Unassociated Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
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 þ No o

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

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
o
Accelerated filer
o
 
 
Non-accelerated filer
o
Smaller reporting company
þ
 

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

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

Class
 
Shares outstanding at May 13, 2011
Common Stock, Par Value $1.00
 
6,048,405

 
 

 

Centrue Financial Corporation
Form 10-Q Index
March 31, 2011
 
         
Page
             
     
             
  Financial Statements      
             
   
§
 
1
 
             
   
§
 
2
 
             
   
§
 
4
 
             
   
§
 
5
 
             
  Management’s Discussion and Analysis of Financial Condition and Results of Operations  
28
 
             
  Quantitative and Qualitative Disclosures About Market Risk  
44
 
             
  Controls and Procedures  
45
 
             
     
             
  Legal Proceedings  
46
 
             
  Risk Factors  
46
 
             
  Unregistered Sales of Equity Securities and Use of Proceeds  
46
 
             
  Defaults Upon Senior Securities  
46
 
             
  [Reserved]  
46
 
             
  Other Information  
46
 
             
  Exhibits  
46
 
             
  47  
 
 
 

 
 
Centrue Financial Corporation
Part I Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets
March 31, 2011 and December 31, 2010 (In Thousands, Except Share and Per Share Data)

 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and cash equivalents
 
$
44,445
   
$
82,945
 
Securities available-for-sale
   
234,775
     
219,475
 
Restricted securities
   
10,148
     
10,470
 
Loans
   
710,529
     
721,871
 
Allowance for loan losses
   
(29,089
)
   
(31,511
)
Net loans
   
681,440
     
690,360
 
Bank-owned life insurance
   
30,652
     
30,403
 
Mortgage servicing rights
   
2,383
     
2,425
 
Premises and equipment, net
   
25,267
     
25,687
 
Other real estate owned
   
28,581
     
25,564
 
Other assets
   
16,145
     
17,833
 
                 
Total assets
 
$
1,073,836
   
$
1,105,162
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Non-interest-bearing
 
$
119,779
   
$
118,667
 
Interest-bearing
   
802,704
     
812,438
 
Total deposits
   
922,483
     
931,105
 
Federal funds purchased and securities sold under agreements to repurchase
   
15,931
     
16,188
 
Federal Home Loan Bank advances
   
51,059
     
71,059
 
Notes payable
   
10,623
     
10,623
 
Series B mandatory redeemable preferred stock
   
268
     
268
 
Subordinated debentures
   
20,620
     
20,620
 
Other liabilities
   
13,086
     
12,378
 
Total liabilities
   
1,034,070
     
1,062,241
 
                 
Commitments and contingent liabilities
   
     
 
                 
Stockholders’ equity
               
Series A convertible preferred stock (aggregate liquidation preference of $2,762)
   
500
     
500
 
Series C fixed rate, Cumulative Perpetual Preferred Stock (aggregate liquidation preference of $32,668)
   
30,965
     
30,810
 
Common stock, $1 par value, 15,000,000 shares authorized; 7,453,555 shares issued at March 31, 2011 and December 31, 2010
   
7,454
     
7,454
 
Surplus
   
74,751
     
74,721
 
Retained earnings (accumulated deficit)
   
(50,969
)
   
(46,861
)
Accumulated other comprehensive income (loss)
   
(821
)
   
(1,589
)
     
61,880
     
65,035
 
Treasury stock, at cost 1,405,150 shares at March 31, 2011 and December 31, 2010
   
(22,114
)
   
(22,114
)
Total stockholders’ equity
   
39,766
     
42,921
 
                 
Total liabilities and stockholders’ equity
 
$
1,073,836
   
$
1,105,162
 
 
See Accompanying Notes to Unaudited Financial Statements

 
1.

 

Centrue Financial Corporation
Unaudited Consolidated Statements Of Income (Loss)
And Comprehensive Income (Loss)
Three Months Ended March 31, 2011 and 2010
(In Thousands, Except Per Share Data)


   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Interest income
           
Loans
  $ 9,281     $ 11,248  
Securities
               
Taxable
    997       1,733  
Exempt from federal income taxes
    215       278  
Federal funds sold and other
    31       27  
Total interest income
    10,524       13,286  
                 
Interest expense
               
Deposits
    2,487       4,371  
Federal funds purchased and securities sold under agreements to repurchase
    11       18  
Federal Home Loan Bank advances
    412       581  
Series B mandatory redeemable preferred stock
    4       4  
Subordinated debentures
    270       254  
Notes payable
    90       88  
Total interest expense
    3,274       5,316  
                 
Net interest income
    7,250       7,970  
Provision for loan losses
    4,250       9,350  
Net interest income (loss) after provision for loan losses
    3,000       (1,380 )
                 
Noninterest income
               
Service charges
    1,062       1,420  
Mortgage banking income
    407       319  
Bank-owned life insurance
    249       255  
Electronic banking services
    527       484  
Securities gains
          2  
Total other-than-temporary impairment losses
    (393 )     (4,516 )
Portion of loss recognized in other comprehensive income (before taxes)
    1       2,909  
Net impairment on securities
    (392 )     (1,607 )
Gain on sale of OREO
    44       9  
Gain on sale of other assets
    63       202  
Other income
    164       238  
      2,124       1,322  
 
See Accompanying Notes to Unaudited Financial Statements
 
 
2.

 
 
Centrue Financial Corporation
Unaudited Consolidated Statements Of Income (Loss)
And Comprehensive Income (Loss)
Three Months Ended March 31, 2011 and 2010
(In Thousands, Except Per Share Data)

 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Noninterest expenses
               
Salaries and employee benefits
    3,633       3,771  
Occupancy, net
    720       788  
Furniture and equipment
    439       524  
Marketing
    60       107  
Supplies and printing
    64       98  
Telephone
    204       179  
Data processing
    364       382  
FDIC insurance
    850       854  
Loan processing and collection costs
    591       512  
OREO valuation adjustment
    200       1,657  
Amortization of intangible assets
    276       339  
Other expenses
    1,399       1,275  
      8,800       10,486  
                 
Income (loss) before income taxes
  $ (3,676 )   $ (10,544 )
Income tax expense (benefit)
    (218 )     (4,284 )
Net income (loss)
  $ (3,458 )   $ (6,260 )
                 
Preferred stock dividends
    494       473  
Net income (loss) for common stockholders
  $ (3,952 )   $ (6,733 )
                 
Basic earnings (loss) per common share
  $ (0.65 )   $ (1.11 )
Diluted earnings (loss) per common share
  $ (0.65 )   $ (1.11 )
                 
Total comprehensive income (loss):
               
Net income (loss)
  $ (3,458 )   $ (6,260 )
Change in unrealized gains (losses) on available for sale securities for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassifications and tax effect
    (123 )     (1,784 )
Change in unrealized gains (losses) on other securities available for sale, net of reclassifications and tax effect
    984       478  
Reclassification adjustment:
               
Net impairment loss recognized in earnings
    392       1,607  
(Gains) recognized in earnings
          (2 )
Net unrealized gains (loss)
    1,253       299  
Tax expense (benefit)
    485       116  
Other comprehensive income (loss)
    768       183  
Total comprehensive income (loss)
  $ (2,690 )   $ (6,077 )
 
See Accompanying Notes to Unaudited Financial Statements
 
 
3.

 

Centrue Financial Corporation
Unaudited Consolidated Statements Of Cash Flows
Three Months Ended March 31, 2011 and 2010 (In Thousands)

 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net Income (Loss)
 
$
(3,458
)
 
$
(6,260
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
Depreciation
   
479
     
575
 
Amortization of intangible assets
   
276
     
339
 
Amortization of mortgage servicing rights, net
   
107
     
106
 
Amortization of bond premiums, net
   
642
     
554
 
Income tax valuation adjustment
   
1,141
     
 
Share based compensation
   
29
     
24
 
Provision for loan losses
   
4,250
     
9,350
 
Provision for deferred income taxes
   
(1,141
)
   
(189
)
Earnings on bank-owned life insurance
   
(249
)
   
(255
)
Other than temporary impairment, securities
   
392
     
1,607
 
OREO valuation allowance
   
200
     
1,657
 
Securities sale losses (gains), net
   
     
(2
)
(Gain) on sale of other assets, net
   
(63
)
   
(202
)
(Gain) on sale of OREO
   
(44
)
   
(9
)
(Gain) loss on sale of loans
   
(266
)
   
(190
)
Proceeds from sales of loans held for sale
   
12,172
     
10,886
 
Origination of loans held for sale
   
(11,931
)
   
(9,699
)
Change in assets and liabilities
               
(Increase) decrease in other assets
   
1,395
     
(3,899
)
Increase (decrease) in other liabilities
   
(294
)
   
(37
)
Net cash provided by operating activities
   
3,637
     
4,356
 
Cash flows from investing activities
               
Proceeds paydowns of securities available for sale
   
12,538
     
15,943
 
Proceeds from calls and maturities of securities available for sale
   
4,660
     
2,310
 
Proceeds from sales of securities available for sale
   
322
     
51
 
Purchases of securities available for sale
   
(32,240
)
   
(30,012
)
Net decrease (increase) in loans
   
209
     
36,203
 
(Purchase) disposal of premises and equipment
   
(59
)
   
265
 
Proceeds from sale of OREO
   
1,312
     
127
 
Net cash provided by (used in) investing activities
   
(13,258
)
   
24,887
 
Cash flows from financing activities
               
Net increase (decrease) in deposits
   
(8,622
)
   
(8,456
)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
   
(257
)
   
(1,554
)
Repayment of advances from the Federal Home Loan Bank
   
(20,000
)
   
(25,201
)
Proceeds from advances from the Federal Home Loan Bank
   
     
15,000
 
Dividends on preferred stock
   
     
 
Net cash provided by (used in) financing activities
   
(28,879
)
   
(20,211
)
Net increase (decrease) in cash and cash equivalents
   
(38,500
)
   
9,032
 
Cash and cash equivalents
               
Beginning of period
   
82,945
     
56,452
 
End of period
 
$
44,445
   
$
65,484
 
Supplemental disclosures of cash flow information
               
Cash payments for
               
Interest
 
$
3,254
   
$
4,885
 
Income taxes
   
     
 
Transfers from loans to other real estate owned
   
4,486
     
781
 
 
See Accompanying Notes to Unaudited Financial Statements
 
 
4.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 1. Summary of Significant Accounting Policies

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

Basis of presentation

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

For further information with respect to significant accounting policies followed by the Company in the preparation of its consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The consolidated financial statements include the accounts of the Company and Centrue Bank. Intercompany balances and transactions have been eliminated in consolidation and certain 2010 amounts have been reclassified to conform to the 2011 presentation. The annualized results of operations during the three months ended March 31, 2011 are not necessarily indicative of the results expected for the year ending December 31, 2011. All financial information in the following tables is in thousands (000s), except shares and per share data. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included.

Note 2. Earnings Per Share

Basic earnings per share for the three months ended March 31, 2011 and 2010 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share for the same periods were computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of the stock options and warrants. Computations for basic and diluted earnings per share are provided as follows:
 
 
5.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data) 

Note 2. Earnings Per Share (Continued)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Basic Earnings (Loss) Per Common Share
           
Net income (loss) for common shareholders
  $ (3,952 )   $ (6,733 )
Weighted average common shares outstanding
    6,048       6,043  
                 
Basic earnings (loss) per common share
  $ (0.65 )   $ (1.11 )
                 
Diluted Earnings (Loss) Per Common Share
               
Weighted average common shares outstanding
    6,048       6,043  
Add: dilutive effect of assumed exercised stock options
           
Add: dilutive effect of assumed exercised common stock warrants
           
Weighted average common and dilutive potential shares outstanding
    6,048       6,043  
                 
Diluted earnings (loss) per common share
  $ (0.65 )   $ (1.11 )

There were 496,738 options and 508,320 warrants outstanding for the three months ended March 31, 2011 and 670,769 options and 508,320 warrants outstanding for the three months ended March 31, 2010 that were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price and therefore, were anti-dilutive. In addition, the Company’s convertible preferred stock was not included in the computation of diluted earnings per share as it was anti-dilutive.

Note 3. Securities

The primary strategic objective related to the Company’s $244.9 million investment securities portfolio is to assist with liquidity and interest rate risk management. Securities classified as available-for-sale, carried at fair value, were $234.8 million at March 31, 2011 compared to $219.5 million at December 31, 2010. The Company also holds $10.1 million and $10.5 million as of March 31, 2011 and December 31, 2010, respectively, Federal Reserve and Federal Home Loan Bank stock which are classified as restricted securities. The Company does not have any securities classified as trading or held-to-maturity.

The following tables represent the fair value of available-for-sale securities and the related, gross unrealized gains and losses recognized in accumulated other comprehensive income(loss) at March 31, 2011 and December 31, 2010:

   
March 31, 2011
 
         
Gross
   
Gross
       
   
Fair
   
Unrealized
   
Unrealized
   
Amortized
 
   
Value
   
Gains
   
Losses
   
Cost
 
U.S. government agencies
  $ 10,669     $ 96     $ (10 )   $ 10,583  
States and political subdivisions
    26,694       513       (1 )     26,182  
U.S. government agency residential mortgage-backed securities
    163,144       2,586       (200 )     160,758  
Collateralized residential mortgage obligations:
                               
Agency
    19,299       140             19,159  
Private label
    3,878       35       (12 )     3,855  
Equity securities
    2,305       75             2,230  
Collateralized debt obligations:
                               
Single issue
    3,872       26             3,846  
Pooled
    4,914       60       (3,367 )     8,221  
                                 
    $ 234,775     $ 3,531     $ (3,590 )   $ 234,834  
 
 
6.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data) 

Note 3. Securities (Continued)

   
December 31, 2010
 
         
Gross
   
Gross
       
   
Fair
   
Unrealized
   
Unrealized
   
Amortized
 
   
Value
   
Gains
   
Losses
   
Cost
 
U.S. government agencies
  $ 7,085     $ 168     $     $ 6,917  
States and political subdivisions
    28,348       531       (8 )     27,825  
U.S. government agency residential mortgage-backed securities
    147,846       2,070       (131 )     145,907  
Collateralized residential mortgage obligations:
                               
Agency
    20,735       192             20,543  
Private label
    4,936       70       (77 )     4,943  
Equity securities
    2,254       41             2,213  
Collateralized debt obligations:
                               
Single issue
    3,849       3             3,846  
Pooled
    4,422       42       (4,213 )     8,593  
                                 
    $ 219,475     $ 3,117     $ (4,429 )   $ 220,787  

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

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Proceeds from calls and maturities
  $ 4,660     $ 2,310  
Proceeds from sales
    322       51  
Realized gains
          2  
Realized losses
           
Net impairment loss recognized in earnings
    (392 )     (1,607 )
Tax benefit (provision) related to net realized gains and losses
    151       620  

The following table represents securities with unrealized losses not recognized in income presented by the length of time individual securities have been in a continuous unrealized loss position:
 
   
March 31, 2011
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
                                     
U.S. government agencies
  $ 1,990     $ (10 )   $     $     $ 1,990     $ (10 )
State and political subdivisions
    492       (1 )                 492       (1 )
U.S. government agency residential mortgage-backed securities
    23,451       (200 )                 23,451       (200 )
Collateralized residential mortgage obligations: private label
    950       (1 )     1,770       (11 )     2,720       (12 )
Collateralized debt obligations: pooled
                4,804       (3,367 )     4,804       (3,367 )
                                                 
Total temporarily impaired
  $ 26,883     $ (212 )   $ 6,574     $ (3,378 )   $ 33,457     $ ( 3,590 )
 
 
7.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data) 

Note 3. Securities (Continued)

   
December 31, 2010
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
                                     
State and political subdivisions
  $ 664     $ (3 )   $ 350     $ (5 )   $ 1,014     $ (8 )
U.S. government agency residential mortgage-backed securities
    17,216       (131 )                 17,216       (131 )
Collateralized residential mortgage obligations: private label
                2,559       (77 )     2,559       (77 )
Collateralized debt obligations: pooled
                4,330       (4,213 )     4,330       (4,213 )
                                                 
Total temporarily impaired
  $ 17,880     $ (134 )   $ 7,239     $ (4,295 )   $ 25,119     $ (4,429 )

The fair values of securities classified as available-for-sale at March 31, 2011, by contractual maturity, are shown as follows. Securities not due at a single maturity date, including mortgage-backed securities, collateralized mortgage obligations, and equity securities are shown separately.

   
Amortized
       
   
Cost
   
Fair Value
 
Due in one year or less
  $ 9,730     $ 9,830  
Due after one year through five years
    16,054       16,303  
Due after five years through ten years
    7,697       7,835  
Due after ten years
    15,351       12,181  
U.S. government agency residential mortgage-backed securities
    160,758       163,144  
Collateralized residential mortgage obligations
    23,014       23,177  
Equity
    2,230       2,305  
    $ 234,834     $ 234,775  
 
The following table presents a rollforward of the credit losses recognized in earnings for the three month period ended March 31, 2011 and 2010:


   
2011
   
2010
 
Beginning balance, January 1,
  $ 20,362     $ 15,341  
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized
           
Additions/Subtractions
               
Amounts realized for securities sold during the period
           
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis
           
Reduction for increase in cash flows expected to be collected that are recognized over the remaining life of the security
           
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized
    392       1,607  
                 
Ending balance, March 31,
  $ 20,754     $ 16,948  

See Note 9 on Fair Value for additional information about our analysis on the security portfolio related to the fair value and other-than-temporary impairment disclosures of these instruments.
 
 
8.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 4. Loans

The major classifications of loans follow:
 
   
Aggregate Principal Amount
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Commercial
  $ 86,914     $ 87,226  
Agricultural & AGRE
    45,931       44,289  
Construction, land & development
    63,645       72,078  
Commercial RE
    343,472       342,208  
1-4 family mortgages
    167,612       172,666  
Consumer
    2,955       3,404  
Total loans
  $ 710,529     $ 721,871  
Allowance for loan losses
    (29,089 )     (31,511 )
Loans, net
  $ 681,440     $ 690,360  

There were $1.7 million of loans held for sale at both March 31, 2011 and December 31, 2010.

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

The following table presents the commercial loan portfolio by internal risk rating:
 
Mar. 31, 2011
 
Commercial
         
Construction
   
Commercial Real Estate
       
Internal Risk Rating
 
Closed end
   
Lines of Credit
   
Agriculture & AG RE
   
Land & Development
   
Owner-Occupied
   
Non-Owner Occupied
   
Total
 
1-2
   
$
2,129
   
$
362
   
$
7,688
   
$
4,319
   
$
7,197
   
$
1,051
   
$
22,746
 
3
     
3,903
     
4,317
     
14,228
     
1,195
     
13,664
     
21,396
     
58,703
 
4
     
20,026
     
27,804
     
14,858
     
1,477
     
88,370
     
49,025
     
201,560
 
5
     
10,564
     
4,402
     
4,654
     
8,226
     
24,786
     
53,376
     
106,008
 
6
     
1,337
     
5,554
     
     
7,615
     
7,126
     
21,152
     
42,784
 
7
     
1,895
     
4,222
     
4,503
     
40,813
     
22,773
     
32,954
     
107,160
 
8
     
91
     
308
     
     
     
602
     
     
1,001
 
Total
 
$
39,945
   
$
46,969
   
$
45,931
   
$
63,645
   
$
164,518
   
$
178,954
   
$
539,962
 
 
Dec. 31, 2010
 
Commercial
         
Construction
   
Commercial Real Estate
       
Internal Risk Rating
 
Closed end
   
Lines of Credit
   
Agriculture & AG RE
   
Land & Development
   
Owner-Occupied
   
Non-Owner Occupied
   
Total
 
1-2
   
$
2,294
   
$
331
   
$
8,527
   
$
4,700
   
$
8,559
   
$
1,479
   
$
25,890
 
3
     
3,935
     
7,333
     
10,873
     
1,237
     
17,673
     
23,045
     
64,096
 
4
     
21,225
     
24,042
     
16,742
     
1,500
     
76,491
     
61,468
     
201,468
 
5
     
10,483
     
4,768
     
3,588
     
8,720
     
21,389
     
42,495
     
91,443
 
6
     
1,217
     
4,506
     
42
     
7,232
     
3,206
     
20,821
     
37,024
 
7
     
2,149
     
4,898
     
4,517
     
48,689
     
25,075
     
40,507
     
125,835
 
8
     
     
45
     
     
     
     
     
45
 
Total
 
$
41,303
   
$
45,923
   
$
44,289
   
$
72,078
   
$
152,393
   
$
189,815
   
$
545,801
 
 
 
9.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 4. Loans (Continued)

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

   
Residential – 1-4 family
 
   
Senior Lien
   
JR Lien & Lines of Credit
   
Total
 
Mar. 31, 2011
           
Unrated
  $ 96,892     $ 53,046     $ 149,938  
Special mention
    1,312       1,897       3,209  
Substandard
    13,421       1,044       14,465  
Total
  $ 111,625     $ 55,987     $ 167,612  

   
Residential – 1-4 family
 
   
Senior Lien
   
JR Lien & Lines of Credit
   
Total
 
Dec. 31, 2010
           
Unrated
  $ 99,852     $ 55,147     $ 154,999  
Special mention
    1,034       1,769       2,803  
Substandard
    13,707       1,157       14,864  
Total
  $ 114,593     $ 58,073     $ 172,666  

An analysis of the March 31, 2011 and March 31, 2010 activity in the allowance for loan losses follows:

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

March 31, 2010
     
Beginning Balance
  $ 40,909  
Charge-offs
    (8,356 )
Recoveries
    122  
Provision
    9,350  
Ending Balance
  $ 41,845  
 
 
10.

 

Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 4. Loans (Continued)

The following is an analysis on the balance and allowance for loan loss for impaired loans as of March 31, 2011 and December 31, 2010:

Mar. 31, 2011
 
Commercial
 
Agriculture & AG RE
 
Construction, Land & Development
 
Commercial RE
 
1-4 Family Residential
 
Consumer
 
Total
 
Allowance for loan losses:
                             
Loans individually evaluated for impairment
  $ 1,326   $ 311   $ 4,404   $ 8,738   $ 1,242   $ 1   $ 16,022  
Loans collectively evaluated for impairment
    433     4     4,251     6,531     1,813     35     13,067  
Total ending allowance balance
  $ 1,759   $ 315   $ 8,655   $ 15,269   $ 3,055   $ 36   $ 29,089  
                                             
Loan balances:
                                           
Loans individually evaluated for impairment
  $ 6,293   $ 4,503   $ 40,634   $ 52,474   $ 14,054   $ 1   $ 117,959  
Loans collectively evaluated for impairment
    80,621     41,428     23,011     290,998     153,558     2,954     592,570  
Loans with an allowance recorded:
  $ 86,914   $ 45,931   $ 63,645   $ 343,472   $ 167,612   $ 2,955   $ 710,529  

Dec. 31, 2010
 
Commercial
 
Agriculture & AG RE
 
Construction, Land & Development
 
Commercial RE
 
1-4 Family Residential
 
Consumer
 
Total
 
Allowance for loan losses:
                             
Loans individually evaluated for impairment
  $ 1,175   $ 328   $ 8,174   $ 6,487   $ 1,500   $   $ 17,664  
Loans collectively evaluated for impairment
    459     9     4,326     7,234     1,773     46     13,847  
Total ending allowance balance
  $ 1,634   $ 337   $ 12,500   $ 13,721   $ 3,273   $ 46   $ 31,511  
                                             
Loan balances:
                                           
Loans individually evaluated for impairment
  $ 6,858   $ 4,516   $ 48,535   $ 51,652   $ 14,602   $ 1   $ 126,164  
Loans collectively evaluated for impairment
    80,368     39,773     23,543     290,556     158,064     3,403     595,707  
Loans with an allowance recorded:
  $ 87,226   $ 44,289   $ 72,078   $ 342,208   $ 172,666   $ 3,404   $ 721,871  
 
Troubled debt restructurings (“TDRs”) are separately identified for impairment disclosures. If a loan is considered to be collateral dependent loan, the TDR is reported, net, at the fair value of the collateral. The company had TDRs of $5.1 million and $5.3 million as of March 31, 2011 and December 31, 2010, respectively. Specific reserves of $0.4 million were allocated to TDRs as of March 31, 2011 and December 31, 2010, respectively. At March 31, 2011, nonaccrual TDR loans were $4.9 million, as compared to $5.0 million at December 31, 2010. At March 31, 2011 and December 31, 2010, $0.2 million and $0.3 million of TDRs were on accrual status. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs as of March 31, 2011.
 
 
11.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 4. Loans (Continued)

The following tables present data on impaired loans:

March 31, 2011
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
Loans with no related allowance recorded:
                             
Commercial
  $ 817     $ 2,331     $     $ 1,515     $ 2  
Agricultural & AGRE
    55       671             145       3  
Construction, land & development
    16,193       39,316             10,322       (39 )
Commercial RE
    19,557       29,174             19,290       170  
1-4 family residential
    3,471       5,123             3,311       27  
Consumer
                             
Subtotal
    40,093       76,615             34,583       163  
                                         
Loans with an allowance recorded:
                                       
Commercial
    5,476       5,476       1,326       3,355       38  
Agricultural & AGRE
    4,449       4,449       311       3,996       36  
Construction, land & development
    24,440       38,159       4,404       33,415       2  
Commercial RE
    32,917       32,918       8,738       26,034       432  
1-4 family residential
    10,583       10,604       1,242       10,304       217  
Consumer
    1       1       1              
Subtotal
    77,866       91,607       16,022       77,104       725  
Total
  $ 117,959     $ 168,222     $ 16,022     $ 111,687     $ 888  
                                         
Commercial
  $ 103,904     $ 152,494     $ 14,779     $ 98,072     $ 644  
Residential
  $ 14,054     $ 15,727     $ 1,242     $ 13,615     $ 244  
Consumer
  $ 1     $ 1     $ 1     $     $  

December 31, 2010
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
Loans with no related allowance recorded:
                             
Commercial
  $ 3,968     $ 5,805     $     $ 1,638     $ 133  
Agricultural & AGRE
    68       685             143       86  
Construction, land & development
    8,695       23,949             8,188       (395 )
Commercial RE
    22,129       26,581             15,795       313  
1-4 family residential
    2,838       2,953             3,069       104  
Consumer
    1       1                    
Subtotal
    37,699       59,974             28,833       241  
Loans with an allowance recorded:
                                       
Commercial
    2,890       2,890       1,175       4,228       140  
Agricultural & AGRE
    4,448       4,448       328       3,849       155  
Construction, land & development
    39,840       51,001       8,174       40,972       914  
Commercial RE
    29,523       34,695       6,487       28,443       635  
1-4 family residential
    11,764       12,812       1,500       11,481       856  
Consumer
                      11        
Subtotal
    88,465       105,846       17,664       88,984       2,700  
Total
  $ 126,164     $ 165,820     $ 17,664     $ 117,817     $ 2,941  
                                         
Commercial
  $ 111,561     $ 150,055     $ 16,164     $ 103,256     $ 1,981  
Residential
  $ 14,602     $ 15,765     $ 1,500     $ 14,550     $ 960  
Consumer
  $ 1     $ 1     $     $ 11     $  

Due to the economic conditions facing many of its customers, the Company determined that there were $54.4 million and $56.5 million of loans that were classified as impaired but were considered to be performing loans at March 31, 2011 and December 31, 2010, respectively.
 
 
12.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 4. Loans (Continued)

The following tables represent activity related to loan portfolio aging:

March 31, 2011
 
30 – 59 days past due
 
60 -89 days past due
 
90 days past due or nonaccrual
 
Total Past Due
 
Current
 
Total Loans
 
Recorded Investment 90 days Accruing
 
Commercial
                             
Closed end
  $ 7   $ 126   $ 281   $ 414   $ 39,531   $ 39,945   $  
Line of credit
            3,780     3,780     43,189     46,969      
Agricultural & AGRE
    215     10     4,503     4,728     41,203     45,931      
CRE – construction, land & develop
    2,362     347     35,896     38,605     25,040     63,645      
CRE – all other
                                           
Owner occupied
    893     147     10,686     11,726     152,792     164,518      
Non-owner occupied
    2,019     727     5,396     8,142     170,812     178,954      
Residential – 1-4 family
                                           
Senior lien
    3,610     194     2,413     6,217     105,408     111,625      
Junior lien & lines of credit
    742     618     568     1,928     54,059     55,987      
Consumer
    64             64     2,891     2,955      
Total
  $ 9,912   $ 2,169   $ 63,523   $ 75,604   $ 634,925   $ 710,529   $  

December 31, 2010
 
30 – 59 days past due
 
60 -89 days past due
 
90 days past due or nonaccrual
 
Total Past Due
 
Current
 
Total Loans
 
Recorded Investment 90 days Accruing
 
Commercial
                             
Closed end
  $ 225   $ 1   $ 321   $ 547   $ 40,756   $ 41,303   $  
Line of credit
            4,089     4,089     41,834     45,923      
Agricultural & AGRE
    58         89     147     44,142     44,289      
CRE – construction, land & develop
    1,856     2,664     36,355     40,875     31,203     72,078      
CRE – all other
                                           
Owner occupied
    633     217     12,361     13,211     139,182     152,393      
Non-owner occupied
    1,194         12,765     13,959     175,856     189,815        
Residential – 1-4 family
                                           
Senior lien
    2,111     866     3,143     6,120     108,473     114,593     58  
Junior lien & lines of credit
    862     300     566     1,728     56,345     58,073      
Consumer
    2     2         4     3,400     3,404      
Total
  $ 6,941   $ 4,050   $ 69,689   $ 80,680   $ 641,191   $ 721,871   $ 58  

The following tables represent data for nonaccrual loans. Included in the March 31, 2011 and December 31, 2010 totals are $4.9 million and $5.0 million of TDRs. Excluded are the accruing TDRs of $0.2 million and $0.3 million, respectively:
 
   
For the period ended
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Commercial
           
Closed end
  $ 281     $ 321  
Line of credit
    3,780       4,088  
Agricultural & AGRE
    4,503       89  
CRE – construction, land & development
    35,896       36,355  
CRE – all other
               
Owner occupied
    10,686       12,361  
Non-owner occupied
    5,396       12,765  
Residential – 1-4 family
               
Senior lien
    2,413       3,085  
Junior lien & lines of credit
    568       567  
Consumer
           
Total
  $ 63,523     $ 69,631  
 
 
13.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 4. Loans (Continued)

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

Note 5. Share Based Compensation

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

A summary of the status of the option plans as of March 31, 2011, and changes during the period ended on those dates is presented below:
 
   
March 31, 2011
 
             
Weighted-
     
         
Weighted-
 
Average
     
         
Average
 
Remaining
 
Aggregate
 
         
Exercise
 
Contractual
 
Intrinsic
 
   
Shares
   
Price
 
Life
 
Value
 
Outstanding at January 1, 2011
    525,969     $ 16.68          
Granted
                   
Exercised
                   
Forfeited
    (29,231 )     11.82          
                         
Outstanding at end of period
    496,738     $ 16.96  
 3.4 years
  $  
Vested or expected to vest
    492,855     $ 16.99  
 3.4 years
  $  
Options exercisable at period end
    410,438     $ 17.71  
 3.2 years
  $  

Options outstanding at March 31, 2011 and December 31, 2010 were as follows:

     
Outstanding
 
Exercisable
 
         
Weighted-
         
         
Average
     
Weighted-
 
         
Remaining
     
Average
 
       
Contractual
     
Exercise
 
Range of Exercise Prices
 
Number
 
Life
 
Number
 
Price
 
March 31, 2011:
                   
                     
$    5.24 -        $   13.00       108,500  
4.9 years
    61,400   $ 7.43  
 13.88 - 18.63       164,338  
2.9 years
    135,938     16.71  
 19.03 - 23.31       223,900  
3.1 years
    213,100     21.31  
                           
        496,738  
3.4 years
    410,438   $ 17.71  
                           
December 31, 2010:
                         
                           
$     5.24 - $    13.00       137,331  
4.1 years
    74,531   $ 8.65  
 13.88 -  18.63       164,738  
3.1 years
    122,138     16.60  
 19.03 -  23.31       223,900  
3.3 years
    211,500     21.33  
                           
        525,969  
3.5 years
    408,169   $ 17.60  
 
 
14.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 5. Share Based Compensation (Continued)

There were no options exercised for the periods ended March 31, 2011 and 2010. The compensation cost that has been charged against income for the stock options portion of the Option Plans was $0.03 million and $0.02 million for the three months ended March 31, 2011 and 2010, respectively.

There were no stock options granted during the 2011 and 2010 periods.

Unrecognized stock option compensation expense related to unvested awards (net of estimated forfeitures) for the remainder of 2011 and beyond is estimated as follows:

   
Amount
 
April, 2011 – December, 2011
  $ 83  
2012
    78  
2013
    33  
2014
     
         
Total
  $ 194  

Note 6. Contingent Liabilities and Other Matters

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

Note 7. Segment Information

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

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

The Retail Banking Segment provides retail banking services including direct and indirect lending, checking, savings, money market and certificate of deposit (CD) accounts, safe deposit rental, automated teller machines and other traditional and electronic commerce retail banking services to individual customers through the Bank’s branch locations. The Retail Banking Segment also provides a variety of mortgage lending products to meet customer needs. The majority of the mortgage loans it originates are sold to a third party mortgage services company, which provides private label loan processing and servicing support for both loans sold and loans retained by the Bank.
 
 
15.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 7. Segment Information (Continued)

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

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

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

   
Three Months Ended
 
   
March 31, 2010
 
   
Retail
   
Commercial
   
Treasury
   
Other
   
Total
 
   
Segment
   
Segment
   
Segment
   
Operations
   
Company
 
Net interest income (loss)
  $ 1,261     $ 6,426     $ 903     $ (620 )   $ 7,970  
Other revenue
    1,672       235       (1,604 )     1,019       1,322  
Other expense
    2,358       2,226       52       4,936       9,572  
Noncash items
                                       
Depreciation
    314       2             259       575  
Provision for loan losses
          9,350                   9,350  
Other intangibles
    339                         339  
Net allocations
    1,541       2,837       418       (4,796 )      
Income tax expense (benefit)
    (680 )     (3,197 )     (407 )           (4,284 )
Segment profit (loss)
  $ (939 )   $ (4,557 )   $ (764 )   $     $ (6,260 )
                                         
Goodwill
  $ 7,784     $ 8,096     $     $     $ 15,880  
Segment assets
  $ 220,268     $ 650,706     $ 301,065     $ 114,493     $ 1,286,532  

Note 8. Borrowed Funds and Debt Obligations

As of March 31, 2011, the Company has $10.3 million outstanding per a loan agreement dated March 31, 2008. This original agreement was entered into with Bank of America and consisted of three credit facilities: a secured revolving line of credit, a secured term facility, and a subordinated debt. In February 2009, the loan agreement on the revolving line of credit was amended resulting in an aggregate principal amount of $20.3 million. The first credit facility consisted of a $10.0 million secured revolving line of credit which matured on June 30, 2009 and was not renewed by Bank of America. The second credit facility consists of a $0.3 million secured term facility, which will mature in March 31, 2015. The third credit facility consists of $10.0 million in subordinated debt, which also matures in March 31, 2015. On December 14, 2009, Bank of America transferred to Cole Taylor Bank all rights, title, interest in to and under the loan agreements dated March 31, 2008. Repayment of each of the remaining two credit facilities is interest only on a quarterly basis, with the principal amount of the loan due at maturity. The term credit facility is secured by a pledge of the stock of the Bank. The subordinated debt credit facility is unsecured and is intended to qualify as Tier II capital for regulatory purposes. The outstanding balance of the debt agreements was $10.6 million as of March 31, 2011 and December 31, 2010. The Company requires regulatory approval in order to make the quarterly interest payments under our debt agreements as described in Note 13.
 
 
16.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 8. Borrowed Funds and Debt Obligations (Continued)

On March 7, 2011 the Company entered into an amendment with the lender, which modified the covenant relating to capitalization at the parent and bank level so that the Company returned to full compliance with the terms of its credit agreement. The amendment contains customary covenants, including but not limited to, the Company and the Bank’s maintenance of its status as adequately capitalized and the Bank’s minimum allowance for loan losses to total loans of 3.00%. The Company was in compliance will all covenants and all payments remain current at March 31, 2011.

Additionally, the Company has a note outstanding to an individual with an imputed interest rate of 5.25% maturing October 24, 2012 from a prior acquisition. The balance as of March 31, 2011 and December 31, 2010 was $0.4 million.

Note 9. Fair Value

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

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

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

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

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

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

Securities

Available for Sale Securities. The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). If the securities could not be priced using quoted market prices, observable market activity or comparable trades, the financial market was considered not active and the assets were classified as Level 3.
 
 
17.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

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

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

Each issuer in the tranche was analyzed using the Fitch ratings for the quarter and key financial data so that the issuer in each tranche can be divided between a pool of “performing” company and “under-performing” company. A factor is applied to the under-performing company for each quarter to project additional defaults and deferrals to be factored into the cash flow model. Three internal scenarios were developed that had different assumptions regarding the impact of the economic environment on additional defaults and deferrals for the upcoming quarters. On average, the additional deferrals for a specific CDO that were factored in to our calculation ranged between 7% and 21% of the performing balance of the instrument between the three scenarios. All of the additional deferrals for the three scenarios are factored in to the cash flow for each tranche. A discount factor to be added to the London Interbank Offered Rate (“LIBOR”) was developed for each specific tranche and incorporated to arrive at the discount rate for the CDO. The factor ranged from 200 basis points to 600 basis points based over LIBOR on the rating of the CDO and its gross-up factor for risk based capital. These rates were applied to calculate the net present value of the cash flows. The results of the three net present value calculations were weighted based on their likelihood of occurring. The scenarios were weighted 35%, 47% and 18%.

Finally, an independent valuation of our portfolio was obtained. This was weighted as the final overall step to arrive at our valuation for March 31, 2011 using 55% for the internal weighting and 45% for the external one. Due to market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

At March 31, 2011, the Company held seven pooled trust preferred CDOs with an amortized cost of $8.2 million (after first quarter 2011 credit impairment). These securities were rated high quality (A3 and above) at inception, but at March 31, 2011, these securities were rated as Ca, which are defined as highly speculative and/or default, with some recovery; and C, which is the lowest rating. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies.

 
18.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

The Company performed an analysis including evaluation for OTTI for each of the seven CDOs. During first quarter 2011, our model indicated OTTI on three CDOs, with an aggregate cost basis (after impairment) of $0.5 million. Total impairment for these three CDOs was $0.4 million. Management has determined that the remaining CDOs are deemed to be only temporarily impaired at quarter-end due to the projected cash flows adjusted for the possible further deterioration is sufficient to return the outstanding principal balance with interest at the stated rate. Specific ratings of our CDOs that have incurred OTTI during 2011 are listed below:

Issue
 
Tranche
   
Gross Amortized Cost
   
Fair Value
   
Gross Unrealized Gains/(Losses)
 
Ratings as of
Mar 31, 2011
Moody’s/S&P
 
Ratings as of
Dec 31, 2010
Moody’s/S&P
PreTSL XIII
    B-3       381       177       (204 )
Ca / NR
 
Ca / NR
PreTSL XVI
    B                    
Ca / NR
 
Ca / NR
PreTSL XXIV
    C-2       104       18       (86 )
Ca / NR
 
Ca / NR
            $ 485     $ 195     $ (290 )      

Private Label CMOs. Private label CMOs were also evaluated using management’s internal analysis process. These securities were rated high quality (A3 and above) at inception and are primarily supported by prime collateral, although the RAST Series security has some alt-a collateral support. During first quarter 2011, our model indicated no OTTI on these CMOs, with an aggregate cost basis of $3.9 million.

Single Issue Trust Preferred. During the third quarter of 2010, the Company purchased $3.8 million of single-issue trust preferred securities that are classified as available for sale. With respect to these securities, the Company looks at rating agency actions, payment history, the capital levels of the banks and the financial performance as filed in regulatory reports.

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

Other Real Estate Owned (“OREO”)

Other real estate owned includes properties acquired in partial or total satisfaction of certain loans. Properties are initially recorded at fair value, which represents the estimated sales price of the properties on the date acquired less estimated selling costs, establishing a new cost basis. Any write-downs in the carrying value of a property at the time of acquisition are charged against the allowance for loan losses. Management periodically reviews the carrying value of other real estate owned. Any write-downs of the properties subsequent to acquisition, as well as gains or losses on disposition and income or expense from the operations of other real estate owned, are recognized in operating results in the period they are realized.
 
 
19.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

         
Quoted Prices in
   
Significant
       
         
Active Markets
   
Other
   
Significant
 
         
For Identical
   
Observable
   
Unobservable
 
   
Carrying
   
Assets
   
Inputs
   
Inputs
 
   
Amount
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
March 31, 2011
                       
U.S. government agencies
 
$
10,669
   
$
   
$
10,669
   
$
 
State and political subdivisions
   
26,694
     
     
26,694
     
 
U.S. government agency residential mortgage-backed securities
   
163,144
     
     
163,144
     
 
Collateralized mortgage obligations:
                               
Agency
   
19,299
     
     
19,299
     
 
Private Label
   
3,878
     
     
     
3,878
 
Equities
   
2,305
     
     
2,305
     
 
Collateralized debt obligations:
                               
Single Issue
   
3,872
     
     
3,872
     
 
Pooled
   
4,914
     
     
     
4,914
 
Available-for-sale securities
 
$
234,775
   
$
   
$
225,983
   
$
8,792
 

         
Quoted Prices in
   
Significant
       
         
Active Markets
   
Other
   
Significant
 
         
For Identical
   
Observable
   
Unobservable
 
   
Carrying
   
Assets
   
Inputs
   
Inputs
 
   
Amount
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
December 31, 2010
                       
U.S. government agencies
 
$
7,085
   
$
   
$
7,085
   
$
 
State and political subdivisions
   
28,348
     
     
28,348
     
 
U.S. government agency residential mortgage-backed securities
   
147,846
     
     
147,846
     
 
Collateralized mortgage obligations:
                               
Agency
   
20,735
     
     
20,735
     
 
Private Label
   
4,936
     
     
     
4,936
 
Equities
   
2,254
     
     
2,254
     
 
Collateralized debt obligations:
                               
Single Issue
   
3,849
     
     
3,849
     
 
Pooled
   
4,422
     
     
     
4,422
 
Available-for-sale securities
 
$
219,475
   
$
   
$
210,117
   
$
9,358
 
 
 
20.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

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

The following table reconciles the beginning and ending balances of the assets of the Company that are measured at fair value on a recurring basis using significant unobservable inputs. There currently are no liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.
 
   
Securities Available for Sale
 
   
2011
 
   
CDOs
   
CMOs
 
Beginning balance, January 1, 2011
  $ 4,422     $ 4,936  
                 
Transfers into Level 3
           
Total gains or losses (realized/unrealized) included in earnings
               
Security impairment
    (392 )      
Payments received
          (1,088 )
Other changes in fair value
    20        
Included in other comprehensive income
    864       30  
Ending Balance, March 31,2011
  $ 4,914     $ 3,878  

   
Securities Available for Sale
 
   
2010
 
   
CDOs
   
CMOs
 
Beginning balance, January 1, 2010
  $ 9,758     $ 9,789  
                 
Transfers into Level 3
           
Total gains or losses (realized/unrealized) included in earnings
               
Security impairment
    (1,468 )     (139 )
Payments received
          (1,110 )
Other changes in fair value
    37        
Included in other comprehensive income
    (74 )     (47 )
Ending Balance, March 31,2010
  $ 8,253     $ 8,493  

Assets Measured at Fair Value on a Non-Recurring Basis

The following table summarizes, by measurement hierarchy, financial assets of the Company that are measured at fair value on a non-recurring basis.
 
   
Carrying
Amount
   
Quoted Prices in
Active Markets
For Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
March 31, 2011
                       
Impaired loans
                       
Commercial
  $ 4,150     $     $     $ 4,150  
Agricultural & AGRE
    4,138                   4,138  
Construction, land & development
    20,036                   20,036  
Commercial RE
    24,179                   24,179  
1-4 family residential
    9,341                   9,341  
OREO property
                               
Construction, land & development
    9,317                   9,317  
Commercial RE
    3,084                   3,084  
1-4 family residential
    178                   178  
 
 
21.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

December 31, 2010
                       
Impaired loans
                       
Commercial
  $ 1,715     $     $     $ 1,715  
Agricultural & AGRE
    4,120                   4,120  
Construction, land & development
    31,666                   31,666  
Commercial RE
    23,036                   23,036  
1-4 family residential
    10,264                   10,264  
                                 
OREO property
                               
Construction, land & development
    9,317                   9,317  
Commercial RE
    3,284                   3,284  
1-4 family residential
    178                   178  

The fair value of impaired loans with specific loan loss allocations is generally based on the most recent real estate appraisals, with further discounts applied, or discounted cash flows. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Judgments used to determine appraised values can be subjective, discounts applied can be significant, as the timing of expected cash flows can be fluid. All of these factors result in a Level 3 classification of the inputs for determining fair value. Impaired loans had a carrying amount of $77.9 million with specific loan loss allocations of $16.0 million in first quarter 2011, resulting in a decrease in provision for loan losses of $1.6 million for the period. At December 31, 2010, impaired loans had a carrying amount of $88.5 million with specific loan loss allocations of $17.7 million, resulting in an additional provision for loan losses of $9.1 million in 2010.

At March 31, 2011, OREO properties had a net carrying value of $12.6 million, comprised of $17.9 million with a valuation allowance of $5.3 million. This resulted in a charge to earnings of $0.2 million for the first quarter 2011. At December 31, 2010, OREO properties had a net carrying value of $12.8 million, comprised of $17.9 million with a valuation allowance of $5.1 million.

The Methods and Assumptions Used to Estimate Fair Value

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

The carrying value and fair value of the subordinated debentures issued to capital trusts are estimated using market data for similarly risk weighted items to value them. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. The fair value of loans held for sale is based on market quotes. The fair value of debt and redeemable stock is based on current rates for similar financing. It was not practicable to determine the fair value of the restricted securities due to restrictions placed on its transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.
 
 
22.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

The estimated fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010 are as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
Financial assets
                       
Cash and cash equivalents
  $ 44,445     $ 44,445     $ 82,945     $ 82,945  
Securities
    234,775       234,775       219,475       219,475  
Restricted securities
    10,148       N/A       10,470       N/A  
Net loans
    681,440       658,728       690,360       657,529  
Accrued interest receivable
    3,722       3,722       3,860       3,860  
Financial liabilities
                               
Deposits
    922,483       922,673       931,105       935,371  
Federal funds purchased and securities sold under agreements to repurchase
    15,931       15,931       16,188       16,188  
Federal Home Loan Bank advances
    51,059       52,891       71,059       73,170  
Notes payable
    10,623       9,046       10,623       10,796  
Subordinated debentures
    20,620       11,601       20,620       9,865  
Series B mandatory redeemable preferred stock
    268       268       268       268  
Accrued interest payable
    3,982       3,982       3,962       3,962  

Other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. In addition, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning potential of core deposit accounts, the earnings potential of loan servicing rights, customer goodwill and similar items.

Note 10. Participation in the Treasury Capital Purchase Program

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

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

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Common Stock will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.14) declared on the Common Stock prior to October 28, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock and (b) the date on which the Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of the Preferred Stock to third parties.
 
 
23.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

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

On August 10, 2009, the Company announced that it would defer scheduled dividend payments on the Series C, fixed rate cumulative, perpetual preferred stock. The Company is accruing the dividends in accordance to GAAP and the terms of the program. At March 31, 2011 and December 31, 2010 the amounts accrued are $3.2 million and $2.7 million, respectively. The Company may, at its option with regulatory concurrence, redeem the deferred securities at their liquidation preference plus accrued and unpaid dividends at any time.

Note 11. Goodwill and Intangible Assets

Goodwill

Goodwill is tested annually for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit, which for the Company is the Bank. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any.

Based upon impairment testing in the fourth quarter of 2010, Centrue Bank indicated potential impairment and was subjected to the second step of goodwill impairment testing. As a result of applying the second step of the impairment test, all remaining goodwill associated with our banking operations was fully impaired, totaling $15.9 million.

The change in balance of goodwill during the year is as follows:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Beginning of period
  $     $ 15,880  
Impairment recorded December 31, 2010
          (15,880 )
                 
End of period
  $     $  
 
Acquired intangible assets were as follows as of the quarter ending:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Gross
         
Gross
       
   
Carrying
   
Accumulated
   
Carrying
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
                         
Amortized intangible assets:
                       
Core deposit intangibles
  $ 14,124     $ 8,688     $ 14,124     $ 8,412  
Missouri charter
    581             581        
                                 
Total
  $ 14,705     $ 8,688     $ 14,705     $ 8,412  

The core deposit intangible asset recorded in the 2006 merger with former Centrue Financial Corporation was $13.0 million. Aggregate amortization expense was $0.3 million for the three months ended March 31, 2011 and 2010.
 
 
24.

 
 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 11. Goodwill and Intangible Assets (Continued)

Estimated amortization expense for subsequent periods is as follows:

Remaining quarters in 2011
  $ 753  
2012
    951  
2013
    951  
2014
    951  
2015
    951  
Thereafter
    879  
 
Note 12. Income Taxes

In accordance with current income tax accounting guidance, the Company assessed whether a valuation allowance should be established against their deferred tax assets (DTAs) based on consideration of all available evidence using a “more likely than not” standard. The most significant portions of the deductible temporary differences relate to (1) net operating loss carryforwards (2) the allowance for loan losses and (3) fair value adjustments or impairment write-downs related to securities.

In assessing the need for a valuation allowance, both the positive and negative evidence about the realization of DTAs were evaluated. The ultimate realization of DTAs is based on the Company’s ability to carryback net operating losses to prior tax periods, tax planning strategies that are prudent and feasible, and the reversal of deductible temporary differences that can be offset by taxable temporary differences and future taxable income.

After evaluating all of the factors previously summarized and considering the weight of the positive evidence compared to the negative evidence, the Company determined a full valuation adjustment was necessary as of December 31, 2010 and March 31, 2011. A three year cumulative loss position and continued near-term losses represent negative evidence that cannot be overcome with future taxable income.

Below is a summary of items included in the deferred tax inventory as of March 31, 2011 and December 31, 2010:
 
   
Balance at 03/31/11
   
Balance at 12/31/10
   
Change
 
Allowance for loan loss
  $ 11,236     $ 12,172     $ (936 )
Impairment on securities portfolio
    8,017       7,865       152  
Net operating loss carryforwards
    13,675       11,480       2,195  
Valuation adjustments on OREO property
    2,066       1,989       77  
Basis adjustments from merger
    (1,509 )     (1,577 )     68  
Mortgage servicing rights
    (920 )     (937 )     17  
All other
    49       481       (432 )
                         
Net deferred tax before allowance
  $ 32,614     $ 31,473     $ 1,141  
Valuation allowance
    (32,614 )     (31,473 )     (1,141 )
Net deferred tax assets
  $     $     $  

 
25.

 
 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 13. Regulatory Matters

               
To Be Well
               
Capitalized Under
         
To Be Adequately
 
Prompt Corrective
   
Actual
 
Capitalized
 
Action Provisions
   
Amount
   
Ratio
 
Amount
   
Ratio
 
Amount
 
Ratio
As of March 31, 2011
                                   
Total capital (to risk-weighted assets)
                                   
Centrue Financial
  $ 72,677     9.0 %   $ 64,706     8.0 %   N/A     N/A  
Centrue Bank
    75,318     9.4       63,806     8.0     79,758     10.0  
                                         
Tier I capital (to risk-weighted assets)
                                       
Centrue Financial
  $ 47,861     5.9       32,353     4.0     N/A     N/A  
Centrue Bank
    65,112     8.2       31,903     4.0     47,855     6.0  
                                         
Tier I leverage ratio (to average assets)
                                       
Centrue Financial
  $ 47,861     4.2       45,909     4.0     N/A     N/A  
Centrue Bank
    65,112     6.0       43,423     4.0     54,279     5.0  

As of December 31, 2010
                                   
Total capital (to risk-weighted assets)
                                   
Centrue Financial
  $ 76,459     9.4 %   $ 65,422     8.0 %   N/A     N/A  
Centrue Bank
    78,171     9.7       64,535     8.0     80,669     10.0  
                                         
Tier I capital (to risk-weighted assets)
                                       
Centrue Financial
  $ 57,974     7.1       32,711     4.0     N/A     N/A  
Centrue Bank
    67,823     8.4       32,268     4.0     48,402     6.0  
                                         
Tier I leverage ratio (to average assets)
                                       
Centrue Financial
  $ 57,974     5.1       45,683     4.0     N/A     N/A  
Centrue Bank
    67,823     6.0       45,544     4.0     56,931     5.0  
 
On December 18, 2009, the Bank entered into the Agreement with the Federal Reserve Bank of Chicago (“FRB”) and the Illinois Department of Financial & Professional Regulation (“IDFPR”). The Agreement describes commitments made by the Bank to address and strengthen banking practices relating to credit risk management practices; improving loan underwriting and loan administration; improving asset quality by enhancing the Bank’s position on problem loans through repayment, additional collateral or other means; reviewing and revising as necessary the Bank’s allowance for loan and lease losses policy; maintaining sufficient capital at the Bank, implementing an earnings plan and comprehensive budget to improve and sustain the Bank’s earnings; and improving the Bank’s liquidity position and funds management practices. The Bank has implemented enhancements to its processes to address the matters identified by the FRB and the IDFPR and continues its efforts to comply with all the requirements specified in the Agreement. In the meantime, the Agreement results in the Bank’s ineligibility for certain actions and expedited approvals without the prior written consent and approval of the FRB and the IDFPR. These actions include, among other things, the payment of dividends by the Bank to the Company, the Company cannot pay dividends on its common or preferred shares, payments of interest or principal on subordinated debentures, note payable to Cole Taylor, and Trust Preferred securities, the Company may not increase its debt level and the Company cannot redeem or purchase any shares of its stock.
 
 
26.

 
 
Centrue Financial Corporation
Note to Unaudited Consolidated Financial Statements
(Table Amounts In Thousands, Except Share Data)

Note 13. Regulatory Matters (Continued)

The Company has incurred net losses of $3.5 for the first quarter 2011 and $65.8 million for the full year 2010 due to the recent downturn in the economy. Some of the factors contributing to the losses include, reduced net interest income, loan losses, security OTTI, establishing a deferred tax valuation allowance, and goodwill impairment. The Company is also subject to ongoing monitoring by its regulatory agencies and requires regulatory approval in order to make the quarterly interest payments to Cole Taylor under our debt agreements. Management has sufficient cash at the parent Company and believes regulatory approval will be obtained for the remaining interest payments due in 2011. Should the Company and/or its bank subsidiary capital levels fall below “adequately capitalized” or the regulatory agencies deem it appropriate to downgrade our capital classification further regulatory actions may be taken including requiring us to have higher capital requirements than those required by Prompt Corrective Action regulations.

Note 14. Recent Accounting Developments

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-2, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (ASU 2011-2”). ASU 2011-2 clarifies the guidance for determining whether a loan restructuring constitutes a troubled debt restructuring (“TDR”) outlined in Accounting Standards Codification (“ASC”) No. 310-40, “Receivables-Troubled Debt Restructurings by Creditors”, by providing additional guidance to a creditor in making the following required assessments needed to determine whether a restructuring is a TDR: (i) whether or not a concession has been granted in a debt restructuring; (ii) whether a temporary or permanent increase in the contractual interest rate precludes the restructuring from being a TDR; (iii) whether a restructuring results in an insignificant delay in payment; (iv) whether a borrower that is not currently in payment default is experiencing financial difficulties; and (v) whether a creditor can use the effective interest rate test outlined in debtor’s guidance on restructuring of payables (ASC Topic No. 470-60-55-10) when evaluating whether or not a restructuring constitutes a TDR. ASU 2011-2 is effective for interim periods beginning on or after June 15, 2011. Adoption of ASU 2011-2 is not expected to have a material effect.

In July 2010, FASB issued Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). ASU 2010-20 requires companies to provide a greater level of disaggregated information regarding: (1) the credit quality of their financing receivables; and (2) their allowance for credit losses. ASU 2010-20 further requires companies to disclose credit quality indicators, past due information, and modifications of their financing receivables. For public companies, ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. ASU 2010-20 encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption. Adoption of ASU 2010-20 did not have a material impact on the Company.

In January 2010, FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-6”). ASU 2010-6 required new disclosures related to transfers in and out of fair value hierarchy Levels 1 and 2, as well as certain activities for assets whose fair value is measured under the Level 3 hierarchy. ASU 2010-6 also provided amendments clarifying the level of disaggregation and disclosures about inputs and valuation techniques along with conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of ASU 2010-6 has not had a material impact on the Company.
 
 
27.

 

 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)


The following management discussion and analysis (“MD&A”) is intended to address the significant factors affecting the Company’s results of operations and financial condition for the three months ended March 31, 2011 as compared to the same period in 2010. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included. The preparation of financial statements requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware corporation, and its consolidated subsidiaries. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank.

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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the Company’s financial position or results of operations. Actual results could differ from those estimates. Those critical accounting policies that are of particular significance to the Company are discussed in Note 1 of the Company’s 2010 Annual Report on Form 10-K.

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

Realized securities gains or losses are reported in securities gains (losses), net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of available for sale securities below their amortized cost are evaluated to determine whether the loss is temporary or other-than-temporary. If the Company (a) has the intent to sell a debt security or (b) is more likely than not will be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire unrealized loss in earnings as an other-than-temporary loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The impairment is separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income.
 
 
28.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

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

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

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

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

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

Other Real Estate Owned: Other real estate owned includes properties acquired in partial or total satisfaction of certain loans. Properties are recorded at the lower of the recorded investment in the loans for which the properties previously served as collateral or the fair value, which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Any write-downs in the carrying value of a property at the time of acquisition are charged against the allowance for loan losses. Management periodically reviews the carrying value of other real estate owned. Any write-downs of the properties subsequent to acquisition, as well as gains or losses on disposition and income or expense from the operations of other real estate owned, are recognized in operating results in the period they are realized.
 
 
29.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)


General

Centrue Financial Corporation is a bank holding company organized under the laws of the State of Delaware. The Company provides a full range of products and services to individual and corporate customers extending from the far western and southern suburbs of the Chicago metropolitan area across Central Illinois down to the metropolitan St. Louis area. These products and services include demand, time, and savings deposits; lending; mortgage banking, brokerage, asset management, and trust services. Brokerage, asset management, and trust services are provided to our customers on a referral basis to third party providers. The Company is subject to competition from other financial institutions, including banks, thrifts and credit unions, as well as nonfinancial institutions providing financial services. Additionally, the Company and its subsidiary, Centrue Bank, are subject to regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

Results of Operations

Net Income (Loss)

Net income (loss) for the three months ended March 31, 2011 equaled $(3.5) million or $(0.65) per common diluted share as compared to $(6.3) million or $(1.11) per common diluted share in the same period of 2010.

The results for the first quarter 2011 were adversely impacted by a $4.3 million provision for loan losses largely related to asset quality deterioration in the Company’s land development, construction and commercial real estate portfolios. Also contributing to the loss was a $0.2 million reduction in carrying value of OREO properties reflective of existing market conditions and more aggressive disposition strategies and a $0.4 million non-cash impairment charge on securities largely reflective of conditions impacting the banking sector leading to deterioration of capital, liquidity and asset quality. During the first quarter of 2010, the Company took a $9.4 million provision for loan losses, $1.7 million OREO valuation adjustment and $1.6 million non-cash impairment charge on securities.

Net Interest Income/ Margin

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

Fully tax equivalent net interest income for the first quarter 2011 decreased 8.6% to $7.4 million as compared to $8.1 million for the same period in 2010. The decrease in net interest income from 2010 was primarily due to average loan volume decline, higher premium amortization due to increased prepayments and lower coupon income with adjustable resets in the security portfolio. Additionally, the loan portfolio purchase accounting adjustments that were accreted into interest income related to the Company’s 2006 merger expired in the first quarter 2010. Positively impacting net interest income were lower cost of funds.
 
 
30.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
The net interest margin was 3.09% for the first quarter of 2011, representing increases of 2 basis points from 3.07% recorded in the fourth quarter of 2010 and 21 basis points from 2.88% reported in the first quarter of 2010. The increase in the first quarter 2011 net interest margin, as compared to the same period in 2010, was primarily due to increased utilization of interest rate floors on a majority of variable rate loans and a reduction in the Company’s cost of interest-bearing liabilities due to maturity of higher rate time deposits and the decline in market interest rates. Adversely impacting the margin was the cost of retaining surplus liquidity, lower average volume of higher-yielding loans, increased premium amortization due to higher prepayments and lower coupon income with adjustable resets in the securities portfolio and the impact of nonaccrual loan interest reversals. Due largely to the protracted economic downturn, the carrying cost of nonaccrual loans and the Company’s interest rate sensitivity, the margin will likely remain under pressure throughout 2011.
 
 
31.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
AVERAGE BALANCE SHEET
 
AND ANALYIS OF NET INTEREST INCOME
 
             
    
For the Three Months Ended March 31,
       
   
2011
   
2010
       
       
Interest
             
Interest
           
   
Average
 
Income/
 
Average
   
Average
   
Income/
 
Average
   
Change Due To:
 
   
Balance
 
Expense
 
Rate
   
Balance
   
Expense
 
Rate
   
Volume
   
Rate
   
Net
 
ASSETS
                                               
                                                 
Interest-earning assets
                                               
Interest-earning deposits
  $ 3,152   $ 23     2.92 %   $ 3,255     $ 19     2.41 %   $     $ 4     $ 4  
Securities
                                                                 
Taxable
    210,041     990     1.91       241,947       1,721     2.89       (173 )     (558 )     (731 )
Non-taxable
    25,064     333     5.39       32,989       433     5.33       (105 )     5       (100 )
                                                                   
Total securities (tax equivalent)
    235,105     1,323     2.28       274,936       2,154     3.18       (278 )     (553 )     (831 )
                                                                   
Federal funds sold
    1,009     8     3.26       1,453       8     0.00       (3 )     3        
                                                                   
Loans
                                                                 
Commercial
    148,388     1,983     5.42       146,405       2,008     5.56       29       (54 )     (25 )
Real estate
    579,191     7,251     5.08       717,245       9,181     5.19       (1,726 )     (204 )     (1,930 )
Installment and other
    2,444     68     11.32       3,928       86     8.89       (16 )     (2 )     (18 )
                                                                   
Gross loans (tax equivalent)
    730,023     9,302     5.17       867,578       11,275     5.27       (1,713 )     (260 )     (1,973 )
                                                                   
Total interest-earnings assets
    969,289     10,656     4.46       1,147,222       13,456     4.76       (1,994 )     (806 )     (2,800 )
                                                                   
Noninterest-earning assets
                                                                 
Cash and cash equivalents
    58,254                   60,301                                        
Premises and equipment, net
    25,471                   29,953                                        
Other assets
    44,715                   65,049                                        
                                                                   
Total nonearning assets
    128,440                   155,303                                        
                                                                   
Total assets
  $ 1,097,729                 $ 1,302,525                                        
                                                                   
LIABILITIES & STOCKHOLDERS’ EQUITY
                                                                 
                                                                   
Interest-bearing liabilities
                                                                 
NOW accounts
    85,715     46     0.22       101,325       118     0.47       (11 )     (61 )     (72 )
Money market accounts
    127,338     241     0.77       133,816       386     1.17       (3 )     (142 )     (145 )
Savings deposits
    96,590     35     0.15       92,157       61     0.27       5       (31 )     (26 )
Time deposits
    502,960     2,165     1.75       611,036       3,806     2.53       (478 )     (1,164 )     (1,642 )
Federal funds purchased and repurchase Agreements
    18,450     11     0.24       14,821       18     0.48       4       (11 )     (7 )
Advances from FHLB
    56,170     412     2.97       81,964       581     2.87       (186 )     17       (169 )
Notes payable
    31,807     364     4.64       31,981       346     4.39             18       18  
                                                                   
Total interest-bearing liabilities
    919,030     3,274     1.45       1,067,100       5,316     2.02       (669 )     (1,374 )     (2,043 )
                                                                   
Noninterest-bearing liabilities
                                                                 
Noninterest-bearing deposits
    120,643                   112,272                                        
Other liabilities
    16,171                   12,405                                        
Total noninterest-bearing liabilities
    136,814                   124,677                                        
                                                                   
Stockholders’ equity
    41,885                   110,748                                        
                                                                   
Total liabilities and stockholders’ equity
  $ 1,097,729                 $ 1,302,525                                        
                                                                   
Net interest income (tax equivalent)
        $ 7,382                   $ 8,140           $ (1,325 )   $ 568     $ (757 )
Net interest income (tax equivalent) to total earning assets
                3.09 %                   2.88 %                        
Interest-bearing liabilities to earning assets
    94.81 %                 93.02 %                                      
 
(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.
 
 
32.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Provision for Loan Losses

The amount of the provision for loan losses is based on management’s evaluations of the loan portfolio, with particular attention directed toward nonperforming, impaired and other potential problem loans. During these evaluations, consideration is also given to such factors as management’s evaluation of specific loans, the level and composition of impaired loans, other nonperforming loans, other identified potential problem loans, historical loss experience, results of examinations by regulatory agencies, results of the independent asset quality review process, the market value of collateral, the estimate of discounted cash flows, the strength and availability of guarantees, concentrations of credits and various other factors, including concentration of credit risk in various industries and current economic conditions.

The provision for loan losses for first quarter 2011 was $4.3 million, compared to $10.5 million and $9.4 million for fourth quarter 2010 and first quarter 2010, respectively. The first quarter of 2011 provision level was driven by:

 
sustained level of nonperforming loans and new credits that migrated to nonperforming status that have required current specific allocation estimates;
     
 
elevated charge-offs of previously accrued specific allocations that impact historical loss levels;
     
 
elevated past due loans;
     
 
weakening guarantor positions due to adverse economic conditions;
     
 
continued deteriorating collateral values, reflecting the impact of the adverse economic climate on the Company’s borrowers.

Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential and commercial real estate, and commercial development exposures. Many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry that existed throughout the first quarter 2011 and is projected to continue through the remainder of the year. Should the economic climate deteriorate from current levels, more borrowers may experience repayment difficulty, and the level of nonperforming loans, charge-offs and delinquencies will rise requiring further increases in the provision for loan losses.

Noninterest Income

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

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
                 
Service charges
  $ 1,062     $ 1,420  
Mortgage banking income
    407       319  
Electronic banking services
    527       484  
Bank-owned life insurance
    249       255  
Other income
    164       238  
Subtotal recurring noninterest income
    2,409       2,716  
Securities gains
          2  
Net impairment on securities
    (392 )     (1,607 )
Gain on sale of OREO
    44       9  
Gain on sale of other assets
    63       202  
Total noninterest income
  $ 2,124     $ 1,322  
 
 
33.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Noninterest income totaled $2.1 million for the three months ended March 31, 2011, compared to $1.3 million for the same period in 2010. Excluding credit impairment charges on CDO securities and gains related to the sale of OREO and other assets from both periods, noninterest income decreased $0.3 million or 11.1%. This $0.3 million decrease was primarily concentrated in service charges due to reduced consumer spending and its impact on overdraft and NSF fees.

Noninterest Expense

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

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Salaries and employee benefits
  $ 3,633     $ 3,771  
Occupancy expense, net
    720       788  
Furniture and equipment expenses
    439       524  
Marketing
    60       107  
Supplies and printing
    64       98  
Telephone
    204       179  
Data processing
    364       382  
FDIC insurance
    850       854  
Loan processing and collection costs
    591       512  
Amortization of intangible assets
    276       339  
Other expenses
    1,399       1,275  
Subtotal recurring noninterest expenses
    8,600       8,829  
OREO valuation adjustment
    200       1,657  
Total noninterest expense
  $ 8,800     $ 10,486  
 
Total noninterest expense for the first quarter of 2011 was $8.8 million, a decrease of $1.7 million, compared to $10.5 million recorded during the same period in 2010. Excluding OREO valuation adjustments from both periods, noninterest expense levels decreased by $0.2 million, or 2.3%. This $0.2 million decline in expenses was spread over various categories, including salaries and employee benefits, net occupancy costs, furniture and equipment, marketing and amortization expense. Adversely impacting expense levels were increases in loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate.

Applicable Income Taxes

Income tax expense for the periods included benefits for tax-exempt income, tax-advantaged investments and general business tax credits offset by the effect of nondeductible expenses. The following table shows the Company’s income before income taxes, as well as applicable income taxes and the effective tax rate for the three months ended March 31, 2011 and 2010.
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Income (loss) before income taxes
  $ (3,676 )   $ (10,544 )
Applicable income taxes
    (218 )     (4,284 )
Effective tax rates
    5.9 %     40.6 %

The Company recorded an income tax benefit of $(218) and $(4,284) for the three months ended March 31, 2011 and 2010, respectively. Effective tax rates equaled 5.93% and 40.63% respectively, for such periods.
 
 
34.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
The Company recorded a tax benefit of $(218) allocated to the loss from continuing operations in the first quarter of 2011 due to the following GAAP application: The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. Excluding this benefit, no tax benefit was recorded for the quarter due to the full deferred tax valuation allowance established as of December 31, 2010.

In 2010, the Company’s tax rates were impacted by several tax-exempt items. First, the Company derived interest income from municipal securities and loans, which are exempt from federal tax and certain U.S. government agency securities, which are exempt from state tax. Second, the Company derived income from bank owned life insurance policies, which is exempt from federal and state tax. Finally, state income taxes are recorded net of the federal tax benefit, which lowers the combined effective tax rate. The higher than statutory effective tax rate for the three months ended March 31, 2010 was due to the taxable loss generating a tax benefit at the combined statutory rate of 38.62% and further increased by the tax-exempt items.

Earnings Review by Business Segment

The Company’s internal reporting and planning process focuses on three primary lines of business: Retail, Commercial and Treasury. See Note 7 of the Notes to Unaudited Consolidated Financial Statements for the presentation of the condensed income statement and total assets for each Segment.

The financial information presented was derived from the Company’s internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, to portray the Segment as if it operated on a stand alone basis. Thus, each Segment, in addition to its direct revenues and expenses, assets and liabilities, includes an allocation of shared support function expenses. The Retail, Commercial and Treasury Segments also include funds transfer pricing adjustments to appropriately reflect the cost of funds on loans made and funding credits on deposits generated. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of the Notes to Consolidated Financial Statements.

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

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

Retail generated a loss of $1.1 million, or 31.4% of total Segment loss, in the first quarter 2011 as compared to a loss of $0.9 million, or 14.3% of total Segment loss, during the same period in 2010. Retail assets were $185.2 million at March 31, 2011, $191.4 million at December 31, 2010 and $220.3 million as of March 31, 2010. This represented 17.3%, 17.3% and 17.1% of total consolidated assets, respectively.
 
 
35.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Net income results for the first quarter of 2011, when compared to the same period of 2010, was negatively impacted by higher provision and noninterest expense levels partially offset by improved net interest margin due to a lower cost of funds.

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

Commercial generated a loss of $1.0 million, or 28.6% of total Segment loss, in the first quarter 2011 as compared to a loss of $4.6 million, or 73.0% of total Segment income, during the same period in 2010. Commercial assets were $574.7 million at March 31, 2011, $576.2 million at December 31, 2010 and $650.7 million as of March 31, 2010. This represented 53.5%, 52.1% and 50.6% of total consolidated assets, respectively.

Net income results for the first quarter of 2011, when compared to the same period of 2010, was positively impacted by lower provision for loan losses and noninterest expense levels due to reduced loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate and OREO valuation adjustments. Offsetting these positive developments were lower net interest income due to average loan volume decline and the impact of nonaccrual loan interest reversals. Additionally, the loan portfolio purchase accounting adjustments that were accreted into interest income related to the Company’s 2006 merger expired in the first quarter 2010.

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

Treasury generated a loss of $1.4 million, or 40.0% of total Segment net loss, in the first quarter 2011 as compared to a net loss of $0.8 million, or 12.7% of total Segment loss, during the same period in 2010. Treasury assets were $242.0 million at March 31, 2011, $218.0 million at December 31, 2010 and $301.1 million at March 31, 2010. This represented 22.5%, 19.7% and 23.4% of total consolidated assets, respectively.

Net income results for the first quarter of 2011, when compared to the same period of 2010, was negatively impacted by lower net interest income due to decreased yields on the security portfolio partially offset by lower non-cash impairment charge on CDO securities.
 
 
36.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Financial Condition

General

Following are highlights of the March 31, 2011 balance sheet when compared to December 31, 2010:

Securities. The primary strategic objective of the Company’s securities portfolio is to assist with liquidity and interest rate risk management. In managing the securities portfolio, the Company seeks to minimize any credit risk and avoid investments in sophisticated and complex investment products. The Company does not hold any securities containing sub-prime mortgages or any Fannie Mae or Freddie Mac equities.

Securities at March 31, 2011 totaled $244.9 million as compared to $229.9 million recorded at December 31, 2010. The $15.0 million, or 6.5%, net increase from year-end 2010 was largely related to enhancing the Company’s liquidity position through reinvesting dollars from the loan portfolio into security instruments with shorter durations.

At quarter-end, the Company held seven pooled trust preferred collateralized debt obligations (“CDOs”) involving three hundred issuers with a total book value of $8.2 million and fair value of $4.9 million. The investments in trust-preferred securities receive principal and interest payments from several pools of subordinated capital debentures with each pool containing issuances by a minimum of twenty-three banks or, in a few instances, capital notes from insurance companies.

Per accounting guidance issued regarding the recognition and presentation of Other-Than-Temporary Impairments, the Company recorded for the first quarter 2011 a $0.4 million pre-tax non-cash impairment charge based upon management’s determination that three trust preferred securities with an aggregate cost before impairment of $0.9 million were other than temporarily impaired. This determination was based on the Company’s analysis which follows accounting pronouncements. The analysis showed an adverse change in estimated cash flows from these securities due to a significant number of deferrals. These values continued to decline as rating agencies downgraded the ratings of the securities. Per the accounting pronouncements, the Company calculated the difference between the present value of the cash flows expected to be collected and the cost basis, otherwise referred to as the credit loss.

Should the economic climate deteriorate from current levels, the underlying credits may experience repayment difficulty, and the level of deferrals and defaults could increase requiring additional impairment charges in future quarters.

Loans. Total loans equaled $710.5 million, representing decreases of $11.4 million, or 1.6%, from December 31, 2010. The net decrease from year-end 2010 was related to a combination of normal attrition, pay-downs, loan charge-offs, transfers to OREO and strategic initiatives to reduce balance sheet risk. Due to economic conditions, we have also experienced a decrease in loan demand as many borrowers continue to reduce their debt.

Deposit. Total deposits equaled $922.5 million at March 31, 2011 compared to $931.1 million recorded at December 31, 2010, representing a decrease of $8.6 million or 0.9%. The net decrease from year-end 2010 was largely related to strategic initiatives to reduce higher costing time deposits and collateralized local public agency deposits. Wholesale funding decreased $20.9 million, as $0.9 million in maturing brokered certificates of deposits and $20.0 million in FHLB advances were not replaced.
 
 
37.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Nonperforming Assets

The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual status when there are serious doubts regarding the collectibility of all principal and interest due under the terms of the loans. If a loan is placed on nonaccrual status, the loan does not generate current period income for the Company and any amounts received are generally applied first to principal and then to interest. It is the policy of the Company not to renegotiate the terms of a loan because of a delinquent status. Rather, a loan is generally transferred to nonaccrual status if it is not in the process of collection and is delinquent in payment of either principal or interest beyond 90 days.

The classification of a loan as nonaccrual does not necessarily indicate that the principal is uncollectible, in whole or in part. The Bank makes a determination as to collectibility on a case-by-case basis and considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon the specific facts of each situation. Alternatives that are typically considered to collect nonaccrual loans are foreclosure, collection under guarantees, loan restructuring, or judicial collection actions.

Each of the Company’s commercial loans is assigned a rating based upon an internally developed grading system. A separate credit administration department also reviews grade assignments on a quarterly basis. Management continuously monitors nonperforming, impaired, and past due loans in an effort to prevent further deterioration of these loans. The Company has an independent loan review function which is separate from the lending function and is responsible for the review of new and existing loans.

The following table summarizes nonperforming assets and loans past due 90 days or more for the previous five quarters:
 
   
2011
   
2010
 
   
Mar 31,
   
Dec 31,
   
Sep 30,
   
June 30,
   
Mar 31,
 
Nonaccrual loans
  $ 58,607     $ 64,600     $ 78,197     $ 78,260     $ 78,958  
Troubled debt restructurings
    5,124       5,332       16,899       14,898       11,226  
Loans 90 days past due and still accruing interest
          58                    
Total nonperforming loans
    63,731       69,990       95,096       93,158       90,184  
                                         
Other real estate owned
    28,581       25,564       24,695       16,182       15,230  
Total nonperforming assets
  $ 92,312     $ 95,554     $ 119,791     $ 109,340     $ 105,414  
                                         
End of period loans
  $ 710,529     $ 721,871     $ 764,585     $ 792,289     $ 838,700  
                                         
Nonperforming loans to total end of period loans
    8.97 %     9.70 %     12.44 %     11.76 %     10.75 %
Nonperforming assets to total end of period loans
    12.99 %     13.24 %     15.67 %     13.80 %     12.57 %
Nonperforming assets to total end of period assets
    8.60 %     8.65 %     10.15 %     8.91 %     8.19 %

Total nonperforming assets were $92.3 million, or 8.60% of total assets, at March 31, 2011. This included $5.1 million in troubled debt restructurings, $28.6 million of OREO and $58.6 million of nonaccrual loans. The majority of the OREO is comprised of six parcels (land development and commercial real estate) which account for 66.8% of the balance. The Company updates these appraisals quarterly to ensure that they are properly carried at their fair market value. Approximately 56.5% of total nonaccrual loans at March 31, 2011 were concentrated in land development and construction credits. Additionally, 57.8% of total nonaccrual loans represented loans to 10 borrowers.

The level of nonperforming loans (nonaccrual, 90 days past due, and troubled debt restructurings) at March 31, 2011 decreased $6.3 million, or 9.0%, from December 31, 2010 levels and $26.5 million, or 29.4%, from the $90.2 million that existed at March 31, 2010. The decrease in nonperforming loans was mainly due to the charge-off of nonaccrual loans and the transfer of the property securing the credits into OREO.
 
 
38.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
The level of nonperforming loans to total end of period loans was 8.97% at March 31, 2011, as compared to 9.70% at December 31, 2010 and 10.75% at March 31, 2010. As a result of the decrease in nonperforming loans, the coverage ratio (allowance to nonperforming loan) was reported at 45.64% as of March 31, 2011 as compared to 45.02% as of December 31, 2010.

Other Potential Problem Loans

The Company has other potential problem loans that are currently performing, but where some concerns exist regarding the nature of the borrowers’ projects in our current economic environment. Through the end of the first quarter of 2011, $54.4 million of loans had been identified by management that are currently performing but due to the economic environment facing these borrowers were classified by management as impaired. Impaired loans that are performing account for 46.15% of the loans deemed impaired during the first quarter of 2011, whereas, 44.85% of impaired loans were performing at December 31, 2010. Excluding nonperforming loans and loans that management has classified as impaired, there are other potential problem loans that totaled $8.6 million at March 31, 2011 as compared to $6.7 million at December 31, 2010. The classification of these loans, however, does not imply that management expects losses on each of these loans, but believes that a higher level of scrutiny and closer monitoring is prudent under the circumstances. Such classifications relate to specific concerns for each individual borrower and do not relate to any concentration risk common to all loans in this group.

Allowance for Loan Losses

At March 31, 2011, the allowance for loan losses was $29.1 million, or 4.09% of total loans, as compared to $31.5 million, or 4.37%, at December 31, 2010 and $41.8 million, or 4.99%, of total loans at March 31, 2010.

The Company recorded a provision of $4.3 million to the allowance for loan losses in the first quarter 2011 largely due to the following factors:

 
sustained level of nonperforming loans and new credits that migrated to nonperforming status that have required current specific allocation estimates;
     
 
elevated charge-offs of previously accrued specific allocations that impact historical loss levels;
     
 
elevated past due loans;
     
 
weakening guarantor positions due to adverse economic conditions;
     
 
continued deteriorating collateral values, reflecting the impact of the adverse economic climate on the Company’s borrowers.

Net loan charge-offs for the first quarter of 2011 were $6.7 million, or 0.91% of average loans, compared with $22.3 million, or 2.98% of average loans, for the fourth quarter of 2010 and $8.4 million, or 0.97% of average loans, for the first quarter of 2010. Loan charge-offs during the first quarter of 2011 were largely influenced by the credit performance of the Company’s land development, construction and commercial real estate portfolio. These charge-offs reflect management’s continuing efforts to align the carrying value of these assets with the value of underlying collateral based upon more aggressive disposition strategies and recognizing falling property values. Because these loans are collateralized by real estate, losses occur more frequently when property values are declining and borrowers are losing equity in the underlying collateral. Management believes we are recognizing losses in our portfolio through provisions and charge-offs as credit developments warrant.

Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with land development, residential and commercial real estate, and commercial development exposures. Many of these relationships continued to show duress due to the ongoing economic downturn being experienced for this industry that existed throughout the first quarter 2011 and is projected to continue through the remainder of the year. Should the economic climate deteriorate from current levels, more borrowers may experience repayment difficulty, and the level of nonperforming loans, charge-offs and delinquencies will rise requiring further increases in the provision for loan losses. Management believes that the allowance for loan losses at March 31, 2011 represented probable incurred credit losses inherent in the loan portfolio.
 
 
39.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Liquidity

Due to continued uncertainty in the financial markets, liquidity strategies are conservatively postured in an effort to mitigate adverse pressure on liquidity levels. The Company continues to remain in a liquid position by reducing reliance on wholesale funding sources and a reduction in the loan portfolio, net of gross charge-offs and transfers to OREO. Total deposits equaled $922.5 million, representing decreases of $8.6 million, or 0.9%, from December 31, 2010 and $123.7 million, or 11.8%, from March 31, 2010. During the quarter, in-market deposits decreased $7.7 million or 0.9%, primarily as the result of a decrease in balances in certificates of deposit which was partially offset by an increase in core deposits (checking, savings, NOW and money market). Wholesale funding (brokered deposits and FHLB advances) decreased $20.9 million or 14.5%, as borrowings from the FHLB matured and were repaid.

The Company manages its liquidity position with the objective of maintaining sufficient funds to respond to the needs of depositors and borrowers and to take advantage of earnings enhancement opportunities. In addition to the normal inflow of funds from core-deposit growth together with repayments and maturities of loans and investments, the Company utilizes other short-term funding sources such as securities sold under agreements to repurchase, overnight federal funds purchased from correspondent banks and the acceptance of short-term deposits from public entities.

The Company can borrow from the Federal Reserve Bank of Chicago’s discount window to meet short-term liquidity requirements. These borrowings are secured by commercial loans. At March 31, 2011, the Company maintained borrowing capacity of $16.8 million from the Federal Reserve Bank discount window.

The Company is also a member of the Federal Home Loan Bank-Chicago (FHLB) and as such has advances from FHLB secured generally by residential mortgage loans with a remaining borrowing capacity of $45.5 million.

The Company monitors and manages its liquidity position on several bases, which vary depending upon the time period. As the time period is expanded, other data is factored in, including estimated loan funding requirements, estimated loan payoffs, investment portfolio maturities or calls and anticipated depository buildups or runoffs.

The Company classifies all of its securities as available-for-sale, thereby maintaining significant liquidity. The Company’s liquidity position is further enhanced by structuring its loan portfolio interest payments as monthly and by the significant representation of retail credit and residential mortgage loans in the Company’s loan portfolio, resulting in a steady stream of loan repayments. In managing its investment portfolio, the Company provides for staggered maturities so that cash flows are provided as such investments mature.

The Company’s cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Cash flows provided by operating activities and investing activities offset by those used in financing activities, resulted in a net decrease in cash and cash equivalents of $38.5 million from December 31, 2010 to March 31, 2011.

During the first quarter of 2011, the Company experienced net cash inflows of $3.6 million in operating activities. In contrast, net cash outflows of $28.9 million were used in financing activities largely due to the repayment on wholesale funding and decreases in deposits; $13.2 million was used in investing activities primarily to purchase securities above the level of maturities and pay downs.
 
 
40.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
At December 31, 2010 the parent Company had $3.0 million in cash and cash equivalents. During the first quarter of 2011, the parent Company experienced net cash outflow of $0.2 million leaving $2.8 million in cash and cash equivalents available at March 31, 2011. The parent Company’s primary use of cash is for quarterly debt payments. These payments are estimated to be $0.5 million for the remainder of the year and are more fully described in Note 13.

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 March 31, 2011.

   
Payments Due by Period
 
   
Within 1
               
After
       
   
Year
   
1 – 3 Years
   
4 – 5 Years
   
5 Years
   
Total
 
Contractual Obligations
                             
                               
Short-term debt
  $     $     $ 250     $     $ 250  
Long-term debt
    182       191       10,000             10,373  
Certificates of deposit
    355,750       93,340       42,168       92       491,350  
Operating leases
    275       496       499       249       1,519  
Series B mandatory redeemable preferred stock
          268                   268  
Subordinated debentures
                      20,620       20,620  
FHLB advances
    28,000       3,059       15,000       5,000       51,059  
                                         
Total contractual cash obligations
  $ 384,207     $ 97,354     $ 67,917     $ 25,961     $ 575,439  

   
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
  $ 75,354     $ 2,506     $ 1,080     $ 25,550     $ 104,490  
Standby letters of credit
    2,695       103       40             2,838  
                                         
Total contractual cash obligations
  $ 78,049     $ 2,609     $ 1,120     $ 25,550     $ 107,328  
 
Capital Resources

Stockholders’ Equity

Stockholders’ equity at March 31, 2011 was $39.8 million, a decrease of $3.1, or 7.2%, from December 31, 2010. The change in stockholders’ equity was largely related to the operating loss incurred in the first quarter 2011. Book value per common share equaled $1.09 at March 31, 2011 compared to $1.61 at December 31, 2010. Tangible book value per common share equaled $0.10 at March 31, 2011 compared to $0.57 at December 31, 2010.

Stock Repurchase

Restrictions set forth in the U.S. Treasury CPP program prohibit the Company from repurchasing its common stock until the CPP proceeds are paid back.
 
 
41.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

 
Capital Measurements

As reflected in the following table, the Company and Bank was considered “adequately-capitalized” under regulatory defined capital ratios as of March 31, 2011:

   
Centrue Financial
   
Centrue Bank
   
Adequately- Capitalized
   
Mar 31, 2011
   
Dec 31, 2010
   
Mar 31, 2011
   
Dec 31, 2010
    Thresholds
                               
Carrying amounts ($millions):
                             
Total risk-based capital
  $ 72.7     $ 76.5     $ 75.3     $ 78.2        
Tier 1 risk-based capital
  $ 47.9     $ 58.0     $ 65.1     $ 67.8        
Tangible common equity
  $ 0.6     $ 3.5     $ 65.6     $ 67.5        
                                       
Capital ratios:
                                     
Total risk-based capital
    9.0 %     9.4 %     9.4 %     9.7 %   8.0 %
Tier 1 risk-based capital
    5.9 %     7.1 %     8.2 %     8.4 %   4.0 %
Tier 1 leverage ratio
    4.2 %     5.1 %     6.0 %     6.0 %   4.0 %
 
Total capital and corresponding capital ratios decreased during the first quarter 2011 due to net operating losses.

Recent Accounting Developments

See Note 14 to the Unaudited Consolidated Financial Statements for information concerning recent accounting developments.
 
 
42.

 
 
Centrue Financial Corporation
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Table Amounts In Thousands, Except Share Data)

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

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

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could effect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any forward-looking statements.

Among the factors that could have an impact on the Company’s ability to achieve operating results and the growth plan goals are as follows:

 
management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of the Company’s net interest income;
 
fluctuations in the value of the Company’s investment securities;
 
the Company’s ability to ultimately collect on any downgraded loan relationships;
 
the Company’s ability to respond and adapt to economic conditions in our geographic market;
 
the Company’s ability to adapt successfully to technological changes to compete effectively in the marketplace;
 
credit risks and risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio and individual large loans;
 
volatility of rate sensitive deposits;
 
operational risks, including data processing system failures or fraud;
 
asset/liability matching risks and liquidity risks;
 
the ability to successfully acquire low cost deposits or funding;
 
the ability to successfully execute strategies to increase noninterest income;
 
the ability to successfully grow non-commercial real estate loans;
 
the ability of the Company to continue to realize cost savings and revenue generation opportunities in connection with the synergies of centralizing operations;
 
the ability to adopt and implement new regulatory requirements as dictated by the SEC, FASB or other rule-making bodies which govern our industry;
 
changes in the general economic or industry conditions, nationally or in the communities in which the Company conducts business;
 
the Company’s ability to raise additional capital, if available, to sustain growth or operating results;
 
the Company’s ability to dispose of other real estate owned (“OREO”) at reasonable values in a market that is very volatile.
 
 
43.

 
 
Centrue Financial Corporation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(Table Amounts In Thousands, Except Share Data)

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity Management

The Company performs a net interest income analysis as part of its asset/liability management practices. The net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 50, 100, and 200 basis point increase in market interest rates or a 50 basis point decrease in market rates. The interest rates scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. The tables below present the Company’s projected changes in net interest income for the various rate shock levels at March 31, 2011 and December 31, 2010, respectively:

   
Change in Net Interest Income Over One Year Horizon
   
March 31, 2011
 
December 31, 2010
   
Change
 
Change
    $     %   $     %
+ 300 bp   $ (778 )   (2.44 )%   $ (570 )   (1.82 )%
+ 200 bp     (1,824 )   (5.72 )     (1,637 )   (5.23 )
+ 100 bp     (1,332 )   (4.17 )     (1,376 )   (4.40 )
+   50 bp     (682 )   (2.14 )     (701 )   (2.24 )
                             
Base
                   
                             
-    50 bp     587     1.84       568     1.82  
 
As shown above, the effect of an immediate 200 basis point increase in interest rates as of March 31, 2011 would decrease the Company’s net interest income by $1.8 million or 5.72%. The effect of an immediate 50 basis point decrease in rates would increase the Company’s net interest income by $0.6 million or 1.84%. Rate increases over 200 basis points have a lesser negative impact than a 200 point increase and the impact becomes positive when the increase is 400 basis points.

During late 2008 and 2009, management instituted new underwriting standards that incorporated interest rate floors into the terms for many of its commercial loan relationships in order to maximize the net interest margin during the time when market interest rates are at extremely low levels. While these floors have held income to a higher level in this low rate environment, they will also make it necessary for rates to climb to somewhat higher levels before the yield of the adjustable rate assets move above the floors and add significantly to interest income. An increase of 300 basis points in the interest rates enables the loan yields to move up from the rate floors and respond to rising market rates similar to the increase in deposit costs.

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.
 
 
44.

 

Centrue Financial Corporation
Item 4. Controls And Procedures


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.
 
 
45.

 

PART II - OTHER INFORMATION

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.

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, 2010.

Unregistered Sales of Equity Securities and Use of Proceeds
   
  None.
 
Defaults Upon Senior Securities
   
  None.

[Reserved]
   
Item 5.  Other Information 
   
  None.

Exhibits

  Exhibits:   
     
 
10.1
Sixth Amendment to Loan Agreement between the Company and Cole Taylor as assignee of Bank of America dated March 29, 2011.
     
 
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.
 
 
46.

 
 
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: May 13, 2011
By:
/s/ Thomas A. Daiber
   
Thomas A. Daiber
   
President and Principal Executive Officer
   
 
Date: May 13, 2011
By:
/s/ Kurt R. Stevenson
   
Kurt R. Stevenson
   
Senior Executive Vice President and Principal Financial and Accounting Officer
 
 
47.