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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, 2008
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 [X] 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 [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
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 8, 2008
----------------------------- ------------------------------------
Common Stock, Par Value $1.00 6,028,491
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Centrue Financial Corporation
Form 10-Q Index
June 30, 2008
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets............................1
o Unaudited Consolidated Statements of Income and
Comprehensive Income ........................................2
o Unaudited Consolidated Statements of Cash Flows..................4
o Notes to Unaudited Consolidated Financial Statements.............5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................33
Item 4. Controls and Procedures .............................................34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................35
Item 1A. Risk Factors.........................................................35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........35
Item 3. Defaults Upon Senior Securities......................................35
Item 4. Submission of Matters to a Vote of Security Holders..................36
Item 5. Other Information....................................................36
Item 6. Exhibits.............................................................36
SIGNATURES....................................................................37
CENTRUE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND DECEMBER 31, 2007
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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June 30, December 31,
2008 2007
------------ ------------
ASSETS
Cash and cash equivalents $ 48,238 $ 51,628
Securities available-for-sale 203,864 238,661
Restricted securities 10,670 10,670
Loans 1,003,689 957,285
Allowance for loan losses (11,542) (10,755)
------------ ------------
Net loans 992,147 946,530
Cash value of life insurance 27,402 26,895
Mortgage servicing rights 2,993 3,161
Premises and equipment, net 33,750 35,615
Goodwill 24,804 25,498
Intangible assets, net 10,013 11,007
Other real estate 4,317 2,937
Other assets 15,350 12,397
------------ ------------
Total assets $ 1,373,548 $ 1,364,999
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 116,470 $ 114,360
Interest-bearing 894,253 918,662
------------ ------------
Total deposits 1,010,723 1,033,022
Federal funds purchased and securities sold
under agreements to repurchase 64,301 44,937
Federal Home Loan Bank advances 128,300 121,615
Notes payable 21,933 13,802
Series B mandatory redeemable preferred stock 831 831
Subordinated debentures 20,620 20,620
Other liabilities 10,233 11,296
------------ ------------
Total liabilities 1,256,941 1,246,123
Commitments and contingent liabilities -- --
Stockholders' equity
Series A convertible preferred stock (aggregate liquidation
preference of 2,762) 500 500
Common stock, $1 par value, 15,000,000 shares authorized;
7,453,555 and 7,438,110 shares issued at June 30, 2008 and
at December 31, 2007 7,454 7,438
Surplus 71,383 70,901
Retained earnings 63,028 60,344
Accumulated other comprehensive income (loss) (3,338) 939
------------ ------------
139,027 140,122
Treasury stock, at cost 1,425,064 shares at June 30, 2008
and 1,366,564 at December 31, 2007 (22,420) (21,246)
------------ ------------
Total stockholders' equity 116,607 118,876
------------ ------------
Total liabilities and stockholders' equity $ 1,373,548 $ 1,364,999
============ ============
See Accompanying Notes to Unaudited Financial Statements
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1.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Interest income
Loans $ 15,974 $ 16,917 $ 33,268 $ 32,963
Securities
Taxable 2,106 3,182 4,581 6,472
Exempt from federal income taxes 355 381 713 763
Federal funds sold and other 25 173 80 268
------------ ------------ ------------ ------------
Total interest income 18,460 20,653 38,642 40,466
Interest expense
Deposits 7,026 9,443 15,366 18,260
Federal funds purchased and securities
sold under agreements to repurchase 153 463 486 873
Federal Home Loan Bank advances 776 628 1,948 1,273
Series B mandatory redeemable preferred 13 13 25 25
Subordinated debentures 250 450 634 898
Notes payable 238 165 476 323
------------ ------------ ------------ ------------
Total interest expense 8,456 11,162 18,935 21,652
Net interest income 10,004 9,491 19,707 18,814
Provision for loan losses 866 226 1,632 226
------------ ------------ ------------ ------------
Net interest income after
Provision for loan losses 9,138 9,265 18,075 18,588
Noninterest income
Service charges 1,875 1,969 3,511 3,552
Trust income 232 232 485 461
Mortgage banking income 389 449 835 883
Brokerage commissions and fees 66 104 168 230
Bank owned life insurance 254 247 506 488
Securities gains (losses), net -- (33) 848 (33)
Gain on sale of OREO 142 491 238 588
Gain on sale of other assets 629 -- 1,111 --
Other income 705 735 1,528 1,279
------------ ------------ ------------ ------------
4,292 4,194 9,230 7,448
Noninterest expenses
Salaries and employee benefits 4,493 5,144 9,322 10,292
Occupancy 919 1,019 1,957 1,960
Furniture and equipment 624 627 1,406 1,322
Marketing 315 221 551 413
Supplies and printing 99 156 230 337
Telephone 201 210 442 388
Data Processing 231 276 534 859
Amortization of intangible assets 775 591 1,684 1,212
Other expenses 1,564 1,602 3,411 3,011
------------ ------------ ------------ ------------
9,221 9,846 19,537 19,794
See Accompanying Notes to Unaudited Financial Statements
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2.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Income before income taxes 4,209 3,613 7,768 6,242
Income taxes 1,504 1,107 2,618 1,837
------------ ------------ ------------ ------------
Net income $ 2,705 $ 2,506 $ 5,150 $ 4,405
============ ============ ============ ============
Preferred stock dividends 52 52 104 104
------------ ------------ ------------ ------------
Net income for common stockholders $ 2,653 $ 2,454 $ 5,046 $ 4,301
============ ============ ============ ============
Basic earnings per common share $ 0.44 $ 0.38 $ 0.84 $ 0.67
============ ============ ============ ============
Diluted earnings per common share $ 0.44 $ 0.38 $ 0.83 $ 0.66
============ ============ ============ ============
Total comprehensive income:
Net income $ 2,705 $ 2,506 $ 5,150 $ 4,405
Change in unrealized gains (losses) on
available for sale securities (5,428) (1,961) (6,979) (1,678)
Tax effect (2,103) (759) (2,704) (650)
------------ ------------ ------------ ------------
Total comprehensive income (loss), net of tax (3,325) (1,202) (4,275) (1,028)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (620) $ 1,304 $ 875 $ 3,377
============ ============ ============ ============
See Accompanying Notes to Unaudited Financial Statements
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3.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (IN THOUSANDS)
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Six Months Ended
June 30,
----------------------------
2008 2007
------------ ------------
Cash flows from operating activities
Net income $ 5,150 $ 4,405
Adjustments to reconcile net income to
Net cash provided by operating activities
Depreciation 1,493 789
Amortization of intangible assets 1,688 1,212
Amortization of mortgage servicing rights, net 284 201
Amortization of bond premiums, net 244 109
Share based compensation 265 63
Provision for loan losses 1,632 226
Provision for deferred income taxes 1,333 (3,778)
Tax benefit related to exercised options -- (122)
Earnings on bank-owned life insurance (506) (489)
Securities losses/(gains), net (848) 33
(Gain) loss on sale of OREO (238) (588)
(Gain) loss on sale of loans (665) (634)
(Gain) on sale of branch (1,111) --
Proceeds from sales of loans held for sale 70,488 43,149
Origination of loans held for sale (74,786) (44,316)
Change in assets and liabilities
(Increase) decrease in other assets (3,733) 2,235
Increase (decrease) in other liabilities 1,613 3,126
------------ ------------
Net cash provided by (used in) operating activities 2,303 5,621
Cash flows from investing activities
Proceeds from maturities and paydowns of securities available for sale 103,761 25,124
Purchases of securities available for sale (75,160) (4,557)
Net decrease (increase) in loans (79,033) (81,374)
Purchase of premises and equipment (402) (1,336)
Proceeds from sale of OREO 3,215 3,874
Purchase of Missouri Bank charter -- (633)
Sale of Branches, net of premium received (19,498) --
------------ ------------
Net cash provided by (used in) investing activities (67,117) (58,902)
Cash flows from financing activities
Net increase (decrease) in deposits 29,922 61,502
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 19,364 9,051
Repayment of advances from the Federal Home Loan Bank (294,315) (5,416)
Proceeds from advances from the Federal Home Loan Bank 301,000 --
Payments on notes payable (2,119) (348)
Proceeds from notes payable 10,250 2,250
Dividends on common stock (1,633) (1,610)
Dividends on preferred stock (104) (104)
Proceeds from exercise of stock options 233 316
Purchase of treasury stock (1,174) (2,168)
------------ ------------
Net cash provided by financing activities 61,424 63,473
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,390) 10,192
Cash and cash equivalents
Beginning of period 51,628 40,195
------------ ------------
End of period $ 48,238 $ 50,387
============ ============
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 20,506 $ 21,751
Income taxes 2,270 --
Transfers from loans to other real estate owned 4,497 7,718
See Accompanying Notes to Unaudited Financial Statements
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4.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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Note 1. Summary of Significant Accounting Policies
Centrue Financial Corporation (the "Company") is a bank holding company
organized under the laws of the State of Delaware. The Company provides 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; lending;
mortgage banking; brokerage; asset management; and trust services. The Company
is subject to competition from other financial institutions and nonfinancial
institutions providing financial services. Additionally, the Company and its
subsidiary Centrue Bank (the "Bank") are subject to regulations of certain
regulatory agencies and undergo periodic examinations by those regulatory
agencies.
Basis of presentation
---------------------
The consolidated financial statements include the accounts of the Company and
Centrue Bank. Intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited interim consolidated financial statements of Centrue
Financial Corporation have been prepared in accordance with U.S. generally
accepted accounting principles and with the rules and regulations of the
Securities and Exchange Commission for interim financial reporting. Accordingly,
they do not include all of the information and footnotes required for complete
financial statements. 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. The allowance for loan losses,
carrying value of goodwill, value of mortgage servicing rights, deferred taxes,
and fair values of financial instruments are particularly subject to change.
Actual results could differ from those estimates. Certain 2007 amounts have been
reclassified to conform to the 2008 presentation.
Assets held in an agency or fiduciary capacity, other than trust cash on deposit
with Centrue Bank, are not assets of the Company and, accordingly, are not
included in the accompanying consolidated financial statements.
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, 2007. The annualized results of operations during the three and six months
ended June 30, 2008 are not necessarily indicative of the results expected for
the year ending December 31, 2008. All financial information is in thousands
(000s), except shares and per share data.
Note 2. Earnings Per Share
Basic earnings per share for the three and six months ended June 30, 2008 and
2007 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three and six months
ended June 30, 2008 and 2007 were computed by dividing net income by the
weighted average number of shares outstanding, adjusted for the dilutive effect
of the stock options. Computations for basic and diluted earnings per share are
provided below:
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5.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 2. Earnings Per Share (continued)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Basic Earnings Per Common Share
Net income for common stockholders $ 2,653 $ 2,454 $ 5,046 $ 4,301
Weighted average common shares outstanding 6,027,000 6,414,000 6,039,000 6,438,000
------------ ------------ ------------ ------------
Basic earnings per common share $ 0.44 $ 0.38 $ 0.84 $ 0.67
============ ============ ============ ============
Diluted Earnings Per Common Share
Weighted average common shares outstanding 6,027,000 6,414,000 6,039,000 6,438,000
Add: dilutive effect of assumed exercised
stock options 22,000 36,000 30,000 34,000
------------ ------------ ------------ ------------
Weighted average common and dilutive
potential shares outstanding 6,049,000 6,450,000 6,069,000 6,472,000
============ ============ ============ ============
Diluted earnings per common share $ 0.44 $ 0.38 $ 0.83 $ 0.66
============ ============ ============ ============
There were approximately 406,300 and 321,200 options outstanding at June 30,
2008 and 2007, respectively that were not included in the computation of diluted
earnings per share. These options were antidilutive since the exercise prices
were greater than the average market price of the common stock.
Note 3. Securities
All of the Company's securities are classified as available-for-sale and are
carried at fair value. The Company does not have any securities classified as
trading or held-to-maturity.
The following table describes the fair value, gross unrealized gains and losses
of securities available-for-sale at June 30, 2008 and December 31, 2007,
respectively:
June 30, 2008
------------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized % of
Value Gains Losses Portfolio
------------ ------------ ------------ ------------
U.S. government agencies $ 19,548 $ 396 $ -- 9.6%
States and political subdivisions 40,419 603 (68) 19.8
U. S. government mortgage-backed securities 96,116 211 (591) 47.1
Collateralized mortgage obligations 21,796 10 (462) 10.7
Equity securities 1,621 101 (15) 0.8
Investment in Trust Preferred instruments 22,391 -- (5,622) 11.0
Corporate 1,973 6 (15) 1.0
------------ ------------ ------------ ------------
$ 203,864 $ 1,327 $ (6,773) 100.0%
============ ============ ============ ============
December 31, 2007
------------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized % of
Value Gains Losses Portfolio
------------ ------------ ------------ ------------
U.S. government agencies $ 103,624 $ 1,415 $ (14) 43.5%
States and political subdivisions 41,561 501 (13) 17.4
U. S. government mortgage-backed securities 47,784 287 (106) 20.0
Collateralized mortgage obligations 24,077 68 (100) 10.1
Equity securities 1,601 105 -- 0.7
Investment in Trust Preferred instruments 17,273 -- (609) 7.2
Corporate 2,741 9 (10) 1.1
------------ ------------ ------------ ------------
$ 238,661 $ 2,385 $ (852) 100.0%
============ ============ ============ ============
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6.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 3. Securities (continued)
Management does not believe any individual unrealized losses as of June 30,
2008, identified in the preceding tables represent other-than-temporary
impairment based on our analysis. These unrealized losses are primarily
attributable to changes in interest rates, general market risk repricing, and
illiquidity in the capital markets. The Company has both the intent and ability
to hold each of the securities shown in the table for the time necessary to
recover its amortized cost. The unrealized loss on the available for sale
securities is included, net of tax, in other comprehensive income.
The amounts below include the activity related to security sales and calls. The
activity related to securities available-for-sale were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Proceeds $ -- $ 2,497 $ 83,897 $ 2,497
Realized gains $ -- $ 4 $ 848 $ 4
Realized losses $ -- $ (37) $ -- $ (37)
Note 4. Loans
The following table describes the composition of loans by major categories
outstanding as of June 30, 2008 and December 31, 2007, respectively:
June 30, 2008 December 31, 2007
---------------------------- ----------------------------
$ % $ %
------------ ------------ ------------ ------------
Commercial $ 188,039 18.7% $ 181,210 18.9%
Agricultural 12,834 1.3 21,861 2.3
Real estate:
Commercial mortgages 408,775 40.7 362,920 37.9
Construction 180,589 18.0 159,274 16.6
Agricultural 17,819 1.8 23,560 2.5
1-4 family mortgages 188,648 18.8 198,208 20.7
Installment 6,354 0.6 8,611 0.9
Other 631 0.1 1,641 0.2
------------ ------------ ------------ ------------
Total loans 1,003,689 100.0% 957,285 100.0%
============ ============
Allowance for loan losses (11,542) (10,755)
------------ ------------
Loans, net $ 992,147 $ 946,530
============ ============
The following table presents data on impaired loans:
June 30, December 31,
2008 2007
------------ ------------
Impaired loans for which an allowance has been provided $ 23,410 $ 5,502
Impaired loans for which no allowance has been provided 1,752 5,923
------------ ------------
Total loans determined to be impaired $ 25,162 $ 11,425
============ ============
Allowance for loan loss for impaired loans included in
the allowance for loan losses $ 2,640 $ 2,350
============ ============
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide
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7.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 4. Loans (continued)
for probable incurred losses in the loan portfolio. In making this
determination, the Company analyzes the ultimate collectibility of the loans in
its portfolio; incorporating feedback provided by internal loan staff; the
independent loan review function; and information provided by regulatory
agencies.
The Company reported loans held for sale of $3,769 and $1,598 at June 30, 2008
and December 31, 2007 respectively.
The Company conducts a quarterly evaluation as to the adequacy of the allowance
for loan losses. Transactions in the allowance for loan losses for the three and
six months ended June 30, 2008 and 2007 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Beginning balance $ 11,221 $ 10,607 $ 10,755 $ 10,835
Charge-offs (622) (191) (1,020) (689)
Recoveries 77 186 175 456
Provision for loan losses 866 226 1,632 226
----------- ----------- ----------- -----------
Ending balance $ 11,542 $ 10,828 $ 11,542 $ 10,828
=========== =========== =========== ===========
Period end total loans $ 1,003,689 $ 912,168 $ 1,003,689 $ 912,168
=========== =========== =========== ===========
Average loans $ 1,012,878 $ 883,151 $ 1,005,960 $ 870,129
=========== =========== =========== ===========
Ratio of net charge-offs to average loans 0.05% 0.00% 0.08% 0.03%
Ratio of provision for loan losses to average loans 0.09 0.03 0.16 0.03
Ratio of allowance for loan losses
to period end total loans 1.15 1.19 1.15 1.19
Ratio of allowance for loan losses
to total nonperforming loans 58.27 241.05 58.27 241.05
Ratio of allowance for loan losses
to average loans 1.14 1.23 1.15 1.24
Note 5. Share Based Compensation
In 1999, the Company adopted the 1999 Option Plan. Under the 1999 Option Plan,
nonqualified options may be granted to employees and eligible directors of the
Company and its subsidiaries to purchase the Company's common stock at 100% of
the fair market value on the date the option is granted. The Company has
authorized 50,000 shares for issuance under the 1999 Option Plan. During 1999,
40,750 of these shares were granted and are 100% fully vested. The options have
an exercise period of ten years from the date of grant. There are 9,250 shares
available for grant under this plan.
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, 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 ten years from the date of grant.
There are 209,000 shares available for grant under this plan.
--------------------------------------------------------------------------------
8.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 5. Share Based Compensation (continued)
The Company's compensation committee awarded 5,000 restricted common stock
awards on November 14, 2006 which were available under the restricted stock
portion of the plan. The restricted shares were issued out of treasury shares
with an aggregate grant date fair value of $90. The awards were granted using
the fair value as the last sale price as quoted on the NASDAQ Stock Market on
the date of grant of $18.03. The awarded shares vest at a rate of 20% of the
initially awarded amount per year, beginning on the first anniversary date of
the award, and are contingent upon continuous service by the recipient through
the vesting date. Currently, there are 1,000 shares of the restricted stock that
have vested.
A summary of the status of the option plans as of June 30, 2008, and changes
during the period ended on those dates is presented below:
June 30, 2008
------------------------------------------------------------
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life Value
------------ ------------ ------------ ------------
Outstanding at January 1, 2008 574,024 $ 18.71
Granted 138,000 17.96
Exercised (15,445) 16.17
Forfeited (38,010) 20.66
------------ ------------
Outstanding at end of period 658,569 $ 18.72 5.1 years $ --
============ ============ ============ ============
Vested or expected to vest 649,380 18.73 4.8 years $ --
============ ============ ============ ============
Options exercisable at period end 454,369 $ 18.74 4.6 years $ --
============ ============ ============ ============
Options outstanding at June 30, 2008 and December 31, 2007 were as follows:
Outstanding Exercisable
---------------------------- ----------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Range of Exercise Prices Number Life Number Price
--------------------------------- ------------ ------------ ------------ ------------
June 30, 2008:
$ 11.25 - $ 13.00 46,381 2.1 years 46,381 $ 11.60
13.88 - 18.63 258,388 5.0 years 165,388 16.40
19.03 - 23.31 353,800 5.5 years 242,600 21.70
------------ ------------ ------------ ------------
658,569 5.1 years 454,369 $ 18.74
============ ============ ============ ============
December 31, 2007:
11.25 - 13.00 46,381 2.6 years 46,381 11.60
13.88 - 18.63 143,443 3.2 years 143,443 15.60
19.03 - 23.31 384,200 5.9 years 260,600 21.86
------------ ------------ ------------ ------------
574,024 5.0 years 450,424 $ 18.81
============ ============ ============ ============
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9.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 5. Share Based Compensation (continued)
Information related to the stock option plan during the quarter ended June 30,
2008 and 2007 is as follows:
June 30, June 30,
2008 2007
------------ ------------
Intrinsic value of options exercised $ 6 $ 75
Cash received from option exercises 233 316
Tax benefit realized from option exercises -- 122
Weighted average of fair value of options granted 3.69 4.62
The compensation cost that has been charged against income for the stock options
portion of the Equity Incentive Plan was $256 and $63 for the six months ended
June 30, 2008 and 2007. The compensation cost that has been charged against
income for the restricted stock portion of the Equity Incentive Plan was $9 and
$0 for the six months ended June 30, 2008 and 2007.
The fair value of each option award is estimated on the date of grant using a
closed form option valuation (Black-Scholes) model that uses the assumptions
noted in the table below. Expected volatilities are based on historical
volatilities of the Company's common stock. The Company uses historical data to
estimate option exercise and post-vesting termination behavior. (Employee and
management options are tracked separately.) The expected term of options granted
is based on historical data and represents the period of time that options
granted are expected to be outstanding, which takes into account that the
options are not transferable. The risk-free interest rate for the expected term
of the option is based on the U.S. Treasury yield curve in effect at the time of
the grant. The fair value of options granted was determined using the following
weighted-average assumptions as of grant date:
June 30, December 31,
2008 2007
------------ ---------------
Fair value $ 3.69 $ 4.41 - 4.65
Risk-free interest rate 2.95% 4.06% - 4.95%
Expected option life (years) 6 6
Expected stock price volatility 23.91% 23.33% - 23.67%
Dividend yield 2.79% 2.57 - 2.64%
Unrecognized stock option compensation expense related to unvested awards (net
of estimated forfeitures) for the remainder of 2008 and beyond is estimated as
follows:
Amount
------------
July, 2008 - December, 2008 $ 97
2009 172
2010 172
2011 160
2012 104
2013 5
------------
Total $ 710
============
--------------------------------------------------------------------------------
10.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
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 utilizes a line of business ("LOB") reporting structure which was
implemented as of January 1, 2005. The reportable segments are determined by the
products and services offered, primarily distinguished between retail,
commercial, treasury, wealth management, and other operations. Loans, and
deposits generate the revenues in the commercial segments; deposits, loans,
secondary mortgage sales and servicing generates the revenue in the retail
segment; investment income generates the revenue in the treasury segment;
brokerage, and trust services generate the revenue in the wealth management
segment and holding company services generate revenue in the other operations
segment. The "net allocations" line represents the allocation of the costs that
are overhead being spread to the specific segments.
The accounting policies used with respect to segment reporting are the same as
those described in the summary of significant accounting policies as forth in
Note 1. Segment performance is evaluated using net income.
Information reported internally for performance assessment follows.
Three Months Ended
June 30, 2008
------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 3,846 $ 7,932 $ 404 $ (11) $ (2,167) $ 10,004
Other revenue 3,357 349 -- 306 280 4,292
Other expense 2,976 789 52 327 3,534 7,678
Noncash items
Depreciation 563 2 -- 2 201 768
Provision for loan losses -- 866 -- -- -- 866
Other intangibles 478 -- -- 297 -- 775
Net allocations 348 2,830 369 187 (3,734) --
Income tax expense 937 1,252 (6) (171) (508) 1,504
Segment profit (loss) $ 1,901 $ 2,542 $ (11) $ (347) $ (1,380) $ 2,705
Goodwill $ 11,927 $ 12,404 $ -- $ 473 $ -- $ 24,804
Segment assets $ 294,634 $ 785,542 $ 216,047 $ 597 $ 76,727 $ 1,373,548
Three Months Ended
June 30, 2007
------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 3,440 $ 6,089 $ 1,182 $ 64 $ (1,284) $ 9,491
Other revenue 2,822 686 (27) 366 347 4,194
Other expense 3,324 478 55 358 4,278 8,493
Noncash items
Depreciation 446 4 -- 4 308 762
Provision for loan losses -- 226 -- -- -- 226
Other intangibles 589 -- -- 2 -- 591
Net allocations 700 3,204 453 229 (4,586) --
Income tax expense 397 945 213 (54) (394) 1,107
Segment profit (loss) $ 806 $ 1,918 $ 434 $ (109) $ (543) $ 2,506
Goodwill $ 11,898 $ 12,374 $ -- $ 1,167 $ -- $ 25,439
Segment assets $ 341,965 $ 685,656 $ 281,329 $ 1,396 $ 43,040 $ 1,353,386
--------------------------------------------------------------------------------
11.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 7. Segment Information (continued)
Six Months Ended
June 30, 2008
------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 6,849 $ 13,449 $ 965 $ 358 $ (1,914) $ 19,707
Other revenue 6,433 634 848 688 627 9,230
Other expense 6,313 1,755 110 646 7,386 16,210
Noncash items
Depreciation 994 3 -- 6 640 1,643
Provision for loan losses -- 1,632 -- -- -- 1,632
Other intangibles 988 -- -- 696 -- 1,684
Net allocations 830 6,001 793 402 (8,026) --
Income tax expense 1,372 1,548 300 (232) (370) 2,618
Segment profit (loss) $ 2,785 $ 3,144 $ 610 $ (472) $ (917) $ 5,150
Goodwill $ 11,927 $ 12,404 $ -- $ 473 $ -- $ 24,804
Segment assets $ 294,634 $ 785,542 $ 216,047 $ 597 $ 76,727 $ 1,373,548
Six Months Ended
June 30, 2007
------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 6,777 $ 12,102 $ 1,594 $ 126 $ (1,785) $ 18,814
Other revenue 5,133 844 (27) 789 709 7,448
Other expense 6,725 1,133 114 798 8,213 16,983
Noncash items
Depreciation 973 8 -- 9 609 1,599
Provision for loan losses -- 226 -- -- -- 226
Other intangibles 1,209 -- -- 3 -- 1,212
Net allocations 1,216 6,294 871 441 (8,822) --
Income tax expense 590 1,744 192 (111) (578) 1,837
Segment profit (loss) $ 1,197 $ 3,541 $ 390 $ (225) $ (498) $ 4,405
Goodwill $ 11,898 $ 12,374 $ -- $ 1,167 $ -- $ 25,439
Segment assets $ 341,965 $ 685,656 $ 281,329 $ 1,396 $ 43,040 $ 1,353,386
Note 8. Borrowed Funds and Debt Obligations
On March 31, 2008, the Company entered into a new loan agreement with LaSalle
Bank N.A. which provides for up to an aggregate principal amount of $35,250 in
borrowings. The loan agreement consists of three credit facilities. The first
credit facility consists of a $25,000 secured revolving line of credit which
matures in December 2008. The second credit facility consists of a $250 secured
term facility, which will mature in March 2015. The third credit facility
consists of a $10,000 in subordinated debt, which also matures in March 2015.
The interest rate on the term and subordinated debt credit facilities is three
month LIBOR plus 295 basis points. The interest rate on the revolving credit
facility is three month LIBOR plus 125 basis points. Repayment of each of the
three credit facilities is interest only on a quarterly basis, with the
principal amount of the loan due at maturity. The revolving and term credit
facilities are secured by a pledge of the stock of Centrue Bank. The
subordinated debt credit facility is unsecured and is intended to qualify as
tier II capital for regulatory purposes. The loan agreement contains customary
covenants, including but not limited to, Centrue Bank's maintenance of its
status as well-capitalized, minimum return on average assets on an annual basis
of 0.50%, maximum nonperforming assets to primary capital below 20%, and minimum
loan loss reserves to total loans of 1.00%. The Company intends to use the
credit facilities for general working capital purposes. The loan agreement
contains no penalty for early repayment of either the revolving credit facility
or the subordinated debt credit facility.
--------------------------------------------------------------------------------
12.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 9. Business Acquisitions and Divestures
On March 28, 2008 the Company completed the sale of its Hanover and Elizabeth
branches to Apple River State Bank headquartered in Apple River, Illinois. Apple
River assumed approximately $25,300 in deposits and acquired $12,700 in loans,
and $401 in premises and equipment. The net gain on the sale was $482.
On June 6, 2008 the Company completed the sale of its Manlius and Tampico
branches to Peoples National Bank headquartered in Kewanee, Illinois. Peoples
National assumed approximately $29,400 in deposits and acquired $17,400 in
loans, and $214 in premises and equipment. The net gain on the sale was $629.
Note 10. Fair Value
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued staff
position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays
the effective date of FAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008 and interim periods within those fiscal years. The impact of adoption was
not material.
Statement 157 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) or identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs to reflect a reporting
entity's own assumptions about the assumptions that market participants
would use to price and asset or liability.
The fair value of securities available for sale are 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).
--------------------------------------------------------------------------------
13.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 10. Fair Value (continued)
Assets and liabilities measured at fair value are summarized below:
Fair Value Measurements at June 30, 2008 Using
----------------------------------------------
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
June 30, Identical Assets Inputs Inputs
2008 (Level 1) (Level 2) (Level 3)
------------ ------------ ------------ ------------
Assets and Liabilities Measured on a Recurring Basis
----------------------------------------------------
Assets:
Available for sale securities $ 203,864 $ -- $ 203,864 $ --
Assets and Liabilities Measured on a Non-Recurring Basis
--------------------------------------------------------
Assets:
Impaired loans $ 20,770 $ -- $ 20,770 $ --
Impaired loans, which are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a carrying amount of $23,410 with
a valuation allowance of $2,640, resulting in an additional provision for loan
losses of $0 for the period. During the quarter the fair value of impaired loans
decreased by $440.
The majority of our impaired loans are collateralized by real estate. The
carrying value for these real estate secured impaired loans was based upon
information in independent appraisals obtained on the underlying collateral.
--------------------------------------------------------------------------------
14.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 11. Recent Accounting Developments
In February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective of SFAS 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting principles. The new standard is
effective for the Company on January 1, 2008. The Company did not elect the fair
value option for any financial assets or financial liabilities as of January 1,
2008.
In January 2007, the FASB issued Derivatives Implementation Group Issue B40,
Application of Paragraph 13 (b) to Securitized Interests in Prepayable Financial
Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded
derivative test of paragraph 13 (b) of SFAS No. 133 for instruments that would
otherwise require bifurcation if the test is met solely because of a prepayment
feature included within the securitized interest and prepayment is not
controlled by the security holder. SFAS No. 155 and DIG Issue B40 did not have a
material impact on the Company's consolidated financial position or results of
operations.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a
liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants' employment or retirement. The
required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit
depending on contractual terms of the underlying agreement. This issue is
effective for fiscal years beginning after December 15, 2007. Due to the
adoption of this item, the Company recorded an entry of $730 to the beginning
balance for retained earnings as of January 1, 2008.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written
Loan Commitments Recorded at Fair Value through Earnings ("SAB 109").
Previously, SAB 105, Application of Accounting Principles to Loan Commitments,
stated that in measuring the fair value of a derivative loan commitment, a
company should not incorporate the expected net future cash flows related to the
associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that
the expected net future cash flows related to the associated servicing of the
loan should be included in measuring fair value for all written loan commitments
that are accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment, and SAB 109 retains that view.
SAB 109 is effective for derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The impact of this standard
was not material.
On March 19, 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS 161), which is intended to
improve financial reporting for derivative instruments and hedging activities.
Additional disclosures will be required that require disclosure of the fair
values of derivative instruments and their gains and losses in tabular format.
It also requires disclosure of derivatives features that are credit
risk-related. These changes will enable investors to better understand their
effects on an entity's financial position, financial performance and cash flows.
It is effective for financial statements for fiscal years and interim periods
beginning after November 15, 2008. The impact of this statement will not have a
material effect on the Company's consolidated financial statements.
--------------------------------------------------------------------------------
15.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Centrue Financial Corporation (the "Company") is a bank holding company
organized under the laws of the State of Delaware. Operating results of former
Centrue are included in the consolidated financial statements since the date of
the acquisition. The Company provides a full range of products and services to
individual and corporate customers located in the north central, east central,
south central, suburban west area of Chicago, suburban metro east area of St.
Louis areas. These products and services include demand, time, and savings
deposits; lending; mortgage banking, brokerage, asset management, and trust
services. 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 (the "Bank") are subject to regulations
of certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
The following discussion provides an analysis of the Company's results of
operations and financial condition for the three and six months ended June 30,
2008 as compared to the same period in 2007. 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. Actual
results could differ from those estimates.
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, 2007. The annualized results of operations during the three and six months
ended June 30, 2008 are not necessarily indicative of the results expected for
the year ending December 31, 2008. All financial information is in thousands
(000s), except shares and per share data.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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 2007 Annual Report on Form 10-K.
Securities: Available-for-sale securities are those that the Company
intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value with unrealized gains or losses,
net of the related deferred income tax effect, reported in other comprehensive
income. Declines in the fair value of securities below their cost that are other
than temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: The length of time and extent
that fair value has been less than cost, the financial condition and near term
prospects of the issuer, and the Company's ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value. Securities are written down to fair value when a decline in fair value is
not temporary.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
--------------------------------------------------------------------------------
16.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Goodwill and other intangible assets: Goodwill results from business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Goodwill is assessed at least annually for impairment and any such impairment
will be recognized in the period identified. Other intangible assets consist of
core deposit and acquired customer relationship intangible assets arising from
whole bank, and branch company acquisitions. They are initially measured at fair
value and then are amortized over their estimated useful lives, which is ten
years.
Income taxes: Deferred tax assets and liabilities are recognized for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities. Deferred taxes are recognized for the
estimated taxes ultimately payable or recoverable based on enacted tax laws.
Changes in enacted tax rates and laws are reflected in the financial statements
in the periods they occur.
General
o Second quarter 2008 results included the following
nonrecurring activity:
o Net gain on sale of branches of $629.
o Write-down of $297 in goodwill related to the
anticipated sale of a Wealth Management business
line.
o Approximately $266 in costs associated with branch
sales/closings and employee separation costs.
o Excluding $563 in nonrecurring 2008 operating expense items
mentioned above and $716 in restructuring items taken in the
second quarter 2007, noninterest expense levels decreased $457
or 5.0% in the second quarter of 2008 compared to 2007.
o Total core deposits (checking, NOW, savings and money market)
increased $11,500 or 2.5% from year-end 2007. Excluding
$24,300 in core deposits related to branch sales recorded in
the first and second quarters of 2008, core deposits grew
$37,100 or 8.0% since year-end 2007.
o The efficiency ratio improved to 64.76% during the quarter
from 73.06% in the first quarter 2008 and 70.80% recorded in
the first quarter 2007.
o The net interest margin increased 4 basis points to 3.34% as
compared to 3.30% recorded in the second quarter of 2007 and
increased 9 basis points from the first quarter of 2008 level
of 3.25%.
o The level of nonperforming assets increased to $24,100 versus
the $5,200 recorded at March 31, 2008 and $7,100 at December
31, 2007.
o As part of an ongoing effort to redeploy capital to higher
growth markets, the Company closed its Ashkum branch and
completed the sale of its Manlius and Tampico branches. The
transaction resulted in selling $17,400 in loans and $29,400
in deposits and generated a net gain on sale of $629.
--------------------------------------------------------------------------------
17.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Results of Operations
Net Income
Net Income for the second quarter ended June 30, 2008 equaled $2,705 or $0.44
per diluted share as compared to $2,506 or $0.38 per diluted share in the same
period of 2007. This represents increases of 7.9% in net income and 15.8% in
diluted per share earnings. For the six months ended June 30, 2008, net income
equaled $5,150 or $0.83 per diluted share as compared to $4,405 or $0.66 per
diluted share in the same period during 2007. This represents increases of 16.9%
in net income and 25.8% in diluted per share earnings.
Return on average equity was 9.26% for the second quarter 2008 as compared to
8.51% for the same period in 2007. Return on average assets was 0.80% for the
second quarter 2008 compared to 0.76% for the same period in 2007.
Return on average equity was 8.74% for the six month period ended June 30, 2008
compared to 7.51% for the same period in 2007. Return on average assets was
0.76% for the six month period ended June 30, 2008 compared to 0.68% for the
same period in 2007.
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 2008 increased
5.3% to $10,251 as compared $9,740 for the same period in 2007. The improvement
in net interest income was due to strong growth in average earning assets, an
improving net interest margin from a year ago and decreases in rates paid on
interest-bearing funding, which dropped in response to the rate environment
changes that occurred during the first quarter 2008.
The net interest margin increased 4 basis points to 3.34% as compared to 3.30%
recorded in the second quarter of 2007 and increased 9 basis points from the
first quarter of 2008 level of 3.25%. The improvement in the net interest margin
was due to several factors, including growth in higher spread assets, an
increase in yield-related loan fees and decreases in time deposit and other
wholesale funding rates due to current market conditions. It is likely that the
net interest margin will remain under pressure throughout 2008 due to ongoing
competitive and market pressures in pricing loans and deposits.
Fully tax equivalent net interest income for the six months ended June 30, 2008
totaled $20,219, representing an increase of $906 or 4.7% compared to the
$19,313 earned during the same period in 2007. Net interest income increased
largely due to the factors described above impacting the second quarter results.
--------------------------------------------------------------------------------
18.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30,
------------------------------------------------------------------
2008 2007
-------------------------------- --------------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average -----------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
ASSETS
Interest-earning
assets
Interest-earning
deposits $ 2,855 $ 2 0.29% $ 5,898 $ 8 0.56% $ (3) $ (3) $ (6)
Securities
Taxable 177,521 2,100 4.76 243,905 3,196 5.26 (842) (254) (1,096)
Non-taxable 39,142 554 5.69 40,956 563 5.51 (29) 20 (9)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Total securities
(tax
equivalent) 216,663 2,654 4.93 284,861 3,759 5.29 (871) (234) (1,105)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Federal funds sold 2,679 13 1.96 12,878 165 5.15 (92) (60) (152)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Loans
Commercial 203,604 3,121 6.17 175,253 3,538 8.10 353 (770) (417)
Real estate 798,308 12,755 6.43 691,119 13,184 7.65 1,461 (1,890) (429)
Installment and
other 10,966 162 5.94 16,779 248 5.92 (78) (8) (86)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Gross loans
(tax
equivalent) 1,012,878 16,038 6.37 883,151 16,970 7.71 1,736 (2,668) (932)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Total
interest-
earnings
assets 1,235,075 18,707 6.09 1,186,788 20,902 7.06 770 (2,965) (2,195)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Noninterest-earning
assets
Cash and cash
equivalents 29,373 30,185
Premises and equipment,
net 34,443 35,724
Other assets 66,180 77,632
---------- ----------
Total nonearning
assets 129,996 143,541
---------- ----------
Total assets $1,365,071 $1,330,329
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
NOW accounts $ 107,000 $ 291 1.10 $ 105,629 $ 476 1.81 12 (197) (185)
Money market accounts 165,208 1,107 2.69 118,795 1,058 3.57 370 (321) 49
Savings deposits 90,920 61 0.27 101,525 173 0.69 (4) (108) (112)
Time deposits 556,088 5,566 4.03 616,306 7,735 5.03 (688) (1,481) (2,169)
Federal funds
purchased and
repurchase
Agreements 39,585 154 1.56 40,695 463 4.56 (141) (168) (309)
Advances from FHLB 111,762 777 2.80 57,735 629 4.37 478 (330) 148
Notes payable 46,769 500 4.30 32,405 628 7.77 169 (297) (128)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Total interest-
bearing
liabilities 1,117,332 8,456 3.04 1,073,090 11,162 4.17 196 (2,902) (2,706)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 57,222 126,755
Other liabilities 72,986 12,304
---------- ----------
Total noninterest-
bearing liabilities 130,208 139,059
---------- ----------
Stockholders' equity 117,531 118,180
---------- ----------
Total liabilities and
stockholders' equity $1,365,071 $1,330,329
========== ==========
Net interest income
(tax equivalent) $10,251 $ 9,740 $ 574 $ (63) $ 511
======= ======== ========== ========= ========
Net interest income
(tax equivalent)
to total earning
assets 3.34% 3.30%
======= =======
Interest-bearing
liabilities
to earning assets 90.47% 90.42%
========== ==========
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances; overdraft loans are
excluded in the balances.
(4) Loan fees are included in the specific loan category.
--------------------------------------------------------------------------------
19
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
------------------------------------------------------------------
2008 2007
-------------------------------- --------------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average -----------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
ASSETS
Interest-earning
assets
Interest-earning
deposits $ 2,916 $ 9 0.61% $ 4,733 $ 21 0.91% $ (7) $ (5) $ (12)
Securities
Taxable 185,096 4,553 4.95 248,369 6,500 5.28 (1,610) (337) (1,947)
Non-taxable 39,261 1,129 5.78 40,991 1,128 5.55 (54) 55 1
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Total securities
(tax
equivalent) 224,357 5,682 5.09 289,360 7,628 5.32 (1,664) (282) (1,946)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Federal funds sold 3,440 50 2.93 9,509 247 5.45 (127) (70) (197)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Loans
Commercial 212,135 6,863 6.51 179,082 7,258 8.17 911 (1,306) (395)
Real estate 781,892 26,203 6.74 674,892 25,293 7.56 3,250 (2,340) 910
Installment and
other 10,867 347 6.41 16,155 518 6.46 (161) (10) (171)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Gross loans
(tax
equivalent) 1,004,894 33,413 6.69 870,129 33,069 7.66 4,000 (3,656) 344
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Total
interest-
earnings
assets 1,235,607 39,154 6.37 1,173,731 40,965 7.04 2,202 (4,013) (1,811)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Noninterest-earning
assets
Cash and cash
equivalents 31,401 28,440
Premises and equipment,
net 34,933 35,617
Other assets 68,837 74,481
---------- ----------
Total nonearning
assets 135,171 138,538
Total assets $1,370,778 $1,312,269
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
NOW accounts $ 109,505 $ 694 1.28 $ 104,124 $ 896 1.74 (6) (196) (202)
Money market accounts 160,723 2,428 3.04 119,364 2,117 3.58 601 (290) 311
Savings deposits 90,167 203 0.45 102,039 354 0.70 (59) (92) (151)
Time deposits 560,587 12,042 4.32 601,892 14,893 4.99 (1,174) (1,677) (2,851)
Federal funds
purchased and
repurchase
Agreements 44,899 486 2.18 38,546 873 4.57 787 (1,174) (387)
Advances from FHLB 116,199 1,948 3.37 59,471 1,273 4.32 947 (272) 675
Notes payable 41,474 1,134 5.11 31,397 1,246 8.00 279 (391) (112)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Total interest-
bearing
liabilities 1,123,554 18,935 3.39 1,056,833 21,652 4.13 1,375 (4,092) (2,717)
---------- -------- ------- ---------- -------- ------- ---------- ---------- --------
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 117,706 126,134
Other liabilities 11,044 11,009
---------- ----------
Total noninterest-
bearing liabilities 128,750 137,143
---------- ----------
Stockholders' equity 118,474 118,293
---------- ----------
Total liabilities and
stockholders' equity $1,370,778 $1,312,269
========== ==========
Net interest income
(tax equivalent) $ 20,219 $ 19,313 $ 827 $ 79 $ 906
======== ======== ========== ========= ========
Net interest income
(tax equivalent)
to total earning
assets 3.29% 3.32%
======= =======
Interest-bearing
liabilities
to earning assets 90.93% 90.04%
========== ==========
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances; overdraft loans are
excluded in the balances.
(4) Loan fees are included in the specific loan category.
--------------------------------------------------------------------------------
20.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Provision for Loan Losses
The amount of the provision for loan losses is based on management's evaluations
of the loan portfolio, with particular attention directed toward nonperforming,
impaired and other potential problem loans. During these evaluations,
consideration is also given to such factors as management's evaluation of
specific loans, the level and composition of impaired loans, other nonperforming
loans, other identified potential problem loans, historical loss experience,
results of examinations by regulatory agencies, results of the independent asset
quality review process, the market value of collateral, the estimate of
discounted cash flows, the strength and availability of guarantees,
concentrations of credits and various other factors, including concentration of
credit risk in various industries and current economic conditions.
Due largely to the deterioration of two loan relationships during the second
quarter 2008 (see "Nonperforming Asset" section for further discussion), the
Company recorded an $866 provision for loan losses versus $226 in the same
quarter of 2007. For the six months ended June 30, 2008, the Company recorded a
$1,632 provision for loan losses as compared to recognizing a provision of $226
in the 2007 period.
The following factors have impacted 2008 provision levels:
o growth in loan portfolio;
o increase in action list loans since year-end;
o identifying and addressing problem credits based on the recent
deteriorating economic conditions.
Net charge-offs for the second quarter 2008 were $545 or 0.05% of average loans
as compared to $300 or 0.03% reported in the first quarter 2008 and $5 in net
charge-offs reported in the second quarter 2007. Net charge-offs for the six
months ended June 30, 2008 were $845 or 0.08% of average loans as compared to
$233 or 0.03% of average loans for the comparable period in 2007.
Management remains watchful of credit quality issues. Should the economic
climate deteriorate from current levels, borrowers may experience difficulty,
and the level of nonperforming loans, charge-offs and delinquencies could rise
and require further increases in the provision. See "Nonperforming Assets" and
"Other Potential Problem Loans" for further information.
--------------------------------------------------------------------------------
21.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues from
bank-related service charges on deposits and mortgage revenues. Also included in
this category are revenues generated by the Company's brokerage, trust and asset
management services as well as increases in cash surrender value on bank-owned
life insurance. The following table summarizes the Company's noninterest income:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Service charges 1,875 1,969 3,511 3,552
Trust income 232 232 485 461
Mortgage banking income 389 449 835 883
Brokerage commissions and fees 66 104 168 230
Bank owned life insurance 254 247 506 488
Securities gains, net -- (33) 848 (33)
Gain on sale of OREO 142 491 238 588
Gain on sale of Other Assets 629 -- 1,111 --
Other income 705 735 1,528 1,279
------------ ------------ ------------ ------------
Total noninterest income $ 4,292 $ 4,194 $ 9,230 $ 7,448
============ ============ ============ ============
Noninterest income increased $98 during the second quarter 2008 to $4,292 as
compared to $4,194 for the same period in 2007. Excluding $771 in gains on sale
of branches and OREO properties from the second quarter 2008 and $491 in OREO
gains from the second quarter 2007, noninterest income decreased $182 or 4.9%.
The decrease was primarily the result of a reduction in service charges on
deposit accounts, fees received on items drawn on customer accounts with
insufficient funds and revenue generated from the mortgage banking and wealth
management business units.
Noninterest income totaled $9,230 for the six months ended June 30, 2008,
compared to $7,448 for the same period in 2007. Excluding all net gains on sale
of assets, OREO, and net securities gains for both periods, noninterest income
increased $140 or 2.0%. This improvement was largely due to increases in fees
collected for electronic banking services for debit cards and ATM machines.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Salaries and employee benefits $ 4,493 $ 5,144 $ 9,322 $ 10,292
Occupancy expense, net 919 1,019 1,957 1,960
Furniture and equipment expense 624 627 1,406 1,322
Marketing 315 221 551 413
Supplies and printing 99 156 230 337
Telephone 201 210 442 388
Data processing 231 276 534 859
Amortization of intangible assets 775 591 1,684 1,212
Other expenses 1,564 1,602 3,411 3,011
------------ ------------ ------------ ------------
Total noninterest expense $ 9,221 $ 9,846 $ 19,537 $ 19,794
============ ============ ============ ============
Noninterest expense decreased $625 to $9,221 for the three months ended June 30,
2008 as compared to $9,846 for the same period in 2007. Excluding nonrecurring
charges of $563 in 2008 and $716 in 2007, noninterest expense levels decreased
$472 or 5.2%. The decrease was reported across most categories and was
predominantly due to a reduction in the number of full-time equivalent employees
which yielded lower salary and benefits costs.
--------------------------------------------------------------------------------
22.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Noninterest expense totaled $19,537 for the six months ended June 30, 2008,
decreasing by $257 or 1.3% from the same period in 2007. Excluding nonrecurring
charges of $1,307 for 2008 and $716 for 2007, noninterest expense levels
decreased $848 or 4.4% for the first six months of 2008 as compared to 2007. The
change was largely reflective of the same items discussed regarding the second
quarter.
Applicable Income Taxes
Income tax expense for the periods included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses. The following table shows the Company's income before
income taxes, as well as applicable income taxes and the effective tax rate for
the three and six months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Income before income taxes $ 4,209 $ 3,613 $ 7,768 $ 6,242
Applicable income taxes 1,504 1,107 2,618 1,837
Effective tax rates 35.7% 30.6% 33.7% 29.4%
The Company recorded an income tax expense of $1,504 and $1,107 for the three
months ended June 30, 2008 and 2007, respectively. Effective tax rates equaled
35.7% and 30.6% respectively, for such periods. The Company recorded income tax
expense of $2,618 and $1,837 for the six months ended June 30, 2008 and 2007,
respectively. Effective tax rates equaled 33.7% and 29.4% respectively, for such
periods.
The Company's effective tax rate was lower than statutory rates due to several
factors. First, the Company derives interest income from municipal securities
and loans, which are exempt from federal tax and certain U. S. government agency
securities, which are exempt from state tax. Also, the Company derives income
from bank owned life insurance policies, which is exempt from federal and state
tax. The increase in the effective tax rates over the prior year is driven by
the higher pretax income and a decline in tax-exempt interest leading to higher
federal taxes. In regard to the increased state tax expense, the growth in the
Missouri branch and the changes in the Illinois tax code regarding apportionment
rules resulted in higher state taxes for the applicable states.
Earnings Review by Business Segment
The Company's internal reporting and planning process focuses on four primary
lines of business: Retail, Commercial, Treasury and Wealth Management. See Note
7 of the Notes to Unaudited Consolidated Financial Statements for the
presentation of the condensed income statement and total assets for each
Segment.
The financial information presented was derived from the Company's internal
profitability reporting system that is used by management to monitor and manage
the financial performance of the Company. This information is based on internal
management accounting policies which have been developed to reflect the
underlying economics of the Segments and, to the extent practicable, to portray
the Segment as if it operated on a stand alone basis. Thus, each Segment, in
addition to its direct revenues and expenses, assets and liabilities, includes
an allocation of shared support function expenses. The Retail, Commercial,
Treasury, and Wealth Management Segments also include funds transfer adjustments
to appropriately reflect the cost of funds on loans made and funding credits on
deposits generated. Apart from these adjustments, the accounting policies used
are similar to those described in Note 1 of the Notes to Consolidated Financial
Statements.
Since there are no comprehensive authorities for management accounting
equivalent to U.S. generally accepted accounting principles, the information
presented is not necessarily comparable with similar information from other
financial institutions. In addition, methodologies used to measure, assign and
allocate certain items may change from time-to-time to reflect, among other
things, accounting estimate refinements, changes in risk profiles, changes in
customers or product lines and changes in management structure.
--------------------------------------------------------------------------------
23.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Retail Segment. The Retail Segment ("Retail") provides retail banking
services to individual customers through the Company's branch locations in
Illinois and Missouri. The services provided by this Segment include direct
lending, checking, savings, money market, CD accounts, safe deposit rental,
ATM's and other traditional and electronic banking services.
Retail generated $1,901 of net income in the second quarter of 2008 as
compared to $806 during same period in 2007. Year to date Retail Segment net
income was $2,785 as compared to $1,197 for the same period in 2007. Retail
assets were $294,634 at June 30, 2008, $306,156 at December 31, 2007 and
$341,965 as of June 30, 2007.
For the second quarter of 2008, net income increased due to the gain on
sale of branches and stronger revenues on electronic banking products.
Additionally, FTE's are lower which decreased the payroll and benefit costs for
retail and core deposit amortization was lower. These positive variances were
slightly offset by higher IT costs, debit card expenses, miscellaneous deposit
expenses and miscellaneous expenses.
The change in net income for the six months ended June 30, 2008 was
reflective of the same reasons discussed for the second quarter.
Commercial Segment. The Commercial Segment ("Commercial") provides
commercial banking services to business customers served through the Company's
full service branch channels located in Illinois and Missouri. The services
provided by this Segment include lending, business checking and deposits, cash
management, and other traditional as well as electronic commercial banking
services.
Commercial had $2,542 of net income in the second quarter of 2008 as
compared to $1,918 during same period in 2007. Year to date Commercial Segment
net income was $3,144 as compared to $3,541 for the same period in 2007.
Commercial assets were $785,542 at June 30, 2008, $741,861 at December 31, 2007
and $685,656 as of June 30, 2007.
Net income for the second quarter of 2008 increased as compared to the
same period in 2007 due to the growth in the commercial loan portfolio which led
to 30.3% increase in margin. Lower funding costs also helped increase the margin
during the period. This increase was slightly offset by an increased provision
due to the growth in the loan portfolio, identifying and addressing problem
credits, and the recent deteriorating economic conditions. Additionally,
noninterest income was lower as compared to 2007 due to the gain on sale of OREO
recorded in 2007 as well as, payroll costs are higher than in 2007 due to an
increase in the FTE's in this line of business.
For the six months ended June 30, 2008, the change in net income was
largely due to the higher provision taken during the second quarter as discussed
in "Provision for Loan Losses" section.
Treasury Segment. The Treasury Segment ("Treasury") is responsible for
managing the investment portfolio and acquiring funding for loan activity.
Treasury had a net loss of ($11) in the second quarter of 2008 and generated net
income of $434 during same period in 2007. Year to date Treasury Segment net
income was $610 as compared to $390 for the same period in 2007. Treasury assets
were $216,047 at June 30, 2008, $268,484 at December 31, 2007 and $281,329 as of
June 30, 2007.
Treasury's net income for second quarter declined in comparison to 2007
results due to the approximately $83,000 in discounted agency securities called
during first quarter which resulted in fewer earning assets to generate revenue
during the period. Additionally, since assets were lower than in 2007, net
allocated expenses were lower due to the decreased asset base. These positive
variances were augmented by a tax benefit for the period.
--------------------------------------------------------------------------------
24.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Net income for the first six months of 2008 decreased in comparison to
2007 due to the discounted agency securities called during first quarter as
mentioned previously which led to lower net interest income that was offset
partially by the net gain on sale of $848. Offsetting this negative variance was
lower net allocated expenses attributed to the decreased asset base and lower
income taxes.
Wealth Management Segment. The Wealth Management Segment ("Wealth")
provides trust services, estate administration, financial planning, employee
benefit plan administration, asset management, and brokerage transaction
services.
Wealth had a loss of $(347) during the second quarter 2008 as compared
to $(109) in same period in 2007. Year to date Wealth generated a loss of $(472)
as compared to $(225) for the same period in 2007. Wealth assets were $597 at
June 30, 2008, $1,289 at December 31, 2007 and $1,396 as of June 30, 2007.
Assets and earnings decreased due to the $297 write-down of goodwill
for its business lines in the second quarter.
The results for the first six months of 2008 decreased over the same
period in 2007 due to the write-down of $694 of goodwill during the first and
second quarters of 2008. This negative variance was slightly offset by increased
earnings and other costs being lower during the period.
Financial Condition
General
As of June 30, 2008, the following are the highlights of the balance sheet when
compared to December 31, 2007:
o Outstanding loans totaled $1,003,689 at June 30, 2008 compared
to $957,285 at December 31, 2007, representing an increase of
$46,404 or 4.8%. The loan growth was largely generated in the
St. Louis market and was concentrated in commercial real
estate. Excluding $30,100 in loans related to branch sales
recorded in the first and second quarters of 2008, loans grew
$76,500 or 8.0% since year-end 2007. The Company has no direct
exposure to subprime mortgages.
o Deposits totaled $1,011,723 at June 30, 2008 compared to
$1,033,022 at December 31, 2007, representing a decrease of
$21,299 or 2.1%. The decrease was experienced across most
types with a significant portion coming from higher costing
time deposits. Excluding $54,700 in deposits related to branch
sales recorded in the first and second quarters of 2008,
deposits increased $32,400 or 3.1% since year-end 2007. This
increase was due to an overall increase in core deposits which
grew 8.0%.
o The Company's consolidated securities portfolio is managed to
minimize interest rate risk, maintain sufficient liquidity and
maximize return. Total securities fair market value declined
$5,400 from March 31, 2008 and $6,979 from December 31, 2007.
o Management believes that the decline in fair market value was
attributable to interest rate factors, general market risk
repricing, and lack of liquidity in the capital markets verses
an underlying collateral or credit quality issues of a
particular investment. As such, we do not believe any
individual unrealized losses as of June 30, 2008 represent
other-than-temporary impairment based on the following
factors:
--------------------------------------------------------------------------------
25.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
o No holdings have been downgraded below investment grade by any
of the rating agencies.
o We have no knowledge that any of our direct investments
consists of sub prime loans.
o We've obtained updated cash flow projections on all of our
Trust Preferred issuances. Based on this analysis and our
review, these instruments have cash flows sufficient to cover
any scheduled principle and interest payments.
o The Company has both the intent and ability to hold each of
the securities shown in the table for the time necessary to
recover its amortized cost.
Nonperforming Assets
If a loan is placed on nonaccrual status, the loan does not generate current
period income for the Company. Loans are placed on nonaccrual status when there
are serious doubts regarding the collectibility of all principal and interest
due under the terms of the loans. Amounts received on nonaccrual loans generally
are applied first to principal and then to interest after all principal has been
collected. A loan is generally transferred to nonaccrual status if it is not in
the process of collection and is delinquent in payment of either principal or
interest beyond 90 days. Other nonperforming assets consist of real estate
acquired through loan foreclosures or other workout situations and other assets
acquired through repossessions.
The classification of a loan as nonaccrual does not necessarily indicate that
the principal is uncollectible, in whole or in part. The Bank makes a
determination as to collectibility on a case-by-case basis. The Bank considers
both the adequacy of the collateral and the other resources of the borrower in
determining the steps to be taken to collect nonaccrual loans. The final
determination as to the steps taken is made based upon the specific facts of
each situation. Alternatives that are typically considered to collect nonaccrual
loans are foreclosure, collection under guarantees, loan restructuring or
judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired and past due loans to prevent further deterioration of
these loans. The Company has an independent loan review function which is
separate from the lending function and is responsible for the review of new and
existing loans.
The following table summarizes nonperforming assets and loans past due 90 days
or more for the previous five quarters.
2008 2007
----------------------- ------------------------------------
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30,
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 19,808 $ 4,057 $ 4,090 $ 5,573 $ 4,492
Loans 90 days past due and still accruing interest -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 19,808 4,057 4,090 5,573 4,492
Other real estate owned 4,317 1,153 2,937 4,620 6,568
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 24,125 $ 5,210 $ 7,027 $ 10,193 $ 11,060
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 1.97% 0.44% 0.43% 0.60% 0.49%
Nonperforming assets to total end of period loans 2.40% 0.57% 0.73% 1.09% 1.21%
Nonperforming assets to total end of period assets 1.76% 0.38% 0.51% 0.75% 0.81%
The level of nonperforming loans at June 30, 2008 increased to $19,808 versus
$4,058 that existed at March 31, 2008 and $4,090 that existed as of December 31,
2007. As previously disclosed in its quarterly report on Form 10-Q for the first
quarter 2008 filed on May 9, 2008, the Company is engaging in an ongoing review
of its commercial real estate loan portfolio. This review prompted the
identification of two large problem relationships aggregating $28,000 in late
March and early-April. Upon further analysis and deterioration of these two
relationships, action plans were implemented to address these loans which
resulted in $20,000 related to these loans being classified as nonperforming
loans during the second quarter 2008.
--------------------------------------------------------------------------------
26.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
One relationship, totaling $16,300, is currently in foreclosure which is
expected to be completed in the third quarter. The Company's exposure was
reduced by extinguishing an unfunded commitment of $100 and a $500 write down
during the second quarter. Marketing efforts are under way and, management has
entered into a contract for $6,800 to sell one parcel of the collateral and
anticipates selling all of the underlying collateral prior to year-end.
The second relationship, totaling $11,100, included a $7,300 loan which is
currently being restructured and is expected to continue as a performing
relationship. Of the remaining balance, the Company successfully foreclosed on
the property securing a $3,800 loan. This foreclosed property is now under
contract and management anticipates closing on the sale of this property prior
to year-end.
The level of nonperforming loans to total end of period loans was 1.97% at June
30, 2008, as compared to 0.43% at December 31, 2007 and 0.40% at March 31, 2008.
The reserve coverage ratio (allowance to nonperforming loans) was reported at
58.27% as of June 30, 2008 as compared to 262.96% as of December 31, 2007 and
276.52% as of March 31, 2008. In light of current market conditions, the Company
is continuing to review its commercial real estate loan portfolio.
Other Potential Problem Loans
The Company has other potential problem loans that are currently performing, but
where some concerns exist as to the ability of the borrower to comply with
present loan repayment terms. Excluding nonperforming loans and loans that
management has classified as impaired, these other potential problem loans
totaled $1,039 at June 30, 2008 as compared to $2,044 at June 30, 2007 and
$1,485 at December 31, 2007. The classification of these loans, however, does
not imply that management expects losses on each of these loans, but believes
that a higher level of scrutiny and close monitoring is prudent under the
circumstances. Such classifications relate to specific concerns for each
individual borrower and do not relate to any concentration risk common to all
loans in this group.
Allowance for Loan Losses
At June 30, 2008, the allowance for loan losses was $11,542 or 1.15% of total
loans as compared to $10,755 or 1.12% at December 31, 2007. The allowance was
1.15% of total loans outstanding at June 30, 2008, compared to 1.10% reported at
March 31, 2008 and 1.12% as of December 31, 2007. In originating loans, the
Company recognizes that credit losses will be experienced and the risk of loss
will vary with, among other things, the following:
o general economic conditions;
o the type of loan being made;
o the creditworthiness of the borrower over the term of the
loan;
o in the case of a collateralized loan, the quality of the
collateral for such a loan.
The allowance for loan losses represents the Company's estimate of the allowance
necessary to provide for probable incurred losses in the loan portfolio by
analyzing the following:
o ultimate collectibility of the loans in its portfolio;
o incorporating feedback provided by internal loan staff;
o the independent loan review function;
o results of examinations performed by regulatory agencies.
The Company regularly evaluates the adequacy of the allowance for loan losses.
Commercial credits are graded using a system that is in compliance with
regulatory classifications by the loan officers and the loan review function
validates the officers' grades. In the event that the loan review function
downgrades the loan, it is included in the allowance analysis at the lower
--------------------------------------------------------------------------------
27.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
grade. To establish the appropriate level of the allowance, a sample of loans
(including impaired and nonperforming loans) are reviewed and classified as to
potential loss exposure.
Based on an estimation computed pursuant to the requirements of Financial
Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components:
o specific credit allocation established for expected losses
resulting from analysis developed through specific credit
allocations on individual loans for which the recorded
investment in the loan exceeds its fair value;
o general portfolio allocation based on historical loan loss
experience for each loan category;
o subjective reserves based on general economic conditions as
well as specific economic factors in the markets in which the
Company operates.
The specific credit allocation component of the allowance for loan losses is
based on a regular analysis of loans over a fixed-dollar amount where the
internal credit rating is at or below a predetermined classification. The fair
value of the loan is determined based on either the present value of expected
future cash flows discounted at the loan's effective interest rate, the market
price of the loan, or, if the loan is collateral dependent, the fair value of
the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan losses is
determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years.
Management remains watchful of credit quality issues. Should the economic
climate deteriorate from current levels, borrowers may experience difficulty,
and the level of nonperforming loans, charge-offs and delinquencies could rise
and require further increases in the provision.
Liquidity
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth together with repayments and maturities
of loans and investments, the Company utilizes other short-term funding sources
such as brokered time deposits, securities sold under agreements to repurchase,
overnight federal funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities and Federal Home Loan Bank advances.
The Company monitors and manages its liquidity position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls and anticipated depository
buildups or runoffs.
The Company classifies all of its securities as available-for-sale, thereby
maintaining significant liquidity. The Company's liquidity position is further
enhanced by structuring its loan portfolio interest payments as monthly and by
--------------------------------------------------------------------------------
28.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
the significant representation of retail credit and residential mortgage loans
in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash flows from
operating activities, cash flows from investing activities and cash flows from
financing activities. Cash flows provided by operating activities and financing
activities offset by those used in investing activities, resulted in a net
decrease in cash and cash equivalents of $3,390 from December 31, 2007 to June
30, 2008.
During the first six months of 2008, the Company experienced net cash outflows
of $67,117 in investing activities primarily due to an increase in loans and
purchases of securities. In contrast, net cash inflows of $61,423 were provided
by financing activities largely due to the net growth in deposits and issuance
of debt and $2,304 was provided by operations.
--------------------------------------------------------------------------------
29.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations and commitments and
off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off balance
sheet instruments as of June 30, 2008.
Payments Due by Period
----------------------------------------------------------------------------
Within 1 After
Year 1 - 3 Years 4 - 5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Contractual Obligations
Short-term debt $ 10,893 $ -- $ -- $ 250 $ 11,143
Long-term debt 160 2,345 2,285 6,000 10,790
Certificates of deposit 467,456 58,652 8,659 116 534,883
Operating leases 348 594 613 306 1,861
Severance payments 105 -- -- -- 105
Series B mandatory redeemable
preferred stock -- 831 -- -- 831
Subordinated debentures -- -- -- 20,620 20,620
FHLB advances 92,037 31,200 -- 5,063 128,300
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 570,999 $ 93,622 $ 11,557 $ 32,355 $ 708,533
============ ============ ============ ============ ============
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------
Within 1 After
Year 1 - 3 Years 4 - 5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Off-Balance Sheet Financial Instruments
Lines of credit $ 170,478 $ 46,002 $ 3,487 $ 21,359 $ 241,326
Standby letters of credit 6,464 6,167 -- 2,771 15,402
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 176,942 $ 52,169 $ 3,487 $ 24,130 $ 256,728
============ ============ ============ ============ ============
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors. Stockholders' equity
at June 30, 2008 was $116,607, a decrease of $2,269 or 1.9%, from December 31,
2007. The change in stockholders' equity was largely the result of a decrease in
accumulated other comprehensive income due to a reduction in the fair market
value of available-for-sales securities, postretirement liability adjustment
related to the adoption of FASB Issue No. 06-4 and modest repurchase activity
transacted in the first quarter 2008. Average quarterly equity as a percentage
of average quarterly assets was 8.61% at June 30, 2008, compared to 8.75% at
December 31, 2007. Book value per common share equaled $19.26 at June 30, 2008
compared to $19.50 at December 31, 2007.
Stock Repurchase
The Company did not repurchase shares of stock during the quarter ended June 30,
2008. The 2006 repurchase program approved on November 13, 2006 authorized the
Company to repurchase up to 5% or 370,000 shares of common stock. This plan was
completed in the fourth quarter 2007. The 2007 repurchase program approved on
July 24, 2007 authorized the Company to repurchase an additional 500,000 shares,
or approximately 8% of the Company's currently issued and outstanding shares, in
the open market or privately negotiated transactions over an 18 month period
commencing immediately following the completion of the 2006 stock repurchase
program. The expiration date of this program is January 24, 2009. Unless
terminated earlier by resolution of our board of directors, the program will
expire on the earlier of such expiration date or when we have repurchased all
shares authorized for repurchase under the program.
--------------------------------------------------------------------------------
30.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Capital Measurements
As discussed in Note 8, the Company's current debt agreements include a covenant
that require the Bank to maintain the status of being well capitalized which is
a ratio of 10.0% for total risk based capital. The Bank is expected to meet a
minimum risk-based capital to risk-weighted assets ratio of 8%, of which at
least one-half (or 4%) must be in the form of Tier 1 (core) capital. The
remaining one-half (or 4%) may be in the form of Tier 1 (core) or Tier 2
(supplementary) capital. The amount of loan loss allowance that may be included
in capital is limited to 1.25% of risk-weighted assets. The ratio of Tier 1
(core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary)
capital to risk-weighted assets for the Company was 9.3% and 11.2%,
respectively, at June 30, 2008. The Company is currently, and expects to
continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Company's capital ratios:
December 31, Minimum Well
June 30, ------------------------ Capital Capitalized
2008 2007 2006 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 105,447 $ 101,831 $ 99,869
Tier 2 risk-based capital 21,542 10,755 10,835
---------- ---------- ----------
Total capital $ 126,989 $ 112,586 $ 110,704
========== ========== ==========
Risk-weighted assets $1,137,096 $1,102,602 $ 926,874
========== ========== ==========
Capital ratios:
Tier 1 risk-based capital 9.3% 9.2% 10.8% 4.0% 6.0%
Total risk-based capital 11.2% 10.2% 11.9% 8.0% 10.0%
Leverage ratio 7.9% 7.7% 7.9% 4.0% 5.0%
Recent Regulatory and Accounting Developments
See Note 11 to the Unaudited Consolidated Financial Statements for information
concerning recent regulatory and accounting developments.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934 as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identified by the use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "planned" or "potential" or similar
expressions.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could effect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any
forward-looking statements.
Among the factors that could have an impact on the Company's ability to achieve
operating results and the growth plan goals are as follows:
o management's ability to reduce and effectively manage interest
rate risk and the impact of interest rates in general on the
volatility of the Company's net interest income;
o fluctuations in the value of the Company's investment
securities;
--------------------------------------------------------------------------------
31.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
o the Company's ability to ultimately collect on any downgraded
long-standing loan relationships;
o the Company's ability to adapt successfully to technological
changes to compete effectively in the marketplace;
o credit risks and risks from concentrations (by geographic area
and by industry) within the Company's loan portfolio and
individual large loans;
o volatility of rate sensitive deposits;
o operational risks, including data processing system failures
or fraud;
o asset/liability matching risks and liquidity risks;
o the ability to successfully acquire low cost deposits or
funding;
o the ability to successfully execute strategies to increase
noninterest income;
o the ability to successfully grow non-commercial real estate
loans;
o the ability of the Company to fully realize expected cost
savings and revenue generation opportunities in connection
with the synergies of merging with the former Centrue Bank;
o the ability to adopt and implement new regulatory requirements
as dictated by the SEC, FASB or other rule-making bodies which
govern our industry;
o changes in the general economic or industry conditions,
nationally or in the communities in which the Company conducts
business.
--------------------------------------------------------------------------------
32.
CENTRUE FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Management
The Company performs a net interest income analysis as part of its
asset/liability management practices. The net interest income analysis measures
the change in net interest income in the event of hypothetical changes in
interest rates. This analysis assesses the risk of changes in net interest
income in the event of a sudden and sustained 100 to 200 basis point increase in
market interest rates or a 100 to 200 basis point decrease in market rates. The
interest rates scenarios are used for analytical purposes and do not necessarily
represent management's view of future market movements. The tables below present
the Company's projected changes in net interest income for the various rate
shock levels at June 30, 2008 and December 31, 2007, respectively:
Change in Net Interest Income Over
One Year Horizon
-------------------------------------------------
June 30, 2008 December 31, 2007
----------------------- -----------------------
Change Change
----------------------- -----------------------
$ % $ %
---------- ---------- ---------- ----------
+ 200 bp $ 583 1.49% $ 305 0.74%
+ 100 bp 409 1.04 509 1.23
Base -- -- -- --
- 100 bp (463) (1.18) (1,410) (3.41)
- 200 bp (1,574) (4.01) (3,109) (7.51)
As shown above, the Company's model at June 30, 2008, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by $583 or 1.49%. The effect of an immediate 200 basis point
decrease in rates would decrease the Company's net interest income by $1,574 or
4.01%.
Management continues to position our balance sheet to maximize the net interest
margin as steps were taken to adjust our funding costs to react to the rate
reductions that were announced in the first 6 months of 2008. The mix of our
funding portion of the balance sheet has been adjusted to align it with our
asset sensitive portion of the balance sheet to create better spreads in various
sectors. With these changes, we have been able to reposition our funding and
align it better with the shorter end of the yield curve which minimizes our
exposure to the volatility found at the longer end of the yield curve.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates and should not be relied upon as
indicative of actual results. Actual values may differ from those projections
set forth above, should market conditions vary from the assumptions used in
preparing the analysis. Further, the computations do not contemplate actions the
Company may undertake in response to changes in interest rates.
--------------------------------------------------------------------------------
33.
CENTRUE FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended). Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic
filings with the Securities and Exchange Commission. It should be noted that in
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company has designed its disclosure controls and procedures to reach a level
of reasonable assurance of achieving the desired control objectives and, based
on the evaluation described above, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at reaching that level of reasonable assurance.
There was no change in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended) during the Company's most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
--------------------------------------------------------------------------------
34.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company may be involved in various legal
proceedings from time to time. The Company does not believe it is currently
involved in any claim or action the ultimate disposition of which would have a
material adverse effect on the Company's financial statements.
Item 1A. Risk Factors
The Company did not experience any material changes in the Risk Factors during
the Company's most recently completed fiscal quarter. For specific information
about the risks facing the Company refer to the Company's Annual Report on Form
10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of the Company's common
stock by the Company during the quarter ended June 30, 2008.
Total Number of Maximum Number
Shares Purchased of Shares that
as Part of May Yet Be
Total Number of Average Price Publicly Announced Purchased Under the
Period Shares Purchased Paid per Share Plans or Programs Plans or Programs
------------- ---------------- -------------- ----------------- -----------------
04/01/08 - - $ - - 395,078
04/30/08
05/01/08 - - $ - - 395,078
05/31/08
06/01/08 - - $ - - 395,078
06/30/08
Total (1) - $ - - 395,078
(1) The Company repurchased no shares of stock during the quarter ended June
30, 2008. The 2006 repurchase program approved on November 13, 2006
authorized the Company to repurchase up to 5% or 370,000 shares of common
stock. This plan was completed in the fourth quarter 2007. The 2007
repurchase program approved on July 24, 2007 authorized the Company to
repurchase an additional 500,000 shares, or approximately 8% of the
Company's currently issued and outstanding shares, in the open market or
privately negotiated transactions over an 18 month period commencing
immediately following the completion of the 2006 stock repurchase program.
The expiration date of this program is January 24, 2009. Unless terminated
earlier by resolution of our board of directors, the program will expire on
the earlier of such expiration date or when we have repurchased all shares
authorized for repurchase under the program.
Item 3. Defaults Upon Senior Securities
None.
--------------------------------------------------------------------------------
35.
Item 4. Submission of Matters to a Vote of Security Holders
At the April 23, 2008 annual meeting of stockholders, Richard J. Berry,
Walter E. Breipohl and Randall E. Ganim were elected to serve as Class I
directors until 2011. Continuing as Class II directors until 2009 are Michael A.
Griffith, Michael J. Hejna and John A. Shinkle. Continuing as Class III
directors until 2010 are Thomas A. Daiber, Dennis J. McDonnell, Mark L. Smith
and Scott C. Sullivan.
There were 6,470,840 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item presented at the
annual meetings was as follows:
For Withheld
--------- --------
Election of Directors
Richard J. Berry 5,438,442 109,915
Walter E. Breipohl 5,462,248 86,109
Randall E. Ganim 5,462,395 85,962
Item 5. Other Information
None
Item 6. Exhibits
Exhibits:
31.1 Certification of Thomas A. Daiber, President and Principal
Executive Officer, required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson, Senior Executive Vice
President and Principal Financial and Accounting Officer
required by Rule 13a - 14(a).
32.1(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's President and Principal Executive Officer.
32.2(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Senior Executive Vice President and
Principal Financial and Accounting Officer.
________________
(1) This certification is not "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
--------------------------------------------------------------------------------
36.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTRUE FINANCIAL CORPORATION
Date: August 8, 2008 By: /s/ Thomas A. Daiber
-------------------------------------
Thomas A. Daiber
President and Principal Executive
Officer
Date: August 8, 2008 By: /s/ Kurt R. Stevenson
-------------------------------------
Kurt R. Stevenson
Senior Executive Vice President and
Principal Financial and Accounting
Officer
--------------------------------------------------------------------------------
37.