution, winding up, or liquidation of the
Company, voluntary or otherwise, holders of Series A Preferred Stock will
be entitled to receive, out of the assets of the Company available for
distribution to stockholders, the amount of $1,000 per share, plus any
accrued but unpaid dividends, before any payment or distribution may be
made on shares of common stock or any other securities issued by the
Company that rank junior to the Series A Preferred Stock.
Series B Mandatory Redeemable Preferred Stock: The Company has authorized
1,092 shares of Series B Mandatory Redeemable Preferred Stock. There were
831 shares of Series B Mandatory Redeemable Preferred Stock issued at
December 31, 2006 and 2005 which are shown in other liabilities in
accordance with FASB 150. Preferential cumulative cash dividends are
payable quarterly at an annual rate of $60.00 per share. Dividends accrue
on each share of Series B Preferred Stock from the date of issuance and
from day to day, thereafter, whether or not earned or declared. Each
original holder of Series B Preferred Stock (or upon such holder's death,
their executor or personal representatives) will have the option,
exercisable at their sole discretion, to sell, and the Company will be
obligated to redeem such holder's shares of Series B Preferred Stock upon
the earlier to occur of the death of the respective original holder of
Series B Preferred Stock or August 6, 2006. The per share price payable by
the Company for such shares of Series B Preferred Stock will be equal to
$1,000 per share, plus any accrued but unpaid dividends. Upon dissolution,
wind up, or liquidation of the Company, voluntary or otherwise, holders of
Series B Preferred Stock will be entitled to receive, out of the assets of
the Company available for distribution to stockholders, the amount of
$1,000 per share, plus any accrued but unpaid dividends, before any payment
or distribution may be made on shares of common stock or any other
securities issued by the Company that rank junior to the Series B Preferred
Stock.
Series C Junior Participating Preferred Stock: The Company has authorized
4,500 shares of Series C Junior Participating Preferred Stock. There were
no shares issued at December 31, 2006 and 2005. Effective with the adoption
of the restated articles of incorporation submitted in November, 2006, the
Series C Preferred Stock ceased to exist.
(Continued)
61.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Dividend restriction
--------------------
Banking regulations require the maintenance of certain capital levels and may
limit the amount of dividends that may be paid by the subsidiary bank to the
holding company or by the holding company to stockholders.
Fair value of financial instruments
-----------------------------------
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
Loss contingencies
------------------
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
Comprehensive income
--------------------
Comprehensive income consists of net income and other comprehensive income
elements, including the change in unrealized gains and losses on securities
available-for-sale, net of tax.
Operating segments
------------------
Internal financial information is primarily reported and aggregated in the
following lines of business: banking, mortgage banking, financial services, and
other. The merger between the Company and the former Centrue Financial
Corporation (see Note 23) became effective on November, 13, 2006 and as such,
the results for the former Centrue Bank are presented as a stand alone segment
since its operations were not yet integrated at year end 2006. Comparable
discrete financial information is not available for the acquired entity on the
same reporting basis as the Company (e.g. the former UnionBancorp, Inc.).
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Adoption of new accounting standards
------------------------------------
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Share-based Payment. See "Stock Compensation"
above for further discussion of the effect of adopting this standard.
(Continued)
62
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and
132(R). This Statement requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its balance sheet, beginning
with year end 2006, and to recognize changes in the funded status in the year in
which the changes occur through comprehensive income beginning in 2007.
Additionally, defined benefit plan assets and obligations are to be measured as
of the date of the employer's fiscal year-end, starting in 2008. Adoption of
this statement was not material to the consolidated financial position or
results of operations.
In September 2006, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements (SAB 108),
which is effective for fiscal years ending on or after November 15, 2006. SAB
108 provides guidance on how the effects of prior-year uncorrected financial
statement misstatements should be considered in quantifying a current year
misstatement. SAB 108 requires public companies to quantify misstatements using
both an income statement (rollover) and balance sheet (iron curtain) approach
and evaluate whether either approach results in a misstatement that, when all
relevant quantitative and qualitative factors are considered, is material. If
prior year errors that had been previously considered immaterial now are
considered material based on either approach, no restatement is required so long
as management properly applied its previous approach and all relevant facts and
circumstances were considered. Adjustments considered immaterial in prior years
under the method previously used, but now considered material under the dual
approach required by SAB 108, are to be recorded upon initial adoption of SAB
108. The amount so recorded is shown as a cumulative effect adjustment is
recorded in opening retained earnings as of January 1, 2006. The adoption of SAB
108 had no effect on the Company's financial statements for the year ending
December 31, 2006.
In February 2006, the FASB issued Statement No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140.
This Statement permits fair value re-measurement for any hybrid financial
instruments, clarifies which instruments are subject to the requirements of
Statement No. 133, and establishes a requirement to evaluate interests in
securitized financial assets and other items. The new standard is effective for
financial assets acquired or issued after the beginning of the entity's first
fiscal year that begins after September 15, 2006. Adoption of this statement on
January 1, 2007 did not have a material impact on the Company's consolidated
financial position or results of operations.
In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140. This Statement provides
the following: 1) revised guidance on when a servicing asset and servicing
liability should be recognized; 2) requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value, if
practicable; 3) permits an entity to elect to measure servicing assets and
servicing liabilities at fair value each reporting date and report changes in
fair value in earnings in the period in which the changes occur; 4) upon initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities for securities which are identified as offsetting the
entity's exposure to changes in the fair value of servicing assets or
liabilities that a servicer elects to subsequently measure at fair value; and 5)
requires separate presentation
(Continued)
63.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
of servicing assets and servicing liabilities subsequently measured at fair
value in the statement of financial position and additional footnote
disclosures. This standard is effective as of the beginning of an entity's first
fiscal year that begins after September 15, 2006 with the effects of initial
adoption being reported as a cumulative-effect adjustment to retained earnings.
Adoption of this statement on January 1, 2007 did not have a material impact on
the Company's consolidated financial position or results of operations.
In July 2006, the FASB issued FASB Interpretaion No. 48, Accounting for
uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(FIN48), which prescribes a recognition threshold and measurement attribute for
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. Adoption of this statement
on January 1, 2007 did not have a material effect on the Company's consolidated
financial statements.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
Accounting for Purchases of Life Insurance - Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for
Purchases of Life Insurance). This issue requires that a policyholder consider
contractual terms of a life insurance policy in determining the amount that
could be realized under the insurance contract. It also requires that if the
contract provides for a greater surrender value be determined based on the
assumption that policies will be surrendered on an individual basis. Lastly, the
issue discusses whether the cash surrender value should be discounted when the
policy holder is contractually limited in its ability to surrender a policy.
This issue is effective for fiscal years beginning after December 31, 2006.
Adoption of this issue on January 1, 2007 did not have a material impact on the
Company's financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. The Company has not completed its evaluation
of the impact of the adoption of this standard.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a
liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants' employment or retirement. The
required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit
depending on the contractual terms of the underlying agreement. This issue is
effective for fiscal years beginning after December 15, 2007. The Company has
not completed its evaluation of the impact of adoption of EITF 06-4.
(Continued)
64.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 2. Business Acquisitions and Divestitures
On May 3, 2004, the Company sold the deposits and premises of a UnionBank/West
branch location. At the date of the sale, the branch had approximately $12,535
in deposits, $1,720 of loans, and $336 in fixed assets. The sale price was $440.
On September 10, 2004, the Company completed the sale of five branch offices
located in western Illinois. Per the terms of the agreement announced on May 24,
2004, First Bankers Trust Company of Quincy, Illinois acquired the physical
assets, $88,600 in deposits, and $40,226 of the net loan portfolio of Centrue
Bank's Quincy, Macomb, Paloma, Carthage and Rushville, Illinois offices. This
transaction effectively exited the Bank from the western Illinois marketplace.
The sales price was approximately $4,400. The Company also allocated $679 of
goodwill to the sale of these branches as well as amortized the remaining core
deposit intangible assigned to the deposits sold of $192.
On October 20, 2004, the Company completed the merger of UnionFinancial Services
& Trust Company into the Bank. UnionFinancial was a stand-alone financial
services company that offers a full line of insurance, brokerage trust and asset
management services.
On March 31, 2006, the Company completed its sale of the Mendota sales and
service center to First State Bank in Mendota. At the date of the sale, the
branch had approximately $6,066 in deposits.
On September 30, 2006, the Company completed its sale of its Insurance Product
line to the Phoenix Group. The sale price was $1,100. The Company recorded a net
loss of $452. See Note 22 for further information.
On November 13, 2006, the Company merged with the Centrue Financial Corporation.
UnionBancorp, Inc. was the acquirer and adopted the Centrue Financial
Corporation name. See Note 23 for further information.
Note 3. Securities
The fair value of securities available-for-sale and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income were as
follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
Available-for-sale
December 31, 2006
U.S. government agencies $ 126,039 $ 308 $ (245)
States and political subdivisions 41,471 329 (9)
U.S. government agency mortgage-backed securities 69,579 253 (393)
Collateralized mortgage obligations 27,237 44 (77)
Equity securities 25,602 171 --
Corporate 8,764 16 (13)
---------- ---------- ----------
$ 298,692 $ 1,121 $ (737)
========== ========== ==========
(Continued)
65.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
Available-for-sale
December 31, 2005
U.S. government agencies $ 30,857 $ 8 $ (364)
States and political subdivisions 18,400 424 (16)
U.S. government agency mortgage-backed securities 101,022 854 (675)
Collateralized mortgage obligations 20,938 21 (157)
Equity securities 18,316 54 (49)
Corporate 6,907 62 (7)
---------- ---------- ----------
$ 196,440 $ 1,423 $ (1,268)
========== ========== ==========
Approximately 33% at December 31, 2006 and 35% at December 31, 2005 of the fair
value of equity securities consists of Federal Home Loan Bank stock and Federal
Reserve Bank stock.
Sales of securities available-for-sale were as follows:
Years Ended December 31,
-----------------------------------------
2006 2005 2004
---------- ---------- ----------
Proceeds $ 19,377 $ 10,885 $ 19,584
Realized gains 19 24 166
Realized losses (123) (103) (43)
The fair value of securities classified as available-for-sale at December 31,
2006, by contractual maturity, are shown below. Securities not due at a single
maturity date, primarily mortgage-backed securities, collateralized mortgage
obligations, and equity securities are shown separately.
Fair Value
----------
Due in one year or less $ 22,944
Due after one year through five years 128,628
Due after five years through ten years 12,092
Due after ten years 3,846
U.S. government agency mortgage-backed securities 69,579
Collateralized mortgage obligations 27,237
Equity securities 34,366
------------
$ 298,692
============
The Company held callable securities with carrying value of $133,638 and an
amortized cost basis of $133,188 as of December 31, 2006 and with a carrying
value of $47,091 and an amortized cost basis of $47,097 at December 31, 2005.
Securities with carrying values of approximately $214,605 and $132,000 at
December 31, 2006 and 2005, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required or permitted by law. At year end 2006 and 2005, there were no holdings
of securities of any one issuer, other than the U.S. Government agencies in an
amount greater than 10% of stockholders' equity.
(Continued)
66.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 3. Securities (continued)
Securities with unrealized losses at year-end 2006 not recognized in income are
as follows:
Less than 12 Months 12 Months or More Total
---------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
-------------------------- ------------ ------------ ------------ ------------ ------------ ------------
U. S. government agencies $ 41,240 $ (37) $ 19,684 $ (208) $ 60,924 $ (245)
State and political
subdivisions 3,444 (2) 460 (7) 3,904 (9)
U.S. government agency
mortgage-backed securities 17,009 (88) 24,018 (305) 41,027 (393)
Collateralized mortgage
Obligations 3,228 (36) 8,042 (41) 11,270 (77)
Corporate 1,000 -- 1,785 (13) 2,785 (13)
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired $ 65,921 $ (163) $ 53,989 $ (574) $ 119,910 $ (737)
============ ============ ============ ============ ============ ============
Securities with unrealized losses at year-end 2005 not recognized in income are
as follows:
Less than 12 Months 12 Months or More Total
---------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
-------------------------- ------------ ------------ ------------ ------------ ------------ ------------
U. S. government agencies $ 21,445 $ (260) $ 5,876 $ (104) $ 27,321 $ (364)
State and political
subdivisions 611 (5) 462 (11) 1,073 (16)
U.S. government agency
mortgage-backed securities 36,194 (429) 13,929 (246) 50,123 (675)
Collateralized mortgage
Obligations 15,383 (157) 48 -- 15,431 (157)
Equity securities 1,030 (7) -- -- 1,030 (7)
Corporate 1,822 (7) 3,708 (42) 5,530 (49)
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired $ 76,485 $ (865) $ 24,023 $ (403) $ 100,508 $ (1,268)
============ ============ ============ ============ ============ ============
The Company evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic and market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuer's financial
condition, the Company may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer's financial condition.
The unrealized losses on all securities have not been recognized into income
because the securities are of high credit quality and management has the intent
and ability to hold for the foreseeable future and the decline in fair value is
largely due to increases in market interest rates.
(Continued)
67.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 4. Loans
The major classifications of loans follow:
December 31,
-------------------------
2006 2005
---------- ----------
Commercial $ 177,947 $ 118,231
Commercial real estate 406,403 183,361
Real estate 234,772 101,287
Real estate loans held for sale 4,850 1,316
Installment 11,998 12,747
Other 974 583
---------- ----------
$ 836,944 $ 417,525
========== ==========
An analysis of activity in the allowance for loan losses follows:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Balance at beginning of year $ 8,362 $ 9,732 $ 9,011
Acquired in merger 4,767 -- --
Provision (credit) for loan losses (1,275) 250 1,924
Reduction due to sale of loans -- -- (174)
Recoveries 665 700 1,435
Loans charged off (1,684) (2,320) (2,464)
---------- ---------- ----------
Balance at end of year $ 10,835 $ 8,362 $ 9,732
========== ========== ==========
The following table presents data on impaired loans:
December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Year-end impaired loans for which an allowance
has been provided $ 4,915 $ 12,585 $ 15,709
Year-end impaired loans for which no allowance has
been provided 16,450 563 818
---------- ---------- ----------
Total impaired loans $ 21,365 $ 13,148 $ 16,527
========== ========== ==========
Allowance for loan loss allocated to impaired loans $ 1,562 $ 3,913 $ 4,978
Average recorded investment in impaired loans 14,514 14,839 17,088
Interest income recognized from impaired loans 1,781 1,189 885
Cash basis interest income recognized from impaired loans 225 177 24
In November, the Company completed its merger with the former Centrue Financial
Corporation. As part of this merger, the Company's loan portfolio increased by
$436,460 and the allowance for loan losses increased $4,768. Within the loans
acquired were nonaccrual loans of $10,230. The increase in impaired loans with
no allocated allowance is a direct result of the loans acquired in the merger
being recorded upon acquisition at their fair value.
(Continued)
68.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 4. Loans (Continued)
Nonperforming loans were as follows:
December 31,
-------------------------
2006 2005
---------- ----------
Loans past due over 90 days still on accrual $ -- $ 922
Nonaccrual loans 11,759 3,082
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
The Company and its subsidiary conducts most of their business activities,
including granting agribusiness, commercial, residential, and installment loans,
with customers located in north central, east, central, south central, suburban
east in St. Louis metro area, suburban west in Chicago metro area and northwest
Illinois.
Loans made to executive officers, directors, and their affiliates during 2006
were as follows:
Balance at December 31, 2005 $ 22,544
Additions due to merger 434
New loans, extensions, and modification 1,496
Repayments (1,236)
Effect of changes in composition of related parties (16,186)
----------
Balance at December 31, 2006 $ 7,052
==========
Note 5. Loan Servicing
Loans held for sale at year end are as follows:
December 31,
-------------------------
2006 2005
---------- ----------
Loans held for sale $ 4,850 $ 1,316
Less: Allowance to adjust to lower of cost or market -- --
---------- ----------
Loans held for sale, net $ 4,850 $ 1,316
========== ==========
The following summarizes the secondary mortgage market activities:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Proceeds from sales of mortgage loans $ 49,039 $ 51,838 $ 86,828
========== ========== ==========
Gain on sales of mortgage loans $ 762 $ 1,034 $ 1,877
========== ========== ==========
(Continued)
69.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of these loans are
summarized as follows:
December 31,
-------------------------
2006 2005
---------- ----------
Federal Home Loan Mortgage Corporation $ 137,737 $ 1,706
Federal National Mortgage Association 258,552 289,974
Small Business Administration 856 1,333
IHDA 1,866 2,202
Other 9,653 7,027
---------- ----------
$ 408,664 $ 302,242
========== ==========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $2,543 and $1,348 at December 31, 2006 and 2005,
respectively.
Following is an analysis of the changes in originated mortgage servicing rights:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Balance at beginning of year $ 2,533 $ 2,772 $ 2,775
Acquired in merger 1,300 -- --
Originated mortgage servicing rights 150 296 719
Amortization (473) (535) (722)
---------- ---------- ----------
Balance at end of year $ 3,510 $ 2,533 $ 2,772
========== ========== ==========
In November, 2006, the Company merged with the former Centrue Financial
Corporation. As part of this merger, the Company recorded $1,300 of mortgage
servicing rights at the fair market value on the date of the merger and added
$139,167 of loan balances to its servicing portfolio.
Management periodically evaluates assets for impairment. For purposed of
measuring impairment, servicing assets are stratified by loan type. An
impairment is recognized if the carrying value of servicing assets exceeds the
fair value of the stratum. The fair value of capitalized mortgage servicing
rights was $3,700 and $2,500 at December 31, 2006 and 2005, respectively. Fair
value was determined using discount rates ranging from 9.77% to 10.27%,
prepayment speeds ranging from 15.35% to 16.22%, depending on the stratification
of the specific right.
Estimated amortization expense for each of the next five years:
2007 $ 475
2008 475
2009 450
2010 450
2011 400
(Continued)
70.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 6. Premises and Equipment
Premises and equipment consisted of:
December 31,
---------------------------
2006 2005
------------ ------------
Land $ 10,258 $ 3,329
Buildings 23,349 11,632
Furniture and equipment 20,480 17,728
Construction in process 1,504 132
------------ ------------
55,591 32,821
Less accumulated depreciation 20,188 18,913
------------ ------------
$ 35,403 $ 13,908
============ ============
Note 7. Goodwill and Intangible Assets
Goodwill
Goodwill initially recorded is subject to the completion of the valuation of
assets acquired and liabilities assumed. Purchase accounting adjustments are the
adjustments to the initial goodwill recorded at the time an acquisition is
completed. Such adjustments generally consist of adjustments to the assigned
fair value of assets acquired and liabilities assumed resulting from the
completion of appraisals or other valuations and adjustments to initial
estimates recorded for transaction costs or exit liabilities. Goodwill is not
amortized but is subject to impairment tests on at least an annual basis. The
Company's annual goodwill impairment test determined no impairment existed at
that date.
The change in balance of goodwill during the year is as follows:
2006 2005
------------ ------------
Beginning of year $ 6,963 $ 6,963
Goodwill from merger 19,086 --
Goodwill allocated to Insurance division sale (653) --
------------ ------------
End of year $ 25,396 $ 6,963
============ ============
Acquired Intangible Assets
Acquired intangible assets were as follows as of year end:
2006 2005
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Amortized intangible assets:
Core deposit intangibles $ 14,124 $ 1,433 $ 1,089 $ 1,022
Other customer relationship intangibles 60 18 749 283
------------ ------------ ------------ ------------
Total $ 14,184 $ 1,451 $ 1,838 $ 1,305
============ ============ ============ ============
(Continued)
71.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 7. Goodwill and Intangible Assets (continued)
The core deposit intangible asset recorded in the merger with Centrue Financial
Corporation was $13,035. Aggregate amortization expense was $457, $170, and $280
for 2006, 2005, and 2004.
Estimated amortization expense for subsequent years:
2007 $ 2,308
2008 1,887
2009 1,544
2010 1,263
2011 1,034
Thereafter 4,694
Note 8. Deposits
Deposit account balances by type are summarized as follows:
December 31,
-------------------------
2006 2005
---------- ----------
Non-interest-bearing demand deposits $ 125,585 $ 57,832
Savings, NOW, and money market accounts 329,385 175,004
Time deposits of $100 or more 231,401 162,328
Other time deposits 340,238 148,677
---------- ----------
$1,026,610 $ 543,841
========== ==========
At December 31, 2006, the scheduled maturities of time deposits are as follows:
Year Amount
---- ----------
2007 $ 432,188
2008 92,715
2009 30,759
2010 11,904
2011 3,351
Thereafter 723
----------
$ 571,640
==========
Time certificates of deposit in denominations of $100 or more mature as follows:
December 31,
-------------------------
2006 2005
---------- ----------
3 months or less $ 120,744 $ 60,256
Over 3 months through 6 months 37,826 30,823
Over 6 months through 12 months 22,081 36,871
Over 12 months 50,750 34,378
---------- ----------
$ 231,401 $ 162,328
========== ==========
Deposits from principal officers, directors and their affiliates at year end
2006 and 2005 were $1,134 and $3,100.
(Continued)
72.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 9 - Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are financing arrangements that
mature within two years. At maturity, the securities underlying the agreements
are returned to the Company. Securities sold under agreements to repurchase are
secured by mortgage-backed securities with a carrying value of $36,319 and
$12,497 at year-end 2006 and 2005. Information concerning securities sold under
agreements to repurchase is summarized as follows:
2006 2005
---------- ----------
Average daily balance during the year $ 6,679 $ 3,903
Average interest rate during the year 4.61% 3.04%
Maximum month-end balance during the year $ 36,319 $ 12,497
Weighted average interest rate at year-end 4.70% 3.06%
Note 10 - Subordinated Debentures
As part of the merger, the Company acquired two trust preferred issuances. These
were issued for $10,000 each in April 2002 and April 2004 in cumulative trust
preferred securities through newly formed special-purpose trusts, Kankakee
Capital Trust I (Trust I) and Centrue Statutory Trust II (Trust II). The
proceeds of the offerings were invested by the trusts in junior subordinated
deferrable interest debentures of Trust I and Trust II totaling $20,620. Trust I
and Trust II are wholly-owned subsidiaries of the Company, and their sole assets
are the junior subordinated deferrable interest debentures. Distributions are
cumulative and are payable quarterly at a variable rate of 3.70% and 2.65% over
the LIBOR rate, respectively, (at a rate of 9.06% and 8.01% at December 31,
2006) per annum of the stated liquidation amount of $1,000 per preferred
security. Interest expense on the trust preferred securities was $242 since the
date of the merger. The interest can be deferred at the option of the Company.
The obligations of the trust are fully and unconditionally guaranteed, on a
subordinated basis, by the Company. The trust preferred securities for Trust I
are mandatorily redeemable upon the maturity of the debentures on April 7, 2032,
or to the extent of any earlier redemption of any debentures by the Company, and
are callable beginning April 7, 2007. The trust preferred securities for Trust
II are mandatorily redeemable upon the maturity of the debentures on April 22,
2034, or to the extent of any earlier redemption of any debentures by the
Company, and are callable beginning April 22, 2009. Holders of the capital
securities have no voting rights, are unsecured, and rank junior in priority of
payment to all of the Company's indebtedness and senior to the Company's capital
stock. For regulatory purposes, the trust preferred securities qualify as Tier 1
capital subject to certain provisions.
In accordance with FASB interpretation 46R, the trusts are not consolidated with
the Company's consolidated financial statements, but rather the subordinated
debentures are shown and a liability and the Company's investment in the common
stock for the trusts of $620 is included in other assets.
Note 11. Borrowed Funds
At December 31, 2006, $8,300 of Federal Home Loan Bank advances have various
call provisions. The Company maintains a collateral pledge agreement covering
secured advances whereby the Company had specifically pledged $192,800 of first
mortgage loans on improved residential and mixed use farm property free of all
other pledges, liens, and encumbrances (not more than 90 days delinquent) and
securities carried at $15,100. The Company has two variable rate advances, one
at a rate of 5.35% and the other is at 5.39% at year-end 2006 and one at 4.29%
at year-end 2005. The remaining advances are at
(Continued)
73.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 11. Borrowed Funds (continued)
fixed rates ranging from 2.63% to 4.90%. The scheduled maturities of advances
from the Federal Home Loan Bank at December 31, 2006 are as follows:
2006 2005
------------------------ --------------------------
Average Average
Interest Interest
Year Rate Amount Rate Amount
---- ---------- ---------- ---------- ----------
2006 4.98% $ 8,300
2007 4.74% $ 31,530 3.51 10,200
2008 2.96 13,329 2.97 13,300
2009 3.78 5,023 3.78 5,000
2010 4.50 5,200 4.50 5,200
2011 4.90 3,000 -- --
Thereafter 4.37 5,065 4.68 8,000
---------- ---------- ---------- ----------
4.25% $ 63,147 3.93% $ 50,000
========== ==========
Notes payable consisted of the following at December 31, 2006 and 2005:
2006 2005
---------- ----------
Line of credit loan ($3,000) from
LaSalle National Bank; interest due quarterly at
the higher of (1) 90-day LIBOR plus 1.75% or (2)
4%; balance due on January 1, 2007; secured by
100% of the stock of Centrue Bank $ -- $ 1,000
Revolving credit loan ($15,000) from LaSalle
National Bank; interest due quarterly at the
higher of (1) 90-day LIBOR plus 1.75% or (2) 4%;
balance due on January 1, 2007; secured by 100%
of the stock of Centrue Bank 7,850 8,200
A promissory note to an individual related to
the purchase of the Howard Marshall Agency. The
original amount of the note was $376. The note
was entered into on November 1, 2003 and carries
an interest rate of 5%
The note requires monthly installment payments
of principal and interest. The note matures on
November 1, 2008 149 268
A note to an individual related to the purchase
of the Parrish Bank. The original amount was
$2,000. The note was entered into on October 23,
2002 and carries as imputed interest rate of
5.25%. The note matures on October 24, 2012 1,016 --
---------- ----------
$ 9,015 $ 9,468
========== ==========
The note payable agreements with LaSalle National Bank contain certain covenants
that limit the amount of dividends paid, the purchase of other banks and/or
businesses, the purchase of investments not in the ordinary course of business,
changes in capital structure, and guarantees of other liabilities and
obligations. In addition, the Company must maintain certain financial ratios.
The Company was in compliance with all covenants for the year ended December 31,
2006.
(Continued)
74.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 11. Borrowed Funds (Continued)
Information concerning borrowed funds is as follows:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Federal Funds Purchased
Year-end balance $ -- $ -- $ 11,700
Maximum month-end balance during the year 12,000 8,600 11,700
Average balance during the year 1,884 2,340 1,935
Weighted average interest rate for the year 5.25% 3.34% 1.71%
Weighted average interest rate at year end N/A N/A 1.71%
Advances from the Federal Home Loan Bank
Maximum month-end balance during the year $ 63,165 $ 61,900 $ 74,700
Average balance during the year 46,487 54,472 70,359
Weighted average interest rate for the year 3.92% 3.91% 4.10%
Weighted average interest rate at year end 4.25% 3.93% 3.91%
Notes Payable
Maximum month-end balance during the year $ 10,846 $ 10,105 $ 7,882
Average balance during the year 9,081 8,345 7,347
Weighted average interest rate for the year 6.93% 5.11% 4.18%
Weighted average interest rate at year end 6.36% 5.53% 3.33%
Note 12. Income Taxes
Income taxes consisted of:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Federal
Current $ (690) $ 1,189 $ 1,243
Deferred 2,322 28 438
---------- ---------- ----------
1,632 1,217 1,681
State
Current 113 (20) 349
Deferred 138 2 26
---------- ---------- ----------
251 (18) 375
---------- ---------- ----------
$ 1,883 $ 1,199 $ 2,056
========== ========== ==========
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Expected income taxes $ 2,404 $ 1,826 $ 2,332
Income tax effect of
Interest earned on tax-free investments and loans (394) (397) (471)
Nondeductible interest expense incurred to
carry tax-free investments and loans 50 35 37
Nondeductible amortization -- -- 117
State income taxes, net of federal tax benefit 166 154 241
State income tax refund (18) (251) --
Increase in CSV of officers' life insurance (214) (186) (195)
Deductible merger expenses (98) -- --
Stock option expense 105 -- --
Other (118) 18 (5)
---------- ---------- ----------
$ 1,883 $ 1,199 $ 2,056
========== ========== ==========
(Continued)
75.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 12. Income Taxes (continued)
The significant components of deferred income tax assets and liabilities
consisted of:
December 31,
-------------------------
2006 2005
---------- ----------
Deferred tax assets
Allowance for loan losses $ 4,174 $ 3,246
Deferred compensation, other 325 209
Stock option expense under FAS 123R 88 --
Net operating loss carryforwards 2,222 --
Deferred tax asset arising from merger 198 --
---------- ----------
Total deferred tax assets 7,007 3,455
Deferred tax liabilities
Depreciation $ (781) $ (430)
Basis adjustments arising from acquisitions (1,426) (1,147)
Mortgage servicing rights (1,363) (983)
Securities available-for-sale (149) (60)
Federal Home Loan Bank dividend received in stock (791) (512)
Deferred loan fees & costs under FASB 91 (457) --
Other (214) (147)
---------- ----------
(5,181) (3,279)
Valuation allowance on NOL carryforwards (370) --
---------- ----------
Total deferred tax liabilities (5,551) (3,279)
---------- ----------
Net deferred tax liabilities $ 1,456 $ 176
========== ==========
The December 31, 2006 deferred tax asset includes $3,827 of purchase accounting
and other merger related deferred tax assets transferred in as a result of the
Company's merger. The Federal net operating loss is related to the acquisition
of the Illinois Community Bancorp Inc. transaction. The NOL expires in 2021 thru
2024. The NOL can be used at a rate of $158,673 per year. Due to Section 382
limitations, any unused amounts that can not be used will expire. Thus, the
valuation allowance was established. See Note 23 for further information related
to the merger.
Note 13. Benefit Plans
The Company's Employee Stock Ownership Plan ("the Plan") covered all full-time
employees who had completed six months of service and have attained the minimum
age of twenty and one-half years. As of October 1, 2006, the Company terminated
this plan and began the process of distributing the assets of the plan to
participants. As of December 31, 2006, the Plan owned 304,732 shares of the
Company's common stock. All shares held by the Plan are allocated to plan
participants. The Company expenses all cash contributions made to the Plan.
Contributions were $165, $223, and $269, for the years ended December 31, 2006,
2005, and 2004.
The Company has a 401(k) salary reduction plan (the 401(k) plan) covering
substantially all employees. Eligible employees may elect to make tax deferred
contributions up to annual IRS contribution limits under the company safe harbor
plan status. In 2006, the Company contributed 4% of employee wages to all
eligible participants regardless of whether and to what extent the employee
elected a salary deferral. Contributions to the 401(k) plan are expensed
currently and approximated $427, $415 and $339 for the years ended December 31,
2006, 2005, and 2004.
(Continued)
76.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 14. Stock Option Plans
In 1999, the Company adopted the 1999 Option Plan. Under the 1999 Option Plan,
nonqualified options may be granted to employees and eligible directors of the
Company and its subsidiaries to common stock at 100% of the fair market value on
the date the option is granted. The Company has authorized 50,000 shares for
issuance under the 1999 Option Plan. During 1999, 40,750 of these shares were
granted and are 100% fully vested. The options have an exercise period of ten
years from the date of grant. There are 9,250 shares available to grant under
this plan.
In April 2003, the Company adopted the 2003 Option Plan. Under the 2003 Option
Plan, nonqualified options, incentive stock options, and/or stock appreciation
rights may be granted to employees and outside directors of the Company and its
subsidiaries to purchase the Company's common stock at an exercise price to be
determined by the 2003 Option Plan's administrative committee. Pursuant to the
2003 Option Plan, 200,000 shares of the Company's unissued common stock have
been reserved and are available for issuance upon the exercise of options and
rights granted under the 2003 Option Plan. The options have an exercise period
of ten years from the date of grant. There are 85,000 shares available to grant
under this plan.
In addition to the Company plans described above, in conjunction with the merger
with Centrue Financial Corporation, all outstanding options at Centrue Financial
were converted into options to acquire Company common stock, as adjusted for the
exchange ratio. Following the merger, no additional options are issuable under
any of the previous Centrue plans.
The fair value of each option award is estimated on the date of grant using a
closed form option valuation (Black-Scholes) model that uses the assumptions
noted in the table below. Expected volatilities are based on historical
volatilities of the Company's common stock. The Company uses historical data to
estimate option exercise and post-vesting termination behavior. (Employee and
management options are tracked separately.) The expected term of options granted
is based on historical data and represents the period of time that options
granted are expected to be outstanding, which takes into account that the
options are not transferable. The risk-free interest rate for the expected term
of the option is based on the U.S. Treasury yield curve in effect at the time of
the grant.
The fair value of options granted was determined using the following
weighted-average assumptions as of grant date:
2006 2005 2004
---------- ---------- ----------
Fair value $ 4.89 $ 4.94 $ 4.74
Risk-free interest rate 5.14% 4.56% 3.32%
Expected option life (years) 6 5 5
Expected stock price volatility 23.45% 23.45% 24.58%
Dividend yield 2.47% 1.92% 1.90%
(Continued)
77.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 14. Stock Option Plans (Continued)
A summary of the status of the option plan for 2006 is presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life Value
---------- ---------- ---------- ----------
Outstanding at beginning
of year 301,675 $ 15.74
Assumed in Merger 237,860 18.78
Granted 25,000 19.76
Exercised (27,300) 10.30
Forfeited (42,811) 16.21
---------- ----------
Outstanding at end of year 494,424 $ 18.47 5.1 years $ 1,115
========== ========== ========== ==========
Exercisable at year end 462,424 $ 18.39 5.0 years $ 1,115
========== ========== ========== ==========
Options outstanding at year-end 2006 were as follows:
Outstanding Exercisable
------------------------- -------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
----------------- ---------- ---------- ---------- ----------
$ 7.25 - $ 9.75 7,000 0.2 years 7,000 $ 9.75
11.25 - 13.00 53,931 3.4 years 53,931 11.64
13.88 - 18.50 157,293 4.1 years 157,293 15.50
21.75 - 23.31 276,200 6.1 years 244,200 22.00
---------- ---------- ---------- ----------
494,424 5.1 years 462,424 $ 18.39
========== ========== ========== ==========
Information related to the stock option plan during each year follows:
2006 2005 2004
---------- ---------- ----------
Intrinsic value of options exercised $ 250 $ 454 $ 161
Cash received from option exercises 356 578 161
Tax benefit realized from option exercises 75 106 42
Weighted average of fair value of options
granted 19.27 20.68 21.75
As of December 31, 2006, there was $236 of total unrecognized compensation cost
related to nonvested stock options granted under the Plan. The cost is expected
to be recognized over a weighted-average period of 5.1 years.
(Continued)
78.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 15. Earnings Per Share
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31 is presented below (shares in
thousands). The Convertible Preferred Stock is antidilutive for all years
presented and has not been included in the diluted earnings per share
calculation. In addition, options to purchase 244,200 shares, 60,000 shares and
40,000 shares of common stock were outstanding for 2006, 2005 and 2004,
respectively, but were not included in the computation of diluted earnings per
share because the exercise price was greater than the average market price and,
therefore, were antidilutive.
2006 2005 2004
---------- ---------- ----------
Basic earnings per share
Income from continuing operations
available to common stockholders $ 5,395 $ 4,172 $ 5,083
Net loss from discontinued operations
available to common stockholders $ (415) $ (206) $ (487)
========== ========== ==========
Net income
available to common stockholders $ 4,980 $ 3,966 $ 4,596
========== ========== ==========
Weighted average common shares outstanding 4,119 3,944 4,034
========== ========== ==========
Basic earnings per common Share
from continuing operations $ 1.31 $ 1.06 $ 1.26
========== ========== ==========
Basic earnings per common share
from discontinued operations $ (0.10) $ (0.05) $ (0.12)
========== ========== ==========
Basic earnings per common share $ 1.21 $ 1.01 $ 1.14
========== ========== ==========
Weighted average common shares outstanding 4,119 3,944 4,034
Add dilutive effect of assumed exercised stock
options 45 59 76
---------- ---------- ----------
Weighted average common and dilutive
potential shares outstanding 4,164 4,003 4,110
========== ========== ==========
Diluted earnings per common share
from continuing operations $ 1.30 $ 1.04 $ 1.24
========== ========== ==========
Diluted earnings per common share
from discontinued operations $ (0.10) $ (0.05) $ (0.12)
========== ========== ==========
Diluted earnings per common share $ 1.20 $ 0.99 $ 1.12
========== ========== ==========
Note 16. Regulatory Matters
The Company and Centrue Bank are subject to regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and
Centrue 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Centrue Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets
(Continued)
79.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 16. Regulatory Matters (continued)
and of Tier I capital to average assets. Management believes, as of December 31,
2006, that the Company and Centrue Bank meet all of the capital adequacy
requirements to which they are subject.
As of December 31, 2006, the most recent notification from the corresponding
regulatory agency categorized Centrue Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, Centrue Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that management
believes have changed Centrue Bank's categories.
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
-------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------
As of December 31, 2006
Total capital (to risk-
weighted assets)
Centrue Financial $ 110,703 11.9% $ 74,150 8.0% N/A N/A
Centrue Bank 113,579 12.4 73,533 8.0 91,933 10.0
Tier I capital (to risk-
weighted assets)
Centrue Financial $ 99,869 10.8 37,075 4.0 N/A N/A
Centrue Bank 102,745 11.2 36,766 4.0 55,160 6.0
Tier I leverage ratio (to
average assets)
Centrue Financial $ 99,869 7.9 49,798 4.0 N/A N/A
Centrue Bank 102,745 8.3 49,424 4.0 61,805 5.0
As of December 31, 2005
Total capital (to risk-
weighted assets)
Centrue Financial $ 66,812 13.3% $ 40,107 8.0% N/A N/A
Centrue Bank 77,475 15.5 40,076 8.0 50,095 10.0
Tier I capital (to risk-
weighted assets)
Centrue Financial $ 60,546 12.1 20,054 4.0 N/A N/A
Centrue Bank 71,214 14.2 20,038 4.0 30,057 6.0
Tier I leverage ratio (to
average assets)
Centrue Financial $ 60,546 9.0 26,831 4.0 N/A N/A
Centrue Bank 71,214 10.6 26,816 4.0 33,520 5.0
The Company's ability to pay dividends is dependent on the subsidiary bank,
which is restricted by various laws and regulations. Under these regulations,
the amount of dividends that may be paid in any calendar year
(Continued)
80.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 16. Regulatory Matters (continued)
is limited to the current year's net profits, combined with the retained net
profits of the preceding two years subject to the capital requirements described
above. The Bank can declare dividends to the holding company to the extent its
2007 net income exceeds $955. However, based on the cash and liquid assets
available at the holding company these restrictions would not prohibit the
paying of dividends at historical levels.
Note 17. Fair Value of Financial Instruments
The methods and assumptions used to estimate fair value are described as
follows:
The carrying amount is the estimated fair value for cash and due from banks,
federal funds sold, short-term borrowings, Federal Home Loan Bank stock, accrued
interest receivable and payable, demand deposits, short-term debt, and variable
rate loans or deposits that reprice frequently and fully. Security fair values
are based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer. The carrying value and fair value of the subordinated debentures issued
to capital trusts are estimated to be the same as the debentures all have
variable interest rates. For fixed rate loans or deposits and for variable rate
loans or deposits with infrequent repricing or repricing limits, the fair value
is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral values. The fair
value of loans held for sale is based on market quotes. The fair value of debt
and redeemable stock is based on current rates for similar financing. The fair
value of off-balance-sheet items is based on the current fees or cost that would
be charged to enter into or terminate such arrangements.
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
-------------------------------------------------------
2006 2005
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets
Cash and cash equivalents $ 40,195 $ 40,195 $ 24,358 $ 24,358
Securities 298,692 298,692 196,440 196,440
Loans 826,109 821,817 409,163 405,398
Accrued interest receivable 7,673 7,673 4,418 4,418
Financial liabilities
Deposits 1,026,610 1,025,838 543,841 521,350
Federal funds purchased and
securities sold under
agreements to repurchase 36,319 36,319 612 612
Federal Home Loan Bank Advances 63,147 61,998 50,000 48,828
Notes payable 9,015 9,015 9,468 9,468
Subordinated debentures 20,620 20,620 -- --
Series B mandatory redeemable
preferred stock 831 831 831 831
Accrued interest payable 5,895 5,895 3,206 3,206
(Continued)
81.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 17. Fair Value of Financial Instruments (continued)
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the earnings potential of the trust operations, the trained work force, customer
goodwill, and similar items.
Note 18. Commitments, Contingencies, and Credit Risk
In the normal course of business, there are various contingent liabilities
outstanding, such as claims and legal actions, which are not reflected in the
consolidated financial statements. In the opinion of management, no material
losses are anticipated as a result of these actions or claim.
Centrue Bank is 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 risk in excess of the amount recognized in the balance sheet.
The contractual amounts of these instruments reflect the extent of involvement
in particular classes of financial instruments.
Centrue Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. Centrue Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. Financial instruments whose contract amounts represent credit risk
are as follows:
Standby Variable Range of Rates
Letters Rate Fixed Rate Total on Fixed Rate
of Credit Commitments Commitments Commitments Commitments
---------- ----------- ----------- ----------- -------------
Commitments to extend
credit and standby
letters of credit
December 31, 2006 $ 10,937 $ 159,944 $ 32,864 $ 203,745 2.25% - 18.00%
December 31, 2005 $ 8,066 $ 58,667 $ 20,777 $ 87,510 2.25% - 18.00%
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. For commitments to extend credit, Centrue
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained is based on management's credit evaluation of the
customer. Collateral held varies, but may include accounts receivable;
inventory; property, plant, and equipment; and income producing commercial
properties.
(Continued)
82.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 18. Commitments, Contingencies, and Credit Risk (continued)
Standby letters of credit are conditional commitments issued by Centrue Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan commitments to customers. The standby letters of
credit are unsecured.
The Company has employment agreements with certain executive officers and
certain other management personnel. These agreements generally continue until
terminated by the executive or the Company and provide for continued salary and
benefits to the executive under certain circumstances. The agreements provide
the employees with additional rights after a change of control of the Company
occurs.
The Company leases certain branch properties under operating leases. Rent
expense was $148, $190, and $196 for 2006, 2005 and 2004. Rent commitments,
before considering renewal options that generally are present, were as follows:
2007 $ 429
2008 440
2009 451
2010 469
2011 480
Thereafter 480
------------
Total $ 2,749
============
Note 19. Condensed Financial Information - Parent Company Only
The primary source of funds for the Company is dividends from its subsidiaries.
By regulation, Centrue Bank is prohibited from paying dividends that would
reduce regulatory capital below a specific percentage of assets without
regulatory approval. As a practical matter, dividend payments are restricted to
maintain prudent capital levels.
(Continued)
83.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 19. Condensed Financial Information - Parent Company Only (Continued)
Condensed financial information for Centrue Financial Corporation follows:
Balance Sheets (Parent Company Only)
December 31,
-------------------------
ASSETS 2006 2005
---------- ----------
Cash and cash equivalents $ 1,512 $ 116
Securities available for sale 4,729 --
Investment in subsidiaries 141,064 76,744
Other assets 2,036 100
---------- ----------
$ 149,341 $ 76,960
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-------------------------
LIABILITIES 2006 2005
---------- ----------
Notes payable $ 8,866 $ 9,200
Mandatory redeemable preferred stock 831 831
Subordinated debentures 20,620 --
Other liabilities 833 854
---------- ----------
31,150 10,885
Stockholders' equity 118,191 66,075
---------- ----------
$ 149,341 $ 76,960
========== ==========
Income Statements (Parent Company Only)
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Dividends from subsidiaries $ 6,813 $ 5,031 $ 3,395
Interest income 44 -- --
Other income 8 6 1,206
Interest expense 910 459 334
Other expenses 1,066 488 3,442
Income tax benefit (900) (436) (1,077)
Equity in undistributed earnings of subsidiaries
(dividends in excess of earnings) (602) (353) 2,901
---------- ---------- ----------
Net income 5,187 4,173 4,803
Less dividends on preferred stock 207 207 207
---------- ---------- ----------
Net income on common stock $ 4,980 $ 3,966 $ 4,596
========== ========== ==========
(Continued)
84.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 19. Condensed Financial Information - Parent Company Only (Continued)
Statements of Cash Flows (Parent Company Only)
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Cash flows from operating activities
Net income $ 5,187 $ 4,173 $ 4,803
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation -- -- 186
Undistributed earnings of subsidiaries 602 353 (2,901)
Amortization of deferred compensation -
stock options -- -- 2
Decrease (increase) in other assets (309) (2) 514
Increase in other liabilities 692 (708) 196
---------- ---------- ----------
Net cash provided by operating activities 6,172 3,816 2,800
Cash flows from investing activities
Purchases of premises and equipment -- -- 223
Investment in subsidiaries -- -- (673)
---------- ---------- ----------
Net cash provided by financing activities -- -- (450)
Cash flows from financing activities
Net increase (decrease) in notes payable $ (1,550) $ 2,925 $ (1,000)
Dividend paid on common stock (1,347) (1,721) (1,613)
Dividends paid on preferred stock (207) (207) (207)
Proceeds from exercise of stock options 357 579 161
Stock option expense (352) -- --
Purchase of treasury stock (1,677) (5,739) (156)
---------- ---------- ----------
Net cash used in financing activities (4,776) (4,163) (2,815)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (1,396) (347) (465)
Cash and cash equivalents
Beginning of year 116 463 928
---------- ---------- ----------
End of year $ 1,512 $ 116 $ 463
========== ========== ==========
Note 20. Other Comprehensive Income
Changes in other comprehensive income components and related taxes are as
follows:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Change in unrealized gains on
securities available-for-sale $ 125 $ (2,050) $ (1,167)
Reclassification adjustment for losses (gains)
recognized in income 104 79 (123)
---------- ---------- ----------
Net unrealized gains 229 (1,971) (1,290)
Tax expense 89 (715) (500)
---------- ---------- ----------
Other comprehensive income $ 140 $ (1,256) $ (790)
========== ========== ==========
(Continued)
85.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 21. Segment Information
The Company's reporting was enhanced so that a line of business (LOB) reporting
structure was implemented as of January 1, 2005. In 2006 and 2005, the
reportable segments were determined by the products and services offered,
primarily distinguished between retail, commercial, treasury, wealth management,
and operations & other. Loans and deposits generate the revenues in the
commercial segments; deposits, loans, secondary mortgage sales and servicing
generates the revenue in the retail segment; investment income generates the
revenue in the treasury segment; brokerage and trust services generate the
revenue in the wealth management segment (formerly known as the Financial
Services segment); and holding company services and discontinued operations
associated with the sale of the insurance segment generate the revenue in the
operations & other segment. The "net allocations" line in 2006 and 2005
represents the allocation of the costs that are overhead being spread to the
specific segments. With the sale of the Insurance unit, the results for
Insurance were reclassified into the Operations & Other segment from the
Financial Services segment (which is now referred to as Wealth Management).
The merger became effective on November 13, 2006, and as such, the results for
the former Centrue Bank are presented as a stand alone segment since its
operations were not yet integrated at year end 2006. Comparable discrete
financial information is not available for the acquired entity on the same
reporting basis as the Company (e.g. the former UnionBancorp, Inc.).
Due to a change in the reporting systems, the 2004 data used to monitor segments
is determined by the products and services offered, primarily distinguished
between banking, mortgage banking, financial services, and other operations.
Loans, investments, and deposits provide the revenues in the banking segment;
insurance, brokerage, and trust in the financial services segment; and holding
company services are categorized as other. The accounting policies used with
respect to segment reporting are the same as those described in the summary of
significant accounting policies set forth in Note 1. Segment performance is
evaluated using net income.
Information reported internally for performance assessment follows:
Retail Commercial Treasury Wealth Other Other Continuing
Segment Segment Segment Management Operations Banking Operations
----------- ----------- ----------- ----------- ----------- ----------- -----------
2006
----
Net interest income (loss) $ 7,772 $ 13,046 $ 461 $ 256 $ (1,098) $ 2,070 $ 22,507
Other revenue 3,441 457 (104) 1,177 739 978 6,688
Other expense 5,494 2,309 251 1,359 7,972 2,382 19,767
Noncash items
Depreciation 891 11 -- 7 1,352 284 2,545
Provision for loan losses 325 (1,625) -- -- -- 25 (1,275)
Other intangibles -- -- -- -- 67 344 411
Net allocations 3,231 5,221 812 880 (10,144) -- --
Income tax expense 387 2,485 (584) (239) 142 (46) 2,145
Segment profit (loss) 835 5,102 (122) (574) 252 59 5,602
Goodwill 2,512 2,631 -- 1,167 -- 19,086 25,396
Segment assets 91,199 323,184 197,225 1,330 16,098 653,989 1,283,025
(Continued)
86.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 21. Segment Information (Continued)
Retail Commercial Treasury Wealth Other Other Continuing
Segment Segment Segment Management Operations Banking Operations
----------- ----------- ----------- ----------- ----------- ----------- -----------
2005
----
Net interest income (loss) $ 7,527 $ 13,191 $ 302 $ 102 $ (129) $ -- $ 20,993
Other revenue 3,948 411 (79) 1,321 697 -- 6,298
Other expense 6,913 3,382 230 1,391 7,099 -- 19,015
Noncash items
Depreciation 1,060 13 -- 82 1,053 -- 2,208
Provision for loan losses 420 (170) -- -- -- -- 250
Other intangibles -- -- -- 6 114 -- 120
Net allocations 2,886 4,603 523 844 (8,856) -- --
Income tax expense 67 1,573 (431) (231) 341 -- 1,319
Segment profit (loss) 129 4,201 (99) (669) 817 -- 4,379
Goodwill 2,512 2,631 -- 1,820 -- -- 6,963
Segment assets 99,916 330,240 216,355 3,723 25,988 -- 676,222
Banking Mortgage Wealth Other Continuing
Segment Banking Management Segments Operations
----------- ----------- ----------- ----------- -----------
2004
----
Net interest income $ 21,284 $ 700 $ 14 $ (331) $ 21,667
Other revenue 9,012 2,070 1,295 1 12,378
Other expense 16,833 1,605 1,732 2,052 22,222
Noncash items
Depreciation 1,956 100 100 188 2,344
Provision for loan loss 1,924 -- -- -- 1,924
Amortization of intangibles 286 -- 8 -- 294
Segment profit (loss) 9,297 1,065 (531) (2,570) 7,261
Income tax expense -- -- -- 2,173 2,173
Income from continuing operations 9,297 1,065 (531) (4,743) 5,088
Goodwill 5,143 -- 1,167 -- 6,310
Segment assets 662,415 2,620 3,810 (2,144) 666,701
Note 22. Discontinued Operations
During 2006, the Company began evaluating whether strategically the Insurance
unit was in it's long-term goals. During the 3rd quarter of 2006, an opportunity
surfaced that management determined was the best strategic action plan. Thus,
the Company sold the Insurance unit of their Wealth Management segment to the
Phoenix Group for $1,200 and the deal closed on September 30, 2006. In
accordance with FASB Statement No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" ("FAS 144") the results of operations of the insurance
division are reflected in the Company's statements of income for 2006 and 2005
as "discontinued operations." The loss on sale of the insurance unit of $452 and
related tax benefit of $175 are included in discontinued operations as of
December 31, 2006. Additionally, approximately $1,030
(Continued)
87.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 22. Discontinued Operations (continued)
of goodwill and intangibles attributed to the Insurance unit on the Company's
balance sheet were written off as a result of this transaction and factored into
the loss on the sale of the discontinued operations.
December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Net interest income $ (5) $ (8) $ (5)
Noninterest income 976 1,305 1,724
Noninterest expense 1,196 1,623 2,121
---------- ---------- ----------
Loss from discontinued operations before income taxes (225) (326) (402)
Loss on disposal (452) -- --
Benefit for taxes (262) (120) (117)
---------- ---------- ----------
Net income (loss) from discontinued operations $ (415) $ (206) $ (285)
========== ========== ==========
Note 23. Business Combinations
On November 13, 2006, the Company (formerly known as UnionBancorp, Inc. now
known as Centrue Financial Corporation) merged with Centrue Financial
Corporation (former Centrue), parent of Centrue Bank with the Company being the
surviving entity in the merger. Operating results of former Centrue are included
in the consolidated financial statements since the date of the acquisition. As a
result of this merger, the Company expects to further solidify its market share
in the northern and central Illinois markets, expand its customer base to
enhance deposit fee income, provide an opportunity to market additional products
and services to new customers and reduce operating costs through economies of
scale.
The aggregate purchase price was $49,316, $4 in cash and $49,312 in common
stock. The value of the 2,701 common shares issued was determined using the
market price multiplied by the exchange rate of 1.2. The purchase price resulted
in approximately $19,086 of goodwill, and $13,035 in core deposit and customer
relationship intangible. The intangible asset(s) will be amortized over 10
years, using an accelerated method. Goodwill will not be amortized but instead
it will be evaluated periodically each year for impairment.
The following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition:
Cash and cash equivalents $ 26,506
Securities available-for-sale 125,756
Loans 431,692
Goodwill 19,086
Premises and equipment, net 20,701
Core deposit and other intangibles 13,035
Other assets 14,795
----------
Total assets acquired 651,571
Deposits (523,630)
Other liabilities (78,625)
----------
Total liabilities assumed (602,255)
----------
Net assets acquired $ 49,316
==========
(Continued)
88.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 23. Business Combinations (continued)
The following table presents pro forma information as if the acquisition had
occurred at the beginning of 2006 and 2005. The pro forma information includes
adjustments for interest income on loans and securities acquired, amortization
of intangibles arising from the transaction, depreciation expense on property
acquired, interest expense on deposits acquired, and the related tax effects.
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transaction been effected on the
assumed dates.
December 31,
-------------------------
2006 2005
---------- ----------
Net interest income $ 39,127 $ 39,117
Net income $ 4,228 $ 8,553
Basic earnings per share $ 0.98 $ 2.03
Diluted earnings per share $ 0.97 $ 2.00
(Continued)
89.
CENTRUE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
--------------------------------------------------------------------------------
Note 24. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2006 Year Ended December 31, 2005
Three Months Ended Three Months Ended
-------------------------------------------- -------------------------------------------
Dec. 31 Sep. 30 June 30 March 31 Dec. 31(A) Sep. 30 June 30(B) March 31
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income $ 15,197 $ 9,802 $ 9,476 $ 9,383 $ 9,290 $ 8,720 $ 8,545 $ 8,142
Total interest expense 7,902 4,728 4,523 4,198 3,884 3,502 3,263 3,055
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 7,295 5,074 4,953 5,185 5,406 5,218 5,282 5,087
Provision for loan losses 25 (200) (300) (800) 100 50 -- 100
Noninterest income 2,363 1,481 1,380 1,464 1,405 1,702 1,707 1,484
Noninterest expense 8,372 4,591 4,767 4,993 5,639 5,347 5,239 5,118
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 1,261 2,164 1,866 2,456 1,072 1,523 1,750 1,353
Income tax expense
(benefit) 162 658 543 782 243 405 326 345
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations 1,099 1,506 1,323 1,674 829 1,118 1,424 1,008
Loss on discontinued
Operations (88) (270) (29) (28) (63) (57) (42) (44)
-------- -------- -------- -------- -------- -------- -------- --------
Net income 1,011 1,236 1,294 1,646 766 1,061 1,382 964
Preferred stock dividend 51 52 52 52 51 52 52 52
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) for
common stockholders $ 960 $ 1,184 $ 1,242 $ 1,594 $ 715 $ 1,009 $ 1,330 $ 912
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share
from continuing
operations $ 0.20 $ 0.39 $ 0.32 $ 0.40 $ 0.20 $ 0.27 $ 0.35 $ 0.24
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share
from continuing
operations $ 0.20 $ 0.38 $ 0.31 $ 0.40 $ 0.20 $ 0.26 $ 0.34 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share
from discontinued
operations $ (0.02) $ (0.07) $ (0.01) $ (0.00) $ (0.02) $ (0.01) $ (0.01) $ (0.01)
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share
from discontinued
operations $ (0.02) $ (0.07) $ (0.01) $ (0.00) $ (0.02) $ (0.01) $ (0.01) $ (0.01)
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share $ 0.18 $ 0.32 $ 0.31 $ 0.39 $ 0.18 $ 0.26 $ 0.33 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share $ 0.18 $ 0.31 $ 0.31 $ 0.39 $ 0.18 $ 0.25 $ 0.33 $ 0.22
======== ======== ======== ======== ======== ======== ======== ========
(A) The net income for the quarter was impacted by nonrecurring expenses
primarily related to organizational restructuring. The impact to earnings
was a decrease of approximately $0.05 per diluted share.
(B) The net income for the quarter was impacted by a reduction in state income
taxes related to the receipt of a tax refund related to amended returns
outstanding from prior years. The impact to earnings was an increase of
approximately $0.06 per diluted share.
(Continued)
90.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer carried out an
evaluation, with the participation of other members of management as they deemed
appropriate, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as contemplated by Exchange Act Rule 13a-14
as of December 31, 2006. Based upon, and as of the date of that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, in all material respects, in
timely alerting them to material information relating to the Company (and its
consolidated subsidiaries) required to be included in the periodic reports the
Company is required to file and submit to the SEC under the Exchange Act.
There were no significant changes to the Company's internal control over
financial reporting during the quarter ended December 31, 2006 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information beginning on page 2 of the Company's 2007 Proxy Statement under
the caption "Election of Directors", on page 16 of the 2007 Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Compliance," on page 31
under the caption "Audit Committee Financial Expert" and on page 6 under the
caption "Code of Ethics" is incorporated herein by reference. The Company's
executive officers are identified under the caption "Executive Officers"
contained in Part I of this report.
The Audit Committee of the Company's Board of Directors is an "audit committee"
for purposes of section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Audit Committee are Messrs. Mark L. Smith, Chair, Walter E.
Breipohl, Randall E. Ganim and Scott C. Sullivan.
Item 11. Executive Compensation
The information on page 7 under the caption "Compensation of Directors", pages
17 through 28 of the 2007 Proxy Statement under the caption "Compensation
Discussion and Analysis," page 16 under the caption "Executive and Compensation
Committee Interlocks," and page 16 "Report of Executive & Compensation
Committee" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information on pages 14 through 16 of the 2007 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" and on
page 7 under the caption "Existing Equity Compensation Plans" is incorporated
herein by reference.
91.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information on page 28 of the 2007 Proxy Statement under the caption
"Transactions with Management" and on page 2 under the caption "Election of
Directors" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information on page 28 and 29 of the 2007 Proxy Statement under the caption
"Accountant Fees" is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Index to Financial Statements
The index to Financial Statements is contained in Item 8, appearing on
page 46 of this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable,
or the required information is shown in the Consolidated Financial
Statements or the notes thereto.
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages to this
Form 10-K is incorporated herein by reference.
(b) Exhibits
The exhibits required to be filed with this Form 10-K are included with
this Form 10-K and are located immediately following the Exhibit Index
to this Form 10-K.
(c) Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate
section of this report.
92.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 23, 2007.
CENTRUE FINANCIAL CORPORATION
By: /s/ THOMAS A. DAIBER
-------------------------------------
Thomas A. Daiber
President and Principal Executive
Officer
By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Senior Executive Vice President and
Principal Financial and Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 23, 2007
/s/ RICHARD J. BERRY /s/ MICHAEL J. HEJNA
---------------------------------- -------------------------------------
Richard J. Berry Michael J. Hejna
Director Director
/s/ WALTER E. BREIPOHL /s/ DENNIS J. MCDONNELL
---------------------------------- -------------------------------------
Walter E. Breipohl Dennis J. McDonnell
Director Director
/s/ THOMAS A. DAIBER /s/ JOHN A. SHINKLE
---------------------------------- -------------------------------------
Thomas A. Daiber John A. Shinkle
Director Director
/s/ RANDALL E. GANIM /s/ MARK L. SMITH
---------------------------------- -------------------------------------
Randall E. Ganim Mark L. Smith
Director Director
/s/ MICHAEL A. GRIFFITH /s/ SCOTT C. SULLIVAN
---------------------------------- -------------------------------------
Michael A. Griffith Scott C. Sullivan
Director Director
Centrue Financial Corporation
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Exhibits
3.1 Restated Certificate of Incorporation of the Company [incorporated by
reference from Exhibit 3.1 to Current Report on Form 8-K filed on
November 17, 2006].
3.2 Bylaws of the Company [incorporated by reference from Exhibit 3.2 to
Current Report on Form 8-K filed on November 17, 2006].
4.1 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of the Company [incorporated by reference
from Exhibit 3.1 to Current Report on Form 8-K filed on November 17,
2006].
4.2 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of the Company [incorporated by reference from Exhibit
3.1 to Current Report on Form 8-K filed on November 17, 2006].
4.3 Specimen Common Stock Certificate [filed herewith].
10.1 Registration Agreement dated August 6, 1996, between the Company and
each of Wayne W. Whalen and Dennis J. McDonnell [incorporated by
reference from Exhibit 10.10 to the Registration Statement on Form S-1
filed by the Company on August 19, 1996 (File No. 33-9891)].
10.2 Loan Agreement between the Company and LaSalle National Bank dated
August 2, 1996 [incorporated by reference from Exhibit 10.11 to the
Registration Statement on Form S-1 filed by the Company on August 19,
1996 (File No. 33-9891)].
10.3 Centrue Financial Corporation 1999 Nonqualified Stock Option Plan
[incorporated by reference from Exhibit 10.1 to the registration
statement on Form S-8 filed by the Company on December 10, 1999 (File
No. 333-92549)].
10.4 Centrue Financial Corporation 2000 Incentive Compensation Plan
[incorporated by reference from Exhibit 10.1 to Centrue's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 as filed
with the SEC on November 13, 2001].
10.5 Centrue Financial Corporation 2003 Stock Option Plan [incorporated by
reference from Centrue's 2003 Proxy Statement].
10.6 Form of Stock Option Agreements [incorporated by reference from Exhibit
10.1 to Form 10-Q/A for the Quarter Ended September 30, 2005]
10.7 Thomas A. Daiber Employment Agreement [incorporated by reference from
Current Report on Form 8-K filed on July 7, 2006 (appears as Exhibit
F-1 to Exhibit 2.1)].
10.8 Kurt R. Stevenson Employment Agreement [incorporated by reference from
Current Report on Form 8-K filed on July 7, 2006 (appears as Exhibit
F-3 to Exhibit 2.1)]
10.9 Amendment to Kurt R. Stevenson Employment Agreement [incorporated by
reference from Exhibit 2.2 to Current Report on Form 8-K filed on
November 17, 2006].
10.10 Donald L. Brown Employment Agreement [filed herewith]
10.11 Roger D. Dotson Employment Agreement [filed herewith].
10.12 Steven E. Flahaven Employment Agreement [filed herewith].
10.13 Heather M. Hammitt Employment Agreement [filed herewith].
10.14 Kenneth A. Jones Employment Agreement [filed herewith].
10.15 Diane F. Leto Employment Agreement [filed herewith].
10.16 Michael A. O'Gorman Employment Agreement [filed herewith].
10.17 Ricky R. Parks Employment Agreement [filed herewith].
10.18 Everett J. Solon Employment Agreement [filed herewith].
10.19 Non-employee Directors' Deferred Compensation Plan [incorporated by
reference from Exhibit 10.1 to Current Report on Form 8-K filed
December 21, 2006].
10.20 Kankakee Bancorp, Inc. 1992 Stock Option Plan [incorporated by
reference from Schedule 14A for the 1993 Annual Meeting of Stockholders
of former Centrue Financial Corporation (Filer No. 001-15025)].
10.21 Kankakee Bancorp, Inc. 2003 Director Short Term Incentive Plan
[incorporated by reference from Exhibit 10.1 to Form S-8 (Registration
No. 333-104913) of former Centrue Financial Corporation (Filer No.
001-15025) filed on May 1, 2003].
10.22 Kankakee Bancorp, Inc. 2003 Stock Incentive Plan [incorporated by
reference from Appendix B to Schedule 14A filed on March 14, 2003 of
former Centrue Financial Corporation (Filer No. 001-15025)].
10.23 Indenture dated April 10, 2002 between the Company and Wilmington Trust
Company [incorporated by reference from Exhibit 10.9 to Form 10-K for
the year ended December 31, 2004 of former Centrue Financial
Corporation (Filer No. 001-15025)].
10.24 Indenture dated April 22, 2004 between the Company and U.S. Bank, N.A.
[incorporated by reference from Exhibit 10.1 to Form 10-Q for the
quarter ended June 30, 2004 of former Centrue Financial Corporation
(Filer No. 001-150250].
14.1 Code of Ethics [filed herewith]
21.1 Subsidiaries of Centrue Financial Corporation.
23.1 Consent of Crowe Chizek and Company LLC.
31.1. Certification of Thomas A. Daiber, the Company's Principal Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Kurt R. Stevenson, the Company's Principal Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company's
President and Principal Executive Officer.
32.2* Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company's
Senior Executive Vice President and Principal Financial and Accounting
Officer.
* This certification is not "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or incorporated by
reference into any filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended.