Securities And Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission File Number: 0-28846
Centrue Financial Corporation
(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) |
7700 Bonhomme Avenue, St. Louis, Missouri 63105
(Address of principal executive offices, including zip code)
(314) 505-5500
(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 | |
| 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 o No þ
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 o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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. o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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þ
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Smaller reporting company
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o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act).
Yes o No þ.
As of March 01, 2010, the Registrant had issued and outstanding 6,043,176 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, 2009, the last business day of the Registrant’s most recently completed second quarter, was $15,648,071.*
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*
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Based on the last reported price of $4.43 of an actual transaction in the Registrant’s Common Stock on June 30, 2009, and reports of beneficial ownership filed by directors and executive officers of the Registrant. Shares of Common Stock held by any executive officer or director of the Registrant 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.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the 2010 Annual Meeting of Stockholders (the “2010 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
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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 $1.313 billion at year-end 2009 and is headquartered in St. Louis, Missouri. The Company provides a full range of banking services to individual and corporate customers extending from western and southern suburbs of the Chicago metropolitan area across Central Illinois down to metropolitan St. Louis area.
The Company operates one wholly owned subsidiary: Centrue Bank (the “Bank”), employing 304.5 full-time equivalent employees at December 31, 2009. The Company has responsibility for the overall conduct, direction, and performance of the Bank. The Company provides various services, establishes Company-wide policies and procedures, and provides other resources as needed, including capital.
Subsidiary
At December 31, 2009, the Bank had $1.281 billion in total assets, $1.058 billion in total deposits, and thirty offices (twenty-seven full-service bank branches and three back-room sales support non-banking facilities) located in markets extending from the far western and southern suburbs of the Chicago metropolitan area across Central 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 customers personal attention, professional service and competitive interest rates.
Under the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), 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 the 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.
1.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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 “IDFPR”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Internal Revenue Service, 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 the Bank, 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 the Bank 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 the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply to the Company and the Bank, 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 the Bank. See also “Recent Developments” under Management’s Discussion and Analysis.
The Company
General. The Company, as the sole stockholder of the 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 the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. Under the BHCA, the Company is subject to 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 IDFPR 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.
2.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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 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 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. The Company has no current plans to register as a financial holding company.
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.
3.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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, 2009, the Company had regulatory capital as follows:
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Risk-Based
Capital Ratio
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Leverage
Capital Ratio
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Company
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11.34%
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7.10%
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The risk-based capital ratio and the leverage capital ratio were 3.34% and 3.10% respectively, in excess of the Federal Reserve’s minimum requirements. See Note 18 in the Notes in Consolidated Financial Statements for further information.
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.
As a result of the Company’s issuance of Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the “Preferred Shares”) to the U. S. Department of Treasury (the “Treasury”) pursuant to the Troubled Asset Relief Program’s (“TARP”) Capital Purchase Plan (“CPP”), the Company is restricted in the payment of dividends and, without the Treasury’s consent, may not declare or pay any dividend on the Company’s common stock in excess of $0.14 per share per quarter, as adjusted for any stock dividend or stock split. This restriction no longer applies on the earlier to occur of January 9, 2012 (the third anniversary of the issuance of the Preferred Shares to the Treasury) or the date on which the Company has redeemed all of the Preferred Shares issued or the date on which the Treasury has transferred all of the Preferred Shares to third parties not affiliated with the Treasury. In addition, as long as the Preferred Shares are outstanding, dividend payments are prohibited until all accrued and unpaid dividends are paid on such Preferred Shares, subject to certain limited exceptions. On August 10, 2009, the Company announced that it would defer scheduled interest payments on the $29.9 million in principal outstanding Series C, fixed rate cumulative, perpetual preferred stock.
4.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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 the Company as a registered company under the Exchange Act and as a NASDAQ-traded company. The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with 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 the Exchange Act.
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. Sarbanes-Oxley section 404 requires significant oversight of a public company’s internal control over the financial statements. The rules also require them to provide management’s report on internal control over financial reporting by December 31, 2009. The rule further requires a filer to have an external auditor’s attestation report on internal control over financial reporting as of December 31, 2009. During 2009, the Company incurred additional expenses to comply with the provisions of the Sarbanes-Oxley Act.
The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. Pursuant to EESA, the Treasury has the authority to among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to its authority under EESA, the Treasury created the TARP CPP under which the Treasury was authorized to invest in non-voting, senior preferred stock of U.S. banks and savings associations or their holding companies.
The Company participated in the TARP CPP and on January 9, 2009, completed the sale of $32.7 million in preferred shares to the Treasury. The Company issued the Preferred Shares (32,668 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series C ), with a $1,000 per share liquidation preference, and a warrant to purchase up to 508,320 shares of the Company’s common stock at an exercise price of $9.64 per share (the “Warrant”).
The Preferred Shares issued by the Company pay cumulative dividends of 5% a year for the first five years and 9% a year thereafter. Both the Preferred Shares and the Warrant will be accounted for as components of regulatory Tier 1 capital. Among other restrictions, the securities purchase agreement between the Company and the Treasury limits the Company’s ability to repurchase its stock and subjects the Company to certain executive compensation limitations. The terms of the Preferred Shares, as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”), provide that the Preferred Shares, may be redeemed by the Company, in whole or in part, upon approval of the Treasury and the Company’s primary banking regulators. In addition, if dividends on the Preferred Shares are not paid in full for six dividend periods, the Treasury will have the right to elect two directors to the Company’s Board of Directors. The Treasury’s right to elect directors will end when full dividends have been paid for four consecutive dividend periods.
5.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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ARRA was enacted on February 17, 2009. Among other things, ARRA sets forth additional limits on executive compensation at all financial institutions receiving federal funds under any program, including the TARP CPP, both retroactively and prospectively. The executive compensation restrictions in ARRA include, among others: limits on compensation incentives, prohibitions on “Golden Parachute Payments” to certain employees, the establishment by publicly registered TARP CPP recipients of a board compensation committee comprised entirely of independent directors for the purpose of reviewing employee compensation plans, and the requirement of a non-binding vote on executive pay packages at each annual shareholder meeting until the government funds are repaid.
On October 22, 2009, the Federal Reserve issued proposed guidance for structuring incentive compensation arrangements at all financial institutions. The guidance does not set forth any formulas or pay caps, but sets forth certain principles which companies would be required to follow with respect to employees and groups of employees that may expose the institution to material amounts of risk.
The Bank
Centrue Bank
The Bank is an Illinois-chartered bank, the deposit accounts of which are insured by the FDIC. The Bank is also a member of the Federal Reserve System (“member bank”). As an Illinois-chartered, FDIC-insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the IDFPR, 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, pursuant to a risk-based assessment system, the Bank is required to pay deposit insurance premium assessments to the Deposit Insurance Funds. Deposit accounts are generally insured up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Effective October 3, 2008, EESA raised the base limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The increase is effective on a temporary basis until December 31, 2013.
Under the FDIC’s risk-based assessment regulations, there are four risk categories, and each insured institution is assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with CAMELS composite ratings of 1 or 2 are placed in Risk Category I while other institutions are placed in Risk Categories II, III or IV depending on their capital levels and CAMELS composite ratings. The assessment rates may be changed by the FDIC as necessary to maintain the deposit insurance fund at the reserve ratio designated by the FDIC. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Generally, deposit insurance assessments will be collected for a quarter, at the end of the next quarter. Assessments are based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets, such as the 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.
Due to a decrease in the reserve ratio of the deposit insurance fund, on October 7, 2008, the FDIC established a restoration plan to restore the reserve ratio to at least 1.15% within five years (the FDIC has extended this time to eight years). On December 16, 2008, the FDIC adopted and issued a final rule increasing the rates banks pay for deposit insurance uniformly by 7 basis points (annualized) effective January 1, 2009. Under the final rule, risk-based rates for the first quarter 2009 assessment ranged between 12 and 50 basis points (annualized). The 2009 first quarter assessment rates varied depending on an institution’s risk category. On February 27, 2009, the FDIC adopted a final rule amending the way that the assessment system differentiates for risk and setting new assessment rates beginning with the second quarter of 2009. As of April 1, 2009, for the highest rated institutions, those in Risk Category I, the initial base assessment rate was between 12 and 16 basis points and for the lowest rated institutions, those in Risk Category IV, the initial base assessment rate was 45 basis points. The final rule modified the means to determine a Risk Category I institution’s initial base assessment rate. It also provided for the following adjustments to an institution’s assessment rate: (1) a decrease for long-term unsecured debt, including most senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) an increase for secured liabilities above a threshold amount; and (3) for institutions in risk categories other than Risk Category I, an increase for brokered deposits above a threshold amount. After applying these adjustments, for the highest rated institutions, those in Risk Category I, the total base assessment rate is between 7 and 24 basis points and for the lowest rated institutions, those in Risk Category IV, the total base assessment rate is between 40 and 77.5 basis points.
6.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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On May 22, 2009, the FDIC also imposed a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. The special assessment was collected on September 30, 2009, and the Bank paid an additional assessment of $0.6 million.
On November 12, 2009, the FDIC adopted the final rule that required insured institutions to prepay on December 31, 2009, estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. For purposes of calculating the prepayment amount, the institution’s third quarter 2009 assessment base was increased quarterly at a five percent annual rates uniformly by three basis beginning in 2011. Based on the Bank’s risk rating, no prepayment of these assessments was required.
On November 21, 2008, the FDIC adopted final regulations implementing the Temporary Liquidity Guarantee Program (“TLGP”) pursuant to which depository institutions could elect to participate. Pursuant to the TLGP, the FDIC provides full FDIC deposit insurance coverage for non-interest bearing deposit transaction accounts regardless of dollar amount for an additional fee assessment by the FDIC (the “Transaction Account Guarantee”). These accounts are mainly payment-processing accounts, such as business payroll accounts. The Bank did not opt out of the Transaction Account Guarantee portion of the TGLP. The Transaction Account Guarantee was to expire on December 31, 2009, but has been extended until June 30, 2010. Through December 31, 2009, participating institutions were assessed a 10 basis point surcharge on the portion of eligible accounts that exceed the general limit on deposit insurance coverage. After December 31, 2009, participating institutions will be assessed 15 to 25 basis points depending on the risk category assigned to the institution. All insured depository institutions currently participating may opt out of participation in the extended period. The Bank has elected to continue its participation in the Transaction Account Guarantee program.
Also pursuant to the TLGP, the FDIC will guarantee, through the earlier of maturity or December 31, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before October 31, 2009 (the “Debt Guarantee”). The Company and the Bank opted out of the Debt Guarantee portion of TLGP.
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 Company began taking advantage of this credit in 2007 and realized benefits from this credit thru the second quarter of 2009.
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 aware of any activity or condition that could result in termination of the deposit insurance of the 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, 2009, the FICO assessment rate for DIF members ranged between approximately 0.0102% of deposits and approximately 0.0114% of deposits. During the year ended December 31, 2009, the Bank paid FICO assessments totaling $0.1 million.
7.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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For the first quarter of 2010, the rate established by the FDIC for the FICO assessment is 0.0106% of deposits.
Supervisory Assessments. All Illinois banks are required to pay supervisory assessments to the IDFPR to fund the operations of the IDFPR. The amount of the assessment is calculated based on the institution’s total assets, including consolidated subsidiaries, as reported to the IDFPR. During the year ended December 31, 2009, the Bank paid supervisory assessments to the IDFPR totaling $0.2 million.
Capital Requirements. The Federal Reserve has established the following minimum capital standards for state-chartered Federal Reserve System member banks, such as the 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, 2009, the 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, 2009, the Bank had regulatory capital as follows:
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Risk-Based
Capital Ratio
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Leverage
Capital Ratio
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The Bank
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11.13%
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7.60%
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The risk-based capital ratio and the leverage capital ratio are 3.13% and 3.60% in excess of the Federal Reserve’s minimum requirements. See Note 18 in the Notes in Consolidated Financial Statements for further information.
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, 2009, the Bank was considered well capitalized.
8.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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.
Regulatory Agreements. On December 18, 2009, the Bank entered into a written agreement (the “Agreement”) with the Federal Reserve Bank of Chicago (the “Federal Reserve-Chicago”) and the IDFPR. The Agreement describes commitments made by the Bank to address and strengthen banking practices relating to credit risk management practices; improving loan underwriting and loan administration; improving asset quality by enhancing the Bank’s position on problem loans through repayment, additional collateral or other means; reviewing and revising as necessary the Bank’s allowance for loan and lease losses policy; maintaining sufficient capital at the Bank, implementing an earnings plan and comprehensive budget to improve and sustain the Bank’s earnings; and improving the Bank’s liquidity position and funds management practices. The Bank has implemented enhancements to its processes to address the matters identified by the Federal Reserve-Chicago and the IDFPR and continues its efforts to comply with all the requirements specified in the Agreement. In the meantime, the Agreement results in the Bank’s ineligibility for certain actions and expedited approvals without the prior written consent and approval of the Federal Reserve-Chicago and the IDFPR. These prohibited actions include, among other things, the Bank paying dividends to the Company, the Company paying dividends on its common or preferred stock, the Company increasing its debt level and the Company redeeming or repurchasing any shares of its stock.
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 the 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, less any required transfers to additional paid-in capital or to a fund for the retirement of preferred stock.
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. In addition, notwithstanding the availability of funds for dividends, the Federal Reserve may prohibit the payment of any dividends by the Bank if the Federal Reserve determines such payment would constitute an unsafe or unsound practice. As discussed above, the Agreement requires the Bank to obtain the prior written consent of the Federal Reserve-Chicago for the payment of dividends. During 2010, the Bank will not be expected to pay dividends.
Insider Transactions. The 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 the 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 the Bank maintains a correspondent relationship.
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.
9.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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 the Bank, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. Additionally, the Bank has authority under Missouri law to establish branches anywhere in the State of Missouri, 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.
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.
10.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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Reserve Requirement. Federal Reserve regulations, as presently in effect, require depository institutions including the Bank to maintain cash reserves against their net transaction accounts (primarily NOW and regular checking accounts). Effective October 9, 2008, the Federal Reserve Banks are now authorized to pay interest on such reserves.
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 2010 Proxy Statement, the names and ages of the executive officers of the Company, 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, 52, is the President & Chief Executive Officer of Centrue Financial Corporation and the Bank. Mr. Daiber joined the former Centrue Financial in October of 2002 as its President and Chief Executive Officer.
Kurt R. Stevenson, 43, is the Senior Executive Vice President & Chief Financial Officer of Centrue Financial Corporation and the Bank and has held that role since 2003.
Everett J. Solon, 57, is the Market President for the Bank’s Streator, Dwight, Ottawa and Peru locations, a position held since 2003. In 2007, he also acted as the Bank’s Head of Mortgage Banking.
Robert L. Davidson, 64, is the Bank’s Executive Vice President, Chief Investment Officer and ALCO Manager, a position held since January of 2006. He had previously served as the Bank’s Senior Vice President, Chief Investment Officer and ALCO Manager since 2001.
Roger D. Dotson, 62, is the Bank’s Executive Vice President, a position held since late 2007. In 2009, he was also named the Head of Operations. In this capacity, he is responsible for oversight in the operations, IT, deposit operations, and loan operations areas. He had previously served as the Bank’s Head of Retail Banking. Mr. Dotson joined the former Centrue Bank as their Regional President in 2005. Prior to joining the Bank, Mr. Dotson served as the President & CEO of Illinois Community Bank located in Effingham, Illinois.
Heather M. Hammitt, 35, is the Bank’s Executive Vice President & Head of Human Resources & Corporate Communications. Ms. Hammitt joined the Bank in March of 1998 and has served in various positions of management in the human resources department during that time.
Kenneth A. Jones, 46, is the Bank’s Executive Vice President & Chief Credit Officer. Mr. Jones joined the Bank in October 2000 and, prior to his current position, he served in the role of Commercial Collector.
James J. Kerley, Jr., 61, is the Bank’s Executive Vice President & Senior Lender. Prior to joining the Bank in May of 2009, Mr. Kerley was an agent with Fiduciary Asset Management, an investment management firm, since 1999 and was also a partner of KD Advisory LLC, a consulting firm providing workout services to banks, since 2007.
Diane F. Leto, 48, is the Bank’s Executive Vice President & Chief Risk Officer. She had previously served as the Bank’s Executive Vice President & Head of Operations through year-end 2008. She has been with the Bank since June of 2004.
Ricky R. Parks, 44, is the Market President for the Bank’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.
11.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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Mary Jane Raymond, 53, is the Bank’s Executive Vice President & Head of Retail Banking. Ms. Raymond joined the former Centrue Bank in March of 2005 as a Vice President/Regional Sales Manager. Prior to joining the former Centrue Bank, Ms. Raymond worked as a Vice President for Regions Bank from May of 1997 to March of 2005.
Available Information
Our Internet address is www.centrue.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the investor relations section of our Web site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.
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” and “Recent Developments.”
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.
Risks Related to the Company’s Business
We are subject to current financial market risk.
In 2009 and continuing in 2010, governments, regulators and central banks in the United States and worldwide have taken numerous steps to increase liquidity and to restore investor confidence, but asset values have continued to decline and access to liquidity continues to be very limited.
The EESA authorizes the U. S. Treasury to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions and their holding companies, under TARP. The purpose of TARP is to restore confidence and stability to the United States banking system and to encourage financial institutions to increase their lending to customers and to each other. Under the Capital Purchase Program, which the Company participated in, the U. S. Treasury is purchasing equity securities from participating institutions. The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000. This increase is in place until December 31, 2013 and is not covered by deposit insurance premiums paid by the banking industry. The ARRA, which was signed into law on February 17, 2009, includes a wide array of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our Common Stock.
12.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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The EESA and the ARRA followed, and have been followed by, numerous actions by the Federal Reserve Board, the United States Congress, the U. S. Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime mortgage meltdown that began in 2007. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to stabilize the United States banking system. The EESA, the ARRA and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition and results of operations could be materially and adversely affected.
Our allowance for loan losses may be insufficient.
Managing the Company’s allowance 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 collectability of the respective loan portfolios. Although the Company believes that the allowance for loan losses is adequate, there can be no assurance that such allowance 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 allowance for loan losses would result in a material decrease in the Company’s net income, and possibly its capital, among other adverse consequences.
We are subject to lending risk.
As of December 31, 2009 approximately 81.48% 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. In addition, 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 an 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 States of Illinois and Missouri 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 example, these factors could lead to reduced interest income and an increase in the provision for loan losses.
13.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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, east central, south central and St. Louis’s suburban east counties of Illinois, as well as, the St. Louis metro area of Missouri. 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.
Decline in the Company’s stock price could require a write-down of some portion or all of the Company’s goodwill.
If the Company’s stock price declines and remains low for an extended period of time, the Company could be required to write off all or a portion of its goodwill, which represents the value in excess of the Company’s tangible book value. Such write off would reduce earnings in the period in which it is recorded. The Company’s stock price is subject to market conditions that can be impacted by forces outside of the control of management, such as a perceived weakness in financial institutions in general, and may not be a direct result of the Company’s performance. A write-down of goodwill could have a material adverse effect on the Company’s results of operations.
We are subject to current levels of unprecedented market volatility.
The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption have reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Future growth or operating results may require the Company to raise additional capital but that capital may not be available or it may be dilutive.
The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. To the extent the Company’s future operating results erode capital or the Company elects to expand through loan growth or acquisition it may be required to raise capital. The Company’s ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company’s financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Company’s ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its financial condition and results of operations.
Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from other real estate owned (“OREO”) fair value appraisals.
The Company’s OREO portfolio consists of properties that it obtained through foreclosure in satisfaction of loans. OREO properties are recorded at the lower of the recorded investment in the loans for which the properties served as collateral or estimated fair value, less estimated selling costs. Generally, in determining fair value an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced during 2008 and 2009.
14.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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In response to market conditions and other economic factors, the Company may utilize alternative sale strategies other than orderly dispositions as part of its OREO disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from estimates used to determine the fair value of the Company’s OREO properties.
Overdraft regulation could have an adverse effect on the Company.
The Federal Reserve has amended Regulation E (Electronic Fund Transfers) effective July 1, 2010 to require consumers to opt in, or affirmatively consent, to the institution’s overdraft service for ATM and one-time debit card transactions, before overdraft fees may be assessed on the account. Consumers will also be provided a clear disclosure of the fees and terms associated with the institution’s overdraft service. Such change could adversely affect the level of the Company’s overdraft fees.
The Company and the Bank may not be able to realize the benefit of deferred tax assets.
The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The deferred tax assets can be recognized in future periods dependent upon a number of factors, including the ability to realize the asset through carryback or carryforward to taxable income in prior or future years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. If the Company is not able to recognize deferred tax assets in future periods, it could have a material adverse effect on the Company’s financial condition and results of operations.
The Company is a bank holding Company and its sources of funds are limited.
The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to stockholders of the Company is derived primarily from dividends received from the Bank. The Company’s ability to receive dividends or loans from its subsidiaries is restricted. Dividend payments by the Bank to the Company in the future will require generation of future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of prescribed guidelines. Further, the Company’s right to participate in the assets of the Bank upon its liquidation, reorganization, or otherwise will be subject to the claims of the Bank’s creditors, including depositors, which will take priority except to the extent the Company may be a creditor with a recognized claim. As of December 31, 2009, the Company’s subsidiary had deposits and other liabilities of $1.14 billion.
The Company could experience an unexpected inability to obtain needed liquidity.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The Company seeks to ensure its funding needs are met by maintaining a level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when needed, it could have a material adverse effect on the Company’s business and, in turn, the Company’s financial condition and results of operations.
15.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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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. In addition, 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.
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. 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:
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difficulty in estimating the value of the target company;
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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;
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potential exposure to unknown or contingent liabilities of the target company;
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exposure to potential asset quality issues of the target company;
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there may be volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts;
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difficulty and expense of integrating the operations and personnel of the target company;
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inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits;
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potential disruption to the Company’s business;
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potential diversion of the Company’s management’s time and attention;
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the possible loss of key employees and customers of the target company; and
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potential changes in banking or tax laws or regulations that may affect the target company.
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16.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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Details of the Company’s recent acquisition activity are presented in Note 2, “Business Acquisitions and Divestitures,” of the notes to consolidated financial statements within Part II, Item 8.
Our information systems may experience an interruption or 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 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 interrelated such that defaults by other larger institutions could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect our business.
We operate in an industry that is significantly affected by general business and economic conditions.
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. 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.
None.
17.
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Centrue Financial Corporation
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Part I
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(Table Amounts In Thousands, Except Share Data)
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Properties
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At December 31, 2009, the Company operated thirty offices (twenty-six full-service bank branches and three back-room sales support nonbanking facilities in Illinois and one full-service bank branch in Missouri). The principal offices of the Company are located in St. Louis, Missouri. All of the Company’s offices are owned by the Bank and are not subject to any mortgage or material encumbrance, with the exception of four offices that are leased: one is located in LaSalle County in Illinois, one in Will County in Illinois, one in St. Clair 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: St. Louis, MO
|
||
|
Centrue Bank
|
Bureau, Champaign, Clinton, DeKalb, Effingham, Grundy, Kankakee, Kendall, LaSalle, Livingston, St. Clair and Will Counties in Illinois
|
|
Main Office: Streator, IL
Twenty-six full-service banking offices and three non-banking offices located in markets served.
|
|
|
St. Louis County in Missouri
|
One full-service banking office
|
In addition to the banking locations listed above, the Bank owns twenty-seven automated teller machines, all of which are housed within banking offices.
At December 31, 2009 the properties and equipment of the Company had an aggregate net book value of approximately $30.3 million.
| 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. | Reserved |
18.
|
Centrue Financial Corporation
|
|
(Table Amounts In Thousands, Except Share Data)
|
|
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
The Company’s Common Stock was held by approximately 887 stockholders of record as of March 1, 2010, 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.
|
Stock Sales
|
Cash
Dividends
|
|||||||||||
|
High
|
Low
|
|||||||||||
|
2009
|
||||||||||||
|
First Quarter
|
$ | 6.95 | $ | 2.76 | $ | 0.07 | ||||||
|
Second Quarter
|
6.89 | 4.07 | 0.01 | |||||||||
|
Third Quarter
|
5.74 | 2.92 | 0.00 | |||||||||
|
Fourth Quarter
|
3.79 | 1.00 | 0.00 | |||||||||
|
2008
|
||||||||||||
|
First Quarter
|
$ | 22.94 | $ | 17.26 | $ | 0.13 | ||||||
|
Second Quarter
|
19.90 | 11.03 | 0.14 | |||||||||
|
Third Quarter
|
16.00 | 9.12 | 0.14 | |||||||||
|
Fourth Quarter
|
14.57 | 5.70 | 0.14 | |||||||||
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 an acquisition in 1996, preferential dividends were required to be paid or accrued quarterly, with respect to the outstanding shares of Preferred Stock. In preparation for participation in the U. S. Department of the Treasury’s Capital Purchase Program, the Company has added a Fixed Rate Cumulative Preferred Stock, Series C. This preferred securities series issued by the Company will pay cumulative dividends of 5% a year for the first five years and 9% thereafter.
The ability of the Company to pay dividends in the future will be primarily dependent upon its receipt of dividends from the Bank. As discussed on page 9, the Bank is prohibited from paying dividends to the Company. 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. The 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.
Prior to the second quarter of 2009, the Company had paid regular cash dividends on the Common Stock since it commenced operations in 1982. The Bank is prohibited from paying dividends as discussed on page 9. Beginning with the third quarter of 2009, the Company suspended payment of its Common Stock cash dividends. Once the Agreement is lifted, the Bank can return to paying dividends to the Company. However, there can be no assurance that the Company will promptly return to paying any such dividends. The timing and amount of any future dividends will depend upon the earnings, capital requirements and financial condition of the Company and the Bank, as well as the general economic conditions and other relevant factors affecting the Company and the Bank. Per the Company’s debt agreement with Cole Taylor Bank, the Company cannot declare or pay dividends in excess of 40% of the then current year’s earnings without prior consent. In addition, the terms of the Series A Preferred Stock, and the Series B Preferred Stock issued to certain 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. Additionally, the securities purchase agreement, between the Company and the Treasury limits the payment of dividends on the Common Stock to the current quarterly cash dividend of $0.14 per share.
19.
|
Centrue Financial Corporation
|
|
(Table Amounts In Thousands, Except Share Data)
|
Restrictions set forth in the U.S. Treasury CPP program prohibit the Company from repurchasing its common stock until the CPP proceeds are paid back.
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, 2005 and ending on December 31, 2009. The graph was prepared at our request by SNL Financial LC, Charlottesville, Virginia.
COMPARISON OF CUMULATIVE TOTAL RETURN
(ASSUMES $100 INVESTED ON JANUARY 1, 2005)
|
Period Ending
|
||||||||||||||||||
|
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||
|
Centrue Financial Corporation
|
100.00 | 102.29 | 95.72 | 113.51 | 32.35 | 13.87 | ||||||||||||
|
NASDAQ Composite
|
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||
|
SNL Midwest Bank
|
100.00 | 96.36 | 111.38 | 86.81 | 57.11 | 48.40 | ||||||||||||
20.
|
Centrue Financial Corporation
|
|
(Table Amounts In Thousands, Except Share Data)
|
| Item 6. | Selected Financial Data |
The following table presents selected consolidated financial data for the five years ended December 31, 2009:
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Statement of Income Data
|
||||||||||||||||||||
|
Interest income
|
$ | 63,245 | $ | 73,518 | $ | 83,576 | $ | 43,858 | $ | 34,697 | ||||||||||
|
Interest expense
|
24,562 | 33,944 | 44,735 | 21,351 | 13,704 | |||||||||||||||
|
Net interest income
|
38,683 | 39,574 | 38,841 | 22,507 | 20,993 | |||||||||||||||
|
Provision for loan losses
|
52,049 | 8,082 | 675 | (1,275 | ) | 250 | ||||||||||||||
|
Net interest income (loss) after provision for loan losses
|
(13,366 | ) | 31,492 | 38,166 | 23,782 | 20,743 | ||||||||||||||
|
Noninterest income
|
711 | 13,409 | 15,665 | 6,688 | 6,298 | |||||||||||||||
|
Noninterest expense
|
46,658 | 35,745 | 37,333 | 22,723 | 21,343 | |||||||||||||||
|
Income (loss) before income taxes
|
(59,313 | ) | 9,156 | 16,498 | 7,747 | 5,698 | ||||||||||||||
|
Income taxes (benefit)
|
(21,234 | ) | 2,766 | 5,175 | 2,145 | 1,319 | ||||||||||||||
|
Income (loss) from continuing operations (after taxes)
|
(38,079 | ) | 6,390 | 11,323 | 5,602 | 4,379 | ||||||||||||||
|
Loss on discontinued operations
|
— | — | — | (415 | ) | (206 | ) | |||||||||||||
|
Net income (loss)
|
$ | (38,079 | ) | $ | 6,390 | $ | 11,323 | $ | 5,187 | $ | 4,173 | |||||||||
|
Preferred stock dividends
|
1,810 | 207 | 207 | 207 | 207 | |||||||||||||||
|
Net income (loss) for common stockholders
|
$ | (39,889 | ) | $ | 6,183 | $ | 11,116 | $ | 4,980 | $ | 3,966 | |||||||||
|
Per Share Data
|
||||||||||||||||||||
|
Basic earnings (loss) per common shares from continuing operations
|
$ | (6.61 | ) | $ | 1.02 | $ | 1.75 | $ | 1.31 | $ | 1.06 | |||||||||
|
Basic earnings (loss) per common share
|
(6.61 | ) | 1.02 | 1.75 | 1.21 | 1.01 | ||||||||||||||
|
Diluted earnings (loss) per common share from continuing operations
|
(6.61 | ) | 1.02 | 1.74 | 1.30 | 1.04 | ||||||||||||||
|
Diluted earnings (loss) per common share
|
(6.61 | ) | 1.02 | 1.74 | 1.20 | 0.99 | ||||||||||||||
|
Dividends per common stock
|
0.08 | 0.55 | 0.51 | 0.48 | 0.44 | |||||||||||||||
|
Dividend payout ratio for common stock
|
NM
|
53.71 | % | 29.17 | % | 27.05 | % | 43.39 | % | |||||||||||
|
Book value per common stock
|
$ | 13.15 | $ | 19.14 | $ | 19.50 | $ | 18.23 | $ | 17.23 | ||||||||||
|
Basic weighted average common shares outstanding
|
6,035,598 | 6,033,896 | 6,341,693 | 4,119,235 | 3,943,741 | |||||||||||||||
|
Diluted weighted average common shares outstanding
|
6,035,598 | 6,042,296 | 6,380,659 | 4,163,836 | 4,002,908 | |||||||||||||||
|
Period-end common shares outstanding
|
6,043,176 | 6,028,491 | 6,071,546 | 6,455,068 | 3,806,876 | |||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Securities
|
$ | 275,483 | $ | 252,562 | $ | 249,331 | $ | 298,692 | $ | 196,440 | ||||||||||
|
Loans
|
885,095 | 1,004,390 | 957,285 | 836,944 | 417,525 | |||||||||||||||
|
Allowance for loan losses
|
40,909 | 15,018 | 10,755 | 10,835 | 8,362 | |||||||||||||||
|
Total assets
|
1,312,684 | 1,401,881 | 1,364,999 | 1,283,025 | 676,222 | |||||||||||||||
|
Total deposits
|
1,054,689 | 1,049,220 | 1,033,022 | 1,026,610 | 543,841 | |||||||||||||||
|
Stockholders’ equity
|
112,614 | 115,908 | 118,876 | 118,191 | 66,075 | |||||||||||||||
|
Earnings Performance Data
|
||||||||||||||||||||
|
Return on average total assets
|
(2.82 | )% | 0.47 | % | 0.85 | % | 0.69 | % | 0.63 | % | ||||||||||
|
Return on average stockholders’ equity
|
(27.80 | ) | 5.43 | 9.53 | 6.69 | 6.06 | ||||||||||||||
|
Net interest margin ratio
|
3.26 | 3.32 | 3.35 | 3.41 | 3.56 | |||||||||||||||
|
Efficiency ratio (1)
|
71.21 | 64.32 | 66.67 | 76.81 | 77.78 | |||||||||||||||
|
Asset Quality Ratios
|
||||||||||||||||||||
|
Nonperforming assets to total end of period assets
|
7.40 | % | 1.64 | % | 0.51 | % | 1.08 | % | 0.62 | % | ||||||||||
|
Nonperforming loans to total end of period loans
|
9.14 | 1.03 | 0.43 | 1.40 | 0.96 | |||||||||||||||
|
Net loan charge-offs to total average loans
|
2.74 | 0.38 | 0.08 | 0.22 | 0.39 | |||||||||||||||
|
Allowance for loan losses to total loans
|
4.62 | 1.50 | 1.12 | 1.29 | 2.00 | |||||||||||||||
|
Allowance for loan losses to nonperforming loans
|
50.59 | 145.55 | 262.96 | 92.14 | 208.84 | |||||||||||||||
|
Capital Ratios
|
||||||||||||||||||||
|
Average equity to average assets
|
10.14 | % | 8.69 | % | 8.90 | % | 10.35 | % | 10.39 | % | ||||||||||
|
Total capital to risk adjusted assets
|
11.34 | 12.18 | 10.23 | 11.94 | 13.33 | |||||||||||||||
|
Tier 1 leverage ratio
|
7.10 | 8.10 | 7.69 | 7.90 | 9.03 | |||||||||||||||
| (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.
|
||||
| NM | Not meaningful. |
21.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of Income for the years 2007 through 2009 and Consolidated Statements of Financial Condition as of December 31, 2009 and 2008. When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware Corporation, and its consolidated subsidiaries. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank.
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 in the following tables are displayed in thousands (000s), except per 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, 2009 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 degree 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.
22.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.
Allowance for Loan Losses: The allowance for loan losses is a reserve established through a provision for probably loan losses charged to expense, which 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. 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 guidance and rules stating that the analysis of the allowance for loan losses consists of three components:
|
●
|
Specific Component. The specific credit allocation component is based on an analysis of individual loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification for which the recorded investment in the loan exceeds its fair value. 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. 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;
|
|
|
●
|
Historical Loss Component. The historical loss component is based statistically on using a loss migration analysis that examines historical loan loss experience for each loan category. The loss migration 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 methodology utilized by management to calculate the historical loss portion of the allowance adequacy analysis is based on historical losses. During 2009, this historical loss period migrated from a rolling twenty quarters average (5 years) to a weighted twelve-quarter average (3 years). This migration reflects the increasing economic risk and higher losses being experienced in the portfolio; and
|
|
|
●
|
Qualitative Component. The qualitative component requires qualitative judgment and estimates reserves based on general economic conditions as well as specific economic factors believed to be relevant to the markets in which the Company operates. 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.
23.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
Securities: Available-for-sale securities are those 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 income tax effect, reported in other comprehensive income. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. The fair values of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). If the securities could not be priced using quoted market prices, observable market activity or comparable trades, the financial market was considered not active and the assets were classified as Level 3. The assets included in Level 3 are trust preferred collateralized debt obligations (“CDO”). These securities were historically priced using Level 2 inputs. However, during 2008, the decline in the level of observable inputs and market activity for CDOs by the measurement date was significant and resulted in unreliable external pricing. As such, these investments are now considered Level 3 inputs and are priced using an internal model. The following information is incorporated into the pricing model utilized in determining individual security valuations:
|
●
|
historical and current performance of the underlying collateral;
|
|
|
●
|
deferral/default rates;
|
|
|
●
|
collateral coverage ratios;
|
|
|
●
|
break in yield calculations;
|
|
|
●
|
cash flow projections;
|
|
|
●
|
required liquidity and credit premiums; and
|
|
|
●
|
financial trend analysis with respect to the individual issuing financial institutions and insurance companies.
|
Due to market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.
The Company evaluates securities for other-than-temporary impairment on a quarterly basis. 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.
For additional discussion on securities, see Notes 3 and 5 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.
Goodwill: Goodwill and other intangible assets are reviewed annually for potential impairment on December 31 or more often if events or circumstances indicate that they may be impaired. Goodwill was tested for impairment at the reporting unit level as of June 30, 2009 and a total impairment loss was recorded as a result of management’s determination that the carrying amount of goodwill exceeded its implied fair value. The Company’s market price per share had continued to be less than its stockholders’ common equity as the Company’s stock continued to trade at a price below its book value. At the same time, the Bank’s operating losses, primarily driven by the deterioration of the real estate markets, decreased as nonperforming assets, particularly loans and related charge-offs increased. The Company engaged an independent third party to test for impairment of its goodwill using a two-step process that begins with an estimation of the fair value of the reporting unit. The first step included a screen for potential impairment and the second step measured the amount of impairment.
The first step of the June 30, 2009 analysis used both an income and market approach as part of that analysis. The income approach was based on discounted cash flows, which were derived from internal forecasts and economic expectations for the Bank reporting unit. The key assumptions used to determine fair value under the income approach included the cash flow period, terminal values based on a terminal growth rate and the discount rate. The market approach calculated the change of control price a market participant could have been reasonably expected to pay for the Bank by adding a change of control premium. The results of the first step of the analysis indicated that the Bank’s carrying value exceeded its fair value, which indicated that an impairment existed and required that the Company perform the second step of the analysis to determine the amount of the impairment. The second step of the analysis measures the amount of impairment and involved a valuation of all of the assets of the Bank as if it had just been acquired and comparing the resultant goodwill with the actual carrying amount of goodwill. The results of the second step of the analysis determined that goodwill was impaired, which resulted in the pre-tax impairment charge of $8.5 million.
24.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
The Company performed its annual goodwill impairment analysis at the reporting unit as of December 31, 2009. The analysis was performed using the same independent third party, with updated projections and information, utilizing the same steps as described for the June 30, 2009 test. Based on the results of the first step of the analysis, the Company identified potential impairment associated with the Company’s goodwill. The Company performed another step two analysis, using the same steps as described for the June 30, 2009 test, and compared the resultant goodwill with the actual carrying amount of goodwill as of the December 31, 2009 balance sheet. The result of the second step of the analysis determined no additional impairment since the fair value of the balances supported the level of goodwill carried as of December 31, 2009. However, if the economy remains stressed, the Bank’s operating losses continue and bank stocks remain out of favor, no assurance can be given that future impairment tests will not result in a charge to earnings.
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. Accounting guidance requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.
Per accounting guidance, the Company reviewed its deferred tax assets at December 31, 2009 and determined that no valuation allowance was necessary. An allowance was previously established upon the merger of UnionBancorp, Inc. with Centrue Financial Corporation for the portion of federal net operating loss carryforward that will expire unused under Section 382 of the Internal Revenue Code. Despite the current year net operating loss and challenging economic environment, the Company has a history of strong earnings up until the current year, is well-capitalized, and has positive expectations regarding future taxable income. In addition, the entire current year net taxable loss can be carried back to offset taxable income in both 2007 and 2008, with the exception of the State of Illinois loss which must be carried forward and can be used over a twenty year carry forward period. The deferred tax balance also includes an Alternative Minimum Tax credit carryforward which does not expire as well as a donation carryforward which has a five year expiration.
The deferred tax asset will be analyzed quarterly to determine if a valuation allowance is warranted. However, there can be no guarantee that a valuation allowance will not be necessary in future periods. In making such judgments, significant weight is given to evidence that can be objectively verified. In making decisions regarding any valuation allowance, the Company considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.
General
Centrue Financial Corporation is a bank holding company organized under the laws of the State of Delaware. The Company provides a full range of products and services to individual and corporate customers extending from the far western and southern suburbs of the Chicago metropolitan area across Central Illinois down to the metropolitan St. Louis area. These products and services include demand, time, and savings deposits; lending; mortgage banking, brokerage, asset management, and trust services. Brokerage, asset management, and trust services are provided to our customers on a referral basis to third party providers. The Company is subject to competition from other financial institutions, including banks, thrifts and credit unions, as well as 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.
25.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
Merger, Acquisition and Divestiture Activity
On January 23, 2009 the Company completed the sale of its trust product line. There was no gain or loss recorded on this transaction, other than the $0.2 million impairment of related goodwill.
Results of Operations
Net Income
2009 compared to 2008. Net loss equaled $38.1 million or ($6.61) per diluted share for the year ended December 31, 2009 as compared to net income of $6.4 million or $1.02 per diluted share for the year ended December 31, 2008.
The Company’s annual results for 2009 were adversely impacted by a $52.0 million provision for loan losses, an $8.5 million goodwill impairment charge taken in the second quarter and $12.6 million non-cash impairment charges primarily related to CDOs. These factors were largely reflective of continued deterioration of general economic conditions, primarily driven by the deterioration of the real estate markets and the extraordinary volatility in the securities markets experienced during 2009.
Return on average assets was (2.82)% for the year ended December 31, 2009 compared to 0.47% for the same period in 2008. Return on average stockholders’ equity was (27.80)% for the year ended December 31, 2009 compared to 5.43% for the same period in 2008.
2008 compared to 2007. Net income equaled $6.4 million or $1.02 per diluted share for the year ended December 31, 2008 as compared to net income of $11.3 million or $1.74 per diluted share for the year ended December 31, 2007. This represents a 43.36% decrease in net income and a 41.38% decrease in diluted per share earnings in 2008 versus 2007.
The Company’s annual results for 2008 were adversely impacted by an $8.1 million provision for loan losses and $2.7 million non-cash impairment charges primarily related to CDOs. These two factors were largely reflective of continued deterioration of general economic conditions and the extraordinary volatility in the securities markets experienced in fourth quarter 2008. These items were offset by decreases in noninterest expenses due to the impact of selling four branches in the first and second quarter of 2008 and management initiatives to reduce costs.
Return on average assets was 0.47% for the year ended December 31, 2008 compared to 0.85% for the same period in 2007. Return on average stockholders’ equity was 5.43% for the year ended December 31, 2008 compared to 9.53% for the same period in 2007.
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.
26.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
2009 compared to 2008. Net interest income, on a tax equivalent basis, decreased $1.1 million from $40.6 million earned during the full year 2008 to $39.5 million for the full year 2009. This was the result of a decrease in interest income more than offsetting a decrease in interest expense.
Tax-equivalent interest income declined $10.5 million as compared to 2008. An $11.1 million decrease in interest-earning assets reduced interest income by $0.7 million. The decrease in interest-earning assets was largely due to a reduction in loan growth related to strategic initiatives to reduce balance sheet risk and there being fewer qualified borrowers in the market. An 81 basis point decline in the average yield on interest-earning assets reduced interest income by $9.8 million as new loans were placed on nonaccrual status and the variable rate portion of our loan and security portfolios adjusted to rate decreases that occurred in 2008.
Interest expense declined $9.4 million as compared to 2008. A $21.8 million decrease in interest-bearing liabilities reduced interest expense by $0.7 million. The decrease in interest-bearing liabilities was largely due to strategic initiatives to reduce balance sheet risks by limiting loan growth and using growth from in-market deposits and the proceeds from loan payoffs to decrease brokered CD and FHLB advances borrowing levels. An 80 basis point decline in total funding costs reduced interest expense by $8.7 million as the pricing on deposits lagged the sharp decline in rates experienced in 2008.
The net interest margin decreased 6 basis points to 3.26% for the year ended December 31, 2009 from 3.32% during the same period in 2008. The Company’s margin has been under pressure primarily due to the cost of increasing liquidity, average loan volume declines, the cost of carrying higher nonaccrual loans and the impact of nonaccrual loan interest reversals. Our net interest margin was positively impacted by a decrease in the cost of funds. Due largely to the protracted economic downturn, the carrying cost of nonaccrual loans and the Company’s interest rate sensitivity, the margin will remain under pressure throughout 2010.
2008 compared to 2007. Net interest income, on a tax equivalent basis, increased $0.6 million from $40.0 million earned during the full year 2007 to $40.6 million for the full year 2008. Tax-equivalent interest income declined $10.2 million as compared to 2007. The increase in interest-earning assets increased interest income by $1.9 million, while a 99 basis point decline in the average rate earned on interest-earning assets reduced interest income by $12.1 million. Interest expense declined $10.8 million as compared to 2007. The increase in interest-bearing liabilities increased interest expense by $1.1 million, but the shift to less expensive wholesale borrowing, coupled with an overall 107 basis point decrease in the average rate paid on interest-bearing liabilities reduced interest expense by $11.9 million.
The net interest margin decreased 3 basis points to 3.32% for the year ended December 31, 2008 from 3.35% during the same period in 2007. The Company’s margin in 2008 was pressured by falling short-term interest rates, as approximately 40.00% of the Company’s loan portfolio was tied to prime or LIBOR and immediately repriced downward upon a rate change; whereas, pricing on deposits remained at relatively high competitive levels.
27.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
|
For the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
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
|
$ | 2,755 | $ | 48 | 1.76 | % | $ | 2,891 | $ | 13 | 0.45 | % | $ | 2,362 | $ | 33 | 1.40 | % | ||||||||||||||||||
|
Securities
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
217,717 | 8,670 | 3.98 | 185,507 | 8,992 | 4.85 | 237,078 | 12,473 | 5.26 | |||||||||||||||||||||||||||
|
Non-taxable
|
35,540 | 1,946 | 5.48 | 38,843 | 2,208 | 5.68 | 40,950 | 2,248 | 5.49 | |||||||||||||||||||||||||||
|
Total securities (tax equivalent)
|
253,257 | 10,616 | 4.19 | 224,350 | 11,200 | 4.99 | 278,028 | 14,721 | 5.29 | |||||||||||||||||||||||||||
|
Federal funds sold
|
— | — | — | 2,567 | 54 | 2.10 | 10,811 | 545 | 5.04 | |||||||||||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
151,821 | 8,869 | 5.84 | 191,578 | 11,965 | 6.25 | 180,714 | 14,962 | 8.28 | |||||||||||||||||||||||||||
|
Real estate
|
797,431 | 43,992 | 5.52 | 791,033 | 50,630 | 6.40 | 708,734 | 53,480 | 7.55 | |||||||||||||||||||||||||||
|
Installment and other
|
5,431 | 499 | 9.18 | 9,413 | 636 | 6.76 | 13,210 | 952 | 7.21 | |||||||||||||||||||||||||||
|
Gross loans (tax equivalent)
|
954,683 | 53,360 | 5.59 | 992,024 | 63,231 | 6.37 | 902,658 | 69,394 | 7.69 | |||||||||||||||||||||||||||
|
Total interest-earnings assets
|
1,210,695 | 64,024 | 5.29 | 1,221,832 | 74,498 | 6.10 | 1,193,859 | 84,693 | 7.09 | |||||||||||||||||||||||||||
|
Noninterest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
Cash and cash equivalents
|
44,315 | 28,415 | 31,692 | |||||||||||||||||||||||||||||||||
|
Premises and equipment, net
|
31,225 | 33,992 | 35,747 | |||||||||||||||||||||||||||||||||
|
Other assets
|
64,410 | 69,919 | 73,579 | |||||||||||||||||||||||||||||||||
|
Total non-interest-earning assets
|
139,950 | 132,326 | 141,018 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 1,350,645 | $ | 1,354,158 | $ | 1,,334,877 | ||||||||||||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
NOW accounts
|
103,928 | 611 | 0.59 | % | 105,800 | 1,211 | 1.14 | % | 105,417 | 1,740 | 1.65 | % | ||||||||||||||||||||||||
|
Money market accounts
|
145,870 | 2,125 | 1.46 | 155,001 | 4,083 | 2.63 | 126,614 | 4,861 | 3.84 | |||||||||||||||||||||||||||
|
Savings deposits
|
89,315 | 240 | 0.27 | 87,615 | 319 | 0.36 | 96,838 | 655 | 0.68 | |||||||||||||||||||||||||||
|
Time $100,000 and over
|
237,912 | 6,195 | 2.60 | 216,112 | 7,945 | 3.68 | 226,605 | 12,010 | 5.30 | |||||||||||||||||||||||||||
|
Other time deposits
|
363,356 | 11,383 | 3.13 | 343,456 | 13,997 | 4.08 | 387,530 | 18,294 | 4.72 | |||||||||||||||||||||||||||
|
Federal funds purchased and repurchase agreements
|
28,670 | 148 | 0.52 | 42,148 | 760 | 1.80 | 43,859 | 1,881 | 4.29 | |||||||||||||||||||||||||||
|
Advances from FHLB
|
87,547 | 2,296 | 2.62 | 119,800 | 3,279 | 2.74 | 64,964 | 2,834 | 4.36 | |||||||||||||||||||||||||||
|
Notes payable
|
32,628 | 1,564 | 4.74 | 41,077 | 2,350 | 5.72 | 32,428 | 2,460 | 7.59 | |||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
1,089,226 | 24,562 | 2.26 | 1,111,009 | 33,944 | 3.06 | 1,084,255 | 44,735 | 4.13 | |||||||||||||||||||||||||||
|
Noninterest-bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
113,533 | 114,994 | 120,355 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
10,926 | 10,545 | 11,459 | |||||||||||||||||||||||||||||||||
|
Total noninterest-bearing liabilities
|
124,459 | 125,539 | 131,814 | |||||||||||||||||||||||||||||||||
|
Stockholders’ equity
|
136,960 | 117,610 | 118,808 | |||||||||||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,350,645 | $ | 1,354,158 | $ | 1,334,877 | ||||||||||||||||||||||||||||||
|
Net interest income (tax equivalent)
|
$ | 39,462 | $ | 40,554 | $ | 39,958 | ||||||||||||||||||||||||||||||
|
Net interest income (tax equivalent) to total earning assets
|
3.26 | % | 3.32 | % | 3.35 | % | ||||||||||||||||||||||||||||||
|
Interest-bearing liabilities to earning assets
|
89.97 | % | 90.93 | % | 90.82 | % | ||||||||||||||||||||||||||||||
| (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 34.00%. | |
| (3) | Nonaccrual loans are included in the average balances. | |
| (4) | Overdraft loans are excluded in the average balances. | |
28.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts 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,
|
||||||||||||||||||||||||
| 2009 Compared to 2008 | 2008 Compared to 2007 | |||||||||||||||||||||||
|
Change Due to
|
Change Due to
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
Interest-income:
|
||||||||||||||||||||||||
|
Interest-earning deposits
|
$ | 1 | $ | 34 | $ | 35 | $ | 3 | $ | (23 | ) | $ | (20 | ) | ||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
1,498 | (1,820 | ) | (322 | ) | (2,640 | ) | (841 | ) | (3,481 | ) | |||||||||||||
|
Non-taxable
|
(180 | ) | (82 | ) | (262 | ) | (128 | ) | 88 | (40 | ) | |||||||||||||
|
Federal funds sold
|
(26 | ) | (28 | ) | (54 | ) | (300 | ) | (191 | ) | (491 | ) | ||||||||||||
|
Loans
|
(1,966 | ) | (7,905 | ) | (9,871 | ) | 5,010 | (11,173 | ) | (6,163 | ) | |||||||||||||
|
Total interest income
|
$ | (673 | ) | $ | (9,801 | ) | $ | (10,474 | ) | $ | 1,945 | $ | (12,140 | ) | $ | (10,195 | ) | |||||||
|
Interest expense:
|
||||||||||||||||||||||||
|
NOW accounts
|
(49 | ) | (551 | ) | (600 | ) | 45 | (574 | ) | (529 | ) | |||||||||||||
|
Money market accounts
|
(315 | ) | (1,643 | ) | (1,958 | ) | 1,098 | (1,876 | ) | (778 | ) | |||||||||||||
|
Savings deposits
|
2 | (81 | ) | (79 | ) | (35 | ) | (301 | ) | (336 | ) | |||||||||||||
|
Time, $100,000 and over
|
605 | (2,355 | ) | (1,750 | ) | (255 | ) | (3,810 | ) | (4,065 | ) | |||||||||||||
|
Other time deposits
|
593 | (3,207 | ) | (2,614 | ) | (1,744 | ) | (2,553 | ) | (4,297 | ) | |||||||||||||
|
Federal funds purchased and repurchase agreements
|
(222 | ) | (390 | ) | (612 | ) | (507 | ) | (614 | ) | (1,121 | ) | ||||||||||||
|
Advances from FHLB
|
(859 | ) | (124 | ) | (983 | ) | 1,899 | (1,454 | ) | 445 | ||||||||||||||
|
Notes payable
|
(409 | ) | (377 | ) | (786 | ) | 578 | (688 | ) | (110 | ) | |||||||||||||
|
Total interest expense
|
$ | (654 | ) | $ | (8,728 | ) | $ | (9,382 | ) | $ | 1,079 | $ | (11,870 | ) | $ | (10,791 | ) | |||||||
|
Net interest income
|
$ | (19 | ) | $ | (1,073 | ) | $ | (1,092 | ) | $ | 866 | $ | (270 | ) | $ | 596 | ||||||||
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.
2009 compared to 2008. The 2009 provision for loan losses charged to operating expense totaled $52.0 million, an increase of $43.9 million in comparison to $8.1 million recorded in the 2008 period. The increase to the 2009 provision for loan loss was driven by the following factors throughout 2009:
|
|
●
|
increase in nonperforming and action list loans;
|
|
|
●
|
increase in charge-offs and losses which impacts historical loss levels;
|
|
|
●
|
deteriorating collateral values, reflecting the impact of the adverse economic climate on the Company’s borrowers;
|
|
|
●
|
guarantor positions collapsing due to economic conditions; and
|
|
|
●
|
increase in the level of past due loans.
|
29.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
As the status of many collateral dependent loans deteriorated throughout 2009, management monitored these credits to analyze the adequacy of the cash flows to support the debt levels and obtained updated appraisals to determine the collateral’s fair value for impairment analysis. Based on our analysis, management increased its specific reserves for impaired loans by $44.5 million and updated the historical loss and qualitative factors by $7.5 million to reflect trends for losses being experienced.
Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential and commercial real estate, and commercial development exposures. Many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry that existed throughout 2009 and is projected to continue through much of 2010. Should the economic climate deteriorate from current levels, more borrowers may experience repayment difficulty, and the level of nonperforming loans, charge-offs and delinquencies will rise requiring further increases in the provision for loan losses.
2008 compared to 2007. The 2008 provision for loan losses charged to operating expense totaled $8.1 million, an increase of $7.4 million in comparison to $0.7 million recorded in the 2007 period. The increase in the provision was the result of identifying and addressing problem credits and the continued deterioration of economic conditions. Specifically, nine relationships were identified during 2008 where large specific provisions were recorded.
The following factors also impacted 2008 provision levels:
|
●
|
increase in nonperforming and action list loans since year-end;
|
|
|
●
|
increase in the level of past due loans.
|
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:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Service charges
|
$ | 6,421 | $ | 7,303 | $ | 6,789 | ||||||
|
Mortgage banking income
|
2,303 | 1,525 | 1,743 | |||||||||
|
Electronic banking services
|
1,923 | 1,807 | 1,579 | |||||||||
|
Bank-owned life insurance
|
1,048 | 1,022 | 991 | |||||||||
|
Other Income
|
1,065 | 1,951 | 3,485 | |||||||||
|
Subtotal recurring noninterest income
|
12,760 | 13,608 | 14,587 | |||||||||
|
Securities gains (losses)
|
251 | 848 | (29 | ) | ||||||||
|
Net impairment on securities
|
(12,606 | ) | (2,735 | ) | — | |||||||
|
Gain on sale of Oreo
|
178 | 379 | 1,107 | |||||||||
|
Gain on sale of other assets
|
128 | 1,309 | — | |||||||||
|
Total noninterest income
|
$ | 711 | $ | 13,409 | $ | 15,665 | ||||||
2009 compared to 2008. Total noninterest income totaled $0.7 million for the year ended December 31, 2009, as compared to $13.4 million for the same period in 2008. This represented a decrease of $12.7 million or 94.78% in 2009 over the prior period. Recurring noninterest income declined $0.8 million or 5.88% in 2009 versus 2008 levels.
30.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
The decline in recurring noninterest income was primarily due to a $0.9 million decrease related to reduced consumer spending and its impact on NSF and overdraft fees. Also contributing was a $0.8 million decrease due to the sale of the asset management and brokerage business lines which were finalized in 2008. These negative variances were partially offset by a $0.8 million volume related increase in revenue generated from the mortgage banking division.
Furthermore, the Company concluded that six CDOs were other than temporarily impaired throughout 2009, resulting in a $12.6 million before-tax reduction in earnings. During 2010, additional OTTI might be incurred if the economic environment does not improve.
2008 compared to 2007. Total noninterest income totaled $13.4 million for the year ended December 31, 2008, as compared to $15.7 million for the same period in 2007. This represented a decrease of $2.3 million or 14.65% in 2008 over the prior period. Recurring noninterest income declined $1.0 million in 2008 verse 2007.
The decline was primarily the result of volume related reductions in the mortgage banking division and the sale of the asset management and brokerage business lines which were finalized in third and fourth quarters of 2008. These decreases were partially offset by growth in service charges and NSF fees on deposit accounts.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee benefits, occupancy and other operating expense. The following table summarizes the Company’s noninterest expense:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Salaries and employee benefits
|
$ | 16,195 | $ | 16,283 | $ | 17,635 | ||||||
|
Occupancy expense, net
|
3,364 | 3,598 | 4,043 | |||||||||
|
Furniture and equipment expenses
|
2,303 | 2,673 | 2,621 | |||||||||
|
Marketing
|
783 | 1,228 | 1,035 | |||||||||
|
Supplies and printing
|
458 | 470 | 653 | |||||||||
|
Telephone
|
838 | 772 | 834 | |||||||||
|
Data processing
|
1,510 | 1,309 | 1,650 | |||||||||
|
FDIC insurance
|
2,780 | 184 | 122 | |||||||||
|
Amortization of intangible assets
|
1,537 | 1,883 | 2,307 | |||||||||
|
Goodwill impairment
|
8,451 | 724 | — | |||||||||
|
Other expenses
|
8,439 | 6,621 | 6,433 | |||||||||
|
Total noninterest expense
|
$ | 46,658 | $ | 35,745 | $ | 37,333 | ||||||
2009 compared to 2008. Noninterest expense totaled $46.7 million for the year ended December 31, 2009, as compared to $35.7 million for the same period in 2008. This represented an increase of $11.0 million or 30.81% in 2009 from 2008.
The increase was primarily related to the recognition of an $8.5 million goodwill impairment charge taken during the second quarter 2009. The change was largely a result of increasing loan remediation costs, including collection expenses on nonperforming loans, general expenses associated with maintaining other real estate owned and a valuation adjustment taken on one property held in other real estate owned. Also contributing to the change was an industry-wide increase in FDIC insurance premiums. These increases were partially offset by management’s initiatives to reduce costs with regard to salaries and employee benefits, occupancy expense, furniture and equipment costs and marketing expense.
With the regulatory environment, FDIC insurance premiums will continue at elevated levels. Costs to remediate loans and collect on nonperforming loans will continue to be elevated if the economic conditions do not improve. Additionally, expenses associated with maintaining foreclosed real estate will remain higher than normal. Finally, if operating losses continue, the economy does not improve and bank stocks remain out of favor, additional goodwill impairment charges could be realized in 2010.
31.
|
Centrue Financial Corporation
|
|
Part II: Management’s Discussion and Analysis
|
|
(Table Amounts In Thousands, Except Share Data)
|
2008 compared to 2007. Noninterest expense totaled $35.7 million for the year ended December 31, 2008, as compared to $37.3 million for the same period in 2007. This represented a decrease of $1.6 million or 4.29% in 2008 from 2007.
The decrease was reported across many categories due to management’s initiatives to reduce costs. Furthermore, four branches were sold in 2008 which led to further reductions in the number of full-time equivalent employees which decreased payroll & benefit costs as well as lowered occupancy, telephone and data line expense levels. Also contributing were decreases in wealth management operating expenses and data processing costs. Offsetting these decreases were increases related to marketing, loan related expense due to growth in the portfolio, and goodwill valuation adjustments taken related to the sale of the wealth management business (included in amortization of intangible assets).
Applicable Income Taxes.