10-K
UNITED STATES
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, 2015
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 incorporation or organization) | | | (I.R.S. Employer Identification number) |
122 W. Madison Street, Ottawa, IL 61350
(Address of principal executive offices including zip code)
(815) 431-8400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
|
| | |
Title of Exchange Class | | Name of Each Exchange which Registered |
Common Stock ($0.01 par value) | | The NASDAQ Capital Market |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 403 of the Securities Act. Yes [ ] No [ü]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act. Yes [ ] No [ü]
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 [ü] No [ ]
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ü] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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.
|
| | | |
Large accelerated filer | [ ] | Accelerated filer | [ ] |
Non-accelerated filer | [ ] | Smaller reporting company | [ ü] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ü]
As of March 15, 2016, 6,513,694 shares of the Registrant's Common Stock was issued and outstanding. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2015, the last business day of the Registrant’s most recently completed second quarter, was $24,780,135.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the 2016 Annual Meeting of Stockholders (the "2016 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 $0.01 per share.
TABLE OF CONTENTS
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Item 1. Business
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Some of the statements contained or incorporated by reference in this document are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on the current expectations, forecasts, and assumptions of our management and are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements are sometimes identified by language such as “believe,” “may,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “future,” “likely,” “probably,” “suggest,” “goal,” “potential” and similar expressions and may also include references to plans, strategies, objectives, and anticipated future performance as well as other statements that are not strictly historical in nature. The risks, uncertainties, and other factors that could cause our actual results to differ materially from those expressed or implied in this prospectus include those noted under the caption “Risk Factors.” Readers should carefully review this information as well as the risks and other uncertainties described in other filings we may make with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions, and estimates only as of the date they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances, or otherwise.
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 $961 million, net loans of $625 million, and equity of $121 million at December 31, 2015 and is headquartered in Ottawa, Illinois. The Company currently trades on the NASDAQ Capital Market (NASDAQ: CFCB). 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"). 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, 2015, the Bank had $922 million in total assets, $719 million in total deposits, and twenty-seven offices (twenty-two full-service bank branches, two lending centers and two back-room sales support non-banking facilities in Illinois and one full-service bank branch in Missouri) 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 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.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Employees
At December 31, 2015, the Company and the Bank had a total of 214 full-time employees and 47 part time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relationships with our employees.
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 IDFPR, the Board of Governors of the Federal Reserve Board, 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.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law on July 21, 2010. The Dodd-Frank Act constitutes one of the most significant efforts in recent history to comprehensively overhaul the financial services industry and has affected large and small financial institutions alike. While some of the provisions of the Dodd-Frank Act took effect immediately, many of the provisions have delayed effective dates and their implementation has required the issuance of numerous new regulations.
The Dodd-Frank Act deals with a wide range of regulatory issues including, but not limited to: mandating new capital requirements that would require certain bank holding companies to be subject to the same capital requirements as their depository institutions; eliminating (with certain exceptions) trust preferred securities; codifying the Federal Reserve’s Source of Strength doctrine; creating the Consumer Financial Protection Bureau (the “CFPB”) which has the power to exercise broad regulatory, supervisory and enforcement authority concerning both existing and new consumer financial protection laws; permanently increasing federal deposit insurance protection to $250,000 per depositor; increasing the ratio of reserves to deposits minimum to 1.35%; assessing premiums for deposit insurance coverage on average consolidated total assets less average tangible equity, rather than on a deposit base; authorizing the assessment of examination fees; establishing new standards and restrictions on the origination of mortgages; permitting financial institutions to pay interest on business checking accounts; limiting interchange fees payable on debit card transactions; and implementing requirements on boards, corporate governance and executive compensation for public companies.
In July 2011, the CFPB took over many of the consumer financial functions that had been assigned to the federal banking agencies and other designated agencies. The CFPB has broad rulemaking authority and there has been considerable uncertainty as to how the CFPB will continue to exercise its regulatory, supervisory, examination and enforcement authority.
The Dodd-Frank Act has had and will have significant and immediate effects on banks and bank holding companies in many areas. It is expected that the continued implementation of the Dodd-Frank Act will increase the cost of doing business in the banking industry.
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 Board under the Act. In accordance with Federal Reserve Board 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 Act, the Company is subject to periodic
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
examination by the Federal Reserve Board and is required to file with the Federal Reserve Board periodic reports of operations and such additional information as the Federal Reserve Board 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 Act, a bank holding company must obtain Federal Reserve Board 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 Act), the Federal Reserve Board 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 Board is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
The Act 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 Board to be “so closely related to banking as to be a proper incident thereto.” Under current regulations of the Federal Reserve Board, 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 Act generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
In November 1999, the Gramm-Leach-Bliley Act “GLB Act” was signed into law. Under the GLB Act, bank holding companies that meet certain standards and elect to become “financial holding companies” are permitted to engage in a wider range of activities than those permitted for bank holding companies, including securities and insurance activities. Specifically, a bank holding company that elects to become a financial holding company may engage in any activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines is (i) financial in nature or incidental thereto, or (ii) complementary to any such financial-in-nature activity, provided that such complementary activity does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. A bank holding company may elect to become a financial holding company only if each of its depository institution subsidiaries is well-capitalized, well-managed, and has a Community Reinvestment Act rating of “satisfactory” or better at their most recent examination.
The GLB Act specifies many activities that are financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment or economic advisory services; underwriting, dealing in, or making a 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. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guideline levels, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non bank businesses.
The following minimum regulatory capital requirements for bank holding companies were in effect as of December 31, 2015: a risk based requirements expressed as percentages 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%, of which at least 6% must be Tier I capital and a new common equity Tier I capital ratio with a minimum of 4.5%.
In July 2013, the federal banking agencies approved a final rule implementing the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Act (the “Basel III Rule”). As discussed in more detail below, subject to a phase-in period,
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
beginning January 1, 2015, financial institutions transitioned to the Basel III Rule and were required to report results with the first call report of 2015. The Basel III Rule applies to all banking organizations, except for bank holding companies and savings and loan holding companies with consolidated assets of less than $1.0 billion.
The Basel III Rule also exempts bank holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, from phasing out trust preferred securities (“TruPS”) and cumulative perpetual preferred stock from Tier 1 capital. Capital instruments that were issued prior to May 19, 2010, by these institutions and that are currently in Tier 1 capital, including TruPS and cumulative perpetual preferred stock, are grandfathered in Tier 1 capital, subject to certain limits. More specifically, consistent with the current requirements, these instruments are limited to 25% of Tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.
In addition, pursuant to its Small Bank Holding Company Policy, which was amended in 2014, the Federal Reserve Board exempts certain bank holding and savings and loan holding companies from the capital requirements discussed above. The exemption applies only to bank holding companies with less than $1 billion (formerly $500 million) in consolidated assets that: (i) are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. The Company qualifies for this exemption and, thus, is required to meet applicable capital standards on a bank-only basis. However, bank holding companies with assets of less than $1 billion are subject to various restrictions on debt including requirements that debt is retired within 25 years of being incurred, that the debt to equity ratio is .30 to 1 within 12 years of the incurrence of debt and that dividends generally cannot be paid if the debt to equity ratio exceeds 1 to 1.
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 Board 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 Board 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.
Our ability to declare dividends and pay these dividends to our stockholders will depend on the Company’s receipt of dividends from the Bank, as we have no other source of revenue with which to pay dividends. Under current Illinois law the Bank may only pay dividends equal to or less than its cumulative net profits then on hand, deducting from the net profits the bank’s cumulative losses and bad debts. For many banks that suffered losses as a result of the 2008 recession, including the Bank, the banks have recovered and are generating profits, but the banks may not begin paying dividends until year-to-year cumulative undivided profits exceed the earlier years’ losses. The effect of this provision in the Illinois Banking Act is that these otherwise healthy banks must wait many years before they can begin paying dividends again. Effective August 13, 2015 the Illinois Banking Act was amended to address this dividend issue by authorizing a state bank to restate its capital accounts to eliminate a deficit in its undivided profits account so long as prior to the restatement the bank receives the written approval of the Secretary of the IDFPR. The Bank may now, with the permission of the IDFPR and subject to Federal Reserve Board requirements, restate its capital accounts and begin paying dividends again so long as the Bank is profitable.
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 Board, as the primary federal regulator of member banks, and the FDIC, as administrator of deposit insurance.
Deposit Insurance. The Bank’s deposits are insured up to applicable limitations by a deposit insurance fund administered by the FDIC. As an FDIC insured institution, the Bank is required to pay deposit insurance premium assessments to the deposit insurance fund pursuant to a risk-based assessment system. The Dodd-Frank Act permanently raised the basic limit on deposit insurance coverage from $100,000 to $250,000 per depositor.
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
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 insurance fund at the reserve ratio designated by the FDIC.
A bank’s initial assessment rate is based upon the risk category to which it is assigned. Adjustments may be made to a bank’s initial assessment rate based certain factors including levels of long-term unsecured debt, levels of secured liabilities above a threshold amount, and, for certain institutions, brokered deposit levels. As required by the Dodd-Frank Act, in February 2011, the FDIC adopted a final rule that redefines its deposit insurance premium assessment base to be an insured depository institution’s average consolidated total assets minus average tangible equity capital, rather than on deposits. In addition, FDIC has revised its deposit insurance rate schedules as a consequence of the changes to the assessment base. On an unadjusted basis, initial base assessment rates now range between 5 basis points in the lowest risk category and 35 basis points for banks in the highest risk category.
Due to a decrease in the reserve ratio of the deposit insurance fund, in October 2008, the FDIC established a restoration plan to restore the reserve ratio to at least 1.15%. However, the Dodd-Frank Act raised the minimum reserve ratio to 1.35% and removed the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The Dodd-Frank Act also requires that the reserve ratio reach 1.35% by September 30, 2020. Effective January 1, 2011, the FDIC set the long term reserve ratio at 2%. The FDIC has been directed to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.
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, 2015, the FICO assessment rate for DIF members ranged between approximately 0.0058% and 0.0060% of deposits. During the year ended December 31, 2015 the Bank paid FICO assessments totaling $0.05 million.
For the first quarter of 2016, the rate established by the FDIC for the FICO assessment 0.0058% 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, 2015, the Bank paid supervisory assessments to the IDFPR totaling $0.1 million.
Capital Requirements. The Bank is required to comply with capital adequacy standards set by the FDIC. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimum are subject to certain administrative actions. More than one capital adequacy standard applies, and all applicable standards must be satisfied for an institution to be considered to be in compliance. There are four basic measures of capital adequacy: a total risk-based capital measure, a Tier 1 risk-based capital ratio, a Common equity tier 1 capital ratio; and a leverage ratio.
The risk-based framework was adopted to assist in the assessment of capital adequacy of financial institutions by, (i) making regulatory capital requirements more sensitive to differences in risk profiles among organizations; (ii) introducing off-balance-sheet items into the assessment of capital adequacy; (iii) reducing the disincentive to holding liquid, low-risk assets; and (iv) achieving greater consistency in evaluation of capital adequacy of major banking organizations throughout the world. The risk-based guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to different risk categories. An institution’s risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets.
Qualifying capital consists of two types of capital components: “core capital elements” (or Tier 1 capital) and “supplementary capital elements” (or Tier 2 capital). Tier 1 capital is generally defined as the sum of core capital elements less goodwill and other intangibles. Core capital elements consist of (i) common shareholders’ equity, (ii) noncumulative perpetual preferred stock (subject to certain limitations), and (iii) minority interests in the equity capital accounts of consolidated subsidiaries. Tier 2 capital consists of (i) allowance for loan and lease losses (subject to certain limitations); (ii) perpetual preferred stock which does not qualify as Tier 1 capital (subject to certain conditions); (iii) hybrid capital instruments and mandatory convertible debt securities; (iv) term
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
subordinated debt and intermediate term preferred stock (subject to limitations); and (v) net unrealized holding gains on equity securities.
As described above, in July 2013 the federal banking regulators released the Basel III Rule relating to minimum capital requirements for U.S. banking organizations. The Basel III Rule does not apply to bank holding companies with less than $1.0 billion in consolidated assets, such as the Company; however, many of the requirements apply to the Bank. Namely, the Basel III Rule modifies standards for the risk-weighted assets calculation, sets new minimum capital requirements and refines capital quality through various eligibility restrictions. The Basel III Rule became effective as applied to the Bank on January 1, 2015, with a phase in period of the requirements that generally extends from January 1, 2015 through January 1, 2019.
Under current capital adequacy standards and the Basel III Rule, the Bank must meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%. Of that ratio, at least half, or 4%, was required to be in the form of Tier 1 capital. The Basel III Rule increases the required minimum Tier 1 capital ratio from 4% to 6%. The Basel III Rule also increased the minimum Tier 1 leverage ratio from 3% to 4%. The Basel III Rule also established a Common Equity Tier 1 (“CET1”) capital ratio of 4.5% and phases in a capital conservation buffer equivalent to 2.5% of risk-weighted assets.
The capital conservation buffer as fully implemented will require a 2.5% buffer above these required minimum capital ratio levels. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer may face restrictions on capital distributions or discretionary bonus payments to executive officers. The Basel III rule also revises the methodology for calculating risk-weighted assets for certain types of assets and exposures.
In addition, the Basel III rule provides that smaller banking organizations could make a one-time election to opt out of including most elements of accumulated other comprehensive income in regulatory capital. This opt-out excludes from regulatory capital both unrealized gains and losses on available-for-sale debt securities and accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit post-retirement plans. The Bank made this opt-out election and will exclude the change in unrealized gains and losses in these items from its regulatory capital.
Prompt Corrective Regulatory Action. The Federal Reserve Board is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a bank is considered “well capitalized” if its risk-based capital ratio is at least 10%, its Tier 1 risk-based capital ratio is at least 6%, its leverage ratio is at least 5%, and the bank is not subject to any written agreement, order, or directive by the FDIC.
A bank generally is considered “adequately capitalized” if it does not meet each of the standards for well-capitalized institutions, and its risk-based capital ratio is at least 8%, its Tier 1 risk-based capital ratio is at least 4%, and its leverage ratio is at least 4% (or 3% if the institution receives the highest rating under the Uniform Financial Institution Rating System). A bank that has a risk-based capital ratio less than 8%, or a Tier 1 risk-based capital ratio less than 4%, or a leverage ratio less than 4% (3% or less for institutions with the highest rating under the Uniform Financial Institution Rating System) is considered to be “undercapitalized.” A bank that has a risk-based capital ratio less than 6%, or a Tier 1 capital ratio less than 3%, or a leverage ratio less than 3% is considered to be “significantly undercapitalized,” and a bank is considered “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2%.
The Basel III Rule revised the current prompt corrective action requirements effective January 1, 2015 by:
| |
• | Introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being a minimum of 6.5% for well-capitalized status; |
| |
• | Increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and |
| |
• | Eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. |
The Basel III Rule did not change the total risk-based capital requirement for any prompt corrective action category.
Subject to a narrow exception, the FDIC is required to appoint a receiver or conservator for a bank that is “critically undercapitalized.” In addition, a capital restoration plan must be filed with the FDIC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by each company that controls a bank that submits such a plan, up to an amount equal to 5% of the bank’s assets at the time it was notified regarding its deficient capital status. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions, and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Regulatory Agreements. On December 18, 2009, the Bank entered into a written agreement (the “Agreement”) with the Federal Reserve-Chicago and the IDFPR. The Agreement required the Bank to make certain commitments related 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 complied with its obligations under the Agreement, and the Agreement was terminated on February 16, 2016.
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 Board 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 Board may prohibit the payment of any dividends by the Bank if the Federal Reserve Board determines such payment would constitute an unsafe or unsound practice.
The Illinois Banking Act was amended August 13, 2015 to address the dividend restriction by authorizing a state bank to restate its capital accounts to eliminate a deficit in its undivided profits account so long as prior to the restatement the bank receives the written approval of the IDFPR. The Bank may now, with the permission of the IDFPR and subject to Federal Reserve Board requirements, restate its capital accounts and begin paying dividends again so long as the Bank is profitable.
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.
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 were 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. 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) was allowed by the Riegle-Neal Act only if specifically authorized by state law. However, as a result of the Dodd-Frank Act, interstate branching authority has been expanded.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
A state or national bank may open a de novo branch in another state if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch.
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.
Reserve Requirement. Federal Reserve Board 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). Federal Reserve Banks are authorized to pay interest on such reserves.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company. The Company qualifies as and has elected to be treated as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation. The Company will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
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 2016 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.
Kurt R. Stevenson, 49, is the President & Chief Executive Officer and Director of Centrue Financial Corporation and the Bank, a position he has held since 2011. He had previously served as the Company’s Senior Executive Vice President & Chief Financial Officer since 2003.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Daniel R. Kadolph, 53, is the Executive Vice President & Chief Financial Officer of Centrue Financial Corporation and the Bank, a position he has held since January 2012. Prior to that he served as a consultant to various banks since 2008.
John E. Christy, 56, is the Bank’s Executive Vice President & Chief Lending Officer, a position he has held since January 2014. He joined the Bank in January 2014 and briefly served as VP/Senior Commercial Relationship Manager. Prior to joining the Bank, he worked at Salin Bank as its EVP/Director of Commercial Banking & TM and at PNC Financial Services as its SVP.
Kenneth A. Jones, 52, 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.
Gene A. Guidici, 53, is the Market President for the Bank’s Kankakee, Bradley, Bourbonnais, Herscher, Manteno, Momence and Orland Park locations, a position held since 2012. He joined the Bank as its SVP/Senior Commercial Relationship Manager in November of 2011. He had previously worked at United Central Bank as Vice President & Special Assets Manager and at Amcore Bank as Senior Vice President & Division Manager.
Everett J. Solon, 63, is the Market President for the Bank’s Streator, Dwight, Ottawa, Princeton and Peru locations, a position held since 2003.
Diane F. Leto, 54, is the Bank’s Executive Vice President & Head of Operations. She had previously served as the Bank’s Executive Vice President & Chief Risk Officer through September 2011 and Head of Operations through year-end 2008.
Heather M. Hammitt, 41, 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.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of oerpations, cash flows, and the trading price of our common stock.
Risks Related to Our Business
We are exposed to higher credit risk by commercial real estate, commercial and industrial lending, real estate construction and farm land.
Commercial real estate, commercial and industrial, and real estate construction lending usually involve higher credit risks than single-family residential lending. As of December 31, 2015, the following loan types accounted for the stated percentages of our total loan portfolio: commercial real estate-61.86%, commercial and industrial-10.63%, real estate construction-4.11% and farm land-4.30%.
Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.
Commercial and industrial loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the loans have the following characteristics: (a) they depreciate over time, (b) they are difficult to appraise and liquidate, and (c) they fluctuate in value based on the success of the business.
Risk of loss on a real estate construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent take-out financing and the builder’s ability to ultimately sell the property. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.
Commercial real estate loans, commercial and industrial loans, and real estate construction loans are more susceptible to a risk of loss during a downturn in the business cycle. Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans.
We may not be able to retain or develop a strong core deposit base or other low-cost funding sources.
We depend on checking, savings and money market deposit account balances and other forms of customer deposits as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to retain and grow a strong deposit base. If we are unable to continue to attract and retain core deposits, to obtain third party financing on favorable terms, or to have access to interbank or other liquidity sources, our cost of funds will increase, adversely affecting the ability to generate the funds necessary for lending operations, reducing net interest margin and negatively affecting results of operations. We derive liquidity through core deposit growth, maturity of money market investments, and maturity and sale of investment securities and loans. Additionally, we have access to financial market borrowing sources on an unsecured and a collateralized basis for both short-term and long-term purposes including, but not limited to, the Federal Reserve Board and Federal Home Loan Banks, of which we are a member. If these funding sources are not sufficient or available, we may have to acquire funds through higher-cost sources.
We are subject to losses due to the errors or fraudulent behavior of employees or third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially adversely affected if an individual causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems or if one of our third-party service providers experiences an operational breakdown or failure. When we originate loans, we rely upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of us to operate our business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact our business, financial condition and results of operations.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
We have a deferred tax asset that may not be fully realized in the future.
Our net deferred tax asset totaled $38.2 million as of December 31, 2015. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods that the related net operating losses and certain recognized built-in losses and net unrealized built-in losses, if any (collectively, “pre-change losses”), may be utilized and is also subject to the rules of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), described below. If our estimates and assumptions about future taxable income and prudent and feasible tax planning strategies are not accurate, the value of our deferred tax asset may not be recoverable and our cash flow available to fund operations could be adversely affected. It is possible that we could ultimately not be able to use or could lose a portion of the net deferred tax asset. Realization of our net deferred tax asset would significantly improve our results of operations and capital.
Our ability to realize the benefit of our deferred tax assets may be materially impaired if we experience an ownership change under Sections 382 of the Code.
Our ability to use our deferred tax assets to offset future taxable income will be limited if we experience an “ownership change” as defined in Section 382 of the Code. Due to the complexity of Section 382, it is difficult to conclude with certainty at any given point in time whether an “ownership change” has occurred. A Company that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-change losses equal to the equity value of the Company immediately before the ownership change (in some cases, reduced by certain capital contributions received in the two years preceding the ownership change), multiplied by the applicable “long-term tax-exempt rate” (a rate that changes monthly and was 2.61% for ownership changes occurring in December 2015). While our certificate of incorporation includes provisions intended to prohibit transactions that would result in an ownership change, an ownership change nevertheless could occur in the future, which likely would have a material adverse effect on our results of operations, financial condition and stockholder value. Any change in applicable law may also result in an ownership change. Our tax preservation provisions may also limit our ability to raise capital by selling newly issued shares of our common stock.
We depend on our key officers and employees to continue the implementation of our long-term business strategy and could be harmed by the loss of their services. Management’s ability to retain key officers and employees may change.
We believe that the implementation of our long-term business strategy and future success will depend in large part on the skills of our current senior management team. We believe our senior management team possesses valuable knowledge about and experience in the banking industry and that their knowledge and relationships would be very difficult to replace. Two members of our senior management team have entered into employment agreements with us, they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve.
Our future operating results also depend in significant part upon our ability to attract and retain qualified management, financial, technical, marketing, sales and support personnel, particularly in respect of the implementation of our business strategy, which may require the recruitment of new personnel in new or expanded business areas. There may be only a limited number of persons with the requisite skills to serve in these positions in the geographic markets we serve, and it may be increasingly difficult for us to hire personnel over time. The loss of service of one or more of our key officers and employees, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results and the value of our common stock.
Our allowance for losses on loans may not be adequate to cover probable losses.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when we believe that repayment of principal is unlikely. Any material declines in the creditworthiness of our customers, real estate market conditions and values, general economic conditions or changes in regulatory policies would likely result in a higher probability that principal on some loans will not be repaid and require us to increase our allowance for loan losses. Bank regulators also periodically review our allowance for loan losses and may require an increase in the provision for loan losses or further loan charge-offs. A material increase in the allowance for loan losses would adversely affect our results of operations and our capital.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Centrue Bank’s business is subject to liquidity risk, and changes in its source of funds may adversely affect our performance and financial condition by increasing its cost of funds.
The Bank’s ability to make loans and fund expenses is directly related to its ability to secure funding. Retail and commercial deposits and core deposits are the Bank’s primary source of liquidity. The Bank also relies on cash from payments received from loans and investments, as well as advances from the FHLB of Chicago as a funding source.
Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans and payment of operating expenses. Core deposits represent a significant source of low-cost funds. Alternative funding sources such as large balance time deposits or borrowings are a comparatively higher-cost source of funds. Liquidity risk arises from the inability to meet obligations when they come due or to manage unplanned decreases or changes in funding sources. Significant fluctuations in lower cost funding vehicles would cause the Bank to pursue higher cost funding which would adversely affect our financial condition and results of operations.
The Company’s liquidity is largely dependent upon our ability to receive dividends from the Bank, which accounts for substantially all our revenue, could affect our ability to pay dividends, and we may be unable to generate liquidity from other sources.
We are a separate and distinct legal entity from our bank subsidiary. We historically received dividends from the Bank, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay us. Such limits are also tied to the earnings of the Bank. $2.4 million of the $76.0 million capital raised on March 31, 2015 was retained by the Company for the Company’s use. These retained funds are believed to be sufficient to meet working capital obligations of the Company in the short term, but over time if the Company is unable to receive dividends from the Bank the Company will need an alternative source of working capital funding.
Increases in our level of non-performing assets would have an adverse effect on our financial condition and results of operations.
If loans that are currently performing become non-performing, we may need to continue to increase our allowance for loan losses if additional losses are anticipated which would have an adverse impact on our financial condition and results of operations. The increased time and expense associated with the work out of non-performing assets and potential non-performing assets also could adversely affect our operations.
Maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services.
Our success depends, in part, on the ability to adapt products and services to evolving industry and regulatory standards. There is increasing pressure to provide products and services at lower prices. This can reduce net interest income and non-interest income from fee-based products and services. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services in response to industry trends or development in technology or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to cost increases.
Deterioration in the real estate markets and economic conditions could lead to additional losses, which could have a material negative effect on our financial condition and results of operations.
Our success depends on general and local economic conditions, and real estate and business markets in which we do business. The commercial and residential real estate markets experienced weakness during the recent economic downturn. Any future declines in real estate values may reduce the value of collateral securing loans and impact the customer’s ability to borrow or repay. Increases in delinquency levels or declines in real estate values could have a material negative effect on our business and results of operations.
While we attempt to manage the risk from changes in market interest rates, interest rate risk management techniques are not exact. In addition, we may not be able to economically hedge our interest rate risk. A rapid or substantial increase or decrease in interest rates could adversely affect our net interest income and results of operations.
Our earnings and cash flows depend to a great extent upon the level of our net interest income. The amount of interest income is dependent on many factors, including the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the level of non-performing loans. The cost of funds varies with the amount of funds required to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds and the levels of non-interest-bearing demand deposits and equity capital.
We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, recession, unemployment, money supply, domestic and international events, changes in the United States and other financial markets and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Net interest income is affected by the level and direction of interest rates, credit spreads,
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
client loan and deposit preferences and other factors. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets, loan origination volume, loan and mortgage-backed securities portfolios, and our overall results.
We attempt to manage our risk from changes in market interest rates through asset/liability management by adjusting the rates, maturity and balances of the different types of interest-earning assets and interest bearing liabilities. Interest rate risk management techniques are not precise and we may not be able to successfully manage our interest rate risk. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs and risks associated with the ownership of real property, which could have an adverse effect on our business and results of operations.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans, in which case we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including general or local economic conditions; environmental cleanup liabilities; interest rates; real estate taxes; supply and demand for rental units; occupancy rates for rental units and government regulation and fiscal policies. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may also adversely affect our operating expenses.
An interruption in or breach in security of our information systems may result in a loss of customer business.
We rely heavily on communications and information systems to conduct our business. Any failure or interruptions or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposits, servicing, or loan origination systems. The occurrence of any failures, interruptions or security breaches of information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.
Additionally, we outsource portions of our data processing to third parties. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations. Furthermore, breaches of such third party’s technology may also cause reimbursable loss to our consumer and business customers, through no fault of our own.
Although management regularly reviews and updates our internal controls, disclosure controls and procedures, any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Our regional concentration makes us particularly at risk for changes in economic conditions in our primary market.
Economic conditions in Illinois, Missouri, and the Midwest affect our business, financial condition, results of operations, and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of non-performing assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio. Any regional or local economic downturn that affects Illinois or existing or prospective borrowers or property values in Illinois may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically concentrated.
We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations and financial condition.
When we sell 1-4 family residential real estate loans we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. While we sell mortgage loans with no recourse, our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud. If the level of repurchase and indemnity activity becomes material, our liquidity, results of operations and financial condition could be materially and adversely affected.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Certain provisions in our Certificate of Incorporation limit our likelihood of being acquired in a manner not approved by the Board.
Our certificate of incorporation contains provisions intended to protect certain tax attributes of the Company. Unless approved by the board of directors in accordance with the procedures set forth in the certificate of incorporation and subject to certain exceptions for permitted transfers, any attempted transfer of the Company’s common stock is prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons will own 4.95% or more of the outstanding shares of common stock of the Company or (ii) the ownership interest in the Company of any of its existing 5% Stockholders will be increased.
The existence of the tax preservation provisions may make it more difficult, delay, discourage, prevent or make it more costly to acquire us or affect a change-in-control that is not approved by the board of directors. This, in turn, could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and adversely affect the market price of our common stock.
Changes in the valuation of our securities portfolio may impact our profits.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. The declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
Our use of appraisals in deciding whether to make a loan secured by real property does not ensure the value of the real property collateral.
In considering whether to make a loan secured by real property, we generally require an appraisal. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting, and reputation could be negatively affected if we rely on materially misleading, false, inaccurate, or fraudulent information.
As a community bank, our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring, and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers, and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected. Further, negative public opinion can expose us to litigation and regulatory action as we seek to implement our growth strategy.
We are exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, cash flows, liquidity and results of operations could be materially and adversely affected.
Risks Related to the Ownership of our Common Stock
An active, liquid and orderly trading market for our common stock may not develop and the stock price may be volatile.
Since our common stock is not widely traded, its market value could be subject to wide fluctuations in response to various risk factors including: changes in laws or regulations applicable to our industry, products or services; price and volume fluctuations in the overall stock market; volatility in the market value and trading volume of companies in our industry or companies that investors consider comparable; share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; sales of our common stock by us or by our stockholders, including sales as contractual lock-ups expire; litigation involving us or the financial services industry generally; global economic and political changes; competitive activities and loss of customers; catastrophic events; and general economic and market conditions.
The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.
As a result of the completion of this offering, the Company has become a public reporting company. The obligations of being a public company, include substantial public reporting obligations, which require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we will file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. These obligations will increase our operating expenses and could divert our management’s attention from our operations.
Our stock-based benefit plans will increase our expenses and negatively impact our results of operations.
Our stock-based benefit plans will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under a stock-based benefit plan(s). The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards actually granted, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time.
We will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. Actual expenses will depend on the price of our common stock.
The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.
Our stock-based benefit plans will dilute the ownership interest in our outstanding shares to the extent newly issued shares are used for the stock-based benefits. Although the implementation of new stock-based benefit plans would be subject to stockholder approval, historically stock-based benefit plans adopted by financial institutions and their holding companies have been approved by stockholders.
“Anti-takeover” provisions and the regulations to which we are subject may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to our stockholders.
Anti-takeover provisions in Delaware law and our certificate of incorporation and bylaws, as well as regulatory approvals that would be required under federal law, could make it more difficult for a third party to take control of us and may prevent stockholders from receiving a premium for their shares of our common stock. These provisions could adversely affect the market value of our common stock and could reduce the amount that stockholders might get if we are sold.
Our certificate of incorporation provides for, among other things:
A classified board of directors so that no more than one-third of the directors stand for election in any year;
Limitations on the ability of stockholders to call a special meeting of stockholders;
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The approval by a super-majority of outstanding shares to approve certain change of control transactions and amend certain provisions of the certificate of incorporation and by-laws; and
The tax preservation provisions of the certificate of incorporation.
Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. We believe that these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board and by providing our board with more time to assess any acquisition proposal. However, these provisions apply even if the offer may be determined to be beneficial by some stockholders and could delay or prevent an acquisition that our board determines is not in the best interest of our stockholders.
Furthermore, banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the Federal Savings and Loan Holding Company Act, the Bank Holding Company Act of 1956 and the Change in Bank Control Act. These laws could delay or prevent an acquisition.
A small number of institutional investors, including a stockholder affiliated with one of our directors, owns a significant percentage of our common stock and may vote their shares in a manner that you may consider inconsistent with your best interest or the best interest of our stockholders as a whole.
Capital Z Partners III, L.P. (“Capital Z”), which is affiliated with one of our directors, currently beneficially owns, in the aggregate, approximately 23.64% of our outstanding common stock. As a result, Capital Z, in its capacity as a stockholder, will have the ability to vote a significant percentage of our outstanding common stock on all matters put to a vote of our stockholders, including the election of our board of directors and certain other significant corporate transactions, such as a merger or acquisition transaction. On any such matter, the interests of Capital Z may not coincide with the interests of the other holders of our common stock and any such difference in interests may result in Capital Z voting its shares in a manner inconsistent with the interest of other stockholders of the Company. It is also possible that Capital Z may sell or otherwise dispose of all or a significant portion of the remaining shares it holds which could adversely affect the market price of our common stock and, accordingly the value of your investment in us may decrease. In addition to Capital Z, two other investment funds that acquired shares of our common stock in our recapitalization own, in the aggregate, approximately 19.64% of our outstanding common stock. The interests of these stockholders may not coincide with the interests of the other holders of our common stock and these holders may vote their shares in a manner inconsistent with the interest of other stockholders of the Company. These stockholders could also sell or otherwise dispose of all or a significant portion of the shares they hold which could adversely affect the market price of our common stock and, accordingly the value of your investment in us may decrease. Capital Z, FJ Capital Management, LLC, and Stieven Capital Advisors, L.P. have made passivity commitments to the Federal Reserve Board with regard to their ownership interest in the Company.
Risks Related to Our Industry
Our business may be adversely affected by the slow economic recovery, current conditions in the financial markets, the real estate market and economic conditions generally.
The slow economic recovery has continued to result in decreased lending by some financial institutions to their customers and to each other. This has continued to result in a lack of customer confidence, increased market volatility and a widespread reduction in general business activity. Competition among financial institutions for deposits and loans continues to be high, and access to deposits or borrowed funds remains lower than average.
The soundness of other financial institutions could materially and adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Transactions with other financial institutions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk is likely to be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. Any losses resulting from such defaults by us, our counterparties or our clients could materially and adversely affect our results of operations.
Competition in the financial services industry is intense and could result in losing business or reducing margins.
We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation. We face aggressive competition from other lending institutions and from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This may significantly change the competitive environment in which we conduct business. As a result of these various sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect our profitability.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition, results of operations and cash flows.
Risks Related to Recent Market, Legislative and Regulatory Events
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, may adversely affect us.
We and the Bank are subject to extensive regulation, supervision, and legal requirements that govern almost all aspects of our operations. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividends or distributions that the Bank can pay to us, restrict the ability of institutions to guarantee our debt, and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally accepted accounting principles. Changes to statutes, regulations, or regulatory policies, including interpretation or implementation of statutes, regulations, or policies, could affect us adversely, including limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect us.
Federal banking agencies, including the Federal Reserve Board and the IDFPR, periodically conduct examinations and inspections of our business, including compliance with laws and regulations. If, as a result of an examination, a federal or state banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or the Bank or its management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our or the Bank’s capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance.
Expansion plans may require regulatory approvals, and failure to obtain them may restrict our growth.
We must generally receive federal regulatory approval before we can acquire an institution or business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on the competition, our financial condition, and our future prospects. The regulators also review current and projected capital ratios and levels, the competence, experience, and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act (“CRA”)), the effectiveness of the acquiring institution in combating money laundering activities, and the existence of any outstanding enforcement actions. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. The failure to obtain required regulatory approvals may impact our business plans and restrict our growth.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the USA Freedom Act of 2015, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, U.S. Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to the development of our anti-money laundering program, adopting enhanced policies and procedures and implementing a robust automated anti-money laundering software solution. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plans.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
The FDIC’s restoration plan and the related increased assessment rate could adversely affect our earnings.
Market developments had significantly depleted the Deposit Insurance Fund (“DIF”) of the FDIC. As a result of economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect results of operations.
The Dodd-Frank Act requires the federal banking agencies to establish stricter risk-based capital requirements and leverage limits to apply to banks and certain bank and savings and loan holding companies. In July 2013, the federal banking agencies published the Basel III Capital Rules that revised their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to implement, in part, agreements reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The Basel III Capital Rules apply to banking organizations, including the Bank. As a small bank holding company (i.e., one with less than $1.0 billion in total assets and meeting certain other criteria), the Basel III Capital Rules do not apply to the Company.
The Basel III Capital Rules became effective as applied to the Bank on January 1, 2015, with a phase in period that generally extends from January 1, 2015 through January 1, 2019. Since the effective date of Basel III the Bank has not experienced any material impact involving the new rules. Subsequent potential rules adjustment by the regulatory governing bodies could still impact the Company or the Bank when they become effective. In 2015, the Bank elected to opt-out of including the impact of certain unrealized capital gains and losses in its calculation of regulatory capital.
The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings.
The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. The resultant changes in interest rates can also materially decrease the value of certain financial assets we hold, such as debt securities. Its policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond our control and difficult to predict.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2015, the Company operated twenty-seven offices (twenty-two full-service bank branches, two lending centers, two 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 Ottawa, Illinois. 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 Cook County in Illinois, one in Kane County in Illinois and one in St. Louis County in Missouri. The Company believes that its current facilities are adequate for its existing business. The net book value of our owned locations is $22.0 million in the aggregate.
|
| | |
Location | Leased or Owned | Year Acquired or Leased |
| | |
Principal Office: | | |
122 W. Madison St., Ottawa, IL* | Owned | 1991 |
| | |
Full-service bank branches: | | |
101 S. Page St., Avison, IL** | Owned | 2006 |
680 S. Main St., Bourbonnais, IL | Owned | 2006 |
980 N. Kinzie Ave., Bradley, IL | Owned | 2006 |
180 N. Front St., Coal City, IL | Owned | 2006 |
1275 E. Division St., Diamond, IL | Owned | 2006 |
302 W. Mazon Ave., Dwight, IL | Owned | 2006 |
303 Fountains Parkway, Fairview Heights, IL** | Owned | 2006 |
654 N. Park Rd., Herscher, IL | Owned | 2006 |
310 S. Schuyler Ave., Kankakee, IL | Owned | 2006 |
310 Section Line Rd., Manteno, IL | Owned | 2006 |
200 W. Washington St., Momence, IL | Owned | 2006 |
721 Columbus St., Ottawa, IL | Owned | 2006 |
400 Etna Rd., Ottawa, IL | Owned | 1988 |
1311 Shooting Park Rd., Peru, IL | Leased | 1995 |
15 W. South St., Plano, IL | Owned | 1995 |
601 S. Main St., Princeton, IL | Owned | 1996 |
1839 N. Main St., Princeton, IL | Owned | 1996 |
202 Indian Springs Dr., Sandwich, IL | Owned | 1984 |
18001 St. Rose Rd., St. Rose, IL** | Owned | 2006 |
201 E. Main St., Streator, IL | Owned | 1969 |
24 Danny Dr., Streator, IL | Owned | 1987 |
208 E. Veterans Pkwy., Yorkville, IL | Owned | 2003 |
7700 Bonhomme Ave., St. Louis, MO | Leased | 2007 |
| | |
Lending Centers: | | |
8 E. Galena Blvd., Aurora, IL | Leased | 2013 |
13500 S. Circle Dr., Orland Park, IL | Leased | 2015 |
| | |
Sales Support Non-Banking Facilities: | | |
122 W. Madison St., Ottawa, IL | Owned | 1991 |
200 E. Main St., Streator, IL | Owned | 1990 |
*Principal Office and Sales Support Non-Banking Facility.
**Pending branch sale locations.
CENTRUE FINANCIAL CORPORATION
PART I
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
|
| | | | |
Affiliate | | Markets Served | | Property/Type Location |
The Company | | | | Administrative Office: Ottawa, IL |
| | | | |
Centrue Bank | | Bureau, Clinton, Cook, DeKalb, Grundy, Kane, Kankakee, Kendall, LaSalle, Livingston, St. Clair and Will Counties in Illinois
City and County of St. Louis in Missouri | | Main Office: Streator, IL
Twenty-three full-service banking offices, two lending centers and two non-banking offices located in markets served. |
In addition to the banking locations listed above, the Bank owns twenty-one automated teller machines, most of which are housed within banking offices.
At December 31, 2015 the properties and equipment of the Company had an aggregate net book value of approximately $22.0 million.
Item 3. Legal Proceedings
In the normal course of business the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse affect on the Company’s financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
CENTRUE FINANCIAL CORPORATION
PART II
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
| |
Item 5. | Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company's Common Stock was held by approximately 701 stockholders of record as of March 10, 2016, and is traded on the NASDAQ Capital Market under the symbol "CFCB." 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 |
| High | | Low |
2015 | | | |
First Quarter | $ | 15.60 |
| | $ | 10.80 |
|
Second Quarter | 19.65 |
| | 10.80 |
|
Third Quarter | 18.00 |
| | 14.25 |
|
Fourth Quarter | 17.75 |
| | 14.95 |
|
| | | |
2014 | | | |
First Quarter | $ | 35.10 |
| | $ | 24.90 |
|
Second Quarter | 31.20 |
| | 21.60 |
|
Third Quarter | 27.00 |
| | 13.65 |
|
Fourth Quarter | 21.61 |
| | 13.05 |
|
RECENT SALES OF UNREGISTERED SECURITIES
On July 29, 2014, the Company issued to (i) Dennis McDonnell and Kathleen McDonnell, the Dennis J. McDonnell Trust dated as of May 9, 1991, and the Dennis J. McDonnell IRA (all related persons under Section 382(l)(3) constructive ownership rules); (ii) Jim Miller; and (iii) Wayne Whalen and Paul Wolff, and WPW Associates, L.P. (both related persons under Section 382(l)(3) constructive ownership rules) 2,635.5462 newly issued shares of Fixed Rate Non-Voting Perpetual Non-Cumulative Preferred Stock, Series D of the Company (the “Series D Preferred”), in exchange for 2,762.24 shares of 7.500% Series A Convertible Preferred Stock and 50,993 shares of Common Stock. The shares of Series D Preferred were issued in reliance on the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, and in connection with this exchange (i) the Company was the issuer of both the shares surrendered and the Series D Preferred issued in the exchange; (ii) the only consideration from the security holders for the exchange was surrender of the Common Stock and 7.500% Series A Convertible Preferred Stock referenced above; (iii) all of the recipients of the Series D Preferred were existing stockholders of the Company; and (iv) the Company paid no fees or commissions to any third party in connection with the exchange or the solicitation of the exchange.
On March 31, 2015, 6,333,333 shares of Common Stock were issued to seventy-two (72) investors. Sandler O’Neil & Partners, L.P and Boenning & Scattergood, Inc. assisted the Company in completing the private placement and were paid commissions of $4,826,150. The proceeds of the offering were used to pay the expenses of the offering, to pay commissions to Sandler O’Neil & Partners, L.P and Boenning & Scattergood, Inc. the proceeds of the issuance were used to repay $4,925,000 of TRuPs preferred dividends; and $27,500,000 was used to retire and redeem senior debt, sub debt, preferred stock, dividends and warrants. The offers, sales and issuances of the securities issued on March 31, 2015 were exempt from registration under Section 4(a)(2) of the Securities Act of 1933 and Regulation D promulgated thereunder, and a Form D was filed for the issuance. The recipients represented to the Company that they acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, appropriate legends were affixed to the securities issued in these transactions and the recipients represented to us that they were accredited investors as defined in Rule 501 promulgated under the Securities Act of 1933.
CENTRUE FINANCIAL CORPORATION
PART II
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Item 6. Selected Financial Data
The following tables set forth selected consolidated historical financial and other data of the Company for the periods and at the dates indicated. Common shares and per share amounts for all periods shown have been restated to reflect the impact of the reverse stock split the Company completed effective May 29, 2015.
|
| | | | | | | | | | | |
| As of and For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Statement of Income Data | | | | | |
Interest income | $ | 28,755 |
| | $ | 27,595 |
| | $ | 28,181 |
|
Interest expense | 2,451 |
| | 3,500 |
| | 4,259 |
|
Net interest income | 26,304 |
| | 24,095 |
| | 23,922 |
|
Provision for loan losses | 375 |
| | 7,202 |
| | 3,425 |
|
Net interest income loss after provision for loan losses | 25,929 |
| | 16,893 |
| | 20,497 |
|
Noninterest income | 12,428 |
| | 12,810 |
| | 16,699 |
|
Noninterest expense | 33,239 |
| | 34,214 |
| | 33,516 |
|
Income (loss) before income taxes | 5,118 |
| | (4,511 | ) | | 3,680 |
|
Income taxes (benefit) | (37,484 | ) | | — |
| | — |
|
Net income (loss) | $ | 42,602 |
| | $ | (4,511 | ) | | $ | 3,680 |
|
Net income (loss) for common stockholders (1) | $ | 54,786 |
| | $ | (8,080 | ) | | $ | 1,480 |
|
Per Share Data | | | | | |
Basic earnings (loss) per common share (1) | $ | 11.08 |
| | $ | (44.81 | ) | | $ | 7.32 |
|
Diluted earnings (loss) per common share (1) | 11.08 |
| | (44.81 | ) | | 7.32 |
|
Cash dividends on common stock | NM |
| | NM |
| | NM |
|
Dividend payout ratio for common stock | NM |
| | NM |
| | NM |
|
Book value per common share | $ | 12.37 |
| | $ | (32.93 | ) | | $ | 13.37 |
|
Tangible book value per common share | 12.16 |
| | (45.04 | ) | | (0.39 | ) |
Basic weighted average common shares outstanding | 4,945,073 |
| | 180,320 |
| | 202,115 |
|
Weighted average common shares outstanding | 4,945,073 |
| | 180,320 |
| | 202,115 |
|
Common shares outstanding | 6,513,694 |
| | 151,122 |
| | 202,115 |
|
Balance Sheet | | | | | |
Assets | | | | | |
Cash and cash equivalents | $ | 27,655 |
| | $ | 49,167 |
| | $ | 70,748 |
|
Securities | 180,556 |
| | 141,473 |
| | 163,869 |
|
Loans held for sale | 735 |
| | 364 |
| | 653 |
|
Loans | 633,547 |
| | 553,200 |
| | 565,518 |
|
Allowance for loan losses | (8,591 | ) | | (7,981 | ) | | (11,637 | ) |
Loans, net of allowance | 624,956 |
| | 545,219 |
| | 553,881 |
|
Other real estate owned, net | 8,401 |
| | 10,256 |
| | 23,318 |
|
Other assets | 118,915 |
| | 70,610 |
| | 70,409 |
|
Total assets | $ | 961,218 |
| | $ | 817,089 |
| | $ | 882,878 |
|
CENTRUE FINANCIAL CORPORATION
PART II
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
|
| | | | | | | | | | | |
| As of and For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Liabilities and stockholders’ equity | | | | | |
Non-interest bearing deposits | $ | 164,137 |
| | $ | 144,633 |
| | $ | 139,185 |
|
Interest bearing deposits | 554,367 |
| | 554,191 |
| | 615,160 |
|
Total deposits | 718,504 |
| | 698,824 |
| | 754,345 |
|
Non-deposit funding | 115,618 |
| | 77,829 |
| | 83,409 |
|
Other liabilities | 5,815 |
| | 10,108 |
| | 9,253 |
|
Total liabilities | 839,937 |
| | 786,761 |
| | 847,007 |
|
Stockholders’ equity | 121,281 |
| | 30,328 |
| | 35,871 |
|
Total liabilities and stockholders’ equity | $ | 961,218 |
| | $ | 817,089 |
| | $ | 882,878 |
|
Earnings Performance Data | | | | | |
Return (loss) on average total assets | 4.79 | % | | (0.52 | )% | | 0.41 | % |
Return (loss) on average stockholders’ equity | 60.29 |
| | (12.42 | ) | | 13.51 |
|
Net interest margin (2) | 3.40 |
| | 3.33 |
| | 3.21 |
|
Efficiency ratio (3) | 84.53 |
| | 87.48 |
| | 86.96 |
|
Asset Quality Data | | | | | |
Nonperforming assets to total end of period assets | 1.50 | % | | 2.20 | % | | 5.93 | % |
Nonperforming loans to total end of period loans | 0.93 |
| | 1.40 |
| | 5.13 |
|
Net loan charge-offs (recoveries) to total average loans | (0.04 | ) | | 1.90 |
| | 1.92 |
|
Allowance for loan losses to total end of period loans | 1.33 |
| | 1.44 |
| | 2.06 |
|
Allowance for loan losses to nonperforming loans | 143.02 |
| | 102.99 |
| | 40.06 |
|
Nonperforming loans | $ | 6,007 |
| | $ | 7,749 |
| | $ | 29,052 |
|
Nonperforming assets | 14,408 |
| | 18,005 |
| | 52,370 |
|
Net loan charge-offs (recoveries) | (235 | ) | | 10,858 |
| | 10,736 |
|
Capital Ratios | | | | | |
Total risk-based capital ratio | 15.64 | % | | 9.64 | % | | 10.22 | % |
Common equity tier 1 risk-based capital ratio | 14.23 |
| | NM |
| | NM |
|
Tier 1 leverage ratio | 12.10 |
| | 4.93 |
| | 5.22 |
|
(1)Net income for common stockholders was significantly impacted by a GAAP requirement that any discount received on preferred stock redemption be attributed back to common stockholders. This non-recurring item reflects the retirement of the Series C Preferred stock for $19.0 million which had outstanding par value of $32.7 million less $1.0 million of unpaid dividends cumulating prior to the retirement and $0.5 million of Series D Preferred stock dividends paid in 2014 (as noted in the Statements of Income (Loss) and Note 17.), resulting in the $12.2 million addition to net income for common stockholders. This impacts the earnings per share data, but does not impact the income statement, book value or any of the earnings performance ratios.
| |
(2) | Tax-equivalent net interest income divided by average earning assets. |
| |
(3) | 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, OREO rental income ($344 thousand, $324 thousand and $473 thousand; for December 31, 2015, 2014 & 2013, respectively), and gains on sale of assets. |
(NM) Not meaningful.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management discussion and analysis (“MD&A”) is intended to address the significant factors affecting the Company’s results of operations and financial condition for the twelve months ended December 31, 2015 as compared to the same period in 2014. The preparation of financial statements requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. 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.
The MD&A should be read in conjunction with the consolidated financial statements of the Company, and the accompanying notes thereto. Actual results could differ from those estimates. All financial information in the following tables is 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
Critical accounting estimates are those that are critical to the portrayal and understanding of Centrue’s financial condition and results of operations and require management to make assumptions that are difficult, subjective or complex. These estimates involve judgments, estimates and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
Centrue’s significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements. The majority of these accounting policies do not require management to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material. However, the following policies are deemed critical:
Securities: Securities are classified as available-for-sale when Centrue may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. All of Centrue’s securities are classified as available-for-sale. For all securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Due to the limited nature of the market for certain securities, the fair value and potential sale proceeds could be materially different in the event of a sale.
Realized securities gains or losses are reported in securities gains (losses), net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of available for sale securities below
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
their amortized cost are evaluated to determine whether the loss is temporary or other-than-temporary. If the Company (a) has the intent to sell a debt security or (b) is more likely than not will be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire unrealized loss in earnings as an other-than-temporary loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The impairment is separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income.
The Company also evaluates whether the decline in fair value of an equity security is temporary or other-than-temporary. In determining whether an unrealized loss on an equity security is temporary or other-than-temporary, management considers various factors including the magnitude and duration of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the equity security to forecasted recovery.
Allowance for Loan Losses: The allowance for loan losses is a reserve established through a provision for 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 impaired 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 mathematically based using a modified 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. This historical loss period is based on a weighted twelve-quarter average (3 years); 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.
Other Real Estate Owned: Other real estate owned includes properties acquired in partial or total satisfaction of certain loans. Properties are recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any write-downs in the carrying value of a property at the time of acquisition are charged against the allowance for loan losses. Management periodically reviews the carrying value of other real estate owned. Any write-downs of the properties subsequent to acquisition, as well as gains or losses on disposition and income or expense from the operations of other real estate owned, are recognized in operating results in the period they are realized.
Income Taxes: We determine our income tax expense based on management's judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, we recognize deferred tax assets and liabilities in the Consolidated Balance Sheets based on management's judgment and estimates regarding timing differences in the recognition of income and expenses for financial statement and income tax purposes.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
We assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, management makes judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Management believes that it is more likely than not that deferred tax assets included in the accompanying Consolidated Balance Sheets will be fully realized, although there is no guarantee that those assets will be recognizable in future periods.
Management also makes certain interpretations of federal and state income tax laws for which the outcome of the tax position may not be certain. Uncertain tax positions are periodically evaluated and we may establish tax reserves for benefits that may not be realized. For additional discussion of income taxes, see Notes 1 and 11 of "Notes to the Consolidated Financial Statements" in Item 8 of this Form 10-K. 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.
Results of Operations
Net Income (Loss)
2015 compared to 2014. Net income equaled $42.6 million or $11.08 per common diluted share for the year ended December 31, 2015, as compared to a net loss of $4.5 million or $(44.81) per common diluted share for the year ended December 31, 2014.
The results for the year ended December 31, 2015 were positively impacted by the reversal of the Company's deferred tax asset ("DTA") valuation allowance which provided a tax benefit during the year in the amount of $38.2 million and a $1.8 million gain on extinguishment of debt, representing the difference between the fair value of the consideration issued in the settlement transaction and the carrying value of the amounts due in connection with the settlement of obligations. 2014 results were impacted by a $3.9 million loss attributed to a bulk asset sale.
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.
2015 compared to 2014.
Net interest income, on a tax equivalent basis, increased $2.2 million from $24.2 million earned during the full year 2014 to $26.4 million for the full year 2015. This was the result of an increase in interest income, as well as, a decrease in interest expense.
Tax equivalent interest income rose $1.1 million as compared to 2014. A $47.2 million increase in interest-earning assets improved interest income by $1.7 million with the increases in both the securities and loan portfolios. A nine basis point decline in the average yield on interest-earning assets reduced interest income by $0.6 million as securities, with lower yields than loans, made up a larger proportion of interest-earning assets during 2015 compared to 2014.
Interest expense declined $1.0 million as compared to 2014. A $19.2 million decrease in interest-bearing liabilities reduced interest expense by an immaterial amount. The decrease in interest-bearing liabilities was largely concentrated in high cost time deposits. A fourteen basis point decline in total funding costs reduced interest expense by $1.0 million as high cost time deposits matured and were replaced with non-maturing deposits.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The net interest margin increased seven basis points to 3.40% for the year ended December 31, 2015 from 3.33% during the same period in 2014. The Company's margin improved as it grew new loans, reduced nonaccruing loans in the portfolio, reduced high cost time deposits and paid-off debt obligations.
2014 compared to 2013.
Net interest income, on a tax equivalent basis, increased $0.1 million from $24.1 million earned during the full year 2013 to $24.2 million for the full year 2014. This was the result of a decrease in interest expense more than offsetting a decrease in interest income.
Tax-equivalent interest income declined $0.6 million as compared to 2013 based on a decrease of $21.5 million in interest-earning assets reducing interest income by $0.8 million. The decrease in interest-earning assets was largely due to a reduction in securities. A three basis point increase in the average yield on interest-earning assets improved interest income by $0.2 million as nonaccrual loans were replaced with new loans and lower yielding securities were sold and replaced with higher yielding instruments.
Interest expense declined $0.8 million as compared to 2013 based on a $33.1 million decrease in interest-bearing liabilities reducing interest expense by $0.2 million. The decrease in interest-bearing liabilities was largely due to strategic initiatives to reduce high cost time deposits and FHLB advances with proceeds from successful troubled loan workouts and the bulk asset sale. A nine basis point decline in total funding costs reduced interest expense by $0.6 million as the pricing on deposits were lowered and maturing time deposits either repriced at significantly lower rates or were not retained.
The net interest margin increased 12 basis points to 3.33% for the year ended December 31, 2014 from 3.21% during the same period in 2013. Positively impacting the margin was a reduction in the Company’s cost of interest-bearing liabilities due to maturity of higher rate time deposits and the decline in market interest rates. Negatively impacting the margin was the cost of retaining surplus liquidity, average loan volume decline and the impact of nonaccrual loan interest reversals.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
|
| | | | | | | | | | | | | | | | | | | | | |
AVERAGE BALANCE SHEET |
AND ANALYIS OF NET INTEREST INCOME |
| For the Years Ended December 31, |
| 2015 | | 2014 |
| Average Balance | | Interest/Income Expense | | Average Rate | | Average Balance | | Interest/Income Expense | | Average Rate |
| | | | | |
ASSETS | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Interest-earning deposits | $ | 2,488 |
| | $ | 65 |
| | 2.61 | % | | $ | 3,480 |
| | $ | 81 |
| | 2.33 | % |
Securities | | | | | | | | | | | |
Taxable | 176,119 |
| | 2,887 |
| | 1.64 |
| | 140,494 |
| | 2,272 |
| | 1.62 |
|
Non-taxable | 6,071 |
| | 248 |
| | 4.08 |
| | 6,055 |
| | 352 |
| | 5.82 |
|
Total securities (tax equivalent) | 182,190 |
| | 3,135 |
| | 1.72 |
| | 146,549 |
| | 2,624 |
| | 1.79 |
|
Federal funds sold | 2,058 |
| | 20 |
| | 0.97 |
| | 5,620 |
| | 40 |
| | 0.71 |
|
Loans | | | | | | | | | | | |
Commercial | 101,809 |
| | 4,126 |
| | 4.05 |
| | 93,643 |
| | 3,888 |
| | 4.15 |
|
Real estate | 483,977 |
| | 21,337 |
| | 4.41 |
| | 476,430 |
| | 20,935 |
| | 4.39 |
|
Installment and other | 3,080 |
| | 175 |
| | 5.68 |
| | 2,698 |
| | 166 |
| | 6.14 |
|
Gross loans (tax equivalent) | 588,866 |
| | 25,638 |
| | 4.35 |
| | 572,771 |
| | 24,989 |
| | 4.36 |
|
Total interest-earnings assets | 775,602 |
| | 28,858 |
| | 3.72 |
| | 728,420 |
| | 27,734 |
| | 3.81 |
|
Noninterest-earning assets | | | | | | | | | | | |
Cash and cash equivalents | 43,721 |
| | | | | | 58,761 |
| | | | |
Premises and equipment, net | 22,370 |
| | | | | | 22,984 |
| | | | |
Other assets | 48,431 |
| | | | | | 56,689 |
| | | | |
Total nonearning assets | 114,522 |
| | | | | | 138,434 |
| | | | |
Total assets | $ | 890,124 |
| | | | | | $ | 866,854 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
LIABILITIES & STOCKHOLDERS’ EQUITY |
Interest-bearing liabilities |
NOW accounts | 119,202 |
| | 89 |
| | 0.07 |
| | 117,203 |
| | 101 |
| | 0.09 |
|
Money market accounts | 118,711 |
| | 208 |
| | 0.18 |
| | 122,968 |
| | 237 |
| | 0.19 |
|
Savings deposits | 123,233 |
| | 13 |
| | 0.01 |
| | 117,599 |
| | 12 |
| | 0.01 |
|
Time deposits | 195,358 |
| | 917 |
| | 0.47 |
| | 247,690 |
| | 1,690 |
| | 0.68 |
|
Federal funds purchased and repurchase agreements | 18,144 |
| | 50 |
| | 0.28 |
| | 18,560 |
| | 55 |
| | 0.30 |
|
Advances from FHLB | 64,370 |
| | 529 |
| | 0.82 |
| | 26,466 |
| | 450 |
| | 1.70 |
|
Notes payable | 23,387 |
| | 645 |
| | 2.76 |
| | 31,138 |
| | 955 |
| | 3.07 |
|
Total interest-bearing liabilities | 662,405 |
| | 2,451 |
| | 0.37 |
| | 681,624 |
| | 3,500 |
| | 0.51 |
|
Noninterest-bearing liabilities | | | | | | | | | | | |
Noninterest-bearing deposits | 150,460 |
| | | | | | 139,260 |
| | | | |
Other liabilities | 6,594 |
| | | | | | 9,656 |
| | | | |
Total noninterest-bearing liabilities | 157,054 |
| | | | | | 148,916 |
| | | | |
Stockholders’ equity | 70,665 |
| | | | | | 36,314 |
| | | | |
Total liabilities and stockholders’ equity | $ | 890,124 |
| | | | | | $ | 866,854 |
| | | | |
Net interest income (tax equivalent) | | | $ | 26,407 |
| | | | | | $ | 24,234 |
| | |
Net interest income (tax equivalent) to total earning assets | | | | | 3.40 | % | | | | | | 3.33 | % |
Interest-bearing liabilities to earning assets | | | | | 85.41 | % | | | | | | 93.58 | % |
(1) Average balance and average rate on securities classified as available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on tax exempt securities are reflected on a tax equivalent basis based upon a statutory federal income tax rate of 34%.
(3) In 2015 there was $53 in tax equivalent interest included in gross loans and $55 in 2014.
(4) Nonaccrual loans are included in the average balances; overdraft loans are excluded in the balances.
(5) Loan fees are included in the specific loan category.
(6) Average balances are derived from daily balances.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
|
| | | | | | | | | | | | | | | | | | | | | |
AVERAGE BALANCE SHEET |
AND ANALYIS OF NET INTEREST INCOME |
| For the Years Ended December 31, |
| 2014 | | 2013 |
| Average Balance | | Interest/Income Expense | | Average Rate | | Average Balance | | Interest/Income Expense | | Average Rate |
| | | | | |
ASSETS | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Interest-earning deposits | $ | 3,480 |
| | $ | 81 |
| | 2.33 | % | | $ | 3,096 |
| | $ | 72 |
| | 2.34 | % |
Securities | | | | | | | | | | | |
Taxable | 140,494 |
| | 2,272 |
| | 1.62 |
| | 173,231 |
| | 2,120 |
| | 1.22 |
|
Non-taxable | 6,055 |
| | 352 |
| | 5.82 |
| | 8,582 |
| | 483 |
| | 5.64 |
|
Total securities (tax equivalent) | 146,549 |
| | 2,624 |
| | 1.79 |
| | 181,813 |
| | 2,603 |
| | 1.43 |
|
Federal funds sold | 5,620 |
| | 40 |
| | 0.71 |
| | 5,620 |
| | 45 |
| | 0.79 |
|
Loans | | | | | | | | | | | |
Commercial | 93,643 |
| | 3,888 |
| | 4.15 |
| | 89,112 |
| | 4,043 |
| | 4.54 |
|
Real estate | 476,430 |
| | 20,935 |
| | 4.39 |
| | 467,717 |
| | 21,409 |
| | 4.58 |
|
Installment and other | 2,698 |
| | 166 |
| | 6.14 |
| | 2,601 |
| | 188 |
| | 7.22 |
|
Gross loans (tax equivalent) | 572,771 |
| | 24,989 |
| | 4.36 |
| | 559,430 |
| | 25,640 |
| | 4.58 |
|
Total interest-earnings assets | 728,420 |
| | 27,734 |
| | 3.81 |
| | 749,959 |
| | 28,360 |
| | 3.78 |
|
Noninterest-earning assets | | | | | | | | | | | |
Cash and cash equivalents | 58,761 |
| | | | | | 58,014 |
| | | | |
Premises and equipment, net | 22,984 |
| | | | | | 23,318 |
| | | | |
Other assets | 56,689 |
| | | | | | 58,449 |
| | | | |
Total nonearning assets | 138,434 |
| | | | | | 139,781 |
| | | | |
Total assets | $ | 866,854 |
| | | | | | $ | 889,740 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
LIABILITIES & STOCKHOLDERS’ |
EQUITY |
Interest-bearing liabilities | | | | | | | | | | | |
NOW accounts | 117,203 |
| | 101 |
| | 0.09 |
| | 109,154 |
| | 92 |
| | 0.09 |
|
Money market accounts | 122,968 |
| | 237 |
| | 0.19 |
| | 123,440 |
| | 251 |
| | 0.20 |
|
Savings deposits | 117,599 |
| | 12 |
| | 0.01 |
| | 111,035 |
| | 14 |
| | 0.01 |
|
Time deposits | 247,690 |
| | 1,690 |
| | 0.68 |
| | 292,955 |
| | 2,400 |
| | 0.82 |
|
Federal funds purchased and repurchase agreements | 18,560 |
| | 55 |
| | 0.30 |
| | 17,905 |
| | 51 |
| | 0.29 |
|
Advances from FHLB | 26,466 |
| | 450 |
| | 1.70 |
| | 29,087 |
| | 496 |
| | 1.71 |
|
Notes payable | 31,138 |
| | 955 |
| | 3.07 |
| | 31,138 |
| | 955 |
| | 3.07 |
|
Total interest-bearing liabilities | 681,624 |
| | 3,500 |
| | 0.51 |
| | 714,714 |
| | 4,259 |
| | 0.60 |
|
Noninterest-bearing liabilities | | | | | | | | | | | |
Noninterest-bearing deposits | 139,260 |
| | | | | | 129,992 |
| | | | |
Other liabilities | 9,656 |
| | | | | | 17,793 |
| | | | |
Total noninterest-bearing liabilities | 148,916 |
| | | | | | 147,785 |
| | | | |
Stockholders’ equity | 36,314 |
| | | | | | 27,241 |
| | | | |
Total liabilities and stockholders’ equity | $ | 866,854 |
| | | | | | $ | 889,740 |
| | | | |
Net interest income (tax equivalent) | | | $ | 24,234 |
| | | | | | $ | 24,101 |
| | |
Net interest income (tax equivalent) to total earning assets | | | | | 3.33 | % | | | | | | 3.21 | % |
Interest-bearing liabilities to earning assets | | | | | 93.58 | % | | | | | | 95.30 | % |
(1) Average balance and average rate on securities classified as available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on tax exempt securities are reflected on a tax equivalent basis based upon a statutory federal income tax rate of 34%.
(3) In 2014 there was $55 in tax equivalent interest included in gross loans and $42 in 2013.
(4) Nonaccrual loans are included in the average balances; overdraft loans are excluded in the balances.
(5) Loan fees are included in the specific loan category.
(6) Average balances are derived from daily balances.
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 yield 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 attributed jointly to volume and rate change 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, |
| 2015 Compared to 2014 | | 2014 Compared to 2013 |
| Volume | | Rate | | Net | | Volume | | Rate | | Net |
| | | | | |
Interest income: | | | | | | | | | | | |
Interest-earning deposits | $ | (12 | ) | | $ | (4 | ) | | $ | (16 | ) | | $ | 9 |
| | $ | — |
| | $ | 9 |
|
Investment securities: | | | | | | | | | | | |
Taxable | 633 |
| | (18 | ) | | 615 |
| | (705 | ) | | 857 |
| | 152 |
|
Non-taxable | 166 |
| | (270 | ) | | (104 | ) | | (153 | ) | | 22 |
| | (131 | ) |
Federal funds sold | (13 | ) | | (7 | ) | | (20 | ) | | (2 | ) | | (3 | ) | | (5 | ) |
Loans | 993 |
| | (344 | ) | | 649 |
| | 32 |
| | (683 | ) | | (651 | ) |
Total interest income | 1,767 |
| | (643 | ) | | 1,124 |
| | (819 | ) | | 193 |
| | (626 | ) |
Interest expense: | | | | | | | | | | | |
NOW accounts | 5 |
| | (17 | ) | | (12 | ) | | 8 |
| | 1 |
| | 9 |
|
Money market accounts | (3 | ) | | (26 | ) | | (29 | ) | | 5 |
| | (19 | ) | | (14 | ) |
Savings deposits | 1 |
| | — |
| | 1 |
| | 1 |
| | (3 | ) | | (2 | ) |
Time deposits | (314 | ) | | (459 | ) | | (773 | ) | | (167 | ) | | (543 | ) | | (710 | ) |
Federal funds purchased and repurchase agreements | $ | — |
| | (5 | ) | | (5 | ) | | $ | 2 |
| | 2 |
| | 4 |
|
Advances from FHLB | $ | 463 |
| | (384 | ) | | 79 |
| | $ | (45 | ) | | (1 | ) | | (46 | ) |
Notes payable | $ | (247 | ) | | (63 | ) | | (310 | ) | | $ | 4 |
| | (4 | ) | | — |
|
Total interest expense | (95 | ) | | (954 | ) | | (1,049 | ) | | (192 | ) | | (567 | ) | | (759 | ) |
Net interest income | $ | 1,862 |
| | $ | 311 |
| | $ | 2,173 |
| | $ | (627 | ) | | $ | 760 |
| | $ | 133 |
|
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.
2015 compared to 2014.
The Company recorded $0.4 million of provision for loan losses during 2015 in comparison to $7.2 million recorded in the same period in 2014. The reduced need for provision charge during the period was driven by the following factors:
| |
• | No material migrations of performing loans to nonperforming status from year-end 2014 to year-end 2015; |
| |
• | Charge-offs during the period were offset by recoveries, resulting in net recoveries for the year; |
| |
• | Provision level in 2014 was impacted by a bulk asset sale; |
| |
• | Continued stabilization of collateral values. |
Management continues to update collateral values and evaluate the level of specific allocations for impaired loans. As impaired loans have moved through the liquidation process, many of the previously established specific allocations have been charged off.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
2014 compared to 2013.
The 2014 provision for loan losses charged to operating expense totaled $7.2 million, an increase of $3.8 million in comparison to $3.4 million recorded in the 2013 period. The largest part of the increase was related to the bulk asset sale that was completed in late 2014 and increased the provision charge by $2.9 million. Additionally the provision level for 2014 was driven by more aggressive workout strategies as the Company made a significant improvement to asset quality during the year.
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues, including bank-related service charges on deposits, mortgage revenues and increases in cash surrender value on bank-owned life insurance.
2015 compared to 2014.
Noninterest income totaled $12.4 million for year ended December 31, 2015, compared to $12.8 million for the same period in 2014. Excluding gains related to the sale of OREO, securities and other non-recurring gains, noninterest income decreased by $0.6 million or 5.9%. The decline from 2014 can be attributed to a decrease in mortgage banking income along with a decline in service charge income.
2014 compared to 2013.
Total noninterest income was $12.8 million for the year ended December 31, 2014, as compared to $16.7 million for the same period in 2013. This represented a decrease of $3.9 million in 2014 over the prior period. Included in 2014 and 2013 noninterest income results were securities gains, gains related to the sale of OREO and other gains. Excluding these items from both periods, recurring noninterest income declined $0.7 million or 6.4% in 2014 versus 2013 levels. This decrease was primarily due to a $0.6 million decrease related to reduced mortgage banking income due to lower production.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee benefits, occupancy and other operating expense.
2015 compared to 2014.
Noninterest expense for the year ended December 31, 2015 was $33.2 million which was $1.0 million lower than the year ended December 31, 2014. When excluding the OREO valuation adjustments and other non-recurring items, noninterest expense was $0.4 million, or 1.3%, above the comparable amount for 2014 driven by an increase in salaries and partially offset by a reduction in FDIC premium expense.
2014 compared to 2013.
Noninterest expense totaled $34.2 million for the year ended December 31, 2014, as compared to $33.5 million for the same period in 2013. This represented an increase of $0.7 million or 2.1% in 2014 from 2013. Included in 2014 and 2013 noninterest expense results were OREO valuation adjustments. Excluding OREO valuations noninterest expense was flat in 2014 compared to 2013. Multiple categories saw expense improvement including: salary & benefits, marketing, loan processing and OREO carrying costs. These savings were offset by increasing occupancy, equipment and data processing costs.
Applicable Income Taxes
In accordance with current income tax accounting guidance, the Company assessed whether a valuation allowance should be established against their deferred tax assets (DTAs) based on consideration of all available evidence using a “more likely than not” standard. The most significant portions of the deductible temporary differences relate to (1) net operating loss carryforwards and (2) the allowance for loan losses.
In assessing the need for a valuation allowance, both the positive and negative evidence about the realization of DTAs were evaluated. The ultimate realization of DTAs is based on the Company’s ability to carryback net operating losses to prior tax periods, tax planning strategies that are prudent and feasible, and the reversal of deductible temporary differences that can be offset by taxable temporary differences and future taxable income.
In 2010, the Company established a valuation allowance of $31.5 million against its DTAs because it concluded that, based upon the weight of all available evidence, it was “more likely than not” that the deferred tax asset would not be realized. The valuation allowance increased to $39.8 million at December 31, 2014 due mainly to increases in the net operating loss carryforwards each year from 2010 through 2014. The valuation allowance decreased to $38.2 million before being reversed to zero at December 31, 2015 due to taxable income generated in 2015 which reduced the net operating loss carryforwards.
We evaluate the need for a deferred tax asset valuation allowance on an ongoing basis. For the year ended December 31, 2015, management determined that is it “more likely than not” that the deferred tax asset will be realized. This conclusion was based on
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
an analysis of both positive and negative evidence. Positive evidence included our return to profitability and positive three year cumulative pre-tax earnings as of December 31, 2015, significant improvement in asset quality and credit ratios, positive loan growth throughout 2015, future taxable income based on robust forecasting models including prudent and feasible tax planning strategies if needed, and the termination of the Company’s Written Agreement by the Federal Reserve Bank of Chicago and the Illinois Department of Financial and Professional Regulation. Negative evidence included a pre-tax loss in 2014, no available taxes paid in open carryback years, and the fact that the banking industry is highly competitive and heavily regulated. Management determined that the positive evidence outweighed the negative and therefore the Company released the $38.2 million valuation allowance against the net deferred tax asset on December 31, 2015 resulting in an income tax benefit.
During 2014, the Company recorded no income tax expense or benefit, despite a loss of $4.5 million before income taxes. A current income tax benefit that would normally result from a pre-tax loss was offset by additional deferred tax expense due to an increase in the required valuation allowance. After evaluating all of the factors previously summarized and considering the weight of the positive evidence compared to the negative evidence, the Company determined a full valuation allowance was necessary as of December 31, 2014.
Interest Rate Sensitivity Management
The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities) which are funded for the most part by interest-bearing liabilities (deposits and borrowings). All of the financial instruments of the Company are held for investment rather than trading purposes. Such financial instruments have varying levels of sensitivity of economic value to changes in market rates of interest, but also sensitivity in coupon income for adjustable rate instruments and reinvestment income of maturing instruments. The operating income and net income of the Bank depends, to a substantial extent, on “rate differentials,” i.e., the differences between the income the Bank receives from loans, securities, and other earning assets and the interest expense they pay to obtain deposits and other funding sources. These rates are highly sensitive to many factors that are beyond the control of the Bank, including general economic conditions and the policies of various governmental and regulatory authorities.
The Company measures its overall interest rate sensitivity through a multiple scenario analysis. The primary analysis measures the change in net interest income resulting from instantaneous hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates. Due to the current rate environment, this analysis was done in 2015 using a 100 basis point decrease in rates versus the normal 100 to 300 basis point decreases. Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions including parallel shifts of market interest rates, loan and security prepayments, and deposit run-off rates and should not be relied upon as indicative of actual results. Actual values may differ from those projections set forth above, should market conditions vary from the assumptions used in preparing the analysis. Further, the computations do not contemplate actions the Company may undertake in response to changes in interest rates. The interest rates scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements.
The tables below present the Company’s projected changes in net interest income for December 31, 2015 and December 31, 2014 for the various rate shock levels.
|
| | | | | | | | | | | | | |
| Change in Net Interest Income Over One Year Horizon |
| December 31, 2015 | | December 31, 2014 |
| Change | | Change |
| $ | | % | | $ | | % |
+ 300 bp | $ | 1,966 |
| | 6.89 | % | | $ | 1,561 |
| | 6.53 | % |
+ 200 bp | 1,264 |
| | 4.43 |
| | 978 |
| | 4.09 |
|
+ 100 bp | 649 |
| | 2.27 |
| | 499 |
| | 2.09 |
|
Base | — |
| | — |
| | — |
| | — |
|
- 100 bp | (1,550 | ) | | (5.43 | ) | | (1,091 | ) | | (4.56 | ) |
As shown above, the effect of an immediate 200 basis point increase in interest rates as of December 31, 2015 would increase the Company’s net interest income by $1.3 million or 4.4%. The effect of an immediate 100 basis point decrease in rates would decrease the Company’s net interest income by $1.5 million or 5.4%.
During 2015, management continued to position the balance sheet to generate a benefit to income in a rising interest rate environment. This was accomplished by allowing the fixed rate securities to run off and replacing them with adjustable rate
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
securities. The loan portfolio had a lower amount of loans on which interest was not accruing at the end of the year, thus having a larger percentage of the total benefitting from rising interest rates. The primary factor increasing the benefit to the margin from rising interest rates was the greater percentage of funding coming from non-maturity deposits. These deposits tend to be less sensitive to rising interest rates as these are primarily transaction balances. This is somewhat related to the general industry trend of an influx of funds from money market mutual funds which will likely be less secure funding. This makes it necessary to invest these funds focusing on less volatile assets. With the influx of deposits into non-maturity accounts there was reduced dependence on time deposits and from wholesale funding. Time deposits and wholesale funding tend to have the highest sensitivity to rising interest rates and our reduced concentration of this type of funding allows greater benefit to the margin from rising interest rates.
Financial Condition
General
Following are highlights of the December 31, 2015 balance sheet when compared to December 31, 2014:
Loans. The Company offers a broad range of products, including commercial; agricultural production and agricultural real estate; construction, land and development; commercial real estate, 1-4 family mortgages; and consumer loans, designed to meet the credit needs of its borrowers. The Company’s loans are diversified by borrower and industry group.
Outstanding loans totaled $633.5 million at December 31, 2015 compared to $553.2 million at December 31, 2014, representing an increase of $80.3 million or 14.52%. This increase is primarily due to a combination of new organic loan growth and normal seasonal line draws offset by the classification of $11.5 million of loans included in branch assets held for sale due to our agreement to sell three branches. See Note 19. Subsequent Events for additional disclosure related to the branch sales. As of December 31, 2015 and December 31, 2014, commitments of the Bank under standby letters of credit and unused lines of credit totaled approximately $151.8 million and $115.3 million.
|
| | | | | | | | | | | | | | | |
STATED LOAN MATURITIES (1) |
| | | | | | | |
| Within | | 1 to 5 | | After 5 | | |
| 1 Year | | Years | | Years | | Total |
Commercial | $ | 34,170 |
| | $ | 28,859 |
| | $ | 4,331 |
| | $ | 67,360 |
|
Agricultural & AGRE | 20,600 |
| | 9,640 |
| | 19,881 |
| | 50,121 |
|
Construction, land & development | 8,313 |
| | 13,878 |
| | 3,825 |
| | 26,016 |
|
Commerical RE | 39,321 |
| | 250,229 |
| | 102,368 |
| | 391,918 |
|
1-4 mortgages | 14,362 |
| | 35,099 |
| | 45,766 |
| | 95,227 |
|
Consumer | 677 |
| | 1,830 |
| | 398 |
| | 2,905 |
|
Total | $ | 117,443 |
| | $ | 339,535 |
| | $ | 176,569 |
| | $ | 633,547 |
|
(1) Maturities based upon contractual maturity dates | | | | | | | |
The maturities presented above are based upon contractual maturities. Many of these loans are made on a short-term basis with the possibility of renewal at time of maturity.
Rate sensitivities of the total loan portfolio, net of unearned income, at December 31, 2015 were as follows:
|
| | | | | | | | | | | | | | | |
LOAN REPRICING |
| | | | | | | |
| Within | | 1 to 5 | | After 5 | | |
| 1 Year | | Years | | Years | | Total |
Fixed rate | $ | 64,355 |
| | $ | 222,034 |
| | $ | 26,300 |
| | $ | 312,689 |
|
Variable rate | 47,254 |
| | 117,328 |
| | 150,269 |
| | 314,851 |
|
Nonaccrual | 5,835 |
| | 172 |
| | — |
| | 6,007 |
|
Total | $ | 117,444 |
| | $ | 339,534 |
| | $ | 176,569 |
| | $ | 633,547 |
|
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Nonperforming Assets
The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual status when there are serious doubts regarding the collectability of all principal and interest due under the terms of the loans. If a loan is placed on nonaccrual status, the loan does not generate current period income for the Company and any amounts received are generally applied first to principal and then to interest. It is the policy of the Company not to renegotiate the terms of a loan because of a delinquent status. Rather, a loan is generally transferred to nonaccrual status if it is not in the process of collection and is delinquent in payment of either principal or interest beyond 90 days.
The classification of a loan as nonaccrual does not necessarily indicate that the principal is uncollectible, in whole or in part. The Bank makes a determination as to collectability on a case-by-case basis and considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon the specific facts of each situation. Alternatives that are typically considered to collect nonaccrual loans are foreclosure, collection under guarantees, loan restructuring, or judicial collection actions.
Other nonperforming assets consist of real estate acquired through loan foreclosures or other workout situations and other assets acquired through repossessions.
Each of the Company’s commercial loans is assigned a risk rating at origination based upon an internally developed grading system. A separate credit administration department also reviews selected grade assignments on a quarterly basis. Management continuously monitors nonperforming, impaired, and past due loans in an effort to prevent further deterioration of these loans. The Company has an independent loan review function which is separate from the lending function and is responsible for the review of new and existing loans.
The following table sets forth a summary of nonperforming assets:
|
| | | | | | | | | | | |
| December 31, |
| 2015 | | 2014 | | 2013 |
Nonaccrual loans (including TDRs) | $ | 6,007 |
| | $ | 7,749 |
| | $ | 28,871 |
|
TDRs still accruing interest | — |
| | — |
| | 181 |
|
Loans 90 days past due and still accruing interest | — |
| | — |
| | — |
|
Total nonperforming loans | $ | 6,007 |
| | $ | 7,749 |
| | $ | 29,052 |
|
Other real estate owned | 8,401 |
| | 10,256 |
| | 23,318 |
|
Total nonperforming assets | $ | 14,408 |
| | $ | 18,005 |
| | $ | 52,370 |
|
| | | | | |
Nonperforming loans to total end of period loans | 0.93 | % | | 1.40 | % | | 5.13 | % |
Nonperforming assets to total end of period loans | 2.23 |
| | 3.25 |
| | 9.25 |
|
Nonperforming assets to total end of period assets | 1.50 |
| | 2.20 |
| | 5.93 |
|
The Company’s level of nonperforming assets has declined significantly over the past two years mainly due to the sale of $35.2 million of troubled assets through the bulk asset sale completed on December 5, 2014 which included the sale of $9.5 million in nonaccrual loans and $7.7 million in OREO. Total nonperforming assets declined $3.6 million to $14.4 million, or 1.50% of total assets, at December 31, 2015 from $18.0 million at December 31, 2014. Total nonperforming assets included $0.2 million in troubled debt restructures, $8.4 million of foreclosed assets and repossessed real estate, and $5.8 million of nonaccrual loans compared to $10.3 million of foreclosed assets and $7.7 million of nonaccrual loans at December 31, 2014. Approximately 2.11% of total nonaccrual loans at December 31, 2015 were concentrated in land development, construction and commercial real estate credits. Additionally $3.6 million or 60.28% of total nonaccrual loans represented a multi-family loan to one borrower.
Nonperforming Loans
Nonperforming loans (nonaccrual, 90 days past due and troubled debt restructures) decreased $1.7 million from December 31, 2014 to December 31, 2015, largely due to successful workout asset sale strategies.
The level of nonperforming loans to end of period loans was 0.93% as of December 31, 2015 as compared to 1.40% as of December 31, 2014. As a result of the decrease in the nonperforming loans, the allowance to nonperforming loan coverage ratio increased to 143.02% for year ended December 31, 2015 from 102.99% for the year ended December 31, 2014.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Other Real Estate Owned
Foreclosure of impaired loans has resulted in elevated levels of other real estate owned (OREO) as foreclosed properties have been especially difficult to move in the current economic environment. OREO was $8.4 million as of December 31, 2015 compared to $10.3 million as of December 31, 2014. During 2015, the Company transferred $0.3 million of foreclosed or repossessed real estate from the loan portfolio. OREO properties with a carrying value of $5.2 million were written down to their fair value of $4.9 million, resulting in a charge to earnings of $0.3 million. This compares to 2014 when OREO properties with a carrying value of $6.0 million were written down to their fair value of $4.5 million, which resulted in a charge to earnings of $1.5 million during the year.
The following table sets forth a summary of other real estate owned at December 31, 2015 and December 31, 2014:
|
| | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Net Book | | Net Book |
| Carrying Value | | Carrying Value |
Developed property | $ | 4,508 |
| | $ | 5,785 |
|
Vacant land or unsold lots | 3,893 |
| | 4,471 |
|
Total other real estate owned | $ | 8,401 |
| | $ | 10,256 |
|
Other Potential Problem Loans
The Company has other potential problem loans that are currently performing, but where some concerns exist regarding the nature of the borrowers’ projects in our current economic environment. As of December 31, 2015, management identified $0.1 million of loans that are currently performing but due to the economic environment facing these borrowers were classified by management as impaired. Impaired loans that are performing account for 1.44% of the loans deemed impaired during 2015. Excluding nonperforming loans and loans that management has classified as impaired, there are other potential problem loans that totaled $5.3 million at December 31, 2015 as compared to $8.5 million at December 31, 2014. The classification of these loans, however, does not imply that management expects losses on each of these loans, but believes that a higher level of scrutiny and closer monitoring is prudent under the circumstances. Such classifications relate to specific concerns for each individual borrower and do not relate to any concentration risk common to all loans in this group.
The Company proactively reviews loans for potential impairment regardless of the payment or performance status. This approach results in some relationships being classified as impaired but still performing.
Allowance for Loan Losses
At December 31, 2015, the allowance for loan losses was $8.6 million, or 1.33% of total loans, as compared to $8.0 million, or 1.44% of total loans, at December 31, 2014. The Company recorded $0.4 million of provision to the allowance for loan losses for the year ended December 31, 2015 largely due to net loan growth.
Activity in the Allowance for years ended December 31, 2015 and December 31, 2014 was as follows.
|
| | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Beginning Balance | $ | 7,981 |
| | $ | 11,637 |
|
(Net Charge-offs)/ recoveries | 235 |
| | (10,858 | ) |
Provision | 375 |
| | 7,202 |
|
Ending Balance | $ | 8,591 |
| | $ | 7,981 |
|
During December 2014, the Company entered into a bulk loan sale where $18.0 million of classified loans were sold, at a discount of approximately 24% of their carrying value. This bulk loan sale reduced the level of classified loans by 56.7%. The Allowance for these loans individually evaluated for impairment at the time of sale totaled $3.7 million.
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The components of the Allowance for Loan Losses (“Allowance”) at December 31, 2015 and December 31, 2014 were as follows.
|
| | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Allowance for loan losses: | | | |
Loans individually evaluated for impairment | $ | 1,594 |
| | $ | 1,555 |
|
Loans collectively evaluated for impairment | 6,997 |
| | 6,426 |
|
Ending Balance | $ | 8,591 |
| | $ | 7,981 |
|
The general component of the Allowance covers loans that are collectively evaluated for impairment. The general component also includes loans that are not individually identified for impairment evaluation, as well as those loans that are individually evaluated but are not considered impaired. The general component is based on historical loss experience adjusted for factors. These factors include consideration of the following: levels of and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff, national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
The establishment of the Allowance involves a high degree of judgment and includes a level of imprecision given the difficulty of identifying all of the factors impacting loan repayment and the timing of when losses occur.
Net loan charge-offs for 2015 resulted in a net recovery of $0.2 million, or (0.04)% of average loans, compared with a net charge-off of $10.9 million, or 1.90% of average loans, in the same period of 2014. Management believes losses are being recognized in our portfolio through charge-offs as they are confirmed.
Of the $8.6 million allowance for loan losses at December 31, 2015, $5.7 million, or 66.28%, was allocated to commercial real estate loans. Management monitors these collateral dependent real estate loans periodically to analyze the adequacy of the cash flows to support the debt levels and obtains updated appraisals to determine the collateral’s fair value for impairment analysis.
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. Should the economic climate deteriorate from current levels, more borrowers may experience repayment difficulty, and the level of nonperforming loans, charge-offs and delinquencies could rise, potentially requiring increases in the provision for loan losses. Management believes that the allowance for loan losses at December 31, 2015 was adequate to absorb probable incurred credit losses inherent in the loan portfolio.
The following table presents a ratio analysis of the Company’s allowance for loan losses:
|
| | | | | | | | |
ALLOWANCE FOR LOAN LOSS RATIOS |
|
| Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Net loan charge-offs to total average loans | (0.04 | )% | | 1.90 | % | | 1.92 | % |
Provision for loan losses to average loans | 0.06 |
| | 1.26 |
| | 0.61 |
|
Allowance for loan losses to total end of period loans | 1.33 |
| | 1.44 |
| | 2.06 |
|
Allowance for loan losses to total nonperforming loans | 143.02 |
| | 102.99 |
| | 40.06 |
|
Securities. The primary strategic objective of the Company’s $171.4 million securities - available-for-sale from December 31, 2015, which excludes restricted securities, is to minimize interest rate risk, maintain sufficient liquidity, and maximize return. In managing the securities portfolio, the Company minimizes any credit risk and avoids investments in sophisticated and complex investment products. The portfolio includes several callable agency debentures, adjustable rate mortgage pass-throughs, municipal bonds and collateralized mortgage obligations. Collateralized mortgage obligations currently owned are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Neither the Company nor the Bank hold any securities containing sub-prime mortgages or Fannie Mae or Freddie Mac equities. The Company does not have any securities classified as trading or held-to-maturity.
The Company’s financial planning anticipates income streams generated by the securities portfolio based on normal maturity and reinvestment. Securities classified as available-for-sale, carried at fair value, were $171.4 million at December 31, 2015 compared
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
to $135.4 million at December 31, 2014. The Company also holds Federal Reserve Board and Federal Home Loan Bank stock which are classified as restricted securities of $9.1 million at December 31, 2015 and $6.1 million at December 31, 2014.
Deposits. Deposits are attracted through the offering of a broad variety of deposit instruments, including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more), and retirement savings plans. The Company’s average balance of total deposits was $707.0 million for 2015, representing a decrease of $37.7 million or 5.06% compared with the average balance of total deposits for 2014 of $744.7 million as higher cost time deposits matured and were not renewed.
The following table sets forth certain information regarding the Bank’s average deposits:
|
| | | | | | | | | | | | | | | | | | | |
| 2015 | | 2014 |
| Average | | % of | | Average | | Average | | % of | | Average |
| Amount | | Total | | Rate Paid | | Amount | | Total | | Rate Paid |
Demand deposit accounts: | | | | | | | | | | | |
Interest bearing | $ | 119,202 |
| | 16.86 | % | | 0.07 | % | | $ | 117,203 |
| | 15.74 | % | | 0.09 | % |
Non-interest bearing | 150,460 |
| | 21.29 |
| | — |
| | 139,260 |
| | 18.70 |
| | — |
|
Money market accounts | 118,711 |
| | 16.79 |
| | 0.18 |
| | 122,968 |
| | 16.51 |
| | 0.19 |
|
Savings accounts | 123,233 |
| | 17.43 |
| | 0.01 |
| | 117,599 |
| | 15.79 |
| | 0.01 |
|
Time, less than $100,000 | 123,097 |
| | 17.41 |
| | 0.23 |
| | 154,389 |
| | 20.73 |
| | 0.39 |
|
Time, $100,000 or more | 72,261 |
| | 10.22 |
| | 0.88 |
| | 93,301 |
| | 12.53 |
| | 1.17 |
|
| $ | 706,964 |
| | 100.00 | % | | 0.17 | % | | $ | 744,720 |
| | 100.00 | % | | 0.27 | % |
For the year ended December 31, 2015, average time deposits over $100,000 represented 10.22% of total average deposits, compared with 12.53% of total average deposits for the year ended December 31, 2014. The Company’s large denomination time deposits are generally from customers within the local market areas and provide a greater degree of stability than is typically associated with brokered deposit customers with limited business relationships.
The following table sets forth the remaining maturities for time deposits of $100,000 or more at December 31, 2015:
|
| | | |
TIME DEPOSITS OF 100,000 OR MORE |
| |
Maturity period: | |
Three months or less | $ | 14,745 |
|
Over three months through six months | 10,905 |
|
Over six months through one year | 23,831 |
|
Over one year | 25,237 |
|
Total | $ | 74,718 |
|
Brokered deposits account for $21.3 million of the total from the table above and all of their maturities fall into either the “Over six months through one year” or "Over one year" categories.
Return on Equity and Assets
The following table presents various ratios for the Company:
|
| | | | | |
RETURN ON EQUITY AND ASSETS |
| Years Ended December 31, |
| 2015 | | 2014 |
Return on average assets | 4.79 | % | | (0.52 | )% |
Return on average equity | 60.29 |
| | (12.42 | ) |
Average equity to average assets | 7.94 |
| | 4.19 |
|
CENTRUE FINANCIAL CORPORATION
PART II: MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Liquidity