Noninterest expense totaled $36,133 for the nine months ended September 30, 2009 increasing by $8,474 or 30.6% from the same period in 2008. Excluding nonrecurring charges of $9,627 from 2009 and $1,373 for 2008, noninterest expense levels increased $220 or 0.8% for the first nine months of 2009 as compared to 2008. The increase in expenses was primarily related to salaries and benefits and loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate. This was almost offset by cost savings in occupancy, furniture and equipment and marketing as a result of having fewer locations due to the sale of four branches in the first half of 2008. Additionally, FDIC insurance premiums increased during the nine month period due to the Company’s previous year’s credit expiring and higher factor used to calculate amount of insurance premium.
Income tax expense for the periods included benefits for tax-exempt income, tax-advantaged investments and general business tax credits offset by the effect of nondeductible expenses. The following table shows the Company’s income before income taxes, as well as applicable income taxes and the effective tax rate for the three and nine months ended September 30, 2009 and 2008.
The Company recorded an income tax benefit of $(5,605) and income tax expense of $1,430 for the three months ended September 30, 2009 and 2008, respectively. Effective tax rates equaled 40.0% and 33.8% respectively, for such periods. The Company recorded an income tax benefit of $(11,700) and income tax expense of $4,048 for the nine months ended September 30, 2009 and 2008, respectively. Effective tax rates equaled 33.2% and 33.7% respectively, for such periods.
With the exception of the three months ended September 30, 2009, the Company’s effective tax rate was lower than statutory rates due to several factors. First, the Company derives interest income from municipal securities and loans, which are exempt from federal tax and certain U.S. government agency securities, which are exempt from state tax. Second, the Company derives income from bank owned life insurance policies, which is exempt from federal and state tax. Finally, state income taxes are recorded net of the federal tax benefit, which lowers the combined effective tax rate. The higher effective tax rate for the three months ended September 30, 2009 was due to the taxable loss generating a tax benefit at the combined statutory rate of 38.8% and further increased by the tax-exempt items.
The income tax benefit was generated by the non-cash impairment charges related to CDO securities, the deductible portion of the goodwill impairment charge from the second quarter, and higher provision for loan loss recorded in 2009. The Company recorded a third quarter 2009 income tax benefit of $5,605, as a result of the pre-tax loss of $14,017. It should be noted that $6,545 of the goodwill impairment charge of $8,451 was not deductible for income tax purposes in the year to date tax benefit. Excluding these items, the effective tax rate would have been approximately 30.4% for the three months ended September 30, 2009 and 31.3% for the nine months ended September 30, 2009.
The Company’s internal reporting and planning process focuses on three primary lines of business: Retail, Commercial and Treasury. See Note 7 of the Notes to Unaudited Consolidated Financial Statements for the presentation of the condensed income statement and total assets for each Segment.
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
| |
The financial information presented was derived from the Company’s internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, to portray the Segment as if it operated on a stand alone basis. Thus, each Segment, in addition to its direct revenues and expenses, assets and liabilities, includes an allocation of shared support function expenses. The Retail, Commercial and Treasury Segments also include funds transfer adjustments to appropriately reflect the cost of funds on loans made and funding credits on deposits generated. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of the Notes to Consolidated Financial Statements.
Since there are no comprehensive authorities for management accounting equivalent to U.S. Generally Accepted Accounting Principles, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines and changes in management structure.
Retail Segment.The Retail Segment (“Retail”) provides retail banking services to individual customers through the Company’s branch locations in Illinois and Missouri. The services provided by this Segment include direct lending, checking, savings, money market, CD accounts, safe deposit rental, ATMs and other traditional and electronic banking services.
Retail generated a loss of $421 or 5.0% of total Segment loss in the third quarter of 2009 as compared to net income of $822 or 29.4% during the same period in 2008. Year to date Retail Segment net loss was $4,553 or 19.3% as compared to net income of $1,543 or 19.4% for the same period in 2008. Retail assets were $243,805 at September 30, 2009, $255,028 at December 31, 2008 and $262,272 as of September 30, 2008. This represented 18.2%, 18.2% and 19.5% of total consolidated assets, respectively.
The major factors impacting results for the third quarter were primarily related to lower net interest income due to pressure on lower loan yields and non-interest income due to reduction in overdraft fees. This reduction in revenue was slightly offset by lower interest expense. The segment was further impacted by higher allocations and non-interest expense.
The change in net income for the nine months ended September 30, 2009 was due to the same reasons as stated above for the quarter but was also largely impacted by higher allocations which are higher because of the goodwill impairment taken in the second quarter.
Commercial Segment.The Commercial Segment (“Commercial”) provides commercial banking services to business customers served through the Company’s full service branch channels located in Illinois and Missouri. The services provided by this Segment include lending, business checking and deposits, cash management, and other traditional as well as electronic commercial banking services.
Commercial showed a loss of $6,501 or 77.3% of total Segment loss in the third quarter of 2009 as compared to a profit of $1,652 or 59.0% of total Segment income during the same period in 2008. Year to date Commercial Segment net loss was $13,483 or 57.2% of total Segment loss as compared to a profit of $5,523 or 69.5% of total Segment income during the same period in 2008. Commercial assets were $778,291 at September 30, 2009, $803,069 at December 31, 2008 and $774,190 as of September 30, 2008. This represented 58.1%, 57.3% and 57.7% of total consolidated assets, respectively.
The large provision for loan losses related to land development, construction and commercial real estate credits contributed to the decline from the third quarter of 2008. Additionally, non-interest expense was higher due to loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate.. Offsetting these negative variances were a decrease in allocations, higher non-interest income and slightly better net interest income related to pricing floors on most new and renewed loans.
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
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For the nine months ended September 30, 2009, the decrease in net income was due mainly to higher allocations from the goodwill impairment taken in the second quarter and the larger provision for loan loss taken over the course of the nine months. This was slightly offset by a stronger net interest margin and lower non-interest expenses.
Treasury Segment.The Treasury Segment (“Treasury”) is responsible for managing the investment portfolio and acquiring wholesale funding for loan activity. Additionally, this area is responsible for assisting in the management of the Company’s liquidity and interest rate risk. Treasury generated a loss of $1,490 or 17.7% of total Segment net loss in the third quarter of 2009 and a net income of $325 or 11.6% of total Segment net income during the same period in 2008. Year to date Treasury Segment net loss was $5,526 or 23.5% of total Segment net loss as compared to a profit of $883 or 11.1% of total Segment net income for the same period in 2008. Treasury assets were $257,302 at September 30, 2009, $277,597 at December 31, 2008 and $247,073 at September 30, 2008. This represented 19.2%, 19.8% and 18.4% of total consolidated assets, respectively.
Results for Treasury were impacted by the non-cash impairment charge for securities of $3,132 during the third quarter 2009. Additionally, net interest income is higher while the net allocations are lower.
Net income for the first nine months of 2009 decreased in comparison to 2008 mainly due to the decrease in non-interest revenue from the $9,049 non-cash impairment and reduction in gain on sales of securities from 2008. This was further impacted by higher allocations from the goodwill impairment taken in the second quarter 2009 and higher other non-interest expense. These negative effects were offset slightly by an increase in net interest income.
Financial Condition
General
Following are highlights of the September 30, 2009 balance sheet when compared to December 31, 2008:
Securities.The primary strategic objective of the Company’s securities portfolio is to assist with liquidity and interest rate risk management. In managing the securities portfolio, the Company seeks to minimize any credit risk and avoid investments in sophisticated and complex investment products. The Company does not hold any securities containing sub-prime mortgages or any Fannie Mae or Freddie Mac equities.
Securities at September 30, 2009 totaled $273,085 as compared to $252,562 recorded at December 31, 2008. This represents an increase of $20,523 or 8.1%. To enhance the Company’s liquidity position, the increase in securities is attributed to reinvesting dollars from the loan portfolio in instruments with shorter durations.
At quarter-end, the Company held nine pooled trust preferred collateralized debt obligations (“CDOs”) involving three hundred issuers with a total book value of $16,494 and fair value of $12,509. The investments in trust-preferred securities receive principal and interest payments from several pools of subordinated capital debentures with each pool containing issuances by a minimum of twenty-three banks or, in a few instances, capital notes from insurance companies.
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
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Per guidance and rulings issued by the Financial Accounting Standards Board (“FASB”) regarding the recognition and presentation of Other-Than-Temporary Impairments, codified as ASC 320-10, the Company recorded for the third quarter 2009 a $3,132 pre-tax non-cash impairment charge based upon management’s determination that five trust preferred securities with an aggregate cost before impairment of $13,632 were other than temporarily impaired. This determination was based on the Company’s analysis which follows accounting pronouncements. The analysis showed an adverse change in estimated cash flows from these securities due to a significant number of deferrals in the third quarter. These values continued to decline as rating agencies downgraded the ratings of the securities. Per the accounting pronouncements, the Company calculated the difference between the present value of the cash flows expected to be collected and the cost basis, otherwise referred to as the credit loss.
Management has determined that the remaining $5,994 of trust-preferred securities is deemed to be only temporarily impaired at quarter-end. An unrealized loss of approximately $2,441 associated with all trust preferred securities has been recorded, on an after-tax basis, through stockholders’ equity as a component of other comprehensive income.
Should the economic climate deteriorate from current levels, the underlying credits may experience repayment difficulty, and the level of deferrals and defaults could increase requiring additional impairment charges in future quarters.
Loans.Outstanding loans totaled $921,340 at September 30, 2009 which compared to $1,004,390 at December 31, 2008, representing a decrease of $83,050 or 8.3% due to a combination of normal attrition, pay-downs, and loan charge-offs. The decrease was largely concentrated in commercial lending, commercial real estate, and construction land development and residential mortgages and part of the Company’s strategy to reduce balance sheet risk by shrinking the loan portfolio. Due to economic conditions, the number of loan applications are decreasing and many borrowers are trying to reduce the amount of debt they have outstanding in order to reduce their interest expense.
As of September 30, 2009, the Company had 16.5% of its total loan portfolio invested in real estate construction and development loans and 48.3% invested in commercial real estate (excluding construction and development).
The Company does not have any material direct exposure to sub-prime loan products as it has focused its real estate lending activities on providing traditional loan products to relationship borrowers in locally known markets.
Deposit.Total deposits equaled $1,061,543 at September 30, 2009 compared to $1,049,220 recorded at December 31, 2008 representing an increase of $12,323 or 1.2%. In-market deposits increased $47,588 due to an increase in certificates of deposits and savings accounts. Wholesale funding decreased $98,794 as $34,771 in maturing brokered certificates of deposits and $64,023 in FHLB advances were not replaced. Non-interest bearing deposits were 10.2% of total deposits at September 30, 2009 as compared to 11.3% recorded at December 31, 2008.
Goodwill.Goodwill was $15,880 as of September 30, 2009 as compared to $24,494 recorded at December 31, 2008. U.S. Generally Accepted Accounting Principles requires companies to perform an annual test for goodwill impairment. The Company performed its last annual goodwill impairment test as of December 31, 2008. Results for that test indicated no impairment since the fair value of the reporting unit exceeded its carrying value. Due primarily to the deterioration in the general economic environment, the resulting decline in the Company’s share price and market capitalization, and in conjunction with the decline in earnings and increase in nonperforming loans, the Company recorded in the second quarter of 2009 a non-cash charge of $8,451 for impairment of goodwill recorded at Centrue Bank. There was no additional goodwill impairment taken in the third quarter of 2009 and the Company will conduct its annual impairment test during the fourth quarter 2009. However, if the economy remains stressed and bank stocks remain out of favor, no assurance can be given that future impairment tests will not result in a charge to earnings.
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
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This non-cash impairment charge had no effect on liquidity, cash flows, operations, tangible book value, or regulatory capital ratios at Centrue Bank or Centrue Financial Corporation. The impairment charge represented 34.5% of the $24,494 in total goodwill (prior to impairment charge being taken) as of December 31, 2008 and the net goodwill after the impairment is now $15,880. The goodwill was primarily associated with the November 2006 merger of Centrue Financial Corporation and UnionBancorp, Inc.
Other Assets.Other assets equaled $25,486 at September 30, 2009 compared to $15,445 recorded at December 31, 2008, representing an increase of $10,041 or 39.4%. The majority of this increase was related to the deferred tax asset which has grown primarily due to the level of loan loss provisions incurred and the OTTI impairment on the CDO securities.
Nonperforming Assets
If a loan is placed on nonaccrual status, the loan does not generate current period income for the Company. 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. Amounts received on nonaccrual loans generally are applied first to principal and then to interest after all principal has been collected. 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. Other nonperforming assets consist of real estate acquired through loan foreclosures or other workout situations and other assets acquired through repossessions.
The classification of a loan as nonaccrual does not necessarily indicate that the principal is uncollectible, in whole or in part. The Company makes a determination as to collectability on a case-by-case basis. The Company 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.
Each of the Company’s loans is assigned a rating based upon an internally developed grading system. A separate credit administration department also reviews grade assignments on an ongoing basis. Management continuously monitors nonperforming, impaired and past due loans to prevent further deterioration of these loans. The Company has an independent loan review function which is separate from the lending function and is responsible for the review of new and existing loans.
The following table summarizes nonperforming assets and loans past due 90 days or more for the previous five quarters.
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | |
| | | | | |
| | Sep 30, | | Jun 30, | | Mar 31, | | Dec 31, | | Sep 30, | |
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Nonaccrual loans | | $ | 75,973 | | $ | 67,162 | | $ | 15,398 | | $ | 10,318 | | $ | 12,487 | |
Troubled Debt Restructurings | | | 684 | | | 584 | | | 75 | | | — | | | — | |
Loans 90 days past due and still accruing interest | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Total nonperforming loans | | | 76,657 | | | 67,746 | | | 15,473 | | | 10,318 | | | 12,487 | |
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Other real estate owned | | | 13,961 | | | 13,582 | | | 12,772 | | | 12,723 | | | 12,445 | |
| | | | | | | | | | | | | | | | |
Total nonperforming assets | | $ | 90,618 | | $ | 81,328 | | $ | 28,245 | | $ | 23,041 | | $ | 24,932 | |
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| | | | | | | | | | | | | | | | |
Nonperforming loans to total end of period loans | | | 8.32 | % | | 7.10 | % | | 1.57 | % | | 1.03 | % | | 1.28 | % |
Nonperforming assets to total end of period loans | | | 9.84 | % | | 8.53 | % | | 2.87 | % | | 2.29 | % | | 2.56 | % |
Nonperforming assets to total end of period assets | | | 6.77 | % | | 6.19 | % | | 2.06 | % | | 1.64 | % | | 1.87 | % |
Total nonperforming assets were $90,618, or 6.77% of total assets, at September 30, 2009. This included $684 in troubled debt restructurings, $13,961 of foreclosed assets and repossessed real estate, and $75,973 of nonaccrual loans. The majority of the other real estate owned is comprised of three parcels (commercial development, commercial real estate and residential real estate) which account for 91.1% of the balance. The Company updates these appraisals quarterly to ensure that they are properly carried at their fair market value. Approximately 67.1% of total nonaccrual loans at September 30, 2009 were concentrated in land, construction and commercial real estate credits. Additionally, 80.5% of total nonaccrual loans represented loans to 15 borrowers.
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
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The level of nonperforming loans (nonaccrual, 90 days past due, and troubled debt restructurings) at September 30, 2009 increased $8,911 or 13.2% from June 30, 2009 levels and $66,339 or 642.9% from the $10,318 that existed at December 31, 2008. The increase in nonperforming loans was concentrated in land development, construction and commercial real estate credits as a result of the deterioration of general economic conditions, the ongoing implementation of action plans on previously identified relationships, and the identification of several additional deteriorating relationships.
The level of nonperforming loans to total end of period loans was 8.32% at September 30, 2009, as compared to 7.10% at June 30, 2009 and 1.03% at December 31, 2008. As a result of the increase in nonperforming loans, the allowance to nonperforming loan coverage ratio was reported at 36.48% as of September 30, 2009 as compared to 145.55% as of December 31, 2008 and 39.70% as of June 30, 2009.
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 borrower’s projects in current economic environment. Currently, management has identified $32,060 of loans that are currently performing and on accrual status but due to economic conditions facing these borrowers, were classified by management as impaired. The new relationships identified during this period were $13,857. Of the $32,060, four large relationships make up 95% of these loans. Excluding nonperforming loans and loans that management has classified as impaired, there are other potential problem loans that totaled $5,531 at September 30, 2009 as compared to $9,181 at December 31, 2008. 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.
Allowance for Loan Losses
At September 30, 2009, the allowance for loan losses was $27,965 or 3.04% of total loans as compared to $26,894 or 2.82% at June 30, 2009 and $15,018 or 1.50% of total loans at December 31, 2008. In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things, the following:
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| • | general economic conditions; |
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| • | the type of loan being made; |
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| • | the creditworthiness of the borrower over the term of the loan; |
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| • | in the case of a collateralized loan, the quality of the collateral for such a loan. |
The allowance for loan losses represents the Company’s estimate of the allowance necessary to provide for probable incurred losses in the loan portfolio by analyzing the following:
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| • | ultimate collectibility of the loans in its portfolio; |
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| • | incorporating feedback provided by internal loan staff; |
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| • | the independent loan review function; |
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| • | results of examinations performed by regulatory agencies. |
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
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The Company regularly evaluates the adequacy of the allowance for loan losses. Commercial credits are graded using a system that is in compliance with regulatory classifications by the loan officers and the loan review function validates the officers’ grades. In the event that the loan review function downgrades the loan, it is included in the allowance analysis at the lower grade. To establish the appropriate level of the allowance, a sample of loans (including impaired and nonperforming loans) are reviewed and classified as to potential loss exposure.
Based on an estimation computed pursuant to the requirements published by accounting standards committees, the analysis of the allowance for loan losses consists of three components:
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| • | specific credit allocation established for expected losses resulting from analysis developed through specific credit allocations on individual loans for which the recorded investment in the loan exceeds its fair value; |
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| • | general portfolio allocation based on historical loan loss experience for each loan category; |
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| • | subjective reserves based on general economic conditions as well as specific economic factors in the markets in which the Company operates. |
The specific credit allocation component of the allowance for loan losses is based on a regular analysis of loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan losses is determined statistically using a loss migration analysis that examines historical loan loss experience. The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience. The general portfolio allocation element of the allowance for loan losses also includes consideration of the amounts necessary for concentrations and changes in portfolio mix and volume.
The allowance for loan losses is based on estimates, and ultimate losses will vary from current estimates. These estimates are reviewed monthly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the provision for loan losses. The methodology used to determine the adequacy of the allowance for loan losses is consistent with prior years.
Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential real estate and commercial development exposures. During the third quarter, many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry. This will likely remain to be extremely challenging throughout 2009 and into 2010. Should the economic climate deteriorate from current levels, more borrowers may experience repayment difficulty, and the level of nonperforming loans, charge-offs and delinquencies will rise requiring further increases in the provision for loan losses.
Liquidity
The Company has taken steps to strengthen its liquidity position during the first nine months of 2009 by reducing reliance on wholesale funding sources and reinvesting loan paydowns into securities. As total deposits increased $12,323 during this period, in-market deposits increased $47,095, while total out-of-market deposits decreased by $98,794 as FHLB advances decreased $64,023 and brokered deposits decreased $34,771. Our average cash and due from banks grew to $57,045 as of September 30, 2009 from $28,120 as of December 31, 2008. In comparison to September 30, 2008, it was $28,536.
The Company manages its liquidity position with the objective of maintaining sufficient funds to respond to the needs of depositors and borrowers and to take advantage of earnings enhancement opportunities. In addition to the normal inflow of funds from core-deposit growth together with repayments and maturities of loans and investments, the Company utilizes other short-term funding sources such as brokered time deposits, securities sold under agreements to repurchase, overnight federal funds purchased from correspondent banks and the acceptance of short-term deposits from public entities.
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
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The Company can borrow from the Federal Reserve Bank of Chicago’s discount window to meet short-term liquidity requirements. These borrowings are secured by commercial loans. At September 30, 2009, the Company maintained significant unused borrowing capacity from the Federal Reserve Bank discount window.
The Company is also a member of the Federal Home Loan Bank-Chicago (FHLB) and as such has advances from FHLB secured generally by residential mortgage loans.
The Company monitors and manages its liquidity position on several bases, which vary depending upon the time period. As the time period is expanded, other data is factored in, including estimated loan funding requirements, estimated loan payoffs, investment portfolio maturities or calls and anticipated depository buildups or runoffs.
The Company classifies all of its securities as available-for-sale, thereby maintaining significant liquidity. The Company’s liquidity position is further enhanced by structuring its loan portfolio interest payments as monthly and by the significant representation of retail credit and residential mortgage loans in the Company’s loan portfolio, resulting in a steady stream of loan repayments. In managing its investment portfolio, the Company provides for staggered maturities so that cash flows are provided as such investments mature.
The Company’s cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Cash flows provided by operating activities and investing activities offset by those used in financing activities, resulted in a net increase in cash and cash equivalents of $11,011 from December 31, 2008 to September 30, 2009.
During the first nine months of 2009, the Company experienced net cash inflows of $39,952 in investing activities due to maturities and calls on securities along with a reduction in loans and $15,766 in operating activities. In contrast, net cash outflows of $44,707 were used in financing activities largely due to the repayment on funding primarily FHLB advances.
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Financial Instruments
The Company has entered into contractual obligations and commitments and off-balance sheet financial instruments. The following tables summarize the Company’s contractual cash obligations and other commitments and off balance sheet instruments as of September 30, 2009.
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| | Payments Due by Period | |
| | | |
| | Within 1 | | | | | | After | | | |
| | Year | | 1 – 3 Years | | 4 – 5 Years | | 5 Years | | Total | |
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Contractual Obligations | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Short-term debt | | $ | — | | $ | — | | $ | — | | $ | 250 | | $ | 250 | |
Long-term debt | | | 667 | | | 2,366 | | | 2,097 | | | 5,500 | | | 10,630 | |
Certificates of deposit | | | 427,646 | | | 172,734 | | | 19,570 | | | 109 | | | 620,059 | |
Operating leases | | | 298 | | | 612 | | | 613 | | | 306 | | | 1,829 | |
Severance payments | | | 12 | | | — | | | — | | | — | | | 12 | |
Series B mandatory redeemable preferred stock | | | — | | | 268 | | | — | | | — | | | 268 | |
Subordinated debentures | | | — | | | — | | | — | | | 20,620 | | | 20,620 | |
FHLB advances | | | 5,201 | | | 51,000 | | | 15,061 | | | 5,000 | | | 76,262 | |
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| | | | | | | | | | | | | | | | |
Total contractual cash obligations | | $ | 433,824 | | $ | 226,980 | | $ | 37,341 | | $ | 31,785 | | $ | 729,930 | |
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Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
| |
| | | | | | | | | | | | | | | | |
| | Amount of Commitment Expiration Per Period | |
| | | |
| | Within 1
Year | | After
1 – 3 Years | | 4 – 5 Years | | 5 Years | | Total | |
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Off-Balance Sheet Financial Instruments | | | | | | | | | | | | | | | | |
Lines of credit | | $ | 138,855 | | $ | 6,813 | | $ | 959 | | $ | 22,351 | | $ | 168,978 | |
Standby letters of credit | | | 6,990 | | | 6,395 | | | — | | | 1,715 | | | 15,100 | |
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Total contractual cash obligations | | $ | 145,845 | | $ | 13,208 | | $ | 959 | | $ | 24,066 | | $ | 184,078 | |
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Capital Resources
Stockholders’ Equity
The Company is committed to managing capital for maximum shareholder benefit and maintaining strong protection for depositors and creditors. Stockholders’ equity at September 30, 2009 was $127,066, an increase of $11,158 or 9.63%, from December 31, 2008. The change in stockholders’ equity was largely the result of the Company’s participation in the U.S. Treasury Department’s Capital Purchase Program (the “CPP” program) partially offset by year-to-date losses incurred. Average quarterly equity as a percentage of average quarterly assets was 9.86% at September 30, 2009, compared to 8.82% at December 31, 2008. Book value per common share equaled $15.54 at September 30, 2009 compared to $19.14 at December 31, 2008. Tangible book value per common share equaled $11.60 at September 30, 2009 compared to $13.57 at December 31, 2008.
Stock Repurchase
Restrictions set forth in the U.S. Treasury CPP program prohibit the Company from repurchasing its common stock until the CPP proceeds are paid back.
Capital Measurements
As discussed in Note 8, the Company’s current debt agreements include a covenant that require the Bank to maintain the status of being well capitalized which is a ratio of 10.0% for total risk based capital. The Bank is expected to meet a minimum risk-based capital to risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss allowance that may be included in capital is limited to 1.25% of risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for the Company was 11.0% and 13.2%, respectively, at September 30, 2009. The Company is currently, and expects to continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Company’s capital ratios:
| | | | | | | | | | | | | | | | |
| | Sep 30, | | December 31, | | Minimum
Capital | | Well
Capitalized | |
| | 2009 | | 2008 | | 2007 | | Ratios | | Ratios | |
| | | | | | | | | | | |
Tier 1 risk-based capital | | $ | 115,700 | | $ | 105,581 | | $ | 101,831 | | | | | | | |
Tier 2 risk-based capital | | | 23,388 | | | 23,237 | | | 10,755 | | | | | | | |
| | | | | | | | | | | | | | | | |
Total capital | | $ | 139,088 | | $ | 128,818 | | $ | 112,586 | | | | | | | |
| | | | | | | | | | | | | | | | |
Risk-weighted assets | | $ | 1,056,502 | | $ | 1,058,969 | | $ | 1,102,602 | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital ratios: | | | | | | | | | | | | | | | | |
Tier 1 risk-based capital | | | 11.0 | % | | 10.0 | % | | 9.2 | % | | 4.0 | % | | 6.0 | % |
Total risk-based capital | | | 13.2 | % | | 12.2 | % | | 10.2 | % | | 8.0 | % | | 10.0 | % |
Leverage ratio | | | 8.9 | % | | 8.1 | % | | 7.7 | % | | 4.0 | % | | 5.0 | % |
|
Centrue Financial Corporation |
Item 2. Management’s Discussion and analysis of Financial Condition and results of Operations |
(In Thousands, Except Share and Per Share Data) |
| |
Based upon a regulatory accounting calculation standard that is not directly applicable under generally accepted accounting principles, the preceding ratios include a reduction of 70 basis points in the total risk-based and tier 1 risk-based capital ratios and 56 basis points in the leverage ratio related to a disallowance of $7,300, or approximately 49.4% of the Company’s deferred tax assets.
Recent Accounting Developments
See Note 11 to the Unaudited Consolidated Financial Statements for information concerning recent accounting developments.
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.
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could effect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any forward-looking statements.
Among the factors that could have an impact on the Company’s ability to achieve operating results and the growth plan goals are as follows:
| | |
| • | management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of the Company’s net interest income; |
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| • | fluctuations in the value of the Company’s investment securities; |
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| • | the Company’s ability to ultimately collect on any downgraded loan relationships; |
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| • | the Company’s ability to respond and adapt to economic conditions in our geographic market; |
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| • | the Company’s ability to adapt successfully to technological changes to compete effectively in the marketplace; |
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| • | credit risks and risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio and individual large loans; |
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| • | volatility of rate sensitive deposits; |
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| • | operational risks, including data processing system failures or fraud; |
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| • | asset/liability matching risks and liquidity risks; |
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| • | the ability to successfully acquire low cost deposits or funding; |
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| • | the ability to successfully execute strategies to increase noninterest income; |
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| • | the ability to successfully grow non-commercial real estate loans; |
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| • | the ability of the Company to continue to realize cost savings and revenue generation opportunities in connection with the synergies of centralizing operations; |
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| • | the ability to adopt and implement new regulatory requirements as dictated by the SEC, FASB or other rule-making bodies which govern our industry; |
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| • | changes in the general economic or industry conditions, nationally or in the communities in which the Company conducts business. |
|
Centrue Financial Corporation |
Item 3. Quantitative and Qualitative disclosures About Market Risk |
(In Thousands, Except Share and Per Share Data) |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Management
The Company performs a net interest income analysis as part of its asset/liability management practices. The net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 50, 100, and 200 basis point increase in market interest rates or a 50 basis point decrease in market rates. The interest rates scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. The tables below present the Company’s projected changes in net interest income for the various rate shock levels at September 30, 2009 and December 31, 2008, respectively:
| | | | | | | | | | | | | | |
| | | Change in Net Interest Income Over One Year Horizon | |
| | | | |
| | | September 30, 2009 | | December 31, 2008 | |
| | | | | | |
| | | Change | | Change | |
| | | | | | |
| | | $ | | % | | $ | | % | |
| | | | | | | | | | |
+ | 200 bp | | $ | (996 | ) | | (2.67% | ) | $ | 728 | | | 2.08 | % |
+ | 100 bp | | | (822 | ) | | (2.20 | ) | | 295 | | | 0.84 | |
+ | 50 bp | | | (357 | ) | | (0.96 | ) | | 166 | | | 0.47 | |
| | | | | | | | | | | | | | |
| Base | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
- | 50 bp | | | 1,203 | | | 3.22 | | | (179 | ) | | (0.51 | ) |
| | | | | | | | | | | | | | |
As shown above, the Company’s model at September 30, 2009, the effect of an immediate 200 basis point increase in interest rates would decrease the Company’s net interest income by $996 or 2.67%. The effect of an immediate 50 basis point decrease in rates would increase the Company’s net interest income by $1,203 or 3.22%. If rates increase approximately 250 basis points, there would be no impact to net interest income. Above a 250 basis point increase, there would be a positive impact to earnings.
For the Company’s credit agreements with its commercial customers, management instituted new underwriting standards that incorporated interest rate floors into the terms for many of its commercial relationships in the past three quarters to maximize the net interest margin during the time when market interest rates are at extremely low levels. While these floors have held income to a higher level in this low rate environment, they will also make it necessary for rates to climb to somewhat higher levels before the yield of the adjustable rate assets move above the floors and add significantly to interest income. Management has begun positioning the balance sheet to take advantage of the higher rates over the longer term as we began extending out our funding over the three and five year terms and thereby mitigate the impact on the margin of the limited income benefit of moderately rising rates. The Company continues to take advantage of the lower funding costs in reaction to FOMC rate reductions.
Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay 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.
|
Centrue Financial Corporation |
Item 4. Controls And Procedures |
(In Thousands, Except Share and Per Share Data) |
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Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic filings with the Securities and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives and, based on the evaluation described above, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at reaching that level of reasonable assurance.
There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. 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 effect on the Company’s financial statements.
Item 1A. Risk Factors
The Company did not experience any material changes in the Risk Factors during the Company’s most recently completed fiscal quarter. For specific information about the risks facing the Company refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits:
| | |
| 31.1 | Certification of Thomas A. Daiber, President and Principal Executive Officer, required by Rule 13a – 14(a). |
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| 31.2 | Certification of Kurt R. Stevenson, Senior Executive Vice President and Principal Financial and Accounting Officer required by Rule 13a – 14(a). |
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| 32.1(1) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s President and Principal Executive Officer. |
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| 32.2(1) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Senior Executive Vice President and Principal Financial and Accounting Officer. |
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| (1) | This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| CENTRUE FINANCIAL CORPORATION |
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Date: November 9, 2009 | By: | /s/ Thomas A. Daiber |
| | |
| | Thomas A. Daiber |
| | President and Principal Executive Officer |
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Date: November 9, 2009 | By: | /s/ Kurt R. Stevenson |
| | |
| | Kurt R. Stevenson |
| | Senior Executive Vice President and Principal Financial and Accounting Officer |
