PINX:TRUE Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012 

Commission File Number: 0-28846

 

Centrue Financial Corporation

(Exact name of Registrant as specified in its charter)

 

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

 

7700 Bonhomme Avenue, St. Louis, Missouri 63105 

(Address of principal executive offices including zip code)

 

(314) 505-5500 

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No£

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer £ Accelerated filer £
Non-accelerated filer £ Smaller reporting company S

 

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

 

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

 

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

 

 
 

 

Centrue Financial Corporation

Form 10-Q Index

June 30, 2012

 

        Page
PART I. FINANCIAL INFORMATION    
         
Item 1. Financial Statements    
         
  Unaudited Consolidated Balance Sheets   1
         
  Unaudited Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)   2
         
  Unaudited Consolidated Statements of Cash Flows   4
         
  Notes to Unaudited Consolidated Financial Statements   6
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
         
Item 3. Quantitative and Qualitative Disclosures About Market Risk   36
         
Item 4. Controls and Procedures   54
         
PART II. OTHER INFORMATION    
         
Item 1. Legal Proceedings   55
         
Item 1A. Risk Factors   55
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   55
         
Item 3. Defaults Upon Senior Securities   55
         
Item 4. Mine Safety Disclosures   55
         
Item 5. Other Information   55
         
Item 6. Exhibits   56
         
SIGNATURES   57

 

 
 

 

Centrue Financial Corporation

Part I Financial Information

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

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


  

   June 30,   December 31, 
   2012   2011 
ASSETS          
Cash and cash equivalents  $48,253   $69,735 
Securities available-for-sale   225,667    228,836 
Restricted securities   7,028    9,150 
Loans   567,908    582,395 
Allowance for loan losses   (18,234)   (21,232)
Net loans   549,674    561,163 
Bank-owned life insurance   31,900    31,412 
Mortgage servicing rights   2,003    2,089 
Premises and equipment, net   23,187    23,754 
Other intangible assets, net   4,789    5,264 
Other real estate owned   27,890    29,667 
Other assets   6,183    6,914 
           
Total assets  $926,574   $967,984 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities          
Deposits:          
Non-interest-bearing  $122,107   $134,137 
Interest-bearing   660,157    714,501 
Total deposits   782,264    848,638 
Federal funds purchased and securities sold under agreements to repurchase   17,766    18,036 
Federal Home Loan Bank advances   48,057    23,058 
Notes payable   10,345    10,440 
Series B mandatory redeemable preferred stock   268    268 
Subordinated debentures   20,620    20,620 
Other liabilities   14,853    14,355 
Total liabilities   894,173    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)   31,739    31,429 
Common stock, $1 par value, 15,000,000 shares authorized; 7,453,555 shares issued at June 30, 2012 and December 31, 2011   7,454    7,454 
Surplus   74,570    74,558 
Accumulated deficit   (61,831)   (60,064)
Accumulated other comprehensive income   1,846    569 
    54,278    54,446 
Treasury stock, at cost, 1,390,114 shares at June 30, 2012 and December 31, 2011   (21,877)   (21,877)
Total stockholders' equity   32,401    32,569 
           
Total liabilities and stockholders' equity  $926,574   $967,984 

 

See Accompanying Notes to Unaudited Financial Statements

 

1.
 

 

Centrue Financial Corporation

Unaudited Consolidated Statements Of Income (Loss)

And Comprehensive Income (Loss)

Three Months and Six Months Ended June 30, 2012 and 2011

(In Thousands, Except Per Share Data)


 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Interest income                    
Loans  $6,952   $8,836   $13,989   $18,117 
Securities                    
Taxable   854    1,088    1,684    2,085 
Exempt from federal income taxes   113    177    239    392 
Federal funds sold and other   37    37    76    68 
Total interest income   7,956    10,138    15,988    20,662 
                     
Interest expense                    
Deposits   1,143    2,213    2,542    4,700 
Federal funds purchased and securities sold under agreements to repurchase   10    10    21    21 
Federal Home Loan Bank advances   190    355    376    767 
Series B mandatory redeemable preferred stock   4    4    8    8 
Subordinated debentures   295    274    588    544 
Notes payable   92    91    188    181 
Total interest expense   1,734    2,947    3,723    6,221 
                     
Net interest income   6,222    7,191    12,265    14,441 
Provision for loan losses   1,375    3,250    2,725    7,500 
Net interest income after provision for loan losses   4,847    3,941    9,540    6,941 
                     
Noninterest income                    
Service charges   1,040    1,189    2,089    2,251 
Mortgage banking income   455    302    942    709 
Electronic banking services   558    565    1,090    1,092 
Bank-owned life insurance   245    250    488    499 
Securities gains   698    379    714    379 
Total other-than-temporary impairment losses       (107)       (499)
Portion of loss recognized in other comprehensive income (before taxes)                
Net impairment on securities       (107)       (499)
Gain on sale of OREO   234    (92)   425    (48)
Gain on sale of other assets               63 
Other income   582    198    1,116    362 
    3,812    2,684    6,864    4,808 

 

See Accompanying Notes to Unaudited Financial Statements

 

2.
 

 

Centrue Financial Corporation

Unaudited Consolidated Statements Of Income (Loss)

And Comprehensive Income (Loss)

Three Months and Six Months Ended June 30, 2012 and 2011

(In Thousands, Except Per Share Data)


 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Noninterest expense                    
Salaries and employee benefits   3,582    3,460    7,284    7,093 
Occupancy, net   620    704    1,284    1,424 
Furniture and equipment   283    421    667    860 
Marketing   94    67    169    127 
Supplies and printing   65    77    133    141 
Telephone   179    204    354    408 
Data processing   360    375    667    739 
FDIC insurance   511    824    1,029    1,674 
Loan processing and collection costs   554    511    1,090    1,102 
OREO valuation adjustment   662    1,097    795    1,297 
Amortization of intangible assets   238    263    475    539 
Other expenses   1,428    1,574    2,874    2,973 
    8,576    9,577    16,821    18,377 
                     
Income (loss) before income taxes  $83   $(2,952)  $(417)  $(6,628)
Income tax expense (benefit)       (528)       (746)
Net income (loss)  $83   $(2,424)  $(417)  $(5,882)
                     
Preferred stock dividends   523    501    1,040    995 
Net income (loss) for common stockholders  $(440)  $(2,925)  $(1,457)  $(6,877)
                     
Basic earnings (loss) per common share  $(0.07)  $(0.48)  $(0.24)  $(1.14)
Diluted earnings (loss) per common share  $(0.07)  $(0.48)  $(0.24)  $(1.14)
                     
Total comprehensive income (loss):                    
Net income (loss)  $83   $(2,424)  $(417)  $(5,882)
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       (21)       (145)
Change in unrealized gains (losses) on other securities available for sale, net of reclassifications and tax effect   772    1,416    1,991    2,401 
Reclassification adjustment:                    
Net impairment loss recognized in earnings       107        499 
(Gains) recognized in earnings   (698)   (379)   (714)   (379)
Net unrealized gains (loss)   74    1,123    1,277    2,376 
Tax expense (benefit)       434        919 
Other comprehensive income (loss)   74    689    1,277    1,457 
Total comprehensive income (loss)  $157   $(1,735)  $860   $(4,425)

 

See Accompanying Notes to Unaudited Financial Statements

 

3.
 

 

Centrue Financial Corporation

Unaudited Consolidated Statements Of Cash Flows

Six Months Ended June 30, 2012 and 2011 (In Thousands)


 

   Six Months Ended 
   June 30, 
   2012   2011 
Cash flows from operating activities          
Net income (loss)  $(417)  $(5,882)
Adjustments to reconcile net income (loss) to net cash provided by operating activities          
Depreciation   766    946 
Amortization of intangible assets   475    539 
Amortization of mortgage servicing rights, net   306    198 
Amortization of bond premiums, net   1,404    1,175 
Income tax valuation adjustment   13    2,029 
Share based compensation   13    58 
Provision for loan losses   2,725    7,500 
Provision for deferred income taxes   (13)   (2,029)
Earnings on bank-owned life insurance   (488)   (499)
Other than temporary impairment, securities       499 
OREO valuation allowance   795    1,297 
Securities sale (gains), net   (714)   (379)
(Gain) on sale of other assets, net       (63)
(Gain) loss on sale of OREO   (425)   48 
(Gain) on sale of loans   (1,240)   (443)
Proceeds from sales of loans held for sale   38,018    20,871 
Origination of loans held for sale   (35,174)   (19,517)
Change in assets and liabilities          
(Increase) decrease in other assets   439    1,302 
Increase (decrease) in other liabilities   (316)   (1,328)
Net cash provided by operating activities   6,167    6,322 
Cash flows from investing activities          
Proceeds from paydowns of securities available for sale   26,213    22,647 
Proceeds from calls and maturities of securities available for sale   2,310    11,920 
Proceeds from sales of securities available for sale   18,069    18,419 
Purchases of securities available for sale   (42,800)   (53,485)
Redemption of Federal Home Loan Bank stock   2,088     
Redemption of Federal Reserve Bank stock   110    1,279 
Purchase of Federal Reserve Bank stock   (76)    
Net decrease (increase) in loans   973    30,565 
(Purchase) disposal of premises and equipment   (198)   (194)
Proceeds from sale of OREO   7,402    3,611 
Net cash from investing activities   14,091    34,762 

 

See Accompanying Notes to Unaudited Financial Statements

 

4.
 

 

Centrue Financial Corporation

Unaudited Consolidated Statements Of Cash Flows

Six Months Ended June 30, 2012 and 2011 (In Thousands)

 

   Six Months Ended 
   June 30, 
   2012   2011 
Cash flows from financing activities          
Net increase (decrease) in deposits   (66,374)   (65,068)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase   (270)   (8)
Repayment of advances from the Federal Home Loan Bank   (1)   (23,000)
Proceeds from advances from the Federal Home Loan Bank   25,000    10,000 
Payments on notes payable   (95)   (90)
Net cash used in financing activities   (41,740)   (78,166)
Net increase (decrease) in cash and cash equivalents   (21,482)   (37,082)
Cash and cash equivalents          
Beginning of period   69,735    82,945 
End of period  $48,253   $45,863 
Supplemental disclosures of cash flow information          
Cash payments for          
Interest  $3,495   $6,373 
Income taxes   10    19 
Transfers from loans to other real estate owned   6,187    14,860 

 

See Accompanying Notes to Unaudited Financial Statements

 

5.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 1. Summary of Significant Accounting Policies

 

Centrue Financial Corporation is a bank holding company organized under the laws of the State of Delaware. When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware corporation, and its consolidated subsidiaries. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank. The Company and the Bank provide a full range of banking services to individual and corporate customers located in markets extending from the far western and southern suburbs of the Chicago metropolitan area across Central Illinois down to the metropolitan St. Louis area. These services include demand, time, and savings deposits; business and consumer lending; and mortgage banking. Additionally, brokerage, asset management, and trust services are provided to our customers on a referral basis to third party providers. The Company is subject to competition from other financial institutions and nonfinancial institutions providing financial services. Additionally, the Company and the Bank are subject to regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

 

Basis of presentation

 

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

 

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

 

Note 2. Earnings Per Share

 

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

 

6.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 2. Earnings Per Share (Continued)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Basic Earnings (Loss) Per Common Share                
Net income (loss) for common shareholders  $(440)  $(2,925)  $(1,457)  $(6,877)
Weighted average common shares outstanding   6,063    6,048    6,063    6,048 
Basic earnings per common share  $(0.07)  $(0.48)  $(0.24)  $(1.14)
Diluted Earnings Per Common Share                    
Weighted average common shares outstanding   6,063    6,048    6,063    6,048 
Add:  dilutive effect of assumed exercised stock options                
Add:  dilutive effect of assumed exercised                    
         common stock warrants                
Weighted average common and dilutive potential shares outstanding   6,063    6,048    6,063    6,048 
Diluted earnings (loss) per common share  $(0.07)  $(0.48)  $(0.24)  $(1.14)

 

There were 274,927 options and 508,320 warrants outstanding for the three and six months ended June 30, 2012 and 496,738 options and 508,320 warrants outstanding for the three and six months ended June 30, 2011 that were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price and therefore, were anti-dilutive. In addition, the Company’s convertible preferred stock was not included in the computation of diluted earnings per share as it was anti-dilutive.

 

Note 3. Securities

 

The primary strategic objective related to the Company’s securities portfolio is to assist with liquidity and interest rate risk management. The fair value of securities classified as available-for-sale was $225.7 million at June 30, 2012 compared to $228.8 million at December 31, 2011. The carrying value of securities classified as restricted (Federal Reserve and Federal Home Loan Bank stock) was $7.0 million at June 30, 2012 compared to $9.2 million at December 31, 2011. The Company does not have any securities classified as trading or held-to-maturity.

 

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

 

   June 30, 2012 
       Gross   Gross     
   Fair   Unrealized   Unrealized   Amortized 
   Value   Gains   Losses   Cost 
U.S. government agencies  $15,336   $78   $   $15,258 
States and political subdivisions   16,249    757        15,492 
U.S. government agency residential mortgage-backed securities   153,865    3,224    (6)   150,647 
Collateralized residential mortgage obligations:                    
Agency   25,342    190    (11)   25,163 
Private label   1,280    112        1,168 
Equity securities   2,652    224        2,428 
Collateralized debt obligations:                    
Single issue   2,064            2,064 
Pooled   6,977    660    (1,639)   7,956 
Corporate   1,902        (98)   2,000 
   $225,667   $5,245   $(1,754)  $222,176 

 

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   177,539    2,790    (101)   174,850 
    mortgage-backed securities                    
Collateralized residential mortgage obligations:   15,527    229        15,298 
Agency   1,550    72    (7)   1,485 
Private label   2,530    134        2,396 
Equity securities                    
Collateralized debt obligations:                    
Single issue   2,064            2,064 
Pooled   6,600    53    (1,574)   8,121 
Corporate   1,882        (118)   2,000 
   $228,836   $4,015   $(1,801)  $226,622 

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Proceeds from calls and maturities  $1,040   $7,260   $2,310   $11,920 
Proceeds from sales   17,127    18,419    18,069    18,419 
Realized gains   698    379    714    379 
Realized losses                
Net impairment loss recognized in earnings       (107)       (499)
Tax benefit (provision) related to net realized gains and losses   (271)   (105)   (277)   46 

  

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

 

   June 30, 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 agency residential mortgage-backed securities  $12,001   $(6)  $   $   $12,001   $(6)
Collateralized residential mortgage obligations: agency   12,524    (11)           12,524    (11)
Collateralized debt obligations:  pooled           2,366    (1,639)   2,366    (1,639)
Corporate   1,902    (98)           1,902    (98)
Total temporarily impaired  $26,427   $(115)  $2,366   $(1,639)  $28,793   $(1,754)

 

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 June 30, 2012, by contractual maturity, are shown as follows. Securities not due at a single maturity date, including mortgage-backed securities, collateralized mortgage obligations, and equity securities are shown separately.

  

   Amortized   Fair 
   Cost   Value 
Due in one year or less  $2,006   $2,017 
Due after one year through five years   24,475    24,812 
Due after five years through ten years   5,641    6,010 
Due after ten years   10,648    9,689 
U.S. government agency residential mortgage-backed securities   150,647    153,865 
Collateralized residential mortgage obligations   26,331    26,622 
Equity   2,428    2,652 
   $222,176   $225,667 

  

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

 

   2012   2011 
Beginning balance, April 1,  $20,597   $20,754 
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized        
Additions/Subtractions          
Amounts realized for securities sold during the period        
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis        
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security        
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized       107 
           
Ending balance, June 30,  $20,597   $20,861 

 

9.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 3. Securities (Continued)

 

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

 

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

 

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

 

Note 4. Loans

 

The major classifications of loans follow: 

 

   Aggregate Principal Amount 
   June 30,
2012
   December 31,
2011
 
         
Commercial  $62,697   $63,982 
Agricultural & AGRE   38,418    39,128 
Construction, land & development   35,618    42,008 
Commercial RE   298,387    288,068 
1-4 family mortgages   130,252    146,767 
Consumer   2,536    2,442 
Total Loans  $567,908   $582,395 
Allowance for loan losses   (18,234)   (21,232)
Loans, net  $549,674   $561,163 

  

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

 

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

 

10.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

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

 

June 30, 2012                     
    Commercial           Commercial Real Estate     
Internal Risk Rating   Closed- end   Lines of Credit   Agriculture & AG RE   Construction, Land & Development   Owner- Occupied   Non- Owner Occupied   Total 
1-2   $584   $450   $3,941   $117   $3,302   $633   $9,027 
3    2,532    5,973    13,897    1,616    10,362    13,829    48,209 
4    12,218    12,416    14,491    1,274    73,887    62,665    176,951 
5    9,513    9,809    6,004    11,972    17,770    59,814    114,882 
6    1,357    3,890        2,299    10,087    12,551    30,184 
7    2,739    1,216    85    18,340    15,785    17,702    55,867 
8                             
Total   $28,943   $33,754   $38,418   $35,618   $131,193   $167,194   $435,120 

 

December 31, 2011                     
    Commercial           Commercial Real Estate     
Internal Risk Rating   Closed- end   Lines of Credit   Agriculture & AG RE   Construction, Land & Development   Owner- Occupied   Non- Owner Occupied   Total 
1-2   $716   $449   $4,833   $3,649   $3,489   $647   $13,783 
3    2,938    7,708    15,649    1,034    8,971    17,168    53,468 
4    12,989    13,533    14,323    1,566    68,045    44,665    155,121 
5    10,405    5,322    3,517    6,200    20,518    51,580    97,542 
6    3,374    3,892    741    5,497    10,868    19,900    44,272 
7    1,434    1,222    65    24,062    19,720    22,497    69,000 
8                             
Total   $31,856   $32,126   $39,128   $42,008   $131,611   $156,457   $433,186 

 

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

 

   Residential —1-4 family 
   Senior Lien   Jr. Lien & Lines of Credit   Total 
June 30, 2012               
Unrated  $71,257   $47,488   $118,745 
Special mention   1,297    868    2,165 
Substandard   8,499    843    9,342 
Doubtful            
Total  $81,053   $49,199   $130,252 

 

11.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

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

 

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

 

   Commercial   Agriculture & AG RE     Construction, Land & Development    Commercial RE   1-4 Family Residential   Consumer    Total 
June 30, 2012                                       
Beginning Balance  $1,503   $8   $ 4,655    $11,199   $2,929   $ 44    $20,338 
Charge-offs       (62)    (1,041 )   (1,779)   (675)    (1 )   (3,558)
Recoveries       26     2     44    4     3     79 
Provision   (25)   295     177     301    625     2     1,375 
Ending Balance  $1,478   $267   $ 3,793    $9,765   $2,883   $ 48    $18,234 

   

   Commercial   Agriculture & AG RE     Construction, Land & Development    Commercial RE     1-4 Family Residential    Consumer   Total  
June 30, 2011                                         
Beginning Balance  $1,759   $315     $8,655    $15,269   $ 3,055    $36   $ 29,089  
Charge-offs   (176)   (654)    (2,333)     (4,296)    (667)    (6)    (8,132 )
Recoveries   12    2     99     14     8     16     151  
Provision   156    723     (111)     2,022     471     (11)    3,250  
Ending Balance  $1,751   $386     $6,310    $13,009   $ 2,867    $35   $ 24,358  

  

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

 

   Commercial   Agriculture & AG RE   Construction, Land & Development    Commercial RE   1-4 Family Residential    Consumer   Total  
June 30, 2012                                   
Beginning Balance  $1,590   $5   $4,811   $11,680   $3,090   $56   $21,232 
Charge-offs       (87)   (1,093)   (3,929)   (1,078)   (6)   (6,193)
Recoveries       43    286    131    7    3    470 
Provision   (112)   306    (211)   1,883    864    (5)   2,725 
Ending Balance  $1,478   $267   $3,793   $9,765   $2,883   $48   $18,234 

 

12.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

   Commercial   Agriculture & AG RE   Construction, Land & Development    Commercial RE   1-4 Family Residential    Consumer Total  
June 30, 2011                                   
Beginning Balance  $1,634   $337   $12,500   $13,721   $3,273   $46   $31,511 
Charge-offs   (241)   (654)   (6,834)   (6,014)   (1,293)   (26)   (15,062)
Recoveries   18    3    100    231    36    21    409 
Provision   340    700    544    5,071    851    (6)   7,500 
Ending Balance  $1,751   $386   $6,310   $13,009   $2,867   $35   $24,358 

 

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 June 30, 2012 and December 31, 2011: 

 

June 30, 2012  Commercial   Agriculture & AG RE   Construction, Land & Development   Commercial RE   1-4 Family Residential   Consumer   Total 
Allowance for loan losses:                                   
Loans individually evaluated for impairment  $698   $9   $2,272   $4,613   $1,640   $   $9,232 
Loans collectively evaluated for impairment   780    258    1,521    5,152    1,243    48    9,002 
Total ending allowance balance:  $1,478   $267   $3,793   $9,765   $2,883   $48   $18,234 
                                    
Loan balances:                                   
Loans individually evaluated for impairment  $3,774   $85   $18,340   $30,131   $9,330   $5   $61,665 
Loans collectively evaluated for impairment   58,923    38,333    17,278    268,256    120,922    2,531    506,243 
                                    
Loans with an allowance recorded:  $62,697   $38,418   $35,618   $298,387   $130,252   $2,536   $567,908 

 

 

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

 

13.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

Troubled Debt Restructurings:

 

The Company had troubled debt restructurings (“TDRs”) of $4.3 million and $7.1 million as of June 30, 2012 and December 31, 2011, respectively. Specific reserves of $0.3 million and $0.95 million were allocated to TDRs as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, nonaccrual TDR loans were $4.3 million, as compared to $6.0 million at December 31, 2011. At June 30, 2012 there were $0.03 million of TDRs on accrual status compared to December 31, 2011, when $1.1 million was on accrual. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs as of June 30, 2012.

 

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

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three or six month period ending June 30, 2011 or 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: 

 

June 30, 2012  Recorded Investment   Unpaid Principal Balance   Related Allowance   Average Recorded Investment   Interest Income Recognized   Cash Basis Interest Recognized 
Loans with no related allowance recorded:                         
Commercial                              
Closed-end  $128   $142   $   $73   $1   $1 
Line of credit   45    308        189         
Agricultural & AG RE   25    672        52         
Construction, land & development   5,933    16,069        5,680    (2)   (2)
CRE - all other                              
Owner occupied   4,517    5,051        5,054    11    10 
Non-owner occupied   4,704    5,212        7,804    150    124 
1-4 family residential                              
Senior lien   1,148    1,788        1,465    2    2 
Jr. lien & lines of credit   219    389        570    5    4 
Consumer                        
Subtotal   16,719    29,631        20,887    167    139 
                               
Loans with an allowance recorded:                         
Commercial                              
Closed-end  $2,429   $2,429   $698   $1,816   $54   $55 
Line of credit   1,172    1,172        1,143        (10)
Agricultural & AG RE   60    60    9    20         
Construction, land & development   12,407    17,419    2,272    17,046    9    8 
CRE - all other                              
Owner occupied   11,140    11,595    2,445    13,319    289    233 
Non-owner occupied   9,770    10,531    2,168    10,093    72    58 
1-4 family residential                              
Senior lien   7,340    7,540    1,234    7,729    226    217 
Jr. lien & lines of credit   623    770    406    483    10    10 
Consumer   5    5        4         
Subtotal   44,946    51,521    9,232    51,653    660    571 
Total  $61,665   $81,152   $9,232   $72,540   $827   $710 
                               
Commercial  $52,330   $70,660   $7,592   $62,289   $584   $477 
Residential  $9,330   $10,487   $1,640   $10,247   $243   $233 
Consumer  $5   $5   $   $4   $   $ 

 

15.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued) 

 

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

 

Due to the economic conditions facing many of its customers, the Company determined that there were $22.3 million and $28.6 million of loans that were classified as impaired but were considered to be performing loans at June 30, 2012 and December 31, 2011, respectively.

 

16.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

The following tables represent activity related to loan portfolio aging:

 

June 30, 2012  30 - 59 Days Past Due   60 - 89 Days Past Due   90 Days Past Due or Nonaccrual   Total Past Due   Current   Total Loans 
Commercial                              
Closed-end  $227   $81   $1,554   $1,862   $27,081   $28,943 
Line of credit           1,216    1,216    32,538    33,754 
Agricultural & AG RE   3        85    88    38,330    38,418 
Construction, land & development       24    18,082    18,106    17,512    35,618 
CRE - all other                              
Owner occupied   917    123    6,472    7,512    123,681    131,193 
Non-owner occupied   1,191        7,296    8,487    158,707    167,194 
1-4 family residential                              
Senior lien   549    454    4,434    5,437    75,616    81,053 
Jr. lien & lines of credit   667    110    651    1,428    47,771    49,199 
Consumer   12            12    2,524    2,536 
Total  $3,566   $792   $39,790   $44,148   $523,760   $567,908 

  

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

 

17.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 4. Loans (Continued)

 

The following table represents data for nonaccrual loans: 

 

   For the period ended 
   June 30,
2012
   December 31,
2011
 
Commercial          
Closed-end  $1,554   $95 
Line of credit   1,216    1,222 
Agricultural & AG RE   85    65 
Construction, land & development   18,082    23,738 
CRE - all other          
Owner occupied   6,472    8,633 
Non-owner occupied   7,296    6,572 
1-4 family residential          
Senior lien   4,434    3,588 
Jr. lien & lines of credit   651    806 
Consumer       4 
Total  $39,790   $44,723 

 

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

 

Note 5. Share Based Compensation

 

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

 

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

 

   June 30, 2012 
   Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Life  Aggregate Intrinsic Value 
Outstanding at January 1, 2012   328,438   $16.17         
Granted                
Exercised                
Forfeited   (53,511)   16.96         
                   
Outstanding at end of period   274,927   $16.01   2.8 years  $ 
Vested or expected to vest   273,820   $16.03   2.8 years  $ 
Options exercisable at period end   250,327   $16.42   2.8 years  $ 

 

18.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 5. Share Based Compensation (Continued)

 

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

 

    Outstanding  Exercisable 
Range of Exercise Prices   Number   Weighted-Average Remaining Contractual Life  Number   Weighted-Average Exercise Price 
June 30, 2012:                   
                    
$   5.24       -     $   13.00    73,500   3.7 years   56,100   $7.18 
   13.24       -          18.63    92,327   2.1 years   85,127    17.25 
   19.03       -          23.31    109,100   2.8 years   109,100    20.53 
     274,927   2.8 years   250,327   $16.42 
                    
December 31, 2011:                   
                    
$   5.24       -     $   13.00    75,500   4.2 years   49,400   $6.89 
   13.24       -          18.63    124,838   2.0 years   110,438    16.43 
   19.03       -          23.31    128,100   3.0 years   124,500    20.77 
     328,438   2.9 years   284,338   $16.67 

 

There were no options exercised for the periods ended June 30, 2012 and 2011. The compensation cost that has been charged against income for the stock options portion of the Option Plans was $0.01 million and $0.03 million for the three months ended June 30, 2012 and 2011, and $0.01 million and $0.06 million for the six months ended June 30, 2012 and 2011, respectively.

 

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

 

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

 

    Amount 
July, 2012 - December, 2012   $20 
2013    18 
2014     
Total   $38 

  

Note 6. Contingent Liabilities and Other Matters

 

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

 

Note 7. Segment Information

 

The Company’s segment information provided below focuses on its three primary lines of business (Segment(s)): Retail Banking, Commercial Banking and Treasury. The financial information presented was derived from the Company’s internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, to portray each Segment as if it operated on a stand-alone basis. Thus, each Segment, in addition to its direct revenues, expenses, assets and liabilities, includes an allocation of shared support function expenses and corporate overhead. All Segments also include funds transfer adjustments to appropriately reflect the cost of funds on loans made, funding credits on deposits generated, and the cost of maintaining adequate liquidity. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of our financial statements from the December 31, 2011 10-K.

 

19.
 

  

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 7.  Segment Information (Continued)

 

Since there are no comprehensive standards for management accounting that are equivalent to accounting principles generally accepted in the United States of America, the information presented may not necessarily be comparable with similar information from other financial institutions.  In addition, methodologies used to measure, assign, and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines, and changes in management structure.

 

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

 

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

 

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

 

    Three Months Ended  
    June 30, 2012  
    Retail     Commercial     Treasury     Other     Total  
    Segment     Segment     Segment     Operations     Company  
Net interest income (loss)   $ 1,821     $ 4,820     $ (377 )   $ (42 )   $ 6,222  
Other revenue     2,002       736       698       376       3,812  
Other expense     2,494       1,468       43       3,997       8,002  
Noncash items                                        
Depreciation     236                   100       336  
Provision for loan losses     627       748                   1,375  
Other intangibles     238                         238  
Net allocations     970       2,545       248       (3,763 )      
Income tax benefit                              
Segment profit (loss)   $ (742 )   $ 795     $ 30     $     $ 83  
                                         
Segment assets   $ 152,644     $ 468,471     $ 263,106     $ 42,353     $ 926,574  

 

20.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 7.  Segment Information (Continued)

 

    Three Months Ended  
    June 30, 2011  
    Retail     Commercial     Treasury     Other     Total  
    Segment     Segment     Segment     Operations     Company  
Net interest income (loss)   $ 1,961     $ 5,837     $ (495 )   $ (112 )   $ 7,191  
Other revenue     1,991       134       272       287       2,684  
Other expense     2,630       1,598       43       4,576       8,847  
Noncash items                                        
Depreciation     273                   194       467  
Provision for loan losses     460       2,790                   3,250  
Other intangibles     263                         263  
Net allocations     1,341       2,888       366       (4,595 )      
Income tax benefit     (15 )     (436 )     (77 )           (528 )
Segment profit (loss)   $ (1,000 )   $ (869 )   $ (555 )   $     $ (2,424 )
                                         
Segment assets   $ 182,782     $ 537,493     $ 249,781     $ 52,200     $ 1,022,256  

 

    Six Months Ended  
    June 30, 2012  
    Retail     Commercial     Treasury     Other     Total  
    Segment     Segment     Segment     Operations     Company  
Net interest income (loss)   $ 3,699     $ 9,598     $ (867 )   $ (165 )   $ 12,265  
Other revenue     3,990       1,435       714       725       6,864  
Other expense     5,013       2,559       88       7,920       15,580  
Noncash items                                        
Depreciation     473                   293       766  
Provision for loan losses     859       1,866                   2,725  
Other intangibles     475                         475  
Net allocations     2,154       4,970       529       (7,653 )      
Income tax benefit                              
Segment profit (loss)   $ (1,285 )   $ 1,638     $ (770 )   $     $ (417 )
                                         
Segment assets   $ 152,644     $ 468,471     $ 263,106     $ 42,353     $ 926,574  

 

    Six Months Ended  
    June 30, 2011  
    Retail     Commercial     Treasury     Other     Total  
    Segment     Segment     Segment     Operations     Company  
Net interest income (loss)   $ 4,004     $ 11,817     $ (1,126 )   $ (254 )   $ 14,441  
Other revenue     3,897       452       (120 )     579       4,808  
Other expense     5,353       2,426       87       9,026       16,892  
Noncash items                                        
Depreciation     548       1             397       946  
Provision for loan losses     845       6,655                   7,500  
Other intangibles     539                         539  
Net allocations     2,776       5,607       715       (9,098 )      
Income tax benefit     (27 )     (584 )     (135 )           (746 )
Segment profit (loss)   $ (2,133 )   $ (1,836 )   $ (1,913 )   $     $ (5,882 )
                                         
Segment assets   $ 182,782     $ 537,493     $ 249,781     $ 52,200     $ 1,022,256  

 

Note 8.  Borrowed Funds and Debt Obligations

 

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

 

21.
 

 

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 June 30, 2012, the Company and Bank are in compliance with the covenants of the amended agreement.

 

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

 

22.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

Securities

 

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

 

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

 

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

 

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

 

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

 

23.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

At June 30, 2012, the Company held five pooled trust preferred CDOs with an amortized cost of $8.0 million.  These securities were rated high quality (A3 and above) at inception, but at June 30, 2012, these securities were rated as Ca, which are defined as highly speculative and/or default, with some recovery; and C, which is the lowest rating.  The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies.

 

The Company performed an analysis including evaluation for OTTI for each of the five CDOs.  During the second 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 $1.2 million.

 

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

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

    Carrying    

Quoted Prices in

Active Markets

For Identical Assets

   

Significant

Other

Observable
Inputs

   

Significant

Unobservable

Inputs

 
    Amount     (Level 1)     (Level 2)     (Level 3)  
June 30, 2012                        
U.S. government agencies   $ 15,336     $     $ 15,336     $  
State and political subdivisions     16,249             16,249        

U.S. government agency residential mortgage-backed securities

    153,865             153,865        
Collateralized mortgage obligations:                                
Agency     25,342             25,342        
Private Label     1,280                   1,280  
Equities     2,652             2,652        
Collateralized debt obligations:                                
Single Issue     2,064             2,064        
Pooled     6,977                   6,977  
Corporate     1,902             1,902        
Available-for-sale securities   $ 225,667     $     $ 217,410     $ 8,257  

 

 

24.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

   

Carrying

Amount

   

Quoted Prices in

Active Markets

For Identical Assets

(Level 1)

   

Significant

Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(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 second quarter of 2012 or all of 2011.

 

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

 

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

 

    Securities Available for Sale  
    2012     2011  
    CDOs     CMOs     CDOs     CMOs  
Beginning balance, April 1   $ 7,084     $ 1,433     $ 4,914     $ 3,878  
                                 
Transfers into Level 3                        
Total gains or losses (realized/unrealized) included in earnings                                
Security impairment                 (107 )      
Payment received     (105 )     (151 )           (1,073 )
Other changes in fair value     1             1        
Included in other comprehensive income     (3 )     (2 )     662       199  
Ending Balance, June 30   $ 6,977       1,280       5,470       3,004  

 

25.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

    Securities Available for Sale  
    2012     2011  
    CDOs     CMOs     CDOs     CMOs  
Beginning balance, January 1   $ 6,600     $ 1,550     $ 4,422     $ 4,936  
                                 
Transfers into Level 3                        
Total gains or losses (realized/unrealized) included in earnings                                
Security impairment                 (499 )      
Payment received     (165 )     (317 )           (2,161 )
Other changes in fair value     1       1              
Included in other comprehensive income     541       46       1,547       229  
Ending Balance, June 30   $ 6,977     $ 1,280     $ 5,470     $ 3,004  

 

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

 

    Fair Value   Valuation Technique   Unobservable Inputs  

Range (Weighted Average)

                   
Collateralized mortgage obligations   $  1,280    Collateral coverage   Probability of loss   0% - 40%  (34%)
              Coverage ratio   5% - 5%  (5%)
                   
Collateralized debt obligations   $  6,977    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)  
June 30, 2012                        
Impaired loans                        
Commercial                        
Closed end   $ 1,731     $     $     $ 1,731  
Line of credit     1,172                   1,172  
Agricultural & AGRE     51                   51  
CRE - construction, land & development     10,135                   10,135  
CRE - all other                                
Owner occupied     8,695                   8,695  
Non-owner occupied     7,602                   7,602  
1-4 family residential                                
Senior lien     6,106                   6,106  
Junior lien & lines of credit     217                   217  
Consumer     5                   5  

 

26.
 

 

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     261                   261  
CRE - construction, land & development     4,717                   4,717  
CRE - all other                                
Owner occupied     2,100                   2,100  
Non-owner occupied     3,845                   3,845  
1-4 family residential                                
Senior lien     78                   78  
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  

 

27.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

    Carrying    

Quoted Prices in

Active Markets

For Identical Assets

   

Significant

Other

Observable Inputs

   

Significant

Unobservable

Inputs

 
    Amount     (Level 1)     (Level 2)     (Level 3)  
                         
OREO property                        
Commercial                        
Closed end   $     $     $     $  
Line of credit                        
Agricultural & AGRE     261                   261  
CRE - construction, land & development     3,312                   3,312  
CRE - all other                                
Owner occupied     4,082                   4,082  
Non-owner occupied     829                   829  
1-4 family residential                                
Senior lien     285                   285  
Junior lien & lines of credit     81                   81  
Consumer                        

 

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

 

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

 

Impaired loans had a carrying amount of $44.9 million with specific loan loss allocations of $9.2 million in second quarter 2012, resulting in additional provision for loan losses of $4.1 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 $11.0 million which is made up of the outstanding balance of $19.0 million, net of a valuation allowance of $8.0 million at June 30, 2012, resulting in a write-down of $0.7 million for the second 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.

 

28.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

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 June 30, 2012:

  

    Fair Value   Valuation Technique   Unobservable Inputs  

Range

(Weighted Average)

                   
Impaired loans         Sales comparison approach   Adjustment for differences between comparable sales    
Commercial                  
Closed End   $  1,731           20% - 100%  (30%)
Line of Credit      1,172           20% - 100%  (30%)
Agricultural & AGRE      51           10% - 55%  (12%)
CRE - Construction, land & development     10,135           10% - 55%  (14%)
CRE - all other                  
Owner occupied      8,695           10% - 55%  (18%)
Non-owner occupied      7,602           10% - 55%  (18%)
1-4 family residential                  
Senior lien      6,106           10% - 50%  (16%)
Junior lien & lines of credit      217           20% - 100%  (51%)
Consumer      5           0% - 60%  (0%)

 

    Fair Value   Valuation Technique   Unobservable Inputs  

Range (Weighted Average)

                   
OREO property         Sales comparison approach   Adjustment for differences between comparable sales    
Commercial                  
Closed End   $          
Line of Credit              
Agricultural & AGRE      261           10%  (10%)
CRE - Construction, land & development      4,717           8% - 55%  (25%)
CRE - all other                  
Owner occupied      2,100           15% - 55%  (22%)
Non-owner occupied      3,845           10% - 55%  (26%)
1-4 family residential                  
Senior lien      78           6% - 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, cash equivalents, due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  Security fair values are based on the methods described above.

 

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

 

29.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

          Fair Value measurements at June 30, 2012 Using  
    Carrying Value     Level 1     Level 2     Level 3     Total  
                               
Financial assets                              
Cash and cash equivalents   $ 48,253     $ 43,253     $ 5,000     $     $ 48,253  
Securities     225,667             217,410       8,257       225,667  
Restricted securities     7,028                       NA  
Net loans     549,674                   536,094       536,094  
Accrued interest receivable     2,888             879       2,009       2,888  
Financial liabilities                                        
Deposits   $ 782,264     $     $ 785,071     $     $ 785,071  
Federal funds purchased and securities sold under agreements to repurchase     17,766             17,766             17,766  
Federal Home Loan Bank advances     48,057             49,399             49,399  
Notes payable     10,345                   10,279       10,279  
Subordinated debentures     20,620                   12,469       12,469  
Series B mandatorily redeemable preferred stock     268             268             268  
Accrued interest payable     4,269             1,000       3,269       4,269  

 

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

 

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

 

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

 

30.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 9.  Fair Value (Continued)

 

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

 

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

 

(a) Cash and Cash Equivalents

 

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

 

(b) Loans

 

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

 

(c) Deposits

 

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

 

(d) Short-term Borrowings

 

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

 

(e) Other Borrowings

 

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

 

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

 

(f) Accrued Interest Receivable/Payable

 

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

 

(g) Off-balance Sheet Instruments

 

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

 

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.

 

31.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 10. Participation in the Treasury Capital Purchase Program (Continued)

 

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

 

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

 

On August 10, 2009, the Company announced that it would defer scheduled dividend payments on the Series C, fixed rate cumulative, perpetual preferred stock.  Under the Securities Purchase Agreement entered into with the U.S. Treasury under the TARP program, if a company defers six dividend payments payable to the U.S. Treasury, the U.S. Treasury has the right to appoint up to two directors to its board of directors.  As of June 30, 2012 the two directors have been appointed. The Company is accruing the dividends in accordance to GAAP and the terms of the program.  At June 30, 2012 and December 31, 2011 the amounts accrued are $5.5 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.

 

Note 11.  Intangible Assets

 

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

 

 

    June 30, 2012     December 31, 2011  
    Gross Carrying Amount     Accumulated Amortization     Gross Carrying Amount     Accumulated Amortization  
                         
Amortized intangible assets:                        
Core deposit intangibles   $ 14,124     $ 9,916     $ 14,124     $ 9,441  
Missouri charter     581             581        
                                 
Total   $ 14,705     $ 9,916     $ 14,705     $ 9,441  

 

Aggregate amortization expense was $0.3 million for the three months ended June 30, 2012 and 2011.  Aggregate amortization expense was $0.5 million for the six months ended June 30, 2012 and 2011.

 

Estimated amortization expense for subsequent periods is as follows:

 

Remaining quarters in 2012   $ 476  
2013     951  
2014     951  
2015     951  
2016     879  
Thereafter      

 

32.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

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 June 30, 2012.  A three year cumulative loss position and continued near-term losses represent negative evidence that cannot be overcome with future taxable income.

 

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

 

    Balance at     Balance at        
    6/30/2012     12/31/2011     Change  
Allowance for loan loss   $ 7,076     $ 8,239     $ (1,163 )
Impairment on securities portfolio     8,095       8,095        
Net operating loss carryforwards     20,874       19,388       1,486  
Valuation adjustments on OREO property     3,100       3,020       80  
Basis adjustment form merger     (1,342 )     (1,467 )     125  
Mortgage servicing rights     (777 )     (810 )     33  
Securities available-for-sale     (1,355 )     (859 )     (496 )
All other     (109 )     (57 )     (52 )
                         
Net deferred tax before allowance   $ 35,562     $ 35,549     $ 13  
Valuation allowance     (35,562 )     (35,549 )     (13 )
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 June 30, 2012                                    
Total capital (to risk-weighted assets)                                    
Centrue Financial   $ 57,964       8.8 %   $ 52,962       8.0 %     N/A       N/A  
Centrue Bank     69,480       10.6       52,231       8.0       65,289       10.0  
Tier I capital (to risk-weighted assets)                                                
Centrue Financial   $ 35,751       5.4     $ 26,481       4.0       N/A       N/A  
Centrue Bank     61,194       9.4       26,116       4.0       39,174       6.0  
Tier I leverage ratio (to average assets)                                                
Centrue Financial   $ 35,751       3.8     $ 37,448       4.0       N/A       N/A  
Centrue Bank     61,194       6.6       37,370       4.0       46,712       5.0  

 

33.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

Note 13.  Regulatory Matters (Continued)

 

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

 

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

 

The Company has incurred net losses of $0.4 million for the first six months of 2012 and $10.6 million for the full year 2011 due to loan losses and reduced net interest income.  The Company is subject to ongoing monitoring by its regulatory agencies and requires regulatory approval in order to make the quarterly interest payments to Cole Taylor under our debt agreements.  The Company has sufficient cash at June 30, 2012 and management believes regulatory approval will be obtained for the remaining interest payments due in 2012.  Should the Company and/or its bank subsidiary capital levels fall below “adequately capitalized”, regulatory actions may be taken including requiring us to have higher capital requirements than those required by Prompt Corrective Action regulations.  At June 30, 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.

 

34.
 

 

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

 

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.

 

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)

 

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 six months ended June 30, 2012 as compared to the same period in 2011. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included. The preparation of financial statements requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware corporation, and its consolidated subsidiaries. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank.

 

The MD&A should be read in conjunction with the consolidated financial statements of the Company, and the accompanying notes thereto. Actual results could differ from those estimates. All financial information in the following tables is displayed in thousands (000s), except per share data.

 

Critical Accounting Policies and Estimates

 

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

 

Securities: Securities are classified as available-for-sale when the Company may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. All of the Company’s securities are classified as available-for-sale. For all securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Due to the limited nature of the market for certain securities, the fair value and potential sale proceeds could be materially different in the event of a sale.

 

Realized securities gains or losses are reported in securities gains (losses), net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of available for sale securities below their amortized cost are evaluated to determine whether the loss is temporary or other-than-temporary. If the Company (a) has the intent to sell a debt security or (b) is more likely than not will be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire unrealized loss in earnings as an other-than-temporary loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The impairment is separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income.

 

The Company also evaluates whether the decline in fair value of an equity security is temporary or other-than-temporary. In determining whether an unrealized loss on an equity security is temporary or other-than-temporary, management considers various factors including the magnitude and duration of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the equity security to forecasted recovery.

 

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)

 

Allowance for Loan Losses: The allowance for loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

 

The allowance for loan losses is based on an estimation computed pursuant to the requirements of Financial Accounting Standards Board guidance and rules stating that the analysis of the allowance for loan losses consists of three components:

 

  Specific Component. The specific credit allocation component is based on an analysis of individual impaired loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification for which the recorded investment in the loan exceeds its fair value. The fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values;
     
  Historical Loss Component. The historical loss component is mathematically based using a modified loss migration analysis that examines historical loan loss experience for each loan category. The loss migration is performed quarterly and loss factors are updated regularly based on actual experience. The general portfolio allocation element of the allowance for loan losses also includes consideration of the amounts necessary for concentrations and changes in portfolio mix and volume. The methodology utilized by management to calculate the historical loss portion of the allowance adequacy analysis is based on historical losses. This historical loss period is based on a weighted twelve-quarter average (3 years); and
     
  Qualitative Component. The qualitative component requires qualitative judgment and estimates reserves based on general economic conditions as well as specific economic factors believed to be relevant to the markets in which the Company operates. The process for determining the allowance (which management believes adequately considers all of the potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change.

 

To the extent actual outcomes differs from management estimates, additional provision for credit losses could be required that could adversely affect the Company’s earnings or financial position in future periods.

 

Other Real Estate Owned: Other real estate owned includes properties acquired in partial or total satisfaction of certain loans. Properties are recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any write-downs in the carrying value of a property at the time of acquisition are charged against the allowance for loan losses. Management periodically reviews the carrying value of other real estate owned. Any write-downs of the properties subsequent to acquisition, as well as gains or losses on disposition and income or expense from the operations of other real estate owned, are recognized in operating results in the period they are realized.

 

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)

 

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 income for the three months ended June 30, 2012 equaled $0.1 million or a loss of $0.07 per common diluted share as compared to a net loss of $2.4 million or a loss of $0.48 per common diluted share in the second quarter of 2011. The Company’s principal subsidiary, Centrue Bank (the “Bank”), posted net income of $0.5 million for the second quarter compared to a net loss of $2.0 million for the second quarter of 2011. For the first six months of 2012, the Company had a net loss $0.4 million or a loss of $0.24 per common diluted share as compared to a loss of $5.9 million or $1.14 per common diluted share for the same period in 2011. For the first six months of 2012, the Bank posted net income of $0.6 million compared to a net loss of $4.9 million for the first six months of 2011.

 

The results for the second quarter 2012 were adversely impacted by a $1.4 million provision for loan losses and OREO valuation adjustment of $0.7 million largely related to asset quality deterioration in the Company’s commercial and residential real estate portfolios and declining collateral values. During the second quarter of 2011, the Company recorded a $3.3 million provision for loan losses, $1.1 million OREO valuation adjustment and $0.1 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 second quarter 2012 decreased 13.7% to $6.3 million as compared to $7.3 million for the same period in 2011. The decrease in net interest income from 2011 was primarily due to average loan volume decline, increased rate competition for loan renewals and higher premium amortization due to increased prepayments and lower coupon income with adjustable resets in the security portfolio. Positively impacting net interest income were lower cost of funds led by a 52 basis points reduction in the yield on money market accounts.

 

The net interest margin was 3.11% for the second quarter of 2012, representing a decrease of 2 basis points from the 3.13% recorded at the second quarter of 2011. The Bank’s net interest margin was 3.31% for the second quarter of 2012, representing an increase of 10 basis points from 3.21% recorded at first quarter 2012 and a 3 basis point increase from the 3.29% from the second quarter of 2011. Due largely to the protracted economic downturn, the lost interest income on nonaccrual loans and the Company’s interest rate sensitivity, the margin will likely remain under pressure throughout 2012.

 

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)

 

Fully tax equivalent net interest income for the six months ended June 30, 2012 totaled $12.4 million, representing a decrease of $2.3 million or 15.6% compared to the $14.7 million earned during the same period in 2011. The net interest margin was 3.07% for the six months ended June 30, 2012, representing a decrease of 4 basis points from 3.11% recorded in the same period of 2011. The decrease of net interest income and the net interest margin was driven by the same factors impacting the second quarter.

 

39.
 

 

Centrue Financial Corporation

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

(Table Amounts In Thousands, Except Share Data)

 

AVERAGE BALANCE SHEET

AND ANALYIS OF NET INTEREST INCOME

 

   For the Three Months Ended June 30,                
   2012   2011                
         Interest              Interest                     
    Average    Income/    Average    Average     Income/    Average   Change Due To: 
     Balance     Expense     Rate     Balance     Expense     Rate    Volume