UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

 

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2012

 

Commission File Number: 0-28846

 

Centrue Financial Corporation 

(Exact name of Registrant as specified in its charter)

 

Delaware   36-3145350
(State or other jurisdiction of   (I.R.S. Employer Identification
incorporation or organization)   Number)

  

7700 Bonhomme Avenue, St. Louis, Missouri 63105 

(Address of principal executive offices including zip code)

 

(314) 505-5500 

(Registrant’s telephone number, including area code)

 

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 S    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S    No £

 

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 S

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £    No S.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Shares outstanding at November 13, 2012
Common Stock, Par Value $1.00   6,063,441

  

 
 

 

Centrue Financial Corporation

Form 10-Q Index

September 30, 2012

 

      Page
PART I. FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
         
  Unaudited Consolidated Balance Sheets   1
         
  Unaudited Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)   2
         
  Unaudited Consolidated Statements of Cash Flows   4
         
  Notes to Unaudited Consolidated Financial Statements   6
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   37
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   52
       
Item 4. Controls and Procedures   53
       
PART II. OTHER INFORMATION    
       
Item 1. Legal Proceedings   54
       
Item 1A. Risk Factors   54
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   54
       
Item 3. Defaults Upon Senior Securities   54
       
Item 4. Mine Safety Disclosures   54
       
Item 5. Other Information   54
       
Item 6. Exhibits   55
       
SIGNATURES   56
           

 

 
 

 

Centrue Financial Corporation  

Part I Financial Information 

Item 1. Financial Statements 

Unaudited Consolidated Balance Sheets 

September 30, 2012 and December 31, 2011 (In Thousands, Except Share Data)

 

   September 30,   December 31, 
   2012   2011 
ASSETS          
Cash and cash equivalents  $79,423   $69,735 
Securities available-for-sale   181,496    228,836 
Restricted securities   7,028    9,150 
Loans   561,476    582,395 
Allowance for loan losses   (21,070)   (21,232)
Net loans   540,406    561,163 
Bank-owned life insurance   32,146    31,412 
Mortgage servicing rights   1,997    2,089 
Premises and equipment, net   23,098    23,754 
Other intangible assets, net   4,551    5,264 
Other real estate owned   28,601    29,667 
Other assets   6,079    6,914 
           
Total assets  $904,825   $967,984 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities          
Deposits:          
Non-interest-bearing  $118,733   $134,137 
Interest-bearing   663,864    714,501 
Total deposits   782,597    848,638 
Federal funds purchased and securities sold under agreements to repurchase   16,669    18,036 
Federal Home Loan Bank advances   30,057    23,058 
Notes payable   10,345    10,440 
Series B mandatory redeemable preferred stock   268    268 
Subordinated debentures   20,620    20,620 
Other liabilities   15,562    14,355 
Total liabilities   876,118    935,415 
           
Commitments and contingent liabilities        
           
Stockholders’ equity          
Series A Convertible Preferred Stock (aggregate liquidation preference of $2,762)   500    500 
Series C Fixed Rate, Cumulative Perpetual Preferred Stock (aggregate liquidation preference of $32,668)   31,894    31,429 
Common stock, $1 par value, 15,000,000 shares authorized; 7,453,555 shares issued at September 30, 2012 and December 31, 2011   7,454    7,454 
Surplus   74,581    74,558 
Accumulated deficit   (65,834)   (60,064)
Accumulated other comprehensive income   1,989    569 
    50,584    54,446 
Treasury stock, at cost, 1,390,114 shares at September 30, 2012 and December 31, 2011   (21,877)   (21,877)
Total stockholders’ equity   28,707    32,569 
           
Total liabilities and stockholders’ equity  $904,825   $967,984 

 

 See Accompanying Notes to Unaudited Financial Statements

 

1.
 

 

Centrue Financial Corporation  

Unaudited Consolidated Statements Of Income (Loss) 

And Comprehensive Income (Loss) 

Three Months and Nine Months Ended September 30, 2012 and 2011 

(In Thousands, Except Per Share Data)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
                 
Interest income                    
Loans  $6,850   $8,297   $20,839   $26,414 
Securities                    
Taxable   748    1,047    2,432    3,132 
Exempt from federal income taxes   105    158    344    550 
Federal funds sold and other   23    40    99    108 
Total interest income   7,726    9,542    23,714    30,204 
                     
Interest expense                    
Deposits   973    1,937    3,515    6,637 
Federal funds purchased and securities sold under agreements to repurchase   10    11    31    32 
Federal Home Loan Bank advances   192    347    568    1,114 
Series B mandatory redeemable preferred stock   4    4    12    12 
Subordinated debentures   157    277    745    821 
Notes payable   92    89    280    270 
Total interest expense   1,428    2,665    5,151    8,886 
                     
Net interest income   6,298    6,877    18,563    21,318 
Provision for loan losses   5,750    2,400    8,475    9,900 
Net interest income after provision for loan losses   548    4,477    10,088    11,418 
                     
Noninterest income                    
Service charges   1,128    1,232    3,217    3,483 
Mortgage banking income   777    341    1,719    1,050 
Electronic banking services   550    552    1,640    1,644 
Bank-owned life insurance   246    256    734    755 
Securities gains   684        1,398    379 
Total other-than-temporary impairment losses               (499)
Portion of loss recognized in other comprehensive income (before taxes)                
Net impairment on securities               (499)
Gain (loss) on sale of OREO   40    (12)   465    (60)
Gain (loss) on sale of other assets       (16)       47 
Other income   404    213    1,520    575 
    3,829    2,566    10,693    7,374 

 

 See Accompanying Notes to Unaudited Financial Statements

 

2.
 

 

 Centrue Financial Corporation

Unaudited Consolidated Statements Of Income (Loss)

And Comprehensive Income (Loss)

Three Months and Nine Months Ended September 30, 2012 and 2011

(In Thousands, Except Per Share Data)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Noninterest expense                    
Salaries and employee benefits   3,697    3,505    10,981    10,598 
Occupancy, net   681    712    1,965    2,136 
Furniture and equipment   235    407    902    1,267 
Marketing   115    56    284    183 
Supplies and printing   67    67    200    208 
Telephone   180    229    534    637 
Data processing   396    381    1,063    1,120 
FDIC insurance   515    323    1,544    1,997 
Loan processing and collection costs   337    495    1,427    1,597 
OREO valuation adjustment   640    4,473    1,435    5,770 
Amortization of intangible assets   238    250    713    789 
Other expenses   1,383    1,499    4,257    4,472 
    8,484    12,397    25,305    30,774 
                     
Income (loss) before income taxes  $(4,107)  $(5,354)  $(4,524)  $(11,982)
Income tax expense (benefit)   (788)   (606)   (788)   (1,352)
Net income (loss)  $(3,319)  $(4,748)  $(3,736)  $(10,630)
                     
Preferred stock dividends   529    505    1,569    1,500 
Net income (loss) for common stockholders  $(3,848)  $(5,253)  $(5,305)  $(12,130)
                     
Basic earnings (loss) per common share  $(0.63)  $(0.87)  $(0.87)  $(2.01)
Diluted earnings (loss) per common share  $(0.63)  $(0.87)  $(0.87)  $(2.01)
                     
                     
Total comprehensive income (loss):                    
Net income (loss)  $(3,319)  $(4,748)  $(3,736)  $(10,630)
Change in unrealized gains (losses) on available for sale securities for which a portion of an other-than-temporary impairment has been recognized in earnings               (80)
Change in unrealized gains (losses) on other securities available for sale   1,727    1,075    3,718    3,411 
Reclassification adjustment:                    
Net impairment loss recognized in earnings               499 
(Gains) recognized in earnings   (684)       (1,398)   (379)
Net unrealized gains (loss)   1,043    1,075    2,320    3,451 
Tax expense (benefit)   900    416    900    919 
Other comprehensive income (loss)   143    659    1,420    2,532 
Total comprehensive income (loss)  $(3,176)  $(4,089)  $(2,316)  $(8,098)

 

 See Accompanying Notes to Unaudited Financial Statements

 

3.
 

 

Centrue Financial Corporation 

Unaudited Consolidated Statements Of Cash Flows 

Nine Months Ended September 30, 2012 and 2011 (In Thousands)

  

   Nine Months Ended 
   September 30, 
   2012   2011 
Cash flows from operating activities          
Net income (loss)  $(3,736)  $(10,630)
Adjustments to reconcile net income (loss) to net cash provided by operating activities          
Depreciation   1,042    1,406 
Amortization of intangible assets   713    789 
Amortization of mortgage servicing rights, net   470    341 
Amortization of bond premiums, net   2,071    1,666 
Mortgage servicing rights valuation adjustment       89 
Income tax valuation adjustment   1,369    3,896 
Share based compensation   23    54 
Provision for loan losses   8,475    9,900 
Provision for deferred income taxes   (1,369)   (3,896)
Earnings on bank-owned life insurance   (734)   (755)
Other than temporary impairment, securities       499 
OREO valuation allowance   1,435    5,770 
Securities sale (gains), net   (1,398)   (379)
(Gain) on sale of other assets, net       (47)
(Gain) loss on sale of OREO   (465)   60 
(Gain) on sale of loans   (1,562)   (787)
Proceeds from sales of loans held for sale   63,119    31,651 
Origination of loans held for sale   (61,025)   (31,149)
Change in assets and liabilities          
(Increase) decrease in other assets   373    4,166 
Increase (decrease) in other liabilities   (1,026)   (2,227)
Net cash provided by operating activities   7,775    10,417 
Cash flows from investing activities          
Proceeds from paydowns of securities available for sale   38,536    31,946 
Proceeds from calls and maturities of securities available for sale   10,310    18,000 
Proceeds from sales of securities available for sale   48,381    18,419 
Purchases of securities available for sale   (48,189)   (83,212)
Redemption of Federal Home Loan Bank stock   2,088     
Redemption of Federal Reserve Bank stock   110    1,319 
Purchase of Federal Reserve Bank stock   (76)    
Net decrease (increase) in loans   3,738    64,458 
(Purchase) disposal of premises and equipment   (386)   (245)
Proceeds from sale of OREO   7,905    6,152 
Net cash from investing activities   62,417    56,837 

 

 See Accompanying Notes to Unaudited Financial Statements

 

4.
 

 

Centrue Financial Corporation 

Unaudited Consolidated Statements Of Cash Flows 

Nine Months Ended September 30, 2012 and 2011 (In Thousands)

  

   Nine Months Ended 
   September 30, 
   2012   2011 
Cash flows from financing activities          
Net increase (decrease) in deposits   (66,041)   (68,988)
Net increase (decrease) in federal funds purchased          
and securities sold under agreements to repurchase   (1,367)   5,176 
Repayment of advances from the Federal Home Loan Bank   (67,001)   (33,001)
Proceeds from advances from the Federal Home Loan Bank   74,000    10,000 
Payments on notes payable   (95)   (90)
Net cash used in financing activities   (60,504)   (86,903)
Net increase (decrease) in cash and cash equivalents   9,688    (19,649)
Cash and cash equivalents          
Beginning of period   69,735    82,945 
End of period  $79,423   $63,296 
Supplemental disclosures of cash flow information          
Cash payments for          
Interest  $5,003   $9,018 
Income taxes   10    19 
Transfers from loans to other real estate owned   8,011    19,151 

 

 See Accompanying Notes to Unaudited Financial Statements

 

5.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

  

Note 1. Summary of Significant Accounting Policies

 

Centrue Financial Corporation is a bank holding company organized under the laws of the State of Delaware. 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 Company and the Bank provide a full range of banking services to individual and corporate customers located in markets extending from the far western and southern suburbs of the Chicago metropolitan area across Central Illinois down to the metropolitan St. Louis area. These services include demand, time, and savings deposits; business and consumer lending; and mortgage banking. Additionally, 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 and nonfinancial institutions providing financial services. Additionally, the Company and the Bank are subject to regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

 

Basis of presentation

 

The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities and other-than-temporary impairment of securities, the determination of the allowance for loan losses and valuation of other real estate owned.

 

For further information with respect to significant accounting policies followed by the Company in the preparation of its consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The consolidated financial statements include the accounts of the Company and Centrue Bank. Intercompany balances and transactions have been eliminated in consolidation and certain 2011 amounts have been reclassified to conform to the 2012 presentation. The annualized results of operations during the three and nine months ended September 30, 2012 are not necessarily indicative of the results expected for the year ending December 31, 2012. All financial information in the following tables is in thousands (000s), except share and per share data. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included.

  

Note 2. Earnings Per Share

 

Basic earnings per share for the three and nine months ended September 30, 2012 and 2011 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share for the same periods were computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of the stock options and warrants. Computations for basic and diluted earnings per share are provided as follows:

 

6.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 2. Earnings Per Share (Continued)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Basic Earnings (Loss) Per Common Share                
Net income (loss) for common shareholders  $(3,848)  $(5,253)  $(5,305)  $(12,130)
Weighted average common shares outstanding   6,063    6,048    6,063    6,048 
Basic earnings per common share  $(0.63)  $(0.87)  $(0.87)  $(2.01)
Diluted Earnings Per Common Share                    
Weighted average common shares outstanding   6,063    6,048    6,063    6,048 
Add: dilutive effect of assumed exercised stock options                
Add:  dilutive effect of assumed exercised common stock warrants                
Weighted average common and dilutive potential shares outstanding   6,063    6,048    6,063    6,048 
Diluted earnings (loss) per common share  $(0.63)  $(0.87)  $(0.87)  $(2.01)

 

There were 274,927 options and 508,320 warrants outstanding for the three and nine months ended September 30, 2012 and 464,038 options and 508,320 warrants outstanding for the three and nine months ended September 30, 2011 that were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price and therefore, were anti-dilutive. In addition, the Company’s convertible preferred stock was not included in the computation of diluted earnings per share as it was anti-dilutive.

 

Note 3. Securities

 

The primary strategic objective related to the Company’s securities portfolio is to assist with liquidity and interest rate risk management. The fair value of securities classified as available-for-sale was $181.5 million at September 30, 2012 compared to $228.8 million at December 31, 2011. The carrying value of securities classified as restricted (Federal Reserve and Federal Home Loan Bank stock) was $7.0 million at September 30, 2012 compared to $9.2 million at December 31, 2011. The Company does not have any securities classified as trading or held-to-maturity.

 

The following tables represent the fair value of available-for-sale securities and the related, gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at September 30, 2012 and December 31, 2011:

 

   September 30, 2012 
       Gross   Gross     
   Fair   Unrealized   Unrealized   Amortized 
   Value   Gains   Losses   Cost 
U.S. government agencies  $7,069   $73   $   $6,996 
States and political subdivisions   16,243    764        15,479 
U.S. government agency residential mortgage-backed securities   119,130    3,145        115,985 
Collateralized residential mortgage obligations:                    
Agency   23,336    234        23,102 
Private label   1,083    69        1,014 
Equity securities   2,683    242        2,441 
Collateralized debt obligations:                    
Single issue   2,064            2,064 
Pooled   7,888    1,172    (1,165)   7,881 
Corporate   2,000            2,000 
   $181,496   $5,699   $(1,165)  $176,962 

  

7.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

  

Note 3. Securities (Continued)

 

   December 31, 2011 
       Gross   Gross     
   Fair   Unrealized   Unrealized   Amortized 
   Value   Gains   Losses   Cost 
U.S. government agencies  $3,019   $88   $   $2,931 
States and political subdivisions   18,125    649    (1)   17,477 
U.S. government agency residential mortgage-backed securities   177,539    2,790    (101)   174,850 
Collateralized residential mortgage obligations:   15,527    229        15,298 
Agency   1,550    72    (7)   1,485 
Private label   2,530    134        2,396 
Equity securities                    
Collateralized debt obligations:                    
Single issue   2,064            2,064 
Pooled   6,600    53    (1,574)   8,121 
Corporate   1,882        (118)   2,000 
   $228,836   $4,015   $(1,801)  $226,622 

  

The amounts below include the activity for available-for-sale securities related to sales, maturities and calls:

  

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Proceeds from calls and maturities  $ 8,000   $ 6,080   $ 10,310   $ 18,000 
Proceeds from sales   30,312        48,381    18,419 
Realized gains   686        1,400    379 
Realized losses   (2)       (2)    
Net impairment loss recognized in earnings               (499)
Tax benefit (provision) related to net realized gains and losses   (265)       (542)   46 

  

The following table represents securities with unrealized losses not recognized in income presented by the length of time individual securities have been in a continuous unrealized loss position:

  

   September 30, 2012 
   Less than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loss 
                         
Collateralized debt obligations: pooled  $   $   $2,206   $(1,165)  $2,206   $(1,165)
Total temporarily impaired  $   $   $2,206   $(1,165)  $2,206   $(1,165)

  

8.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

  

 Note 3. Securities (Continued)

  

   December 31, 2011 
   Less than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loss 
                         
State and political subdivisions  $524   $(1)  $   $   $524   $(1)
U.S. government agency residential mortgage-backed securities   30,895    (101)           30,895    (101)
Collateralized residential mortgage obligations: private label   731    (7)           731    (7)
Collateralized debt obligations:  pooled           6,497    (1,574)   6,497    (1,574)
Corporate   1,882    (118)           1,882    (118)
Total temporarily impaired  $34,032   $(227)  $6,497   $(1,574)  $40,529   $(1,801)

  

The fair values of securities classified as available-for-sale at September 30, 2012, by contractual maturity, are shown as follows. Securities not due at a single maturity date, including mortgage-backed securities, collateralized mortgage obligations, and equity securities are shown separately.

  

   Amortized   Fair 
   Cost   Value 
Due in one year or less  $2,156   $2,167 
Due after one year through five years   16,204    16,653 
Due after five years through ten years   5,488    5,847 
Due after ten years   10,572    10,597 
U.S. government agency residential mortgage-backed securities   115,985    119,130 
Collateralized residential mortgage obligations   24,116    24,419 
Equity   2,441    2,683 
   $176,962   $181,496 

 

The following table presents a rollforward of the credit losses recognized in earnings for the three month period ended September 30, 2012 and 2011:

  

   2012   2011 
Beginning balance, July 1,  $20,597   $20,861 
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized        
Additions/Subtractions          
Amounts realized for securities sold during the period        
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis        
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security        
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized        
           
Ending balance, September 30,  $20,597   $20,861 

 

9.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 3. Securities (Continued)

 

The following table presents a rollforward of the credit losses recognized in earnings for the nine month period ended September 30, 2012 and 2011:

  

   2012   2011 
Beginning balance, January 1,  $20,597   $20,362 
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized        
Additions/Subtractions          
Amounts realized for securities sold during the period        
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis        
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security        
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized       499 
           
Ending balance, September 30,  $20,597   $20,861 

  

See Note 9 on Fair Value for additional information about our analysis on the security portfolio related to the fair value and other-than-temporary impairment disclosures of these instruments.

 

Note 4. Loans

 

The major classifications of loans follow:

  

   Aggregate Principal Amount 
   September 30, 2012   December 31, 2011 
         
Commercial  $58,444   $63,982 
Agricultural & AGRE   42,371    39,128 
Construction, land & development   32,431    42,008 
Commercial RE   296,495    288,068 
1-4 family mortgages   129,245    146,767 
Consumer   2,490    2,442 
Total Loans  $561,476   $582,395 
Allowance for loan losses   (21,070)   (21,232)
Loans, net  $540,406   $561,163 

  

There were $0.2 million and $1.8 million of loans held for sale at September 30, 2012 and December 31, 2011, respectively.

 

The credit quality indicator utilized by the Company to internally analyze the loan portfolio is the internal risk rating. Internal risk ratings of 0 to 5 are considered pass credits, a risk rating of a 6 is special mention, a risk rating of a 7 is substandard, and a risk rating of an 8 is doubtful. Loans classified as pass credits have no identified material weaknesses and are performing as agreed. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

10.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

  

Note 4. Loans (Continued)

 

The following table presents the commercial loan portfolio by internal risk rating:

 

September 30, 2012

                         
    Commercial           Commercial Real Estate     
Internal Risk Rating   Closed-end   Lines of Credit   Agriculture & AG RE   Construction, Land & Development   Owner-Occupied   Non-Owner Occupied   Total 
 1-2   $1,019   $288   $4,498   $116   $3,230   $625   $9,776 
 3    2,610    8,914    14,682    1,064    10,248    13,687    51,205 
 4    7,871    10,613    15,463    2,306    78,495    62,581    177,329 
 5    9,051    8,813    7,602    11,494    18,726    54,822    110,508 
 6    461    3,864        2,050    7,060    13,943    27,378 
 7    3,704    1,236    126    14,476    15,954    17,124    52,620 
 8                925            925 
 Total   $24,716   $33,728   $42,371   $32,431   $133,713   $162,782   $429,741 

 

December 31, 2011

                          
    Commercial           Commercial Real Estate     
Internal Risk Rating   Closed-end   Lines of Credit   Agriculture & AG RE   Construction, Land & Development   Owner-Occupied   Non-Owner Occupied   Total 
 1-2   $716   $449   $4,833   $3,649   $3,489   $647   $13,783 
 3    2,938    7,708    15,649    1,034    8,971    17,168    53,468 
 4    12,989    13,533    14,323    1,566    68,045    44,665    155,121 
 5    10,405    5,322    3,517    6,200    20,518    51,580    97,542 
 6    3,374    3,892    741    5,497    10,868    19,900    44,272 
 7    1,434    1,222    65    24,062    19,720    22,497    69,000 
 8                             
 Total   $31,856   $32,126   $39,128   $42,008   $131,611   $156,457   $433,186 

 

The retail residential loan portfolio is generally unrated. Delinquency is a typical factor in adversely risk rating a credit to a special mention or substandard. The following table presents the retail residential loan portfolio by internal risk rating:

  

   Residential -- 1-4 family 
   Senior Lien   Jr. Lien & Lines of Credit   Total 
September 30, 2012               
Unrated  $68,285   $47,917   $116,202 
Special mention   2,580    943    3,523 
Substandard   8,831    689    9,520 
Doubtful            
Total  $79,696   $49,549   $129,245 

 

11.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

  

Note 4. Loans (Continued)

 

   Residential -- 1-4 family 
   Senior Lien   Jr. Lien & Lines of Credit   Total 
December 31, 2011               
Unrated  $83,969   $49,498   $133,467 
Special mention   907    904    1,811 
Substandard   10,013    1,161    11,174 
Doubtful   315        315 
Total  $95,204   $51,563   $146,767 

 

An analysis of the activity in the allowance for loan losses for the three months ended September 30, 2012 and 2011 follows:

  

   Commercial   Agriculture & AG RE   Construction, Land & Development  Commercial RE   1-4 Family Residential  Consumer   Total
September 30, 2012                             
Beginning Balance  $1,478   $267   $ 3,793   $9,765   $ 2,883   $48   $ 18,234 
Charge-offs       (128)  (2,150)   (191)  (714)      (3,183)
Recoveries   1    19      239      1   269 
Provision   503    (48)  2,234    1,264   1,792    5   5,750 
Ending Balance  $1,982   $110   $ 3,879   $11,077   $ 3,968   $54   $ 21,070 

 

   Commercial   Agriculture & AG RE   Construction, Land & Development  Commercial RE   1-4 Family Residential  Consumer   Total
September 30, 2011                                   
Beginning Balance  $1,751   $386   $ 6,310   $13,009   $ 2,867   $35   $ 24,358 
Charge-offs   (151)   (21)    (3,018)   (961)    (194)   (9)    (4,354)
Recoveries   17    3     451    12     426    1     910 
Provision   509    (362)    1,372    702     170    9     2,400 
Ending Balance  $2,126   $6   $ 5,115   $12,762   $ 3,269   $36   $ 23,314 

 

An analysis of the activity in the allowance for loan losses for the nine months ended September 30, 2012 and 2011 follows:

 

   Commercial   Agriculture & AG RE   Construction, Land & Development  Commercial RE   1-4 Family Residential  Consumer   Total
September 30, 2012                             
Beginning Balance  $1,590   $5   $ 4,811   $11,680   $ 3,090   $56   $ 21,232 
Charge-offs       (215)  (3,243)   (4,120)  (1,792)   (6)  (9,376)
Recoveries   1    62   288    370   14    4   739 
Provision   391    258   2,023    3,147   2,656       8,475 
Ending Balance  $1,982   $110   $ 3,879   $11,077   $ 3,968   $54   $ 21,070 

 

 

12.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

 Note 4. Loans (Continued)

 

   Commercial   Agriculture & AG RE   Construction, Land & Development  Commercial RE   1-4 Family Residential  Consumer   Total
September 30, 2011                             
Beginning Balance  $1,634   $337   $ 12,500   $13,721   $ 3,273   $46   $ 31,511 
Charge-offs   (391)   (674)  (9,852)   (6,975)  (1,489)   (35)  (19,416)
Recoveries   35    6   551    243   462    22   1,319 
Provision   848    337   1,916    5,773   1,023    3   9,900 
Ending Balance  $2,126   $6   $ 5,115   $12,762   $ 3,269   $36   $ 23,314 

 

The following is an analysis on the balance in the allowance for loan losses and the recorded investment in impaired loans by portfolio segment based on impairment method as of September 30, 2012 and December 31, 2011:

 

September 30, 2012  Commercial   Agriculture & AG RE   Construction, Land & Development   Commercial RE   1-4 Family Residential   Consumer   Total 
Allowance for loan losses:                                   
Loans individually evaluated for impairment  $1,510   $41   $2,744   $6,852   $2,327   $2   $13,476 
Loans collectively evaluated for impairment   472    69    1,135    4,225    1,641    52    7,594 
Total ending allowance balance:  $1,982   $110   $3,879   $11,077   $3,968   $54   $21,070 
                                    
Loan balances:                                   
Loans individually evaluated for impairment  $4,712   $126   $15,401   $29,746   $9,510   $4   $59,499 
Loans collectively evaluated for impairment   53,732    42,245    17,030    266,749    119,735    2,486    501,977 
Loans with an allowance recorded:  $58,444   $42,371   $32,431   $296,495   $129,245   $2,490   $561,476 

  

December 31, 2011  Commercial   Agriculture & AG RE   Construction, Land & Development   Commercial RE   1-4 Family Residential   Consumer   Total 
Allowance for loan losses:                                   
Loans individually evaluated for impairment  $715   $   $2,228   $5,211   $1,591   $5   $9,750 
Loans collectively evaluated for impairment   875    5    2,583    6,469    1,499    51    11,482 
Total ending allowance balance:  $1,590   $5   $4,811   $11,680   $3,090   $56   $21,232 
                                    
Loan balances:                                   
Loans individually evaluated for impairment  $2,463   $65   $24,062   $36,141   $10,563   $5   $73,299 
Loans collectively evaluated for impairment   61,519    39,063    17,946    251,927    136,204    2,437    509,096 
Loans with an allowance recorded:  $63,982   $39,128   $42,008   $288,068   $146,767   $2,442   $582,395 

  

13.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

Troubled Debt Restructurings:

 

The Company had troubled debt restructurings (“TDRs”) of $3.9 million and $7.1 million as of September 30, 2012 and December 31, 2011, respectively. Specific reserves of $0.1 million and $0.95 million were allocated to TDRs as of September 30, 2012 and December 31, 2011, respectively. At September 30, 2012, nonaccrual TDR loans were $3.8 million, as compared to $6.0 million at December 31, 2011. September 30, 2012 there were $0.1 million of TDRs on accrual status compared to December 31, 2011, when $1.1 million was on accrual. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs as of September 30, 2012.

 

At September 30, 2012, the Company held loans whose terms had been modified as troubled debt restructuring. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan to a below market rate or the payment modification to interest only. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 6 months to 16 months. During the nine month period ending September 30, 2012, there was one TDR added in the amount of $0.9 million during the first quarter and two TDRs added in the third quarter in the amount $0.1 million. The TDR from the first quarter was subsequently removed in the second quarter as the collateral was sold, specific provision charged-off and the remaining loan balance paid-off. The TDRs added during the three month period ending September 30, 2012, have specific reserves of $0.02 million allocated to them.

  

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three or nine month period ending September 30, 2012.

 

The Company evaluates loan modifications to determine if the modification constitutes a troubled debt restructure. A loan modification constitutes a troubled debt restructure if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its loans with the Company’s debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting guidelines. TDRs are separately identified for impairment disclosures. If a loan is considered to be collateral dependent loan, the TDR is reported, net, at the fair value of the collateral.

 

14.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

The following tables present data on impaired loans:

  

September 30, 2012  Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest Income Recognized   Cash Basis Interest Recognized 
Loans with no related allowance recorded:                             
Commercial                              
Closed-end  $181   $195   $   $87   $2   $2 
Line of credit   65    328        39    1    1 
Agricultural & AG RE               39         
Construction, land & development   2,721    8,472        4,120         
CRE - all other                              
Owner occupied   4,755    4,857        4,655    26    23 
Non-owner occupied   4,532    4,532        5,466    224    200 
1-4 family residential                              
Senior lien   1,113    1,568        1,214    5    4 
Jr. lien & lines of credit   261    337        358    7    7 
Consumer   2    2        1         
Subtotal   13,630    20,291        15,979    265    237 
                               
Loans with an allowance recorded:                             
Commercial                              
Closed-end  $3,295   $3,423   $1,510   $2,105   $104   $98 
Line of credit   1,171    1,171        1,185        (10)
Agricultural & AG RE   126    126    41    62    1    1 
Construction, land & development   12,680    24,763    2,744    15,367    16    14 
CRE - all other                              
Owner occupied   11,075    11,608    4,496    11,970    448    355 
Non-owner occupied   9,384    9,608    2,356    10,099    129    104 
1-4 family residential                              
Senior lien   7,708    8,362    2,001    7,779    184    173 
Jr. lien & lines of credit   428    575    326    488    8    8 
Consumer   2    2    2    3         
Subtotal   45,869    59,638    13,476    49,058    890    743 
Total  $59,499   $79,929   $13,476   $65,037   $1,155   $980 
                               
Commercial  $49,985   $69,083   $11,147   $55,194   $951   $788 
Residential  $9,510   $10,842   $2,327   $9,839   $204   $192 
Consumer  $4   $4   $2   $4   $   $ 

 

15.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

  

December 31, 2011  Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest Income Recognized   Cash Basis Interest Recognized 
Loans with no related allowance recorded:                         
Commercial                              
Closed-end  $28   $28   $   $53   $1   $1 
Line of credit   45    308        550         
Agricultural & AG RE   65    682        62    3    3 
Construction, land & development   4,453    14,583        10,066    58    58 
CRE - all other                              
Owner occupied   4,738    5,417        6,284    44    41 
Non-owner occupied   7,749    8,656        11,933    442    416 
1-4 family residential                              
Senior lien   1,108    1,576        2,198    37    37 
Jr. lien & lines of credit   683    799        697    17    16 
Consumer                        
Subtotal   18,869    32,049        31,843    602    572 
                               
Loans with an allowance recorded:                         
Commercial                              
Closed-end  $1,213   $1,213   $449   $1,380   $84   $84 
Line of credit   1,177    1,177    266    2,337    25    14 
Agricultural & AG RE               1,039         
Construction, land & development   19,609    30,053    2,228    19,749    (26)   (27)
CRE - all other                              
Owner occupied   14,851    15,204    3,678    13,152    850    773 
Non-owner occupied   8,803    11,142    1,533    11,632    383    353 
1-4 family residential                              
Senior lien   8,396    8,580    1,391    8,062    693    677 
Jr. lien & lines of credit   375    482    200    386    9    9 
Consumer   6    6    5    4         
Subtotal   54,430    67,857    9,750    57,741    2,018    1,883 
Total  $73,299   $99,906   $9,750   $89,584   $2,620   $2,455 
                               
Commercial  $62,731   $88,463   $8,154   $78,237   $1,864   $1,716 
Residential  $10,562   $11,437   $1,591   $11,343   $756   $739 
Consumer  $6   $6   $5   $4   $   $ 

  

Due to the economic conditions facing many of its customers, the Company determined that there were $12.8 million and $28.6 million of loans that were classified as impaired but were considered to be performing loans at September 30, 2012 and December 31, 2011, respectively.

 

16.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

The following tables represent activity related to loan portfolio aging:

  

September 30, 2012  30 - 59 Days Past Due   60 - 89 Days Past Due   90 Days Past Due or Nonaccrual   Total Past Due   Current   Total Loans 
Commercial                              
Closed-end  $39   $   $1,974   $2,013   $22,703   $24,716 
Line of credit   81        1,216    1,297    32,431    33,728 
Agricultural & AG RE   70        126    196    42,175    42,371 
Construction, land & development   145        15,083    15,228    17,203    32,431 
CRE - all other                              
Owner occupied   1,110    839    13,661    15,610    118,103    133,713 
Non-owner occupied   752        6,232    6,984    155,798    162,782 
1-4 family residential                              
Senior lien   854    624    7,820    9,298    70,398    79,696 
Jr. lien & lines of credit   349    21    558    928    48,621    49,549 
Consumer   3            3    2,487    2,490 
Total  $3,403   $1,484   $46,670   $51,557   $509,919   $561,476 

 

December 31, 2011  30 - 59 Days Past Due   60 - 89 Days Past Due   90 Days Past Due or Nonaccrual   Total Past Due   Current   Total Loans 
Commercial                              
Closed-end  $1,183   $   $95   $1,278   $30,578   $31,856 
Line of credit       43    1,222    1,265    30,861    32,126 
Agricultural & AG RE           65    65    39,063    39,128 
Construction, land & development       472    23,738    24,210    17,798    42,008 
CRE - all other                             
Owner occupied   2,477    1,357    8,633    12,467    119,144    131,611 
Non-owner occupied   3,207    3,000    6,572    12,779    143,678    156,457 
1-4 family residential                             
Senior lien   2,832    691    3,588    7,111    88,093    95,204 
Jr. lien & lines of credit   738    151    806    1,695    49,868    51,563 
Consumer   10        4    14    2,428    2,442 
Total  $10,447   $5,714   $44,723   $60,884   $521,511   $582,395 

 

The Company did not hold any loans as of September 30, 2012 or December 31, 2011 that were ninety or more days past due and still on accrual status.

  

17.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

The following table represents data for nonaccrual loans:

 

   For the period ended 
   September 30, 2012   December 31, 2011 
Commercial          
Closed-end  $1,974   $95 
Line of credit   1,216    1,222 
Agricultural & AG RE   126    65 
Construction, land & development   15,083    23,738 
CRE - all other          
Owner occupied   13,661    8,633 
Non-owner occupied   6,232    6,572 
1-4 family residential          
Senior lien   7,820    3,588 
Jr. lien & lines of credit   558    806 
Consumer       4 
Total  $46,670   $44,723 

  

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

Note 5. Share Based Compensation

 

In April 2003, the Company adopted the 2003 Option Plan. Under the 2003 Option Plan, as amended on April 24, 2007, nonqualified options, incentive stock options, restricted stock and/or stock appreciation rights may be granted to employees and outside directors of the Company and its subsidiaries to purchase the Company’s common stock at an exercise price to be determined by the Executive and Compensation committee. Pursuant to the 2003 Option Plan, 570,000 shares of the Company’s unissued common stock have been reserved and are available for issuance upon the exercise of options and rights granted under the 2003 Option Plan. The options have an exercise period of seven to ten years from the date of grant. There are 66,000 shares available to grant under this plan.

 

A summary of the status of the option plans as of September 30, 2012, and changes during the period ended on those dates is presented below:

  

   September 30, 2012 
   Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Life  Aggregate Intrinsic Value 
Outstanding at January 1, 2012   328,438   $16.17         
Granted                
Exercised                
Forfeited   (53,511)   16.96         
Outstanding at end of period   274,927   $16.01   2.5 years  $ 
Vested or expected to vest   273,820   $16.03   2.5 years  $ 
Options exercisable at period end   250,327   $16.42   2.5 years  $ 

  

18.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 5. Share Based Compensation (Continued)

 

Options outstanding at September 30, 2012 and December 31, 2011 were as follows:

 

    Outstanding  Exercisable 
Range of Exercise Prices   Number   Weighted-Average Remaining Contractual Life  Number   Weighted-Average Exercise Price 
September 30, 2012:                   
 $  5.24 - $  13.00    73,500   3.4 years   56,100   $7.18 
   13.24 -     18.63    92,327   1.8 years   85,127    17.25 
   19.03 -     23.31    109,100   2.6 years   109,100    20.53 
      274,927   2.5 years   250,327   $16.42 
December 31, 2011:                   
 $  5.24 - $  13.00    75,500   4.2 years   49,400   $6.89 
   13.24 -     18.63    124,838   2.0 years   110,438    16.43 
   19.03 -     23.31    128,100   3.0 years   124,500    20.77 
      328,438   2.9 years   284,338   $16.67 

 

There were no options exercised for the periods ended September 30, 2012 and 2011. The compensation cost that has been charged against income for the stock options portion of the Option Plans was $0.01 million and $(0.005) million for the three months ended September 30, 2012 and 2011, and $0.02 million and $0.05 million for the nine months ended September 30, 2012 and 2011, respectively.

 

There were no stock options granted during the 2012 and 2011 periods.

 

Unrecognized stock option compensation expense related to unvested awards (net of estimated forfeitures) for the remainder of 2012 and beyond is estimated as follows:

  

    Amount 
 October, 2012 - December, 2012   $10 
 2013    18 
 2014     
 Total   $28 

 

Note 6. Contingent Liabilities and Other Matters

 

Neither the Company nor its subsidiary is involved in any pending legal proceedings other than routine legal proceedings occurring in the normal course of business, which, in the opinion of management, in the aggregate, are not material to the Company’s consolidated financial condition.

  

Note 7. Segment Information

 

The Company’s segment information provided below focuses on its three primary lines of business (Segment(s)): Retail Banking, Commercial Banking and Treasury. 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 each Segment as if it operated on a stand-alone basis. Thus, each Segment, in addition to its direct revenues, expenses, assets and liabilities, includes an allocation of shared support function expenses and corporate overhead. All Segments also include funds transfer adjustments to appropriately reflect the cost of funds on loans made, funding credits on deposits generated, and the cost of maintaining adequate liquidity. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of our financial statements from the December 31, 2011 10-K.

  

19.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 7. Segment Information (Continued)

 

Since there are no comprehensive standards for management accounting that are equivalent to accounting principles generally accepted in the United States of America, the information presented may not necessarily be 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.

 

The Retail Banking Segment provides retail banking services including direct and indirect lending, checking, savings, money market and certificate of deposit (“CD”) accounts, safe deposit rental, automated teller machines and other traditional and electronic commerce retail banking services to individual customers through the Bank’s branch locations. The Retail Banking Segment also provides a variety of mortgage lending products to meet customer needs. The majority of the mortgage loans it originates are sold to a third party mortgage services company, which provides private label loan processing and servicing support for both loans sold and loans retained by the Bank.

 

The Commercial Banking Segment provides commercial banking services including lending, business checking and deposits, treasury management and other traditional as well as electronic commerce commercial banking services to middle market and small business customers through the Bank’s branch locations.

  

The Treasury segment is responsible for managing the investment portfolio, acquiring wholesale funding for loan activity and assisting in the management of the Company’s liquidity and interest rate risk. Information reported internally for performance assessment follows:

  

   Three Months Ended 
   September 30, 2012 
   Retail   Commercial   Treasury   Other   Total 
   Segment   Segment   Segment   Operations   Company 
Net interest income (loss)  $1,786   $4,894   $(495)  $113   $6,298 
Other revenue   2,396    362    684    387    3,829 
Other expense   2,577    1,450    44    3,899    7,970 
Noncash items                         
Depreciation   216    1        59    276 
Provision for loan losses   1,797    3,953            5,750 
Other intangibles   238                238 
Net allocations   815    2,443    200    (3,458)    
Income tax benefit   (29)   (846)   87        (788)
Segment profit (loss)  $(1,432)  $(1,745)  $(142)  $   $(3,319)
                          
Segment assets  $153,649   $459,138   $205,319   $86,719   $904,825 

  

20.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

 Note 7. Segment Information (Continued)

  

   Three Months Ended 
   September 30, 2011 
   Retail   Commercial   Treasury   Other   Total 
   Segment   Segment   Segment   Operations   Company 
Net interest income (loss)  $1,918   $5,476   $(411)  $(106)  $6,877 
Other revenue   2,111    229        226    2,566 
Other expense   2,607    5,129    45    3,906    11,687 
Noncash items                         
Depreciation   270            190    460 
Provision for loan losses   179    2,221            2,400 
Other intangibles   250                250 
Net allocations   1,200    2,489    287    (3,976)    
Income tax benefit   13    (597)   (22)       (606)
Segment profit (loss)  $(490)  $(3,537)  $(721)  $   $(4,748)
                          
Segment assets  $178,774   $496,275   $267,110   $66,794   $1,008,953 

 

   Nine Months Ended 
   September 30, 2012 
   Retail   Commercial   Treasury   Other   Total 
   Segment   Segment   Segment   Operations   Company 
Net interest income (loss)  $5,485   $14,492   $(1,362)  $(52)  $18,563 
Other revenue   6,386    1,797    1,398    1,112    10,693 
Other expense   7,590    4,009    132    11,819    23,550 
Noncash items                         
Depreciation   689    1        352    1,042 
Provision for loan losses   2,656    5,819            8,475 
Other intangibles   713                713 
Net allocations   2,969    7,413    729    (11,111)    
Income tax benefit   (29)   (846)   87        (788)
Segment profit (loss)  $(2,717)  $(107)  $(912)  $   $(3,736)
                          
Segment assets  $153,649   $459,138   $205,319   $86,719   $904,825 

  

   Nine Months Ended 
   September 30, 2011 
   Retail   Commercial   Treasury   Other   Total 
   Segment   Segment   Segment   Operations   Company 
Net interest income (loss)  $5,922   $17,293   $(1,537)  $(360)  $21,318 
Other revenue   6,008    681    (120)   805    7,374 
Other expense   7,960    7,555    132    12,932    28,579 
Noncash items                         
Depreciation   818    1        587    1,406 
Provision for loan losses   1,024    8,876            9,900 
Other intangibles   789                789 
Net allocations   3,976    8,096    1,002    (13,074)    
Income tax benefit   (14)   (1,181)   (157)       (1,352)
Segment profit (loss)  $(2,623)  $(5,373)  $(2,634)  $   $(10,630)
                          
Segment assets  $178,774   $496,275   $267,110   $66,794   $1,008,953 

 

 

21.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 8. Borrowed Funds and Debt Obligations

 

As of September 30, 2012, the Company has $10.3 million outstanding per a loan agreement dated March 31, 2008. This original agreement was entered into with Bank of America and consisted of three credit facilities: a secured revolving line of credit, a secured term facility, and a subordinated debt. In February 2009, the loan agreement on the revolving line of credit was amended resulting in an aggregate principal amount of $20.3 million. The first credit facility consisted of a $10.0 million secured revolving line of credit which matured on June 30, 2009 and was not renewed by Bank of America. The second credit facility consists of a $0.3 million secured term facility, which will mature in March 31, 2015. The third credit facility consists of $10.0 million in subordinated debt, which also matures in March 31, 2015. On December 14, 2009, Bank of America transferred to Cole Taylor Bank all rights, title, interest in to and under the loan agreements dated March 31, 2008. Repayment of each of the remaining two credit facilities is interest only on a quarterly basis, with the principal amount of the loan due at maturity. The term credit facility is secured by a pledge of the stock of the Bank. The subordinated debt credit facility is unsecured and is intended to qualify as Tier II capital for regulatory purposes. However, the amount included in Tier II capital has been reduced by 60% as of September 30, 2012 due to a sub-debt phase-out provision and will be further reduced by 20% in each of the next two years. The outstanding balance of the debt agreements was $10.3 million as of September 30, 2012 and December 31, 2011. The Company requires regulatory approval in order to make the quarterly interest payments under our debt agreements as described in Note 13.

 

On March 7, 2011, the Company entered into an amendment with the lender, which modified the covenant relating to capitalization at the Company and Bank level so that the Company returned to full compliance with the terms of its credit agreement as of December 31, 2010. The amendment contains customary covenants, including but not limited to, the Company and the Bank’s maintenance of its status as adequately capitalized and the Bank’s minimum loan loss reserves to total loans of 3.00%. As of December 31, 2011, the Company was in compliance with all covenants, with the exception of the Tier 1 leverage ratio, and all payments remain current. A covenant waiver was received from the lender as of December 31, 2011; the loan covenants were revised through an amendment effective quarter-end March 31, 2012 and each quarter thereafter to maintain the adequately capitalized levels for the Bank and remove the holding company capital requirements. As of September 30, 2012, the Company and Bank are in compliance with the covenants of the amended agreement.

 

Additionally, the Company has a note outstanding to an individual with an imputed interest rate of 5.25% maturing October 24, 2012 from a prior acquisition. The balance as of September 30, 2012 and December 31, 2011 was $0.1 million and $0.2 million, respectively.

 

Note 9. Fair Value

 

The Company measures, monitors, and discloses certain of its assets and liabilities on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

  

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Fair value guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three broad levels based on the reliability of the input assumptions. The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements and the categorization of where an asset or liability falls within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are defined as follows:

 

Level 1 – Unadjusted quoted prices for identical assets or liabilities traded in active markets.

 

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

 

22.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

Securities

 

Available for Sale Securities. The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). If the securities could not be priced using quoted market prices, observable market activity or comparable trades, the financial market was considered not active and the assets were classified as Level 3. The fair values of Level 3 investment securities are determined by the Finance group who provide default and scenario assumptions to the Company’s Chief Investment Officer (CIO) who performs the modeling for the analysis and submits for review by the Chief Financial Officer (CFO). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Ratings agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

 

Pooled Trust Preferred Collateralized Debt Obligations (“CDO”). The assets included in Level 3 are CDOs. Over the past few years, the decline in the level of observable inputs and market activity for trust preferred CDOs by the measurement date was significant and resulted in unreliable external pricing. As such, the Company uses an internal other-than-temporary impairment (“OTTI”) evaluation model to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of each CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust-preferred securities. Assumptions used in the model include expected future default rates and prepayments.

 

The Company assumes no recoveries on defaults and treats all interest payment deferrals as defaults. In addition, we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Company’s note class.

 

Each issuer in the tranche was analyzed using the Fitch ratings for the quarter and key financial data so that the issuer in each tranche can be divided between a pool of “performing” companies and “under-performing” companies. A factor is applied to the under-performing company for each quarter to project additional defaults and deferrals to be factored into the cash flow model. Three internal scenarios were developed that had different assumptions regarding the impact of the economic environment on additional defaults and deferrals for the upcoming quarters. On average, the additional deferrals for a specific CDO that were factored in to our calculation were approximately 8% of the performing balance of the instrument across the three scenarios. All of the additional deferrals for the three scenarios are factored in to the cash flow for each tranche. A discount factor to be applied to the London Interbank Offered Rate (“LIBOR”) was developed for each specific tranche and incorporated to arrive at the discount rate for the CDO. The factor applied ranged from 200 basis points to 600 basis points based on the rating of the CDO and its gross-up factor for risk based capital. These rates were applied to calculate the net present value of the cash flows. The results of the three net present value calculations were weighted based on their likelihood of occurring. The scenarios were weighted 35%, 47% and 18%.

 

Finally, an independent valuation of our portfolio was obtained. This was weighted as the final overall step to arrive at our valuation for September 30, 2012 using 55% for the internal weighting and 45% for the external one. Due to market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

 

23.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

At September 30, 2012, the Company held five pooled trust preferred CDOs with an amortized cost of $7.9 million. These securities were rated high quality (A3 and above) at inception, but at September 30, 2012, these securities were rated as Ca, which are defined as highly speculative and/or default, with some recovery; and C, which is the lowest rating. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies.

 

The Company performed an analysis including evaluation for OTTI for each of the five CDOs.  During the third quarter of 2012, our model indicated no OTTI was needed for credit impairment. Management has determined that the remaining CDOs are deemed to be only temporarily impaired at quarter-end due to the projected cash flows adjusted for the possible further deterioration is sufficient to return the outstanding principal balance with interest at the stated rate.

 

Private Label CMOs. Private label CMOs were also evaluated using management’s internal analysis process. These securities were rated high quality (A3 and above) at inception and are primarily supported by prime collateral, although the RAST Series security has some alt-a collateral support. During the third quarter of 2012, our model indicated no OTTI on these CMOs, with an aggregate cost basis of $1.0 million.

 

Single Issue Trust Preferred. During the third quarter of 2010, the Company purchased $3.8 million of single-issue trust preferred securities that are classified as available for sale. With respect to these securities, the Company looks at rating agency actions, payment history, the capital levels of the banks and the financial performance as filed in regulatory reports. As of September 30, 2012, the aggregate cost basis on these securities was $2.1 million as there have been calls on these securities in previous quarters.

 

The Company’s unrealized losses on other securities relate primarily to its investment in CDO securities. The decline in fair value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. Due to the illiquidity in the market, it is unlikely that the Company would be able to recover its investment in these securities if the Company sold the securities at this time. The Company does not intend to sell these securities nor is it more likely than not the Company will be required to sell these securities before its anticipated recovery.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following table summarizes, by measurement hierarchy, the various assets and liabilities of the Company that are measured at fair value on a recurring basis:

  

   Carrying   Quoted Prices in Active Markets For Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 
September 30, 2012                    
U.S. government agencies  $7,069   $   $7,069   $ 
State and political subdivisions   16,243        16,243     
U.S. government agency residential mortgage-backed securities   119,130        119,130     
Collateralized mortgage obligations:                    
Agency   23,336        23,336     
Private Label   1,083            1,083 
Equities   2,683        2,683     
Collateralized debt obligations:                    
Single Issue   2,064        2,064     
Pooled   7,888            7,888 
Corporate   2,000        2,000     
Available-for-sale securities  $181,496   $   $172,525   $8,971 

 

24.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

  

   Carrying   Quoted Prices in Active Markets For Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs 
   Amount   (Level 1)   (Level 2)   (Level 3) 
December 31, 2011                    
U.S. government agencies  $3,019   $   $3,019   $ 
State and political subdivisions   18,125        18,125     
U.S. government agency residential mortgage-backed securities   177,539        177,539     
Collateralized mortgage obligations:                    
Agency   15,527        15,527     
Private Label   1,550            1,550 
Equities   2,530        2,530     
Collateralized debt obligations:                    
Single Issue   2,064        2,064     
Pooled   6,600            6,600 
Corporate   1,882        1,882     
Available-for-sale securities  $228,836   $   $220,686   $8,150 

 

There were no transfers between Level 1 and Level 2 during the nine months ended 2012 or all of 2011.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

 

The following table reconciles the beginning and ending balances of the assets of the Company that are measured at fair value on a recurring basis using significant unobservable inputs. There currently are no liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.

 

   Securities Available for Sale 
   2012   2011 
   CDOs   CMOs   CDOs   CMOs 
Beginning balance, July 1  $6,977   $1,280   $5,470   $3,004 
                     
Transfers into Level 3                
Total gains or losses (realized/unrealized) included in earnings                    
Security impairment                
Payment received   (75)   (155)   (1)   (955)
Other changes in fair value               1 
Included in other comprehensive income   986    (42)   294    128 
Ending Balance, September 30  $7,888    1,083    5,763    2,178 

  

25.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

 Note 9. Fair Value (Continued)

 

   Securities Available for Sale 
   2012   2011 
   CDOs   CMOs   CDOs   CMOs 
Beginning balance, January 1  $6,600   $1,550   $4,422   $4,936 
                     
Transfers into Level 3                
Total gains or losses (realized/unrealized) included in earnings                    
Security impairment           (499)    
Payment received   (240)   (472)   14    (3,117)
Other changes in fair value   1    1    3    2 
Included in other comprehensive income   1,527    4    1,823    357 
Ending Balance, September 30  $7,888   $1,083   $5,763   $2,178 

 

The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2012.

 

   Fair Value   Valuation Technique  Unobservable Inputs  Range
(Weighted Average)
 
               
Collateralized mortgage obligations  $1,083   Collateral coverage  Probability of loss   0% - 40%  (34%) 
           Coverage ratio   5x – 5x  (5x) 
                 
Collateralized debt obligations  $7,888   Discounted cash flow  Collateral default rate   4% - 30%  (8%) 
           Discount rate   3% - 5%  (3%) 

 

The significant unobservable inputs used in the fair value measurement of the Company’s collateralized mortgage obligations are probability of loss and a specified coverage ratio. Significant increases/(decreases) in any of the those inputs in isolation would result in a significantly lower/(higher) fair value measurement.

 

The significant unobservable inputs used in the fair value measurement of the Company’s collateralized debt obligations are probabilities of specific-issuer defaults and deferrals. Significant increases in specific-issuer default assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default and deferral assumptions would result in a higher fair value measurement.

 

26.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

Assets Measured at Fair Value on a Non-Recurring Basis

 

The following table summarizes, by measurement hierarchy, financial assets of the Company that are measured at fair value on a non-recurring basis:

  

   Carrying   Quoted Prices in Active Markets For Identical Assets   Significant Other Observable Inputs  Significant Unobservable Inputs 
   Amount   (Level 1)   (Level 2)  (Level 3) 
September 30, 2012                  
Impaired loans                  
Commercial                  
Closed end  $1,785   $   $   $1,785 
Line of credit   1,171          1,171 
Agricultural & AGRE   85          85 
CRE - construction, land & development   9,936          9,936 
CRE - all other                  
Owner occupied   6,579          6,579 
Non-owner occupied   7,028          7,028 
1-4 family residential                  
Senior lien   5,707          5,707 
Junior lien & lines of credit   102          102 
Consumer              

  

   Carrying   Quoted Prices in Active Markets For Identical Assets   Significant Other Observable Inputs  Significant Unobservable Inputs 
   Amount   (Level 1)   (Level 2)  (Level 3) 
                
OREO property                  
Commercial                  
Closed end  $   $   $   $ 
Line of credit              
Agricultural & AGRE   261          261 
CRE - construction, land & development   7,963          7,963 
CRE - all other                  
Owner occupied   2,100          2,100 
Non-owner occupied   3,755          3,755 
1-4 family residential                  
Senior lien   72          72 
Junior lien & lines of credit              
Consumer              

  

27.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

  

   Carrying   Quoted Prices in Active Markets For Identical Assets   Significant Other Observable Inputs  Significant Unobservable Inputs 
   Amount   (Level 1)   (Level 2)  (Level 3) 
December 31, 2011                  
Impaired loans                  
Commercial                  
Closed end  $764   $   $   $764 
Line of credit   911          911 
Agricultural & AGRE              
CRE - construction, land & development   17,381          17,381 
CRE - all other                  
Owner occupied   11,173          11,173 
Non-owner occupied   7,270          7,270 
1-4 family residential                  
Senior lien   7,005          7,005 
Junior lien & lines of credit   175          175 
Consumer   1          1 

  

   Carrying   Quoted Prices in Active Markets For Identical Assets   Significant Other Observable Inputs  Significant Unobservable Inputs 
   Amount   (Level 1)   (Level 2)  (Level 3) 
                
OREO property                  
Commercial                  
Closed end  $   $   $   $ 
Line of credit              
Agricultural & AGRE   261          261 
CRE - construction, land & development   3,312          3,312 
CRE - all other                  
Owner occupied   4,082          4,082 
Non-owner occupied   829          829 
1-4 family residential                  
Senior lien   285          285 
Junior lien & lines of credit   81          81 
Consumer              

 

At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

28.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

  

Impaired loans had a carrying amount of $45.9 million with specific loan loss allocations of $13.5 million in third quarter 2012, resulting in additional provision for loan losses of $8.9 million for the period. At December 31, 2011, impaired loans had a carrying amount of $54.4 million with a specific loan loss allocation of $9.7 million resulting in an additional provision for loan losses of $9.8 million for the year ended December 31, 2011. The majority of our impaired loans are collateralized by real estate.

 

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

OREO properties measured at fair value, less costs to sell, had a net carrying amount of $14.2 million which is made up of the outstanding balance of $22.8 million, net of a valuation allowance of $8.6 million at September 30, 2012, resulting in a write-down of $0.6 million for the third quarter of 2012 and a write-down of $1.4 million for the nine month period ending September 30, 2012. This compares to 2011 when OREO properties with a carrying value of $16.6 million were written down to their fair value of $8.8 million, which resulted in a charge to earnings of $7.8 million during the year.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2012:

  

   Fair Value     Valuation Technique   Unobservable Inputs Range
(Weighted Average)
                  
Impaired loans        Sales comparison approach   Adjustment for differences between comparable sales    
Commercial                  
Closed End  $1,785             20% - 100%  (30%)
Line of Credit   1,171             20% - 100%  (30%)
Agricultural & AGRE   85             10% - 55%  (12%)
CRE - Construction, land & development   9,936             10% - 55%  (14%)
CRE - all other                  
Owner occupied   6,579             10% - 55%  (18%)
Non-owner occupied   7,028             10% - 55%  (18%)
1-4 family residential                  
Senior lien   5,707             10% - 50%  (16%)
Junior lien & lines of credit   102             20% - 100%  (51%)
Consumer                0% - 60%  (0%)

  

29.
 

  

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

  

   Fair Value   Valuation Technique  Unobservable Inputs  Range
(Weighted Average)
 
              
OREO property       Sales comparison approach  Adjustment for differences between comparable sales   
Commercial              
Closed End  $        
Line of Credit             
Agricultural & AGRE   261         10%  (10%)
CRE - Construction, land & development   7,963         8% - 55%  (17%) 
CRE - all other              
Owner occupied   2,100         15% - 55%  (15%) 
Non-owner occupied   3,755         10% - 55%  (13%)
1-4 family residential              
Senior lien   72         6% - 55%  (12%)
Junior lien & lines of credit             
Consumer           

 

The Methods and Assumptions Used to Estimate Fair Value of Financial Instruments

 

The carrying amount is the estimated fair value for cash, cash equivalents, due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on the methods described above.

 

The carrying value and fair value of the subordinated debentures issued to capital trusts are estimated using market data for similarly risk weighted items to value them. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. The fair value of loans held for sale is based on market quotes. The fair value of debt and redeemable stock is based on current rates for similar financing. It was not practicable to determine the fair value of the restricted securities due to restrictions placed on its transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.

 

30.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

  

       Fair Value measurements at September 30, 2012 Using 
   Carrying Value   Level 1   Level 2   Level 3   Total 
                     
Financial assets                         
Cash and cash equivalents  $79,423   $74,423   $5,000   $   $79,423 
Securities   181,496        172,525    8,971    181,496 
Restricted securities   7,028                NA 
Net loans   540,406            527,836    527,836 
Accrued interest receivable   3,003        813    2,190    3,003 
Financial liabilities                         
Deposits  $782,597   $   $784,872   $   $784,872 
Federal funds purchased and securities sold under agreements to repurchase   16,669        16,669        16,669 
Federal Home Loan Bank advances   30,057        31,333        31,333 
Notes payable   10,345            10,375    10,375 
Subordinated debentures   20,620            12,792    12,792 
Series B mandatorily redeemable preferred stock   268        268        268 
Accrued interest payable   4,189        762    3,427    4,189 

  

The estimated fair values of the Company’s financial instruments at December 31, 2011 are as follows:

  

   December 31, 2011 
   Carrying Value   Fair Value 
         
Financial assets          
Cash and cash equivalents  $69,735   $69,735 
Securities   228,836    228,836 
Restricted securities   9,150    NA 
Net loans   561,163    540,612 
Accrued interest receivable   3,123    3,123 
Financial liabilities          
Deposits  $848,638   $849,141 
Federal funds purchased and securities sold under agreements to repurchase   18,036    18,036 
Federal Home Loan Bank advances   23,058    24,604 
Notes payable   10,440    9,321 
Subordinated debentures   20,620    14,023 
Series B mandatorily redeemable preferred stock   268    268 
Accrued interest payable   4,041    4,041 

 

Other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. In addition, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures.

 

31.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

These include, among other items, the estimated earning potential of core deposit accounts, the earnings potential of loan servicing rights, customer goodwill and similar items.

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

(a) Cash and Cash Equivalents

 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2.

 

(b) Loans

 

Fair values of loans, excluding loans held for sale, are estimated as follows: Fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously and carry a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

(c) Deposits

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

(d) Short-term Borrowings

 

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

 

(e) Other Borrowings

 

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 or Level 3 classification.

 

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

(f) Accrued Interest Receivable/Payable

 

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification depending on the level its associated asset/liability is classified at.

 

(g) Off-balance Sheet Instruments

 

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

  

32.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 10. Participation in the Treasury Capital Purchase Program

 

On January 9, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“U.S. Treasury”), pursuant to which the Company sold 32,668 shares of newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share and liquidation value $1,000 per share (the “Series C Preferred Stock”) and also issued warrants (the “Warrants”) to the U.S. Treasury to acquire an additional 508,320 shares of the Company’s common stock at an exercise price of $9.64 per share.

 

The Series C Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series C Preferred Stock may be redeemed by the Company at any time subject to consultation with the Federal Reserve. The Series C Preferred Stock is not subject to any contractual restrictions on transfer.

 

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Common Stock will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share $0.14 declared on the Common Stock prior to October 28, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock and (b) the date on which the Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of the Preferred Stock to third parties.

 

On August 10, 2009, the Company announced that it would defer scheduled dividend payments on the Series C, fixed rate cumulative, perpetual preferred stock. Under the Securities Purchase Agreement entered into with the U.S. Treasury under the TARP program, if a company defers six dividend payments payable to the U.S. Treasury, the U.S. Treasury has the right to appoint up to two directors to its board of directors. As of June 30, 2012 the two directors had been appointed. The Company is accruing the dividends in accordance to GAAP and the terms of the program. At September 30, 2012 and December 31, 2011 the amounts accrued are $6.0 million and $4.6 million, respectively. The Company may, at its option with regulatory concurrence, redeem the deferred securities at their liquidation preference plus accrued and unpaid dividends at any time.

 

Both the preferred securities and the warrant are accounted for as components of regulatory Tier I capital. Per accounting guidelines, the Company is accreting the discount for this instrument.

 

The U.S. Treasury has notified the Company that the preferred securities and the warrant may be placed into pooled “Dutch Auctions” after October 9, 2012.

 

Note 11. Intangible Assets

 

Acquired intangible assets were as follows as of the quarter ending:

  

  September 30, 2012      December 31, 2011
     Gross Carrying Amount  Accumulated Amortization  Gross Carrying Amount  Accumulated Amortization
Amortized intangible assets:                    
Core deposit intangibles  $14,124   $10,154   $14,124   $9,441 
Missouri charter   581        581     
Total  $14,705   $10,154   $14,705   $9,441 

 

Aggregate amortization expense was $0.2 million and $0.3 million for the three months ended September 30, 2012 and 2011. Aggregate amortization expense was $0.7 million and $0.8 million for the nine months ended September 30, 2012 and 2011.

 

33.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 11. Intangible Assets (Continued)

 

Estimated amortization expense for subsequent periods is as follows:

  

      
 Remaining quarters in 2012   $238 
 2013    951 
 2014    951 
 2015    951 
 2016    879 
 Thereafter     

 

Note 12. 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 (2) the allowance for loan losses and (3) fair value adjustments or impairment write-downs related to securities.

 

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.

 

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 adjustment was necessary as of December 31, 2011 and September 30, 2012. A three year cumulative loss position and continued near-term losses represent negative evidence that cannot be overcome with future taxable income.

 

Below is a summary of items included in the deferred tax inventory as of September 30, 2012 and December 31, 2011:

  

   Balance at   Balance at     
   9/30/2012   12/31/2011   Change 
Allowance for loan loss  $8,177   $8,239   $(62)
Impairment on securities portfolio   8,095    8,095     
Net operating loss carryforwards   21,160    19,388    1,772 
Valuation adjustments on OREO property   3,348    3,020    328 
Basis adjustment form merger   (1,281)   (1,467)   186 
Mortgage servicing rights   (775)   (810)   35 
Securities available-for-sale   (1,760)   (859)   (901)
All other   (46)   (57)   11 
Net deferred tax before allowance  $36,918   $35,549   $1,369 
Valuation allowance   (36,918)   (35,549)   (1,369)
Net deferred tax assets  $   $   $ 

 

34.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 13. Regulatory Matters

  

   Actual   To Be Adequately Capitalized  To Be Well Capitalized Under Prompt Corrective Action Provisions 
   Amount   Ratio   Amount   Ratio  Amount   Ratio 
As of September 30, 2012                            
Total capital (to risk-weighted assets)                            
Centrue Financial  $54,209    8.4%  $51,720   8.0%   N/A    N/A 
Centrue Bank   66,378    10.5    50,789   8.0   63,486    10.0 
Tier I capital (to risk-weighted assets)                            
Centrue Financial  $30,873    4.8   $25,860   4.0   N/A    N/A 
Centrue Bank   58,280    9.2    25,395   4.0   38,092    6.0 
Tier I leverage ratio (to average assets)                            
Centrue Financial  $30,873    3.4   $36,500   4.0   N/A    N/A 
Centrue Bank   58,280    6.4    36,412   4.0   45,515    5.0 

 

   Actual   To Be Adequately Capitalized  To Be Well Capitalized Under Prompt Corrective Action Provisions 
   Amount   Ratio   Amount   Ratio  Amount   Ratio 
As of December 31, 2011                            
Total capital (to risk-weighted assets)                            
Centrue Financial  $61,151    9.0%  $54,184   8.0%   N/A    N/A 
Centrue Bank   68,637    10.3    53,409   8.0   66,762    10.0 
Tier I capital (to risk-weighted assets)                            
Centrue Financial  $37,194    5.5   $27,092   4.0   N/A    N/A 
Centrue Bank   60,133    9.0    26,705   4.0   40,057    6.0 
Tier I leverage ratio (to average assets)                            
Centrue Financial  $37,194    3.7   $39,768   4.0   N/A    N/A 
Centrue Bank   60,133    6.1    39,681   4.0   49,602    5.0 

 

On December 18, 2009, the Bank entered into an Agreement with the Federal Reserve Bank of Chicago (“FRB”) and the Illinois Department of Financial & Professional Regulation (“IDFPR”). The Agreement describes commitments made by the Bank to address and strengthen banking practices relating to credit risk management practices; improving loan underwriting and loan administration; improving asset quality by enhancing the Bank’s position on problem loans through repayment, additional collateral or other means; reviewing and revising as necessary the Bank’s allowance for loan and lease losses policy; maintaining sufficient capital at the Bank, implementing an earnings plan and comprehensive budget to improve and sustain the Bank’s earnings; and improving the Bank’s liquidity position and funds management practices. The Bank has implemented enhancements to its processes to address the matters identified by the FRB and the IDFPR. The Company is in compliance with all the requirements specified in the agreement except for the Capital Plan. Management continues to aggressively pursue capital raising initiatives to comply with this provision; however, until a more definitive capital raise initiative is developed, the Company will continue to be held in noncompliance with this provision. In the meantime, the Agreement results in the Bank’s ineligibility for certain actions and expedited approvals without the prior written consent and approval of the FRB and the IDFPR. These actions include, among other things, the payment of dividends by the Bank to the Company, the Company cannot pay dividends on its common or preferred shares, payments of interest or principal on subordinated debentures, note payable to Cole Taylor, and Trust Preferred securities, the Company may not increase its debt level and the Company cannot redeem or purchase any shares of its stock.

 

35.
 

 

Centrue Financial Corporation  

Notes to Unaudited Consolidated Financial Statements 

(Table Amounts In Thousands, Except Share Data)

 

Note 13. Regulatory Matters (Continued)

 

The Company has incurred net losses of $3.7 million for the first nine months of 2012 and $10.6 million for the full year 2011 due to loan losses and reduced net interest income. The Company is subject to ongoing monitoring by its regulatory agencies and requires regulatory approval in order to make the quarterly interest payments to Cole Taylor under our debt agreements. The Company has sufficient cash at September 30, 2012 and management believes regulatory approval will be obtained for the remaining interest payments due in 2012. Should the Company and/or its bank subsidiary capital levels fall below “adequately capitalized”, regulatory actions may be taken including requiring us to have higher capital requirements than those required by Prompt Corrective Action regulations. At September 30, 2012 and December 31, 2011, the Company had a Tier 1 leverage ratio of 3.4% and 3.7% which is below the “adequately-capitalized” threshold for that ratio. Management is not aware of any further regulatory actions at this time.

 

Note 14. Recent Accounting Developments

  

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance is included in this filing and included disclosure only.

 

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. Public Companies: The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The adoption of this amendment is included in this filing.

  

36.
 

 

Centrue Financial Corporation  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

(Table Amounts In Thousands, Except Share Data)

 

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 nine months ended September 30, 2012 as compared to the same period in 2011. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included. 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.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the Company’s financial position or results of operations. Actual results could differ from those estimates. Those critical accounting policies that are of particular significance to the Company are discussed in Note 1 of the Company’s 2011 Annual Report on Form 10-K.

 

Securities: Securities are classified as available-for-sale when the Company 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 the Company’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 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.

 

37.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

Allowance for Loan Losses: The allowance for loan losses is a reserve established through a provision for probable 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.

 

38.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

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)

 

Net loss for the three months ended September 30, 2012 equaled $3.3 million or a loss of $0.63 per common diluted share as compared to a net loss of $4.7 million or a loss of $0.87 per common diluted share in the third quarter of 2011. For the first nine months of 2012, the Company had a net loss $3.7 million or a loss of $0.87 per common diluted share as compared to a loss of $10.6 million or a loss of $2.01 per common diluted share for the same period in 2011.

 

The results for the third quarter 2012 were adversely impacted by a $5.8 million provision for loan losses and OREO valuation adjustment of $0.6 million largely related to asset quality deterioration in the Company’s commercial and residential real estate portfolios and declining collateral values. During the third quarter of 2011, the Company recorded a $2.4 million provision for loan losses and a $4.5 million OREO valuation adjustment.

 

Net Interest Income/ Margin

 

The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds referred to as “rate change.” The following table details each category of average amounts outstanding for interest-earning assets and interest-bearing liabilities, average rate earned on all interest-earning assets, average rate paid on all interest-bearing liabilities and the net yield on average interest-earning assets. In addition, the table reflects the changes in net interest income stemming from changes in interest rates and from asset and liability volume, including mix. The change in interest attributable to both rate and volume has been allocated to the changes in the rate and the volume on a pro rata basis.

 

Fully tax equivalent net interest income for the third quarter 2012 decreased 8.6% to $6.4 million as compared to $7.0 million for the same period in 2011. The decrease in net interest income from 2011 was primarily due to average loan volume decline, increased rate competition for loan renewals and higher premium amortization due to increased prepayments and lower coupon income with adjustable resets in the security portfolio. Positively impacting net interest income were lower cost of funds led by a 43 basis points reduction in the yield on time deposits and a 42 basis point yield reduction on money market accounts.

 

The net interest margin was 3.20% for the third quarter of 2012, representing an increase of 6 basis points from the 3.14% recorded at third quarter of 2011. The Bank’s net interest margin was 3.33% for the third quarter of 2012, representing an increase of 2 basis points from 3.31% recorded at both the second quarter of 2012 and the third quarter of 2011. Due largely to the protracted economic downturn, the lost interest income on nonaccrual loans and the Company’s interest rate sensitivity, the margin will likely remain under pressure throughout 2012.

 

Fully tax equivalent net interest income for the nine months ended September 30, 2012 totaled $18.8 million, representing a decrease of $2.9 million or 13.4% compared to the $21.7 million earned during the same period in 2011. The net interest margin was 3.11% for the nine months ended September 30, 2012, representing a decrease of 1 basis point from 3.12% recorded in the same period of 2011. The decrease of net interest income and the net interest margin was driven by the same factors impacting the third quarter.

 

39.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

AVERAGE BALANCE SHEET

AND ANALYIS OF NET INTEREST INCOME

 

   For the Three Months Ended September 30,             
   2012   2011             
       Interest           Interest                 
   Average   Income/   Average   Average   Income/   Average   Change Due To: 
   Balance   Expense   Rate   Balance   Expense   Rate   Volume   Rate   Net 
ASSETS                                             
                                              
Interest-earning assets                                             
Interest-earning deposits  $2,853   $12    1.78%  $2,803   $18    2.59%  $3   $(9)  $(6)
Securities                                             
Taxable   206,752    749    1.44    209,010    1,044    1.98    33    (328)   (295)
Non-taxable   10,897    159    5.82    17,526    243    5.50    (94)   10    (84)
                                              
Total securities (tax equivalent)   217,649    908    1.66    226,536    1,287    2.26    (61)   (318)   (379)
                                              
Federal funds sold   5,620    11    0.83    10,675    22    0.80    (4)   (7)   (11)
                                              
Loans                                             
Commercial   87,564    1,071    4.87    115,924    1,598    5.47    (347)   (180)   (527)
Real estate   474,224    5,733    4.81    524,050    6,649    5.03    (586)   (330)   (916)
Installment and other   3,167    58    7.20    2,710    70    10.21    20    (32)   (12)
                                              
Gross loans (tax equivalent)   564,955    6,862    4.83    642,684    8,317    5.13    (913)   (542)   (1,455)
                                              
Total interest-earnings assets   791,077    7,793    3.92    882,698    9,644    4.34    (975)   (876)   (1,851)
                                              
Noninterest-earning assets                                             
Cash and cash equivalents   46,668              55,275                          
Premises and equipment, net   23,152              24,766                          
Other assets   56,925              58,230                          
                                              
Total nonearning assets   126,745              138,271                          
                                              
Total assets  $917,822             $1,020,969                          
                                             
LIABILITIES & STOCKHOLDERS’ EQUITY                                             
                                              
Interest-bearing liabilities                                             
NOW accounts   91,951    15    0.07    85,456    50    0.23    12    (47)   (35)
Money market accounts   124,014    69    0.22    127,554    205    0.64    28    (164)   (136)
Savings deposits   102,681    5    0.02    95,764    36    0.15    10    (41)   (31)
Time deposits   344,319    884    1.02    450,130    1,646    1.45    (341)   (421)   (762)
Federal funds purchased and repurchase                                             
Agreements   16,685    10    0.25    17,732    11    0.24    (1)       (1)
Advances from FHLB   39,089    192    1.95    49,417    347    2.79    (46)   (109)   (155)
Notes payable   31,509    253    3.21    31,944    370    4.61    28    (145)   (117)
                                              
Total interest-bearing liabilities   750,248    1,428    0.76    857,997    2,665    1.23    (310)   (927)   (1,237)
                                              
Noninterest-bearing liabilities                                             
Noninterest-bearing deposits   119,642              112,384                          
Other liabilities   15,676              13,643                          
Total noninterest-bearing liabilities   135,318              126,027                          
                                              
Stockholders’ equity   32,256              36,945                          
                                              
Total liabilities and stockholders’ equity  $917,822             $1,020,969                          
                                              
Net interest income (tax equivalent)       $6,365             $6,979        $(665)  $51   $(614)
                                              
Net interest income (tax equivalent) to total earning assets             3.20%             3.14%               
                                              
Interest-bearing liabilities to earning assets             94.84%             97.20%               

 

(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 non-taxable securities are reflected on a tax equivalent basis based upon a statutory federal income tax rate of 34%.
(3) Nonaccrual loans are included in the average balances; overdraft loans are excluded in the balances.
(4) Loan fees are included in the specific loan category.

 

 

40.
 

 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

AVERAGE BALANCE SHEET

AND ANALYIS OF NET INTEREST INCOME

 

   For the Nine Months Ended September 30,             
   2012   2011             
       Interest           Interest                 
   Average   Income/   Average   Average   Income/   Average   Change Due To: 
   Balance   Expense   Rate   Balance   Expense   Rate   Volume   Rate   Net 
ASSETS                                             
                                              
Interest-earning assets                                             
Interest-earning deposits  $2,794   $56    2.68%  $2,922   $60    2.75%  $10   $(14)  $(4)
Securities                                             
Taxable   219,543    2,430    1.48    210,283    3,117    1.98    542    (1,229)   (687)
Non-taxable   11,957    524    5.85    20,815    849    5.46    (352)   27    (325)
                                              
Total securities (tax equivalent)   231,500    2,954    1.70    231,098    3,966    2.29    190    (1,202)   (1,012)
                                              
Federal funds sold   5,620    43    1.03    7,424    48    0.86    7    (12)   (5)
                                              
Loans                                             
Commercial   90,128    3,433    5.09    133,022    5,392    5.42    (1,497)   (462)   (1,959)
Real estate   474,001    17,282    4.87    551,817    20,881    5.06    (2,463)   (1,136)   (3,599)
Installment and other   2,477    165    8.89    2,552    206    10.77    (18)   (23)   (41)
                                              
Gross loans (tax equivalent)   566,606    20,880    4.92    687,391    26,479    5.15    (3,978)   (1,621)   (5,599)
                                              
Total interest-earnings assets   806,520    23,933    3.96    928,835    30,553    4.40    (3,771)   (2,849)   (6,620)
                                              
Noninterest-earning assets                                             
Cash and cash equivalents   52,915              55,630                          
Premises and equipment, net   23,313              25,106                          
Other assets   57,085              50,308                          
                                              
Total nonearning assets   133,313              131,044                          
                                              
Total assets  $939,833             $1,059,879                          
                                              
LIABILITIES & STOCKHOLDERS’ EQUITY                                             
                                              
Interest-bearing liabilities                                             
NOW accounts   88,373    48    0.07    85,188    141    0.22    27    (120)   (93)
Money market accounts   119,987    226    0.25    129,658    695    0.72    59    (528)   (469)
Savings deposits   102,597    25    0.03    97,706    109    0.15    25    (109)   (84)
Time deposits   376,512    3,216    1.14    474,692    5,692    1.60    (870)   (1,606)   (2,476)
Federal funds purchased and repurchase                                             
Agreements   16,777    31    0.25    17,707    32    0.24    (2)   1    (1)
Advances from FHLB   31,981    568    2.37    51,586    1,114    2.89    (343)   (203)   (546)
Notes payable   31,404    1,037    4.41    31,824    1,103    4.64    18    (84)   (66)
                                              
Total interest-bearing liabilities   767,631    5,151    0.90    888,361    8,886    1.34    (1,086)   (2,649)   (3,735)
                                              
Noninterest-bearing liabilities                                             
Noninterest-bearing deposits   124,373              118,038                          
Other liabilities   15,423              14,361                          
Total noninterest-bearing liabilities   139,796              132,399                          
                                              
Stockholders’ equity   32,406              39,119                          
                                              
Total liabilities and stockholders’ equity  $939,833             $1,059,879                          
                                              
Net interest income (tax equivalent)       $18,782             $21,667        $(2,685)  $(200)  $(2,885)
                                              
Net interest income (tax equivalent) to total earning assets             3.11%             3.12%               
                                              
Interest-bearing liabilities to earning assets             95.18%             95.64%               

 

(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 non-taxable securities are reflected on a tax equivalent basis based upon a statutory federal income tax rate of 34%.
(3) Nonaccrual loans are included in the average balances; overdraft loans are excluded in the balances.
(4) Loan fees are included in the specific loan category.

 

41.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

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.

 

The provision for loan losses for third quarter 2012 was $5.8 million, compared to $1.4 million and $2.4 million for second quarter 2012 and third quarter 2011, respectively. The increase in provision expense from the prior year was warranted based on an increase in the level of nonperforming mainly due to the further deterioration of three credits previously identified that migrated to nonperforming status during the period.

 

Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential, agricultural and commercial real estate, and commercial development exposures. Many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry that existed throughout the third quarter 2012 and is projected to continue through the remainder of the year. 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. Management believes that the allowance for loan losses at September 30, 2012 represented probable incurred credit losses inherent in the loan portfolio.

 

Noninterest Income

 

Noninterest income consists of a wide variety of fee-based revenues from bank-related service charges on deposits, mortgage revenues and increases in cash surrender value on bank-owned life insurance. The following table summarizes the Company’s noninterest income:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
                 
Service charges  $1,128   $1,232   $3,217   $3,483 
Mortgage banking income   777    341    1,719    1,050 
Electronic banking services   550    552    1,640    1,644 
Bank owned life insurance   246    256    734    755 
Other Income   404    213    1,520    575 
Subtotal recurring noninterest income   3,105    2,594    8,830    7,507 
Securities gains   684        1,398    379 
Net impairment on securities               (499)
Gain (loss) on sale of Oreo   40    (12)   465    (60)
Gain (loss) on sale of other assets       (16)       47 
Total noninterest income  $3,829   $2,566   $10,693   $7,374 

 

Noninterest income totaled $3.8 million for the three months ended September 30, 2012, compared to $2.6 million for the same period in 2011. Excluding credit impairment charges on CDO securities and gains related to the sale of OREO, securities and other assets from both periods, noninterest income increased by $0.5 million or 19.2%. This $0.5 million increase was derived mainly from an increase in mortgage banking.

 

42.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

For the nine months ended September 30, 2012 noninterest income saw a dramatic improvement to $10.7 million during the period compared to $7.4 million the prior year. Excluding the above referenced nonrecurring items, the 2012 period saw an increase of $1.3 million or 14.8% in noninterest income compared to the same period in 2011. This increase was driven by improvements in mortgage banking revenue and increased rental income on real estate. Partially offsetting these improvements was a decrease in service charges.

 

Noninterest Expense

 

Noninterest expense is comprised primarily of compensation and employee benefits, occupancy and other operating expense. The following table summarizes the Company’s noninterest expense:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
                 
Salaries and employee benefits  $3,697   $3,505   $10,981   $10,598 
Occupancy expense, net   681    712    1,965    2,136 
Furniture and equipment expense   235    407    902    1,267 
Marketing   115    56    284    183 
Supplies and printing   67    67    200    208 
Telephone   180    229    534    637 
Data processing   396    381    1,063    1,120 
FDIC Insurance   515    323    1,544    1,997 
Loan processing and collection costs   337    495    1,427    1,597 
Amortization of intangibles assets   238    250    713    789 
Other expenses   1,383    1,499    4,257    4,472 
Subtotal recurring noninterest expenses   7,844    7,924    23,870    25,004 
OREO valuation adjustments   640    4,473    1,435    5,770 
Total noninterest expense  $8,484   $12,397   $25,305   $30,774 

 

Total noninterest expense for the third quarter of 2012 was $8.5 million, compared to $12.4 million recorded during the same period in 2011. Excluding OREO valuation adjustments from both periods, noninterest expense levels decreased by $0.1 million, or 1.3%. This $0.1 million decline in expenses was spread over various categories, including net occupancy costs, furniture and equipment, telephone, amortization of intangibles and loan processing and collection costs. Adversely impacting expense levels were increases in salaries and employee benefits, marketing, data processing and FDIC Insurance.

 

For the nine month period ending September 30, 2012, noninterest expense improved to $25.3 million during the period compared to $30.8 million for the prior year. Excluding OREO valuation adjustments for both periods, noninterest expense still improved by $1.1 million. Most expense categories were down across the board with the exception of salaries and employee benefits and marketing.

 

Applicable Income Taxes

 

Income tax expense for the periods included benefits for tax-exempt income, tax-advantaged investments and general business tax credits offset by the effect of nondeductible expenses. The following table shows the Company’s income before income taxes, as well as applicable income taxes and the effective tax rates for the three and nine months ended September 30, 2012 and 2011:

 

43.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

  

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Income (loss) before income taxes  $(4,107)  $(5,354)  $(4,524)  $(11,982)
Applicable income taxes   (788)   (606)   (788)   (1,352)
Effective tax rates   19.2%   11.3%   17.4%   11.3%

  

The Company recorded income tax benefits of $(788) and $(606) for the three months ended September 30, 2012 and 2011, respectively. Effective tax rates equaled 19.2% and 11.3% respectively, for such periods. The Company recorded tax benefits of $(788) and $(1,352) for the nine months ended September 30, 2012 and 2011, respectively. Effective tax rates equaled 17.4% and 11.3% respectively, for such periods.

 

The tax benefits recorded in the third quarter of 2012 and 2011 and on a year-to-date basis for both years were allocated to the loss from continuing operations due to the following GAAP application: The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. Excluding this benefit, no tax benefits were recorded for the quarter and year-to-date periods due to the full deferred tax valuation allowance established as of December 31, 2010.

  

Earnings Review by Business Segment

 

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.

 

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 pricing 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 GAAP, 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 including direct lending, checking, savings, money market and certificate of deposit (“CD”) accounts, safe deposit rental, automated teller machines and other traditional and electronic commerce retail banking services to individual customers through the Bank’s branch locations in Illinois and Missouri. The Retail Segment also provides a variety of mortgage lending products to meet customer needs. The majority of the mortgage loans originated are sold to a third party mortgage services company, which provides private label loan processing and servicing support for both loans sold and loans retained by the Bank.

 

44.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

Retail generated a net loss of $1.4 million in the third quarter 2012 as compared to a net loss of $1.3 million during the same period in 2011. During the nine month period in 2012, the Retail segment had a net loss of $2.7 million compared to $2.6 million during the prior year. Retail assets were $153.6 million at September 30, 2012, $165.9 million at December 31, 2011 and $178.8 million as of September 30, 2011. This represented 17.0%, 17.1% and 17.7% of total consolidated assets, respectively.

 

Earnings results for the third quarter of 2012, when compared to the same period of 2011, were positively impacted by lower expenses and higher mortgage banking revenue which was offset by a decline in net interest margin due to lower loan balances, reduced servicing fees, push-back losses on sold loans and higher provision expense. Year to date results were impacted by the same items listed above.

  

Commercial Segment. The Commercial Segment (“Commercial”) provides commercial banking services including lending, business checking and deposits, and other traditional as well as electronic commerce commercial banking services to middle market and small business customers through the Bank’s branch locations located in Illinois and Missouri.

 

Commercial generated a loss of $1.8 million in the third quarter 2012 as compared to a loss of $7.0 million during the same period in 2011. During the nine month period in 2012, the Commercial segment had a loss of $0.1 million compared to a net loss of $5.4 million during the prior year. Commercial assets were $459.1 million at September 30, 2012, $470.1 million at December 31, 2011 and $496.3 million as of September 30, 2011. This represented 50.7%, 48.6% and 49.2% of total consolidated assets, respectively.

 

Net income results for the third quarter of 2012, when compared to the same period of 2011, were positively impacted by lower provision for loan losses, higher rental and gain income related to OREO and lower OREO valuation adjustments. Offsetting these positive developments were lower net interest income due to average loan volume decline, the impact of nonaccrual loan interest reversals and higher salary expense. Year to date results were impacted by the same items listed above, with the addition of year to date loan related expenses being significantly higher than the prior year for the same period.

 

Treasury Segment. The Treasury Segment (“Treasury”) is responsible for managing the investment portfolio, acquiring wholesale funding for loan activity and assisting in the management of the Company’s liquidity and interest rate risk.

 

Treasury generated a loss of $0.1 million in the third quarter 2012 as compared to a net loss of $1.9 million, during the same period in 2011. During the nine month period in 2012, the Treasury segment had a net loss of $0.9 million compared to a loss $2.6 million during the prior year. Treasury assets were $205.3 million at September 30, 2012, $250.7 million at December 31, 2011 and $267.1 million at September 30, 2011. This represented 22.7%, 25.9% and 26.5% of total consolidated assets, respectively.

 

Earnings results for the third quarter of 2012, when compared to the same period of 2011, were positively impacted by improved interest expense due to decreased balances on borrowed funds and gains on sale of securities during the period. These positives were partially offset with a significant drop in yield on the security portfolio as higher yielding securities have been sold and replaced with lower yielding instruments with higher premium amortization since September 30, 2011. Year to date results were impacted by the same items listed above along with no impairment charges on the CDO portfolio in 2012.

 

Financial Condition

 

General

 

Following are highlights of the September 30, 2012 balance sheet when compared to December 31, 2011:

 

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 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.

 

45.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

  

Securities at September 30, 2012 totaled $188.5 million as compared to $238.0 million recorded at December 31, 2011. The $49.5 million, or 20.8%, net decrease from year-end 2011 was related to a strategy to enhance the Company’s liquidity position.

 

At September 30, 2012, the Company held five pooled trust preferred collateralized debt obligations (“CDOs”) involving three hundred issuers with a total book value of $7.9 million and fair value of $7.9 million. The investments in trust-preferred securities receive principal and interest payments from several pools of subordinated capital debentures with each pool containing issuances by banks and bank holding companies or, in a few instances, capital notes from insurance companies. The Company did not record an other-than-temporary impairment charge during the quarter, which marks the fifth consecutive quarter without an impairment charge. 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. Total loans equaled $561.5 million, representing decreases of $20.9 million, or 3.6% and $59.0 million or 9.5%, from December 31, 2011 and September 30, 2011, respectively. The net decrease from year-end 2011 was related to a combination of normal attrition, pay-downs, loan charge-offs, transfers to OREO and strategic initiatives to reduce balance sheet risk. Due to economic conditions, we have also experienced a decrease in loan demand as many borrowers continue to reduce their debt.

 

Deposits. Total deposits equaled $782.6 million at September 30, 2012 compared to $848.6 million recorded at December 31, 2011 and $862.1 million on record at September 30, 2011. The September 30, 2012 deposit balance represents a decrease of $66.0 million or 7.8% from December 31, 2011 and $79.5 million or 9.2% from September 30, 2011. The net decrease from year-end 2011 was largely related to strategic initiatives to reduce higher costing time deposits and collateralized local public agency deposits. Wholesale funding decreased $27.0 million, as $34.1 million in brokered deposits have matured since year-end 2011 and were not replaced. Partially offsetting this decrease was an increase in FHLB advances.

 

Nonperforming Assets

 

The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual status when there are serious doubts regarding the collectibility of all principal and interest due under the terms of the loans. 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.

 

Each of the Company’s commercial loans is assigned a rating based upon an internally developed grading system. A separate credit administration department also reviews 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.

 

46.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

  

The following table summarizes nonperforming assets and loans past due 90 days or more for the previous five quarters:

  

   2012   2011 
   Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30, 
Nonaccrual loans  $42,855   $35,475   $37,538   $38,688   $40,665 
Troubled debt restructurings   3,884    4,348    6,366    7,147    7,317 
Loans 90 days past due and still accruing interest                    
Total nonperforming loans   46,739    39,823    43,904    45,835    47,982 
                          
Other real estate owned   28,601    27,890    33,501    29,667    32,912 
Total nonperforming assets  $75,340   $67,713   $77,405   $75,502   $80,894 
                          
End of period loans   561,476    567,908    563,732    582,395    620,450 
                          
Nonperforming loans to total end of period loans   8.32%   7.01%   7.79%   7.87%   7.73%
Nonperforming assets to total end of period loans   13.42%   11.92%   13.73%   12.96%   13.04%
Nonperforming assets to total end of period assets   8.33%   7.31%   8.05%   7.80%   8.02%

  

Total nonperforming assets were $75.3 million, or 8.3% of total assets, at September 30, 2012. This included $3.9 million in troubled debt restructurings, $28.6 million of OREO and $42.8 million of nonaccrual loans. The majority of the OREO is comprised of eleven parcels (land development and commercial real estate) which account for 70.6% of the balance. The Company updates these appraisals quarterly to ensure that they are properly carried at their fair market value. Approximately 32.3% of total nonaccrual loans at September 30, 2012 were concentrated in land development and construction credits. Additionally, 72.0% of total nonaccrual loans represented loans to 10 borrowers.

 

The level of nonperforming loans (nonaccrual, 90 days past due, and troubled debt restructurings) at September 30, 2012 increased $0.9 million, or 2.0%, from December 31, 2011 levels and decreased $1.3 million, or 2.7%, from the $48.0 million that existed at September 30, 2011. The increase in nonperforming loans was mainly due to the further deterioration of two credits previously identified as impaired. The level of nonperforming loans to total end of period loans was 8.3% at September 30, 2012, as compared to 7.9% at December 31, 2011 and 7.7% at September 30, 2011. The coverage ratio (allowance to nonperforming loans) was reported at 45.1% as of September 30, 2012 as compared to 46.3% as of December 31, 2011.

 

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. Through the end of the third quarter of 2012, $12.8 million of loans had been identified by management 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 21.6% of the loans deemed impaired as of the September 30, 2012, whereas, 38.99% of impaired loans were performing at December 31, 2011. Excluding nonperforming loans and loans that management has classified as impaired, there are other potential problem loans that totaled $8.4 million at September 30, 2012 as compared to $12.4 million at December 31, 2011. 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, 2012, the allowance for loan losses was $21.1 million, or 3.8% of total loans, as compared to $21.2 million, or 3.7%, at December 31, 2011 and $23.3 million, or 3.8%, of total loans at September 30, 2011.

 

47.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

  

The Company recorded a provision of $5.8 million to the allowance for loan losses in the third quarter 2012 which represents an increase from the same quarter in 2011. The increase in provision expense from the prior year was warranted based on the level of previously identified credits that migrated to nonperforming status.

 

Net loan charge-offs for the third quarter of 2012 were $2.9 million, or 0.5% of average loans, compared with $3.6 million, or 0.6% of average loans, for the fourth quarter of 2011 and $3.4 million, or 0.5% of average loans, for the third quarter of 2011. Loan charge-offs during the third quarter of 2012 were largely influenced by the credit performance of the Company’s commercial and residential real estate portfolios. These charge-offs reflect management’s continuing efforts to align the carrying value of these assets with the value of underlying collateral based upon more aggressive disposition strategies and recognizing falling property values. Because these loans are collateralized by real estate, losses occur more frequently when property values are declining and borrowers are losing equity in the underlying collateral. Management believes we are recognizing losses in our portfolio through provisions and charge-offs as credit developments warrant.

 

Liquidity

 

Due to continued uncertainty in the financial markets, liquidity strategies are conservatively postured in an effort to mitigate adverse pressure on liquidity levels. The Company continues to remain in a liquid position by reducing reliance on wholesale funding sources and a reduction in the loan portfolio, net of gross charge-offs and transfers to OREO. Total deposits equaled $782.6 million, representing decreases of $66.0 million, or 7.8%, from December 31, 2011 and $79.5 million, or 9.2%, from September 30, 2011. During the quarter, in-market deposits increased $14.6 million or 2.0%, primarily as the result of an increase in public funds and money market funds. Wholesale funding (brokered deposits and FHLB advances) decreased $27.0 million or 29.1%, as $34.1 million in brokered deposits have matured since year-end 2011 and were not replaced. Partially offsetting this decrease was an increase in FHLB advances.

 

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 securities sold under agreements to repurchase, overnight federal funds purchased from correspondent banks and the acceptance of short-term deposits from public entities.

 

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, 2012, the Company maintained borrowing capacity of $16.7 million 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 with a remaining borrowing capacity of $33.4 million as of September 30, 2012.

 

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 $9.7 million from December 31, 2011 to September 30, 2012.

 

48.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

 

During the first nine months of 2012, the Company experienced net cash inflows of $7.8 million in operating activities and $62.4 million in investing activities. In contrast, net cash outflows of $60.5 million were used in financing activities largely due to decreases in deposits.

 

At December 31, 2011, the parent Company had $2.0 million in cash and cash equivalents. During the first nine months of 2012, the parent Company experienced net cash outflow of $0.7 million leaving $1.3 million in cash and cash equivalents available at September 30, 2012. The parent Company’s primary use of cash is for quarterly debt payments. These payments are estimated to be $0.3 million for the remainder of the year and are more fully described in Notes 8 & 13 of the Unaudited Consolidated Financial Statements of the Company.

 

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, 2012:

  

   Payments Due by Period 
   Within 1           After     
   Year   1-3 Years   4-5 Years   5 Years   Total 
Contractual Obligations                         
                          
Short-term debt  $   $250   $   $   $250 
Long-term debt   95    10,000            10,095 
Certificates of deposit   237,772    75,029    24,983        337,784 
Operating leases   251    504    504    252    1,511 
Series B mandatory redeemable preferred stock       268            268 
Subordinated debentures               20,620    20,620 
FHLB advances   10,000    15,057    5,000        30,057 
                          
Total contractual cash obligations  $248,118   $101,108   $30,487   $20,872   $400,585 

 

   Amount of Commitment Expiration Per Period 
   Within 1           After     
   Year   1-3 Years   4-5 Years   5 Years   Total 
Off-Balance Sheet Financial Instruments                         
                          
Lines of credit  $80,698   $3,630   $3,660   $21,517   $109,505 
Standby letters of credit   1,076    1,076            2,152 
                          
Total contractual cash obligations  $81,774   $4,706   $3,660   $21,517   $111,657 

  

Capital Resources

 

Stockholders’ Equity

 

Stockholders’ equity at September 30, 2012 was $28.7 million, a decrease of $3.9 million, or 12.0%, from $32.6 million at December 31, 2011. The change in stockholders’ equity was largely related to the operating loss incurred during 2012.

 

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.

 

 

49.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

  

Capital Measurements

 

As reflected in the following table, the Bank was considered “well-capitalized” under regulatory defined capital ratios as of September 30, 2012, however the Company was “less than adequately-capitalized” due to the Tier 1 leverage ratio which was 3.4% being below the threshold for “adequately-capitalized” of 4%. See Note 13 to the Unaudited Consolidated Financial Statements for additional disclosure on the capital threshold levels:

  

   Centrue Financial   Centrue Bank   Well- Capitalized 
   Sep 30, 2012   Dec 31, 2011   Sep 30, 2012   Dec 31, 2011   Thresholds 
Carrying amounts ($ millions):                         
Total risk-based capital  $54.2   $61.2   $66.4   $68.6      
Tier 1 risk-based capital  $30.9   $37.2   $58.3   $60.1      
Tangible common equity  $(9.0)  $(5.9)  $61.4   $62.0      
                          
Capital ratios:                         
Total risk-based capital   8.4%   9.0%   10.5%   10.3%   10.0%
Tier 1 risk-based capital   4.8%   5.5%   9.2%   9.0%   6.0%
Tier 1 leverage ratio   3.4%   3.7%   6.4%   6.1%   5.0%

  

Total capital and some corresponding capital ratios decreased during 2012 for the Company due to a net operating loss and a continued reduction in Tier II capital caused by a sub-debt phase-out provision. The Bank had a slight increase in capital ratios from a reduction in risk-weighted assets in several areas.

 

The Company is in compliance with all the requirements specified in the agreement with the FRB and IDFPR except for the Capital Plan. Management continues to aggressively pursue capital raising initiatives to comply with this provision; however, until a more definitive capital raise initiative is developed, the Company will continue to be held in noncompliance with this provision.

 

The Company’s Series C Preferred Stock was issued January 9, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. At September 30, 2012 this preferred stock totaled $31.9 million, with $5.9 million of deferred dividends. The U.S. Treasury has notified the Company that the preferred securities and the warrant may be placed into pooled “Dutch Auctions” after October 9, 2012.

 

The Company is reviewing proposed rules for Basel III that the FRB released and will continue to monitor during the commenting process before final rules are released.

  

Subsequent Events

 

Under the recently passed Jumpstart Our Business Startups (JOBS) Act, banks and bank holding companies may now go private and deregister their shares from the Securities and Exchange Commission (SEC) if they have less than 1,200 shareholders. This is done by filing Form 15 with the SEC, which becomes effective ninety days after the filing date. The Company filed Form 15 in order to reduce the costs of remaining an SEC registrant. It should be noted that the Company’s stock will still be traded on the OTCQB Marketplace under the symbol “TRUE.PK” following the deregistration.

 

Recent Accounting Developments

 

See Note 14 to the Unaudited Consolidated Financial Statements for information concerning recent accounting developments.

 

50.
 

 

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

  

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934 as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by the use of words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “planned” or “potential” or similar expressions.

 

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 affect 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;
  fluctuations in the value of the Company’s investment securities;
  the Company’s ability to ultimately collect on any downgraded loan relationships;
  the Company’s ability to respond and adapt to economic conditions in our geographic market;
  the Company’s ability to adapt successfully to technological changes to compete effectively in the marketplace;
  credit risks and risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio and individual large loans;
  volatility of rate sensitive deposits;
  operational risks, including data processing system failures or fraud;
  asset/liability matching risks and liquidity risks;
  the ability to successfully acquire low cost deposits or funding;
  the ability to successfully execute strategies to increase noninterest income;
  the ability to successfully grow non-commercial real estate loans;
  the ability of the Company to continue to realize cost savings and revenue generation opportunities in connection with the synergies of centralizing operations;
  the ability to adopt and implement new regulatory requirements as dictated by the SEC, FASB or other rule-making bodies which govern our industry;
  changes in the general economic or industry conditions, nationally or in the communities in which the Company conducts business;
  the Company’s ability to raise additional capital, if available, to sustain growth or operating results;
  the Company’s ability to dispose of other real estate owned (“OREO”) at reasonable values in a market that is very volatile.

  

51.
 

 

Centrue Financial Corporation

Item 3. Quantitative and Qualitative Disclosures About Market Risk

(Table Amounts In Thousands, Except Share Data)

 

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, 200 and 300 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, 2012 and December 31, 2011, respectively:

 

    Change in Net Interest Income Over One Year Horizon 
    September 30, 2012   December 31, 2011 
    Change   Change 
    $   %   $   % 
 +  300 bp   $182    0.78%  $1,442    5.45%
 +  200 bp    165    0.71    743    2.81 
 +  100 bp    111    0.48    174    0.66 
 +    50 bp    90    0.39    107    0.41 
                       
    Base                 
                       
 -     50 bp    (181)   (0.78)   (299)   (1.13)

 

As shown above, the effect of an immediate 200 basis point increase in interest rates as of September 30, 2012 would increase the Company’s net interest income by $0.2 million or 0.7%. The effect of an immediate 50 basis point decrease in rates would decrease the Company’s net interest income by $0.2 million or 0.8%.

  

52.
 

 

Centrue Financial Corporation

Item 4. Controls and Procedures

 

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.

 

53.
 

 

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, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

As previously disclosed, in the third quarter of 2009, the Company elected to defer regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its trust preferred securities and to suspend quarterly cash dividend payments on its Series A convertible preferred stock, Series B mandatory redeemable preferred stock and Series C fixed rate, cumulative perpetual preferred stock issued to the U.S. Treasury. Therefore, the Company is currently in arrears with the dividend payments on the preferred stock and interest payments on the subordinated debentures, as permitted by the related documentation. As of September 30, 2012, the amount of the arrearages on the various instruments was as follows: Junior subordinated debentures: $3.4 million; Series A convertible preferred stock: $0.7 million; Series B mandatory redeemable preferred stock: $0.05 million; and Series C fixed rate, cumulative perpetual preferred stock: $5.9 million.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

54.
 

 

Item 6. Exhibits

 

Exhibits:

 

  31.1   Certification of Kurt R. Stevenson, President and Principal Executive Officer, required by Rule 13a – 14(a).
       
  31.2   Certification of Daniel R. Kadolph, Executive Vice President and Principal Financial and Accounting Officer required by Rule 13a – 14(a).
       
  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.
       
  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 Executive Vice President and Principal Financial and Accounting Officer
       
  101(2)   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Changes in Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text.

  ________________
  (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.
  (2) As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

  

55.
 

 

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.

 

  CENTRUE FINANCIAL CORPORATION
     
Date: November 13, 2012 By: /s/ Kurt R. Stevenson
    Kurt R. Stevenson
    President and Principal Executive Officer

 

Date: November 13, 2012 By: /s/ Daniel R. Kadolph
    Daniel R. Kadolph
    Executive Vice President and Principal
Financial and Accounting Officer

  

56.