PINX:TRUE Quarterly Report 10-Q Filing - 3/31/2012

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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 March 31, 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 May 15, 2012
Common Stock, Par Value $1.00   6,063,441

 

 
 

 

Centrue Financial Corporation

Form 10-Q Index

March 31, 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 33
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
       
Item 4.   Controls and Procedures 48
       
PART II. OTHER INFORMATION  
       
Item 1.   Legal Proceedings 49
       
Item 1A. Risk Factors 49
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
       
Item 3. Defaults Upon Senior Securities 49
       
Item 4. [Reserved] 49
       
Item 5. Other Information 49
       
Item 6. Exhibits 50
       
SIGNATURES 51

 

 
 

  

Centrue Financial Corporation

Part I Financial Information

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

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


 

   March 31,   December 31, 
   2012   2011 
ASSETS          
Cash and cash equivalents  $62,544   $69,735 
Securities available-for-sale   246,361    228,836 
Restricted securities   7,467    9,150 
Loans   563,732    582,395 
Allowance for loan losses   (20,338)   (21,232)
Net loans   543,394    561,163 
Bank-owned life insurance   31,655    31,412 
Mortgage servicing rights   2,031    2,089 
Premises and equipment, net   23,370    23,754 
Other intangible assets, net   5,027    5,264 
Other real estate owned   33,501    29,667 
Other assets   6,453    6,914 
           
Total assets  $961,803   $967,984 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities          
Deposits:          
Non-interest-bearing  $132,163   $134,137 
Interest-bearing   711,242    714,501 
Total deposits   843,405    848,638 
Federal funds purchased and securities sold under agreements to repurchase   16,226    18,036 
Federal Home Loan Bank advances   23,057    23,058 
Notes payable   10,440    10,440 
Series B mandatory redeemable preferred stock   268    268 
Subordinated debentures   20,620    20,620 
Other liabilities   15,029    14,355 
Total liabilities   929,045    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)   31,584    31,429 
Common stock, $1 par value, 15,000,000 shares authorized; 7,453,555 shares issued at March 31, 2012 and December 31, 2011   7,454    7,454 
Surplus   74,561    74,558 
Accumulated deficit   (61,236)   (60,064)
Accumulated other comprehensive income   1,772    569 
    54,635    54,446 
Treasury stock, at cost, 1,390,114 shares at March 31, 2012 and          
December 31, 2011   (21,877)   (21,877)
Total stockholders' equity   32,758    32,569 
           
Total liabilities and stockholders' equity  $961,803   $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 Ended March 31, 2012 and 2011

(In Thousands, Except Per Share Data)

 

   Three Months Ended 
   March 31, 
   2012   2011 
         
Interest income          
Loans  $7,037   $9,281 
Securities          
Taxable   830    997 
Exempt from federal income taxes   126    215 
Federal funds sold and other   39    31 
Total interest income   8,032    10,524 
           
Interest expense          
Deposits   1,399    2,487 
Federal funds purchased and securities sold under agreements to repurchase   11    11 
Federal Home Loan Bank advances   186    412 
Series B mandatory redeemable preferred stock   4    4 
Subordinated debentures   293    270 
Notes payable   96    90 
Total interest expense   1,989    3,274 
           
Net interest income   6,043    7,250 
Provision for loan losses   1,350    4,250 
Net interest income after provision for loan losses   4,693    3,000 
           
Noninterest income          
Service charges   1,049    1,062 
Mortgage banking income   487    407 
Electronic banking services   532    527 
Bank-owned life insurance   243    249 
Securities gains   16     
Total other-than-temporary impairment losses       (393)
Portion of loss recognized in other comprehensive income (before taxes)       1 
Net impairment on securities       (392)
Gain on sale of OREO   191    44 
Gain on sale of other assets       63 
Other income   534    164 
    3,052    2,124 

 

See Accompanying Notes to Unaudited Financial Statements

 

2.
 

  

Centrue Financial Corporation

Unaudited Consolidated Statements Of Income (Loss)

And Comprehensive Income (Loss)

Three Months Ended March 31, 2012 and 2011

(In Thousands, Except Per Share Data)

  

   Three Months Ended 
   March 31, 
   2012   2011 
Noninterest expense          
Salaries and employee benefits   3,702    3,633 
Occupancy, net   664    720 
Furniture and equipment   384    439 
Marketing   75    60 
Supplies and printing   68    64 
Telephone   175    204 
Data processing   307    364 
FDIC insurance   518    850 
Loan processing and collection costs   536    591 
OREO valuation adjustment   133    200 
Amortization of intangible assets   237    276 
Other expenses   1,446    1,399 
    8,245    8,800 
           
Income (loss) before income taxes  $(500)  $(3,676)
Income tax expense (benefit)       (218)
Net income (loss)  $(500)  $(3,458)
           
Preferred stock dividends   517    494 
Net income (loss) for common stockholders  $(1,017)  $(3,952)
           
Basic earnings (loss) per common share  $(0.17)  $(0.65)
Diluted earnings (loss) per common share  $(0.17)  $(0.65)
           
Total comprehensive income (loss):          
Net income (loss)  $(500)  $(3,458)
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, net of reclassifications and tax effect       (123)
Change in unrealized gains (losses) on other securities available for sale, net of reclassifications and tax effect   1,219    984 
Reclassification adjustment:          
Net impairment loss recognized in earnings       392 
(Gains) recognized in earnings   (16)    
Net unrealized gains (loss)   1,203    1,253 
Tax expense (benefit)       485 
Other comprehensive income (loss)   1,203    768 
Total comprehensive income (loss)  $703   $(2,690)

 

See Accompanying Notes to Unaudited Financial Statements

 

3.
 

 

Centrue Financial Corporation

Unaudited Consolidated Statements Of Cash Flows

Three Months Ended March 31, 2012 and 2011 (In Thousands)


 

   Three Months Ended 
   March 31, 
   2012   2011 
Cash flows from operating activities          
Net income (loss)  $(500)  $(3,458)
Adjustments to reconcile net income (loss) to net cash provided by operating activities          
Depreciation   430    479 
Amortization of intangible assets   237    276 
Amortization of mortgage servicing rights, net   153    107 
Amortization of bond premiums, net   727    642 
Income tax valuation adjustment   94    1,141 
Share based compensation   3    29 
Provision for loan losses   1,350    4,250 
Provision for deferred income taxes   (94)   (1,141)
Earnings on bank-owned life insurance   (243)   (249)
Other than temporary impairment, securities       392 
OREO valuation allowance   133    200 
Securities sale (gains), net   (16)    
(Gain) on sale of other assets, net       (63)
(Gain)on sale of OREO   (191)   (44)
(Gain) on sale of loans   (417)   (266)
Proceeds from sales of loans held for sale   17,381    12,172 
Origination of loans held for sale   (16,368)   (11,931)
Change in assets and liabilities          
(Increase) decrease in other assets   327    1,395 
Increase (decrease) in other liabilities   155    (294)
Net cash provided by operating activities   3,161    3,637 
Cash flows from investing activities          
Proceeds from paydowns of securities available for sale   12,868    12,538 
Proceeds from calls and maturities of securities available for sale   1,270    4,660 
Proceeds from sales of securities available for sale   942     
Purchases of securities available for sale   (32,095)   (32,240)
Redemption of Federal Home Loan Bank stock   1,593     
Redemption of Federal Reserve Bank stock   110    322 
Purchase of Federal Reserve Bank stock   (20)    
Net decrease (increase) in loans   10,409    209 
(Purchase) disposal of premises and equipment   (46)   (59)
Proceeds from sale of OREO   1,661    1,312 
Net cash from investing activities   (3,308)   (13,258)

  

See Accompanying Notes to Unaudited Financial Statements

 

4.
 

 

 

Centrue Financial Corporation

Unaudited Consolidated Statements Of Cash Flows

Three Months Ended March 31, 2012 and 2011 (In Thousands)


 

   Three Months Ended 
   March 31, 
   2012   2011 
Cash flows from financing activities          
Net increase (decrease) in deposits   (5,233)   (8,622)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase   (1,810)   (257)
Repayment of advances from the Federal Home Loan Bank   (1)   (20,000)
Net cash used in financing activities   (7,044)   (28,879)
Net increase (decrease) in cash and cash equivalents   (7,191)   (38,500)
Cash and cash equivalents          
Beginning of period   69,735    82,945 
End of period  $62,544   $44,445 
Supplemental disclosures of cash flow information          
Cash payments for          
Interest  $1,896   $3,254 
Income taxes   10     
Transfers from loans to other real estate owned   5,414    4,486 

 

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 months ended March 31, 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 months ended March 31, 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 
   March 31, 
   2012   2011 
Basic Earnings (Loss)  Per Common Share        
Net income (loss) for common stockholders  $(1,017)  $(3,952)
Weighted average common shares outstanding   6,063    6,048 
           
Basic earnings (loss) per common share  $(0.17)  $(0.65)
           
Diluted Earnings (Loss) Per Common Share          
Weighted average common shares outstanding   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 
           
Diluted earnings (loss) per common share  $(0.17)  $(0.65)

 

There were 280,927 options and 508,320 warrants outstanding for the three months ended March 31, 2012 and 496,738 options and 508,320 warrants outstanding for the three months ended March 31, 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 $246.4 million at March 31, 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 $7.5 million at March 31, 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 March 31, 2012 and December 31, 2011:

 

   March 31, 2012 
         Gross    Gross      
    Fair    Unrealized    Unrealized    Amortized 
    Value    Gains    Losses    Cost 
U.S. government agencies  $15,505   $72   $(84)  $15,517 
States and political subdivisions   17,924    656        17,268 
U.S. government agency residential mortgage-backed securities   170,641    3,394    (61)   167,308 
Collateralized residential mortgage obligations:                    
    Agency   27,161    221    (55)   26,995 
    Private label   1,433    124   (10)   1,319 
Equity securities   2,583    171        2,412 
Collateralized debt obligations:                    
    Single issue   2,064            2,064 
    Pooled   7,084    627    (1,604)   8,061 
Corporate   1,966        (34)   2,000 
                     
   $246,361   $5,265   $(1,848)  $242,944 

 

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:                    
    Agency   15,527    229        15,298 
    Private label   1,550    72   (7)   1,485 
Equity securities   2,530    134        2,396 
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 
   March 31, 
   2012   2011 
Proceeds from calls and maturities  $1,270   $4,660 
Proceeds from sales   942     
Realized gains   16     
Realized losses        
Net impairment loss recognized in earnings       (392)
Tax benefit (provision) related to net realized gains and losses   (6)   151 

 

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:

 

   March 31, 2012 
   Less than 12 Months   12 Months or More   Total 
    Fair    Unrealized    Fair    Unrealized    Fair    Unrealized 
    Value    Loss    Value    Loss    Value    Loss 
                               
U.S. government agencies   12,761    (84)           12,761    (84)
U.S. government agency residential mortgage-backed securities   14,260    (61)           14,260    (61)
Collateralized residential mortgage obligations:                                
Agency   12,965    (55)           12,965    (55)
Private label   608   (10)           608   (10)
Collateralized debt obligations: pooled           3,593    (1,604)   3,593    (1,604)
Corporate   1,966    (34)           1,966    (34)
                               
Total temporarily impaired  $42,560   $(244)  $3,593   $(1,604)  $46,153   $(1,848)

 

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 March 31, 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     
   Cost   Fair Value 
Due in one year or less  $3,044   $3,060 
Due after one year through five years   24,743    24,974 
Due after five years through ten years   6,370    6,711 
Due after ten years   10,753    9,798 
U.S. government agency residential mortgage-backed securities   167,308    170,641 
Collateralized residential mortgage obligations   28,314    28,594 
Equity securities   2,412    2,583 
   $242,944   $246,361 

 

The following table presents a rollforward of the credit losses recognized in earnings for the three month period ended March 31, 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        
Reduction 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       392 
           
Ending balance, March 31,  $20,597   $20,754 

 

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.

  

9.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans

 

The major classifications of loans follow:

 

    Aggregate Principal Amount 
    March 31,    December 31, 
    2012    2011 
           
Commercial  $61,872   $63,982 
Agricultural & AGRE   33,800    39,128 
Construction, land & development   37,082    42,008 
Commercial RE   290,284    288,068 
1-4 family mortgages   138,394    146,767 
Consumer   2,300    2,442 
Total loans  $563,732   $582,395 
Allowance for loan losses   (20,338)   (21,232)
Loans, net  $543,394   $561,163 

 

There were $1.2 million and $1.8 million of loans held for sale at March 31, 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.

 

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

 

Mar. 31, 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  $800   $660   $3,922   $3,569   $8,587   $640   $18,178 
3   2,730    6,442    12,838    1,023    8,780    15,515    47,328 
4   11,847    14,543    13,577    1,442    68,768    48,748    158,925 
5   10,082    5,039    2,597    4,878    20,963    49,995    93,554 
6   2,898    3,931    741    6,027    13,057    19,107    45,761 
7   1,681    1,219    125    20,143    15,553    20,571    59,292 
8                            
Total  $30,038   $31,834   $33,800   $37,082   $135,708   $154,576   $423,038 

 

10.
 

  

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

Dec. 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 
Mar. 31, 2012        
Unrated  $78,795   $47,103   $125,898 
Special mention   1,604    830    2,434 
Substandard   8,854    893    9,747 
Doubtful   315        315 
Total  $89,568   $48,826   $138,394 

 

   Residential – 1-4 family 
   Senior Lien   JR Lien & Lines of Credit   Total 
Dec. 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 March 31, 2012 and 2011 follows:

 

   Commercial   Agriculture & AGRE   Construction, Land & Development   Commercial RE   1-4 Family Residential   Consumer   Total 
March 31, 2012                                   
Beginning Balance  $1,590   $5   $4,811   $11,680   $3,090   $56   $21,232 
Charge-offs       (25)   (52)   (2,150)   (403)   (5)   (2,635)
Recoveries       17    284    87    3        391 
Provision   (87)   11    (388)   1,582    239   (7   1,350 
Ending Balance  $1,503   $8   $4,655   $11,199   $2,929   $44   $20,338 

 

11.
 

  

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

   Commercial   Agriculture & AGRE   Construction, Land & Development   Commercial RE   1-4 Family Residential   Consumer   Total 
March 31, 2011                                   
Beginning Balance  $1,634   $337   $12,500   $13,721   $3,273   $46   $31,511 
Charge-offs   (65)       (4,501)   (1,718)   (626)  (20   (6,930)
Recoveries   6    1    1    217    28    5    258 
Provision   184    (23)   655    3,049    380    5    4,250 
Ending Balance  $1,759   $315   $8,655   $15,269   $3,055   $36   $29,089 

 

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 March 31, 2012 and December 31, 2011:

 

Mar. 31, 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  $674   $8   $3,172   $6,044   $1,686   $   $11,584 
Loans collectively evaluated for impairment   829        1,483    5,155    1,243    44    8,754 
Total ending allowance balance  $1,503   $8   $4,655   $11,199   $2,929   $44   $20,338 
                                    
Loan balances:                                   
Loans individually evaluated for impairment  $2,712   $125   $20,143   $32,742   $9,948   $1   $65,671 
Loans collectively evaluated for impairment   59,160    33,675    16,939    257,542    128,446    2,299    498,061 
Loans with an allowance recorded:  $61,872   $33,800   $37,082   $290,284   $138,394   $2,300   $563,732 

 

Dec. 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 

 

12.
 

 

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 $6.4 million and $7.1 million as of March 31, 2012 and December 31, 2011, respectively. Specific reserves of $1.3 million and $0.95 million were allocated to TDRs as of March 31, 2012 and December 31, 2011, respectively. At March 31, 2012, nonaccrual TDR loans were $5.3 million, as compared to $6.0 million at December 31, 2011. March 31, 2012 and December 31, 2011, $1.1 million of TDRs were on accrual status. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs as of March 31, 2012.

 

During the period ending March 31, 2012, the terms of certain loans were modified as troubled debt restructurings. 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.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2012:

 

   For the Three Months Ended March 31, 2012 
                 
   Number of Loans   Pre-Modification Recorded Investment   Post-Modification Recorded Investment   Provision 
                     
Commercial                    
Closed End      $   $   $ 
Line of Credit                
Agricultural & AGRE                
Construction, land & development                
CRE – all other                    
Owner Occupied                
Non-Owner Occupied   1    892    892    585 
1-4 family residential                    
Senior lien                
Junior lien & lines or credit                
Consumer                
Total   1   $892   $892   $585 

 

The troubled debt restructurings described above increased the allowance for loan losses by $0.6 million and resulted in no charge offs during the three month period ending March 31, 2012.

 

13.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2011:

 

   For the Three Months Ended March 31, 2011 
                 
   Number of Loans   Pre- Modification Recorded Investment   Post- Modification Recorded Investment   Provision 
                     
Commercial                    
Closed End      $   $   $ 
Line of Credit                
Agricultural & AGRE                
Construction, land & development   1    45    45     
CRE – all other                    
Owner Occupied                
Non-Owner Occupied                
1-4 family residential                    
Senior lien                
Junior lien & lines or credit                
Consumer                
Total   1   $45   $45   $ 

 

The troubled debt restructurings described did not increase the allowance for loan losses and resulted in no charge offs during the three month period ending March 31, 2011.

 

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 month period ending March 31, 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:

 

March  31, 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  $9   $23   $   $32   $   $ 
Line of Credit               369         
Agricultural & AGRE   65    682        65         
Construction, land & development   3,374    7,245        6,861(8)        (8)
CRE – all other                              
Owner Occupied   4,611    5,290        5,437(2)        (2)
Non-Owner Occupied   4,880    4,880        10,266    77    50 
1-4 family residential                              
Senior lien   1,487    1,776        1,824    5    3 
Junior lien & lines or credit   267    372        642    2    2 
Consumer                        
Subtotal   14,693    20,268        25,496    74    45 
                               
Loans with an allowance recorded:                              
Commercial                              
Closed End  $1,484   $1,575   $673   $1,630   $17   $12 
Line of Credit   1,219    1,482    1    1,727       (10)
Agricultural & AGRE   60    60    8    20    1     
CRE - Construction, land & development   16,769    27,637    3,172    18,933    6    4 
CRE – all other                              
Owner Occupied   10,813    11,166    2,331    13,319    145    89 
Non-owner occupied   12,438    14,378    3,713    11,232    69    40 
1-4 family residential                              
Senior lien   7,670    8,138    1,378    7,693    112    95 
Junior lien & lines of credit   524    671    308    468    3    3 
Consumer   1    1        4         
Subtotal   50,978    65,108    11,584    55,026    353    233 
Total  $65,671   $85,376   $11,584   $80,522   $427   $278 
                               
Commercial  $55,723   $74,418   $9,898   $69,891   $305   $175 
Residential  $9,947   $10,957   $1,686   $10,627   $122   $103 
Consumer  $1   $1   $   $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 & AGRE   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 
Junior lien & lines or 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 & AGRE               1,039         
CRE - 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 
Junior 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   $88,462   $8,154   $78,237   $1,864   $1,716 
Residential  $10,562   $11,438   $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 $22.8 million and $28.6 million of loans that were classified as impaired but were considered to be performing loans at March 31, 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:

 

March  31, 2012  30 – 59 days past due   60 -89 days past due   90 days past due or nonaccrual   Total Past Due   Current   Total Loans   Recorded Investment 90 days Accruing 
Commercial                                   
Closed end  $171   $43   $484   $698   $29,340   $30,038   $ 
Line of credit   65        1,219    1,284    30,550    31,834     
Agricultural & AGRE   100        65    165    33,635    33,800     
CRE – construction, land & develop   24        19,693    19,717    17,365    37,082     
CRE – all other                                   
Owner occupied   1,236    207    6,922    8,365    127,343    135,708     
Non-owner occupied   280        9,925    10,205    144,371    154,576     
Residential – 1-4 family                                   
Senior lien   2,559        3,961    6,520    83,048    89,568     
Junior lien & lines of credit   601    72    578    1,251    47,575    48,826     
Consumer   4            4    2,296    2,300     
Total  $5,040   $322   $42,847   $48,209   $515,523   $563,732   $ 

 

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   Recorded Investment 90 days Accruing 
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 & AGRE           65    65    39,063    39,128     
CRE – construction, land & develop       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      
Residential – 1-4 family                                   
Senior lien   2,832    691    3,588    7,111    88,093    95,204     
Junior 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 following table represents data for nonperforming loans:

 

   For the period ended 
   March 31,   December 31, 
   2012   2011 
Commercial          
Closed end  $484   $95 
Line of credit   1,219    1,222 
Agricultural & AGRE   65    65 
CRE – construction, land & development   19,693    23,738 
CRE – all other          
Owner occupied   6,922    8,633 
Non-owner occupied   9,925    6,572 
Residential – 1-4 family          
Senior lien   3,961    3,588 
Junior lien & lines of credit   578    806 
Consumer       4 
Total  $42,847   $44,723 

 

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

 

17.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

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 March 31, 2012, and changes during the period ended on those dates is presented below:

 

   March 31, 2012 
           Weighted-     
       Weighted-   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
   Shares   Price   Life   Value 
Outstanding at January 1, 2012   328,438   $16.17           
Granted                  
Exercised                  
Forfeited   (47,511)   16.25           
                     
Outstanding at end of period   280,927   $16.15         3.0 years   $ 
Vested or expected to vest   279,730   $16.17         3.0 years   $ 
Options exercisable at period end   254,327   $16.55         2.9 years   $ 

 

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

 

   Outstanding   Exercisable 
       Weighted-         
       Average       Weighted- 
       Remaining       Average 
       Contractual       Exercise 
Range of Exercise Prices  Number   Life   Number   Price 
March 31, 2012:                    
                     
    $     5.24     -     $   13.00   73,500        3.9 years    56,100   $7.18 
         13.88     -          18.63   92,327        2.3 years    85,127    17.25 
         19.03     -          23.31   115,100        2.9 years    113,100    20.67 
                     
    280,927        3.0 years    254,327   $16.55 
                     
December 31, 2011:                    
                     
    $     5.24     -     $   13.00   75,500        4.2 years    49,400   $6.89 
         13.88     -          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 March 31, 2012 and 2011. The compensation cost that has been charged against income for the stock options portion of the Option Plans was $0.003 million and $0.03 million for the three months ended March 31, 2012 and 2011, respectively.

 

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

 

18.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 5. Share Based Compensation (Continued)

 

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 
April, 2012 – December, 2012  $30 
2013   18 
2014    
      
     Total  $48 

 

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.

 

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.

 

19.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 7. Segment Information (Continued)

 

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 
   March 31, 2012 
   Retail   Commercial   Treasury   Other   Total 
   Segment   Segment   Segment   Operations   Company 
Net interest income (loss)  $1,878   $4,778   $(490)  $(123)  $6,043 
Other revenue   1,988    699    16    349    3,052 
Other expense   2,519    1,091    45    3,923    7,578 
Noncash items                         
   Depreciation   237            193    430 
   Provision for loan losses   232    1,118            1,350 
   Other intangibles   237                237 
Net allocations   1,184    2,425    281    (3,890)    
Income tax benefit                    
   Segment profit (loss)  $(543)  $843   $(800)  $   $(500)
                          
Segment assets  $160,298   $461,328   $263,016   $77,161   $961,803 

 

   Three Months Ended 
   March 31, 2011 
   Retail   Commercial   Treasury   Other   Total 
   Segment   Segment   Segment   Operations   Company 
Net interest income (loss)  $2,043   $5,980   $(631)  $(142)  $7,250 
Other revenue   1,906    318    (392)   292    2,124 
Other expense   2,723    828    44    4,450    8,045 
Noncash items                         
   Depreciation   275    1        203    479 
   Provision for loan losses   385    3,865            4,250 
   Other intangibles   276                276 
Net allocations   1,435    2,719    349    (4,503)    
Income tax expense (benefit)   (12)   (148)   (58)       (218)
   Segment profit (loss)  $(1,133)  $(967)  $(1,358)  $   $(3,458)
                          
Segment assets  $185,218   $574,688   $241,950   $71,980   $1,073,836 

 

Note 8. Borrowed Funds and Debt Obligations

 

As of March 31, 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 March 31, 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 March 31, 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.

 

20.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 8. Borrowed Funds and Debt Obligations (Continued)

 

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 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 March 31, 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 March 31, 2012 and December 31, 2011 was $0.2 million.

 

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:

 

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.

 

21.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

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 March 31, 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.

 

At March 31, 2012, the Company held five pooled trust preferred CDOs with an amortized cost of $8.1 million. These securities were rated high quality (A3 and above) at inception, but at March 31, 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 first 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 first quarter of 2012, our model indicated no OTTI on these CMOs, with an aggregate cost basis of $1.3 million.

 

22.
 

  

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

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 March 31, 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) 
March 31, 2012                    
U.S. government agencies  $15,505   $   $15,505   $ 
State and political subdivisions   17,924        17,924     
U.S. government agency residential mortgage-backed securities   170,641        170,641     
Collateralized mortgage obligations:                    
Agency   27,161        27,161     
Private Label   1,433            1,433 
Equities   2,583        2,583     
Collateralized debt obligations:                    
Single Issue   2,064        2,064     
Pooled   7,084            7,084 
Corporate   1,966        1,966     
Available-for-sale securities  $246,361   $   $237,844   $8,517 

 

   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 first quarter of 2012 or all of 2011.

 

23.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

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, 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           (392)    
Payment received   (60)   (166)       (1,088)
Other changes in fair value       1    20     
Included in other comprehensive income   544    48    864    30 
Ending Balance, March 31  $7,084   $1,433   $4,914   $3,878 

 

The following table presents quantitative information about recurring Level 3 fair value measurements at March 31, 2012.

 

  Fair Value   Valuation Technique   Unobservable Inputs   Range (Weighted Average)
                 
Collateralized mortgage obligations $  1,433   Collateral coverage   Probability of loss   0% - 40%  (22%)
            Coverage ratio   5% - 5%  (5%)
                 
Collateralized debt obligations $  7,084   Discounted cash flow   Collateral default rate   4% - 30%  (8%)
            Discount rate   3% - 5%  (3%)

 

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) 
March 31, 2012                    
Impaired loans                    
Commercial                    
Closed end  $811   $   $   $811 
Line of credit   1,218            1,218 
Agricultural & AGRE   52            52 
CRE - construction, land & development   13,597            13,597 
CRE – all other                    
Owner occupied   8,482            8,482 
Non-owner occupied   8,725            8,725 
1-4 family residential                    
Senior lien   6,292            6,292 
Junior lien & lines of credit   216            216 
Consumer   1            1 

 

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) 
OREO property                    
Commercial                    
Closed end  $   $   $   $ 
Line of credit                
Agricultural & AGRE   1,423            1,423 
CRE - construction, land & development   3,857            3,857 
CRE – all other                    
Owner occupied   3,390            3,390 
Non-owner occupied   973            973 
1-4 family residential                    
Senior lien   401            401 
Junior lien & lines of credit                
Consumer                

 

   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 
                     
    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.

 

25.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

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.

 

Impaired loans had a carrying amount of $51.0 million with specific loan loss allocations of $11.6 million in first quarter 2012, resulting in additional provision for loan losses of $4.6 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 $10.0 million which is made up of the outstanding balance of $17.6 million, net of a valuation allowance of $7.6 million at March 31, 2012, resulting in a write-down of $0.1 million for the first quarter of 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 March 31, 2012:

 

  Fair Value   Valuation Technique   Unobservable Inputs   Range (Weighted Average)
                 
Impaired loans       Sales comparison approach   Adjustment for differences between comparable sales    
Commercial                
Closed End $  811           20% - 100%  (30%)
Line of Credit    1,218           20% - 100%  (30%)
Agricultural & AGRE    52           20% - 55%  (12%)
                 
CRE - Construction, land & development    13,597           10% - 55%  (14%)
CRE - all other                
Owner occupied    8,482           10% - 55%  (18%)
Non-owner occupied    8,725           10% - 55%  (18%)
1-4 family residential                
Senior lien    6,292           10% - 50%  (16%)
Junior lien & lines of credit    216           20% - 100%  (51%)
Consumer    1           0% - 60%  (0%)

 

26.
 

 

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    1,423           10%  (10%)
CRE - Construction, land & development    3,857           5% - 50%  (25%)
CRE - all other                
Owner occupied    3,390           15% - 40%  (22%)
Non-owner occupied    973           10% - 40%  (26%)
1-4 family residential                
Senior lien    401           0% - 55%  (26%)
Junior lien & lines of credit    -           -
Consumer    -           -

 

The Methods and Assumptions Used to Estimate Fair Value

 

The carrying amount is the estimated fair value for cash and 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.

 

   Carrying   Fair Value measurements at March 31, 2012 Using 
   Value   Level 1   Level 2   Level 3   Total 
                     
Financial assets                         
Cash and Cash Equivalents  $62,544   $57,544   $5,000   $   $62,544 
Securities   246,361        237,844    8,517    246,361 
Restricted Securities   7,467                NA 
Net Loans   543,394            526,095    526,095 
Accrued interest receivables   2,903        952    1,951    2,903 
Financial liabilities                         
Deposits  $843,405   $   $847,096   $   $847,096 
Federal Funds purchased and securities sold under agreements to repurchase   16,226        16,226        16,226 
Federal Home Loan Bank Advances   23,057        24,505        24,505 
Notes payable   10,440            10,428    10,428 
Subordinated debentures   20,620            18,364    18,364 
Series B mandatorily redeemable  preferred stock   268        268        268 
Accrued interest payable   4,133        1,156    2,977    4,133 

 

27.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

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

 

   December 31, 
   2011 
   Carrying   Fair 
   Amount   Value 
Financial assets          
Cash and cash equivalents  $69,735   $69,735 
Securities   228,836    228,836 
Restricted securities   9,150    N/A 
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 mandatory 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. 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 2 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.

 

28.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9. Fair Value (Continued)

 

(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 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 2 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.

 

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 March 31, 2012 one director has been appointed. The Company is accruing the dividends in accordance to GAAP and the terms of the program. At March 31, 2012 and December 31, 2011 the amounts accrued are $5.0 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.

 

29.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 11. Intangible Assets

 

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

 

   March 31,   December 31, 
   2012   2011 
   Gross       Gross     
   Carrying   Accumulated   Carrying   Accumulated 
   Amount   Amortization   Amount   Amortization 
                 
Amortized intangible assets:                    
Core deposit intangibles  $14,124   $9,678   $14,124   $8,412 
Missouri charter   581        581     
                     
Total  $14,705   $9,678   $14,705   $8,412 

 

Aggregate amortization expense was $0.2 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively.

 

Estimated amortization expense for subsequent periods is as follows:

 

Remaining quarters in 2012  $714 
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 March 31, 2012. A three year cumulative loss position and continued near-term losses represent negative evidence that cannot be overcome with future taxable income.

 

30.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 12. Income Taxes (Continued)

 

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

 

   Balance at 03/31/12   Balance at 12/31/11   Change 
Allowance for loan loss  $7,892   $8,239    $         (347) 
Impairment on securities portfolio   8,095    8,095     
Net operating loss carryforwards   20,111    19,388    723 
Valuation adjustments on OREO property   2,931    3,020    (89)
Basis adjustments from merger   (1,405)   (1,467)   62 
Mortgage servicing rights   (788)   (810)   22 
Securities available-for-sale   (1,326)   (859)   (467)
All other   (55)   (57)   2 
                
Net deferred tax before allowance  $35,455   $35,549   $(94)
Valuation allowance   (35,455)   (35,549)   94 
Net deferred tax assets  $   $   $ 

 

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 March 31, 2012                              
Total capital (to risk-weighted assets)                              
Centrue Financial  $60,234    9.0%  $53,308    8.0%   N/A       N/A 
Centrue Bank   68,768    10.5    52,569    8.0    65,712    10.0 
                               
Tier I capital (to risk-weighted assets)                              
Centrue Financial  $36,085    5.4    26,654    4.0    N/A       N/A 
Centrue Bank   60,404    9.2    26,285    4.0    39,427    6.0 
                               
Tier I leverage ratio (to average assets)                              
Centrue Financial  $36,085    3.8    38,181    4.0    N/A       N/A 
Centrue Bank   60,404    6.3    38,095    4.0    47,618    5.0 
                               
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 

  

31.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 13. Regulatory Matters (Continued)

 

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.

 

The Company has incurred net losses of $0.5 million for the first quarter 2012 and $10.6 million for the full year 2011 due to loan losses, reduced net interest income and security OTTI. 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 March 31, 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 March 31, 2012 and December 31, 2011, the Company had a Tier 1 leverage ratio of 3.8% 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.

 

In September 2011, the FASB amended existing guidance relating to goodwill impairment testing. The amendment permits an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing these events or circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in this guidance are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. The adoption of this guidance is included in this filing.

 

32.
 

 

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 three months ended March 31, 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.

 

33.
 

 

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 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.

 

34.
 

 

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 first quarter 2012 was $1.4 million, compared to $1.5 million and $4.3 million for fourth quarter 2011 and first quarter 2011, respectively. The decline in provision expense was warranted based on decreases in the level of nonperforming loans, decreases in the level of problem loans, and a reduction in the pace of performing loans moving to problem loan classifications. The decline in provision taken during the first quarter of 2012 was driven by:

 

·lowering levels of nonperforming loans and less new credits that migrated to nonperforming status;
   
·current quarter charge-offs decreased significantly from the prior quarters;
   
·declining trend in past due loans;
   
·some stabilization of collateral values.

 

Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential and commercial real estate, and commercial development exposures. Many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry that existed throughout the first 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.

 

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 
   March 31, 
   2012   2011 
Service charges  $1,049   $1,062 
Mortgage banking income   487    407 
Electronic banking services   532    527 
Bank-owned life insurance   243    249 
Other income   534    164 
Subtotal recurring noninterest income   2,845    2,409 
Securities gains   16     
Net impairment on securities       (392)
Gain on sale of OREO   191    44 
Gain on sale of other assets       63 
Total noninterest income  $3,052   $2,124 

 

Noninterest income totaled $3.1 million for the three months ended March 31, 2012, compared to $2.1 million for the same period in 2011. Excluding credit impairment charges on CDO securities and gains related to the sale of OREO and other assets from both periods, noninterest income increased by $0.5 million or 20.8%. This $0.5 million increase was derived from several different categories, one of the largest being income from OREO property.

 

35.
 

 

Centrue Financial Corporation

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

(Table Amounts In Thousands, Except Share Data)

 

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 
   March 31, 
   2012   2011 
Salaries and employee benefits  $3,702   $3,633 
Occupancy expense, net   664    720 
Furniture and equipment expenses   384    439 
Marketing   75    60 
Supplies and printing   68    64 
Telephone   175    204 
Data processing   307    364 
FDIC insurance   518    850 
Loan processing and collection costs   536    591 
Amortization of intangible assets   237    276 
Other expenses   1,446    1,399 
Subtotal recurring noninterest expenses   8,112    8,600 
OREO valuation adjustment   133    200 
Total noninterest expense  $8,245   $8,800 

 

Total noninterest expense for the first quarter of 2012 was $8.2 million, compared to $8.8 million recorded during the same period in 2011. Excluding OREO valuation adjustments from both periods, noninterest expense levels decreased by $0.5 million, or 5.8%. This $0.5 million decline in expenses was spread over various categories, including net occupancy costs, furniture and equipment, telephone, data processing, FDIC insurance, amortization expense, loan processing and collection costs. Adversely impacting expense levels were increases in marketing and salary and employee benefits.

 

Applicable Income Taxes

 

Income tax expense for the periods included benefits for tax-exempt income, tax-advantaged investments and general business tax credits offset by the effect of nondeductible expenses. The following table shows the Company’s income before income taxes, as well as applicable income taxes and the effective tax rate for the three months ended March 31, 2012 and 2011:

 

   Three Months Ended 
   March 31, 
   2012   2011 
Income (loss) before income taxes  $(500)  $(3,676)
Applicable income taxes       (218)
Effective tax rates       5.9%

 

The Company recorded no income tax benefit for the three months ended March 31, 2012 compared to an income tax benefit of $0.2 million recorded for the three months ended March 31, 2011. Effective tax rates equaled 0% and 5.93% respectively, for such periods. The Company recorded no tax benefit for the three months ended March 31, 2012 due to a full valuation allowance recorded on its deferred tax assets.

 

The Company recorded a tax benefit of $0.2 million allocated to the loss from continuing operations in the first quarter of 2011 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 benefit was recorded for the quarter due to the full deferred tax valuation allowance established as of December 31, 2010.

 

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)

 

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.

 

Retail generated a net loss of $0.5 million in the first quarter 2012 as compared to a net loss of $1.1 million during the same period in 2011. Retail assets were $160.3 million at March 31, 2012, $165.9 million at December 31, 2011 and $185.2 million as of March 31, 2011. This represented 16.7%, 17.1% and 17.3% of total consolidated assets, respectively.

 

Earnings results for the first quarter of 2012, when compared to the same period of 2011, were positively impacted by lower provision, lower expenses and higher mortgage banking revenue which were partially offset by a decline in net interest margin due to lower loan balances.

 

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 net income of $0.8 million in the first quarter 2012 as compared to a loss of $1.0 million during the same period in 2011. Commercial assets were $461.3 million at March 31, 2012, $470.1 million at December 31, 2011 and $574.7 million as of March 31, 2011. This represented 48.0%, 48.6% and 53.5% of total consolidated assets, respectively.

 

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)

 

Net income results for the first quarter of 2012, when compared to the same period of 2011, were positively impacted by lower provision for loan losses and higher noninterest income. Offsetting these positive developments were lower net interest income due to average loan volume decline, the impact of nonaccrual loan interest reversals and noninterest expense levels due to salary expense and loan workout expenses.

 

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 $0.8 million in the first quarter 2012 as compared to a net loss of $1.4 million, during the same period in 2011. Treasury assets were $263.0 million at March 31, 2012, $250.7 million at December 31, 2011 and $242.0 million at March 31, 2011. This represented 27.3%, 25.9% and 22.5% of total consolidated assets, respectively.

 

Earnings results for the first 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 no non-cash impairment charge on CDO 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 March 31, 2011.

 

Financial Condition

 

General

 

Following are highlights of the March 31, 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.

 

Securities at March 31, 2012 totaled $253.8 million as compared to $238.0 million recorded at December 31, 2011. The $15.8 million, or 6.6%, net increase from year-end 2011 was largely related to enhancing the Company’s liquidity position through reinvesting funds resulting from pay-downs in the loan portfolio into security instruments due to limited loan demand.

 

At quarter-end, the Company held five pooled trust preferred collateralized debt obligations (“CDOs”) involving three hundred issuers with a total book value of $8.1 million and fair value of $7.1 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 a minimum of twenty-three banks or, in a few instances, capital notes from insurance companies. The Company did not record an Other-than-temporary impairment charge during the quarter. 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 $563.7 million, representing decreases of $18.7 million, or 3.2% and $146.8 million or 20.7%, from December 31, 2011 and March 31, 2011, respectively. The net decrease during the first quarter 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.

 

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)

 

Deposits. Total deposits equaled $843.4 million at March 31, 2012 compared to $848.6 million recorded at December 31, 2011 and $922.5 million on record at March 31, 2011. The March 31, 2012 deposit balance represents a decrease of $5.2 million or 0.6% from December 31, 2011 and $79.1 million or 8.6% from March 31, 2011. The net decreases from year-end 2011 were largely related to strategic initiatives to reduce higher costing time deposits and collateralized local public agency deposits. Wholesale funding decreased $8.4 million, as $8.4 million in maturing brokered certificates of deposits were not replaced since year-end.

 

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 collectibility 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.

 

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

 

   2012   2011 
   Mar 31,   Dec 31,   Sep 30,   Jun 30,   Mar 31, 
Nonaccrual loans  $37,538   $38,688   $40,665   $45,541   $58,607 
Troubled debt restructurings   6,366    7,147    7,317    6,374    5,124 
Loans 90 days past due and still accruing interest                    
Total nonperforming loans   43,904    45,835    47,982    51,915    63,731 
                          
Other real estate owned   33,501    29,667    32,912    35,618    28,581 
Total nonperforming assets  $77,405   $75,502   $80,894   $87,533   $92,312 
                          
End of period loans  $563,732   $582,395   $620,450   $660,882   $710,529 
                          
Nonperforming loans to total end of period loans   7.79%   7.87%   7.73%   7.86%   8.97%
Nonperforming assets to total end of period loans   13.73%   12.96%   13.04%   13.24%   12.99%
Nonperforming assets to total end of period assets   8.05%   7.80%   8.02%   8.56%   8.60%

 

 

Total nonperforming assets were $77.4 million, or 8.1% of total assets, at March 31, 2012. This included $6.4 million in troubled debt restructurings, $33.5 million of OREO and $37.5 million of nonaccrual loans. The majority of the OREO is comprised of nine parcels (land development and commercial real estate) which account for 63.5% of the balance. The Company updates these appraisals quarterly to ensure that they are properly carried at their fair market value. Approximately 45.0% of total nonaccrual loans at March 31, 2012 were concentrated in land development and construction credits. Additionally, 64.6% of total nonaccrual loans represented loans to 10 borrowers.

 

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)

 

The level of nonperforming loans (nonaccrual, 90 days past due, and troubled debt restructurings) at March 31, 2012 decreased $1.9 million, or 4.1%, from December 31, 2011 levels and $19.8 million, or 31.1%, from the $63.7 million that existed at March 31, 2011. The decrease in nonperforming loans was mainly due to the charge-off of nonaccrual loans and the transfer of the property securing the credits into OREO. The level of nonperforming loans to total end of period loans was 7.79% at March 31, 2012, as compared to 7.87% at December 31, 2011 and 8.97% at March 31, 2012. As a result of the decrease in nonperforming loans, the coverage ratio (allowance to nonperforming loan) was reported at 46.3% as of March 31, 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 first quarter of 2012, $22.8 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 34.8% of the loans deemed impaired as of the March 31, 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 $11.0 million at March 31, 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 March 31, 2012, the allowance for loan losses was $20.3 million, or 3.6% of total loans, as compared to $21.2 million, or 3.7%, at December 31, 2011 and $29.1 million, or 4.1%, of total loans at March 31, 2011.

 

The Company recorded a provision of $1.4 million to the allowance for loan losses in the first quarter 2012 which represents a decrease from prior quarters largely due to the following factors:

 

·lowering levels of nonperforming loans;
   
·current quarter charge-offs decreased significantly from the prior quarter;
   
·declining trend in past due loans;
   
·some stabilization of collateral values.

 

Net loan charge-offs for the first quarter of 2012 were $2.2 million, or 0.2% of average loans, compared with $3.6 million, or 0.5% of average loans, for the fourth quarter of 2011 and $6.7 million, or 0.9% of average loans, for the first quarter of 2011. Loan charge-offs during the first 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.

 

Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential and commercial real estate, and commercial development exposures. Many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry that existed throughout the first 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 March 31, 2012 represented probable incurred credit losses inherent in the loan portfolio.

 

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)

 

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 March 31, 2012 equaled $0.5 million or $0.17 per common diluted share as compared to a net loss of $3.5 million or $0.65 per common diluted share in the first quarter of 2011 and net income of $0.1 million or a loss of $0.08 per common diluted share in the fourth quarter of 2011. The Company’s principal subsidiary, Centrue Bank (the “Bank”), posted net income of $0.03 million for the first quarter compared to net income of $0.6 million for the fourth quarter of 2011 and a net loss of $3.0 million for the first quarter of 2011.

 

The results for the first quarter 2012 were adversely impacted by a $1.4 million provision for loan losses largely related to asset quality deterioration in the Company’s commercial and residential real estate portfolios. During the first quarter of 2011, the Company recorded a $4.3 million provision for loan losses, $0.2 million OREO valuation adjustment and $0.4 million non-cash impairment charge on securities.

 

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 first quarter 2012 decreased 17.6% to $6.1 million as compared to $7.4 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.

 

The net interest margin was 3.02% for the first quarter of 2012, representing a decrease of 7 basis points from the 3.09% recorded at the first and fourth quarters of 2011. The Bank’s net interest margin was 3.21% for the first quarter of 2012, representing decreases of 6 basis points from 3.27% recorded in fourth quarter 2011 and 3 basis points from 3.24% from the first quarter of 2011. The decrease in the first quarter 2012 net interest margin, as compared to the same period in 2011, was primarily related to the cost of retaining surplus liquidity, lower average volume of higher-yielding loans, increased premium amortization due to higher prepayments and lower coupon income with adjustable resets in the securities portfolio. 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.

 

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)

  

AVERAGE BALANCE SHEET

AND ANALYIS OF NET INTEREST INCOME

  

   For the Three Months Ended March 31, 
   2012   2011     
   Average   Interest Income/   Average   Average   Interest Income/   Average   Change Due To: 
   Balance   Expense   Rate   Balance   Expense   Rate   Volume   Rate   Net 
ASSETS                                             
                                              
Interest-earning assets                                             
Interest-earning deposits  $2,790   $23    3.24%  $3,152   $23    2.92%  $   $   $ 
Securities                                             
Taxable   223,133    829    1.49    210,041    990    1.91    247    (408)   (161)
Non-taxable   13,261    192    5.80    25,064    333    5.39    (145)   4    (141)
                                              
Total securities (tax equivalent)   236,394    1,021    1.73    235,105    1,323    2.28    102    (404)   (302)
                                              
Federal funds sold   5,620    16    1.12    1,009    8    3.26    21   (13)   8 
                                              
Loans                                             
Commercial   92,875    1,214    5.25    148,388    1,983    5.42    (656)   (113)   (769)
Real estate   476,652    5,785    4.87    579,191    7,251    5.08    (930)   (536)   (1,466)
Installment and other   1,608    53    13.15    2,444    68    11.32   (15)       (15)
                                              
Gross loans (tax equivalent)   571,135    7,052    4.95    730,023    9,302    5.17    (1,601)   (649)   (2,250)
                                              
Total interest-earnings assets   815,939    8,112    3.99    969,289    10,656    4.46    (1,478)   (1,066)   (2,544)
                                              
Noninterest-earning assets                                             
Cash and cash equivalents   65,533              58,254                          
Premises and equipment, net   23,550              25,471                          
Other assets   55,183              44,715                          
                                              
Total nonearning assets   144,266              128,440                          
                                              
Total assets  $960,205             $1,097,729                          
                                              
LIABILITIES & STOCKHOLDERS’ EQUITY                                             
                                              
Interest-bearing liabilities                                             
NOW accounts   86,373    20    0.09    85,715    46    0.22    8    (34)   (26)
Money market accounts   119,792    93    0.31    127,338    241    0.77    29    (177)   (148)
Savings deposits   98,646    13    0.05    96,590    35    0.15    7    (29)   (22)
Time deposits   408,959    1,274    1.25    502,960    2,165    1.75    (201)   (691)   (892)
Federal funds purchased and repurchase Agreements   17,338    11    0.25    18,450    11    0.24             
Advances from FHLB   23,058    186    3.24    56,170    412    2.97    (249)   23    (226)
Notes payable   31,415    392    5.01    31,807    364    4.64    9    19    28 
                                              
Total interest-bearing liabilities   785,581    1,989    1.02    919,030    3,274    1.45    (397)   (889)   (1,286)
                                              
Noninterest-bearing liabilities                                             
                                              
Noninterest-bearing deposits   127,374              120,643                          
Other liabilities   15,127              16,171                          
Total noninterest-bearing liabilities   142,501              136,814                          
                                              
Stockholders’ equity   32,123              41,885                          
                                              
Total liabilities and stockholders’ equity  $960,205             $1,097,729                          
                                              
Net interest income (tax equivalent)       $6,123             $7,382        $(1,081)  $(177)  $(1,258)
Net interest income (tax equivalent) to total earning assets             3.02%             3.09%               
Interest-bearing liabilities to earning assets   96.28%             94.81%                         

 

 

(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.

 

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 $843.4 million, representing decreases of $5.2 million, or 0.6%, from December 31, 2011 and $79.1 million, or 8.6%, from March 31, 2011. During the quarter, in-market deposits increased $3.2 million or 0.4%, primarily as the result of increases in balances in savings accounts. Wholesale funding (brokered deposits and FHLB advances) decreased $8.4 million or 9.1%, as brokered deposits matured and were not replaced.

 

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)

 

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 March 31, 2012, the Company maintained borrowing capacity of $12.2 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 $58.0 million as of March 31, 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.