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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2008
Commission File Number: 0-28846
Centrue Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
7700 Bonhomme Avenue, St. Louis, Missouri 63105
(Address of principal executive offices including zip code)
(314) 505-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at November 7, 2008
----------------------------- --------------------------------------
Common Stock, Par Value $1.00 6,028,491
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CENTRUE FINANCIAL CORPORATION
FORM 10-Q INDEX
SEPTEMBER 30, 2008
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets............................1
o Unaudited Consolidated Statements of Income and
Comprehensive Income ....................................2
o Unaudited Consolidated Statements of Cash Flows..................4
o Notes to Unaudited Consolidated Financial Statements.............5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................36
Item 4. Controls and Procedures ............................................37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................38
Item 1A. Risk Factors........................................................38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........38
Item 3. Defaults Upon Senior Securities.....................................38
Item 4. Submission of Matters to a Vote of Security Holders.................38
Item 5. Other Information...................................................38
Item 6. Exhibits............................................................39
SIGNATURES...................................................................40
CENTRUE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------------------------------------------------------------------------------------------------------------
September 30, December 31,
2008 2007
------------- -------------
ASSETS
Cash and cash equivalents $ 40,642 $ 51,628
Securities available-for-sale 205,549 238,661
Restricted securities 10,411 10,670
Loans 973,933 957,285
Allowance for loan losses (11,461) (10,755)
------------- -------------
Net loans 962,472 946,530
Cash value of life insurance 27,662 26,895
Mortgage servicing rights 2,932 3,161
Premises and equipment, net 32,887 35,615
Goodwill 24,494 25,498
Intangible assets, net 9,524 11,007
Other real estate 12,445 2,937
Other assets 13,164 12,397
------------- -------------
Total assets $ 1,342,182 $ 1,364,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 106,863 $ 114,360
Interest-bearing 901,862 918,662
------------- -------------
Total deposits 1,008,725 1,033,022
Federal funds purchased and securities sold
under agreements to repurchase 32,697 44,937
Federal Home Loan Bank advances 131,293 121,615
Notes payable 20,655 13,802
Series B mandatory redeemable preferred stock 831 831
Subordinated debentures 20,620 20,620
Other liabilities 9,113 11,296
------------- -------------
Total liabilities 1,223,934 1,246,123
------------- -------------
Commitments and contingent liabilities -- --
Stockholders' equity
Series A convertible preferred stock (aggregate liquidation
preference of 2,762) 500 500
Common stock, $1 par value, 15,000,000 shares authorized;
7,453,555 and 7,438,110 shares issued at September 30, 2008
and December 31, 2007 7,454 7,438
Surplus 71,435 70,901
Retained earnings 64,931 60,344
Accumulated other comprehensive income (loss) (3,652) 939
------------- -------------
140,668 140,122
Treasury stock, at cost 1,425,064 shares at September 30, 2008
and 1,366,564 at December 31, 2007 (22,420) (21,246)
------------- -------------
Total stockholders' equity 118,248 118,876
------------- -------------
Total liabilities and stockholders' equity $ 1,342,182 $ 1,364,999
============= =============
See Accompanying Notes to Unaudited Financial Statements
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1.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Interest income
Loans $ 15,316 $ 18,000 $ 48,584 $ 50,963
Securities
Taxable 2,150 3,071 6,731 9,543
Exempt from federal income taxes 351 378 1,064 1,141
Federal funds sold and other 14 112 94 380
------------ ------------ ------------ ------------
Total interest income 17,831 21,561 56,473 62,027
Interest expense
Deposits 6,225 9,734 21,591 27,994
Federal funds purchased and securities
sold under agreements to repurchase 189 536 675 1,409
Federal Home Loan Bank advances 838 636 2,786 1,909
Series B mandatory redeemable preferred 12 12 37 37
Subordinated debentures 322 395 956 1,293
Notes payable 263 164 739 487
------------ ------------ ------------ ------------
Total interest expense 7,849 11,477 26,784 33,129
------------ ------------ ------------ ------------
Net interest income 9,982 10,084 29,689 28,898
Provision for loan losses 1,225 -- 2,857 226
------------ ------------ ------------ ------------
Net interest income after
Provision for loan losses 8,757 10,084 26,832 28,672
Noninterest income
Service charges 1,980 1,725 5,491 5,063
Trust income 176 243 661 704
Mortgage banking income 349 399 1,184 1,282
Brokerage commissions and fees 73 416 241 646
Bank owned life insurance 260 252 767 740
Securities gains (losses), net -- -- 848 (33)
Gain on sale of OREO 122 459 360 1,047
Gain (loss) on sale of other assets (33) (4) 1,078 (4)
Other income 667 877 2,194 2,370
------------ ------------ ------------ ------------
3,594 4,367 12,824 11,815
Noninterest expenses
Salaries and employee benefits 3,554 3,891 12,876 14,183
Occupancy 761 1,028 2,718 2,988
Furniture and equipment 649 616 2,055 1,938
Marketing 355 325 906 738
Supplies and printing 101 137 331 474
Telephone 172 198 614 586
Data Processing 378 308 912 1,167
Amortization of intangible assets 488 562 2,172 1,774
Other expenses 1,664 1,566 5,075 4,577
------------ ------------ ------------ ------------
8,122 8,631 27,659 28,425
See Accompanying Notes to Unaudited Financial Statements
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2.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Income before income taxes 4,229 5,820 11,997 12,062
Income taxes 1,430 1,982 4,048 3,819
------------ ------------ ------------ ------------
Net income $ 2,799 $ 3,838 $ 7,949 $ 8,243
============ ============ ============ ============
Preferred stock dividends 52 52 156 156
------------ ------------ ------------ ------------
Net income for common stockholders $ 2,747 $ 3,786 $ 7,793 $ 8,087
============ ============ ============ ============
Basic earnings per common share $ 0.46 $ 0.60 $ 1.29 $ 1.26
============ ============ ============ ============
Diluted earnings per common share $ 0.46 $ 0.60 $ 1.29 $ 1.26
============ ============ ============ ============
Total comprehensive income:
Net income $ 2,799 $ 3,838 $ 7,949 $ 8,243
Change in unrealized gains (losses) on
available for sale securities (514) 2,008 (7,495) 330
Tax effect (199) 778 (2,904) 128
------------ ------------ ------------ ------------
Total comprehensive income (loss), net of tax (315) 1,230 (4,591) 202
------------ ------------ ------------ ------------
Total comprehensive income $ 2,484 $ 5,068 $ 3,358 $ 8,445
============ ============ ============ ============
See Accompanying Notes to Unaudited Financial Statements
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3.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (IN THOUSANDS)
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Nine Months Ended
September 30,
---------------------------
2008 2007
------------ ------------
Cash flows from operating activities
Net Income $ 7,949 $ 8,243
Adjustments to reconcile net income to
Net cash provided by operating activities
Depreciation 2,157 1,545
Amortization of intangible assets 2,172 1,774
Amortization of mortgage servicing rights, net 370 287
Amortization of bond premiums, net 386 152
Share based compensation 318 72
Provision for loan losses 2,857 226
Provision for deferred income taxes 5,113 (3,778)
Earnings on bank-owned life insurance (767) (740)
Securities losses/(gains), net (848) 33
(Gain) loss on sale of OREO (360) (1,047)
(Gain) loss on sale of loans (904) (938)
(Gain) on sale of branches (1,107) --
Loss related to sale of Wealth Management 340 --
Proceeds from sales of loans held for sale 61,394 62,208
Origination of loans held for sale (60,907) (65,246)
Change in assets and liabilities
(Increase) decrease in other assets (5,424) 5,058
Increase (decrease) in other liabilities 687 2,946
------------ ------------
Net cash provided by (used in) operating activities 13,426 10,795
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 113,170 35,636
Proceeds from sales 258 2,497
Purchases (86,848) (4,557)
Net decrease (increase) in loans (70,341) (101,092)
Purchase of premises and equipment (202) (1,925)
Proceeds from sale of OREO 10,408 6,386
Purchase of Missouri Bank charter -- (581)
Sale of Branches, net of premium received (19,498) --
------------ ------------
Net cash provided by (used in) investing activities (53,053) (63,636)
Cash flows from financing activities
Net increase (decrease) in deposits 27,924 37,195
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (12,240) 15,976
Repayment of advances from the Federal Home Loan Bank (494,322)
Proceeds from advances from the Federal Home Loan Bank 504,000 17,577
Payments on notes payable (3,397) (368)
Proceeds from notes payable 10,250 3,750
Dividends on common stock (2,477) (2,432)
Dividends on preferred stock (156) (156)
Proceeds from exercise of stock options 233 358
Purchase of treasury stock (1,174) (4,246)
------------ ------------
Net cash provided by (used in) financing activities 28,641 67,654
------------ ------------
Net increase (decrease) in cash and cash equivalents (10,986) 14,813
Cash and cash equivalents
Beginning of period 51,628 40,195
------------ ------------
End of period $ 40,642 $ 55,008
============ ============
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 28,958 $ 31,619
Income taxes 4,017 952
Transfers from loans to other real estate owned 19,709 7,900
See Accompanying Notes to Unaudited Financial Statements
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4.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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Note 1. Summary of Significant Accounting Policies
Centrue Financial Corporation (the "Company") is a bank holding company
organized under the laws of the State of Delaware. The Company provides a full
range of banking services to individual and corporate customers located in
markets extending from the far western and southern suburbs of the Chicago
metropolitan area across Central Illinois down to the metropolitan St. Louis
area. These services include demand, time, and savings deposits; lending;
mortgage banking; brokerage; asset management; and trust services. The Company
is subject to competition from other financial institutions and nonfinancial
institutions providing financial services. Additionally, the Company and its
subsidiary Centrue Bank (the "Bank") are subject to regulations of certain
regulatory agencies and undergo periodic examinations by those regulatory
agencies.
Basis of presentation
---------------------
The consolidated financial statements include the accounts of the Company and
Centrue Bank. Intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited interim consolidated financial statements of Centrue
Financial Corporation have been prepared in accordance with U.S. generally
accepted accounting principles and with the rules and regulations of the
Securities and Exchange Commission for interim financial reporting. Accordingly,
they do not include all of the information and footnotes required for complete
financial statements. In the opinion of management, all normal and recurring
adjustments which are necessary to fairly present the results for the interim
periods presented have been included. The preparation of financial statements
requires management to make estimates and assumptions that affect the recorded
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. The allowance for loan losses,
carrying value of goodwill, value of mortgage servicing rights, deferred taxes,
and fair values of financial instruments are particularly subject to change.
Actual results could differ from those estimates. Certain 2007 amounts have been
reclassified to conform to the 2008 presentation.
Assets held in an agency or fiduciary capacity, other than trust cash on deposit
with Centrue Bank, are not assets of the Company and, accordingly, are not
included in the accompanying consolidated financial statements.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2007. The annualized results of operations during the three and nine months
ended September 30, 2008 are not necessarily indicative of the results expected
for the year ending December 31, 2008. All financial information is in thousands
(000s), except shares and per share data.
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5.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 2. Earnings Per Share
Basic earnings per share for the three and nine months ended September 30, 2008
and 2007 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three and nine months
ended September 30, 2008 and 2007 were computed by dividing net income by the
weighted average number of shares outstanding, adjusted for the dilutive effect
of the stock options. Computations for basic and diluted earnings per share are
provided below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Basic Earnings Per Common Share
Net income for common shareholders $ 2,747 $ 3,786 $ 7,793 $ 8,087
Weighted average common shares outstanding 6,028 6,322 6,036 6,399
------------ ------------ ------------ ------------
Basic earnings per common share $ 0.46 $ 0.60 $ 1.29 $ 1.26
============ ============ ============ ============
Diluted Earnings Per Common Share
Weighted average common shares outstanding 6,028 6,322 6,036 6,399
Add: dilutive effect of assumed exercised
stock options 2 36 15 34
------------ ------------ ------------ ------------
Weighted average common and dilutive
potential shares outstanding 6,030 6,358 6,051 6,433
============ ============ ============ ============
Diluted earnings per common share $ 0.46 $ 0.60 $ 1.29 $ 1.26
============ ============ ============ ============
There were approximately 611,738 and 244,200 options outstanding for the three
months ended September 30, 2008 and 2007, respectively that were not included in
the computation of diluted earnings per share. There were approximately 523,300
and 276,200 options outstanding for the nine months ended September 30, 2008 and
2007, respectively that were not included in the computation of diluted earnings
per share. These options were antidilutive since the exercise prices were
greater than the average market price of the common stock.
Note 3. Securities
The primary strategic objective related to the Company's $215,960 investment
securities portfolio is to assist with liquidity and interest rate risk
management. Of the Company's securities, $205,549 are classified as
available-for-sale and are carried at fair value. The Company does not have any
securities classified as trading or held-to-maturity.
The following table describes the fair value, gross unrealized gains and losses
of securities available-for-sale at September 30, 2008 and December 31, 2007,
respectively:
September 30, 2008
---------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized % of
Value Gains Losses Portfolio
------------ ------------ ------------ ------------
U.S. government agencies $ 17,193 $ 380 $ -- 8.4%
States and political subdivisions 39,911 515 (244) 19.4
Mortgage-backed securities of U.S.
government sponsored entities 101,747 350 (401) 49.5
Collateralized mortgage obligations 21,248 21 (493) 10.3
Equity securities 1,649 110 (12) 0.8
Investment in Trust Preferred instruments 21,910 -- (6,092) 10.7
Corporate 1,891 -- (96) 0.9
------------ ------------ ------------ ------------
$ 205,549 $ 1,376 $ (7,338) 100.0%
============ ============ ============ ============
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6.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 3. Securities (continued)
December 31, 2007
---------------------------------------------------------
Gross Gross
Fair Unrealized Unrealized % of
Value Gains Losses Portfolio
------------ ------------ ------------ ------------
U.S. government agencies $ 103,624 $ 1,415 $ (14) 43.5%
States and political subdivisions 41,561 501 (13) 17.4
Mortgage-backed securities of U.S.
government sponsored entities 47,784 287 (106) 20.0
Collateralized mortgage obligations 24,077 68 (100) 10.1
Equity securities 1,601 105 -- 0.7
Investment in Trust Preferred instruments 17,273 -- (609) 7.2
Corporate 2,741 9 (10) 1.1
------------ ------------ ------------ ------------
$ 238,661 $ 2,385 $ (852) 100.0%
============ ============ ============ ============
Management does not believe any individual unrealized losses as of September 30,
2008, identified in the preceding tables represent other-than-temporary
impairment. These unrealized losses are primarily attributable to changes in the
interest rates, general market risk repricing, and illiquidity in the capital
markets. The Company has both the intent and ability to hold each of the
securities shown in the table for the time necessary to recover its amortized
cost. The unrealized loss on the available for sale securities is included, net
of tax, in other comprehensive income.
The Company also attempts 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 Fannie Mae or Freddie Mac equities.
The amounts below include the activity related to security sales and calls. The
activity related to securities available-for-sale were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Proceeds $ -- $ -- $ 83,897 $ 2,497
Realized gains $ -- $ -- $ 848 $ 4
Realized losses $ -- $ -- $ -- $ (37)
All of the activity from the table above was related to calls of securities
during the nine month period ended September 30, 2008. The Company has not sold
any securities during the period ended September 30, 2008.
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7.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 4. Loans
The following table describes the composition of loans by major categories
outstanding as of September 30, 2008 and December 31, 2007, respectively:
September 30, 2008 December 31, 2007
--------------------------- ---------------------------
$ % $ %
------------ ------------ ------------ ------------
Commercial $ 158,180 16.3% $ 181,210 18.9%
Agricultural 14,667 1.5 21,861 2.3
Real estate:
Commercial mortgages 424,788 43.5 362,920 37.9
Construction 167,530 17.2 159,274 16.6
Agricultural 17,183 1.8 23,560 2.5
1-4 family mortgages 184,913 19.0 198,208 20.7
Installment 5,877 0.7 8,611 0.9
Other 795 0.0 1,641 0.2
------------ ------------ ------------ ------------
Total loans 973,933 100.0% 957,285 100.0%
============= ============
Allowance for loan losses (11,461) (10,755)
------------ ------------
Loans, net $ 962,472 $ 946,530
============ ============
The following table presents data on impaired loans: September 30, December 31,
2008 2007
------------ ------------
Impaired loans for which an allowance has been provided $ 16,058 $ 5,502
Impaired loans for which no allowance has been provided 1,273 5,923
------------ ------------
Total loans determined to be impaired $ 17,330 $ 11,425
============ ============
Allowance for loan loss for impaired loans included in the
allowance for loan losses $ 3,006 $ 2,350
============ ============
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectability of the loans in its portfolio;
incorporating feedback provided by internal loan staff; the independent loan
review function; and information provided by regulatory agencies.
The Company reported loans held for sale of $2,015 and $1,598 of September 30,
2008 and December 31, 2007 respectively.
The Company conducts a quarterly evaluation as to the adequacy of the allowance
for loan losses. Transactions in the allowance for loan losses for the three and
nine months ended September 30, 2008 and 2007 are summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Beginning balance $ 11,542 $ 10,828 $ 10,755 $ 10,835
Charge-offs (1,364) (81) (2,384) (770)
Recoveries 58 105 233 561
Provision for loan losses 1,225 -- 2,857 226
------------ ------------ ------------ ------------
Ending balance $ 11,461 $ 10,852 $ 11,461 $ 10,852
============ ============ ============ ============
Period end total loans $ 973,933 $ 933,903 $ 973,933 $ 933,903
============ ============ ============ ============
Average loans $ 987,758 $ 921,608 $ 999,848 $ 887,477
============ ============ ============ ============
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8.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 4. Loans (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Ratio of net charge-offs to average loans 0.13% 0.00% 0.22% 0.02%
Ratio of provision for loan losses to
average loans 0.12 0.00 0.29 0.03
Ratio of allowance for loan losses
to period end total loans 1.18 1.16 1.18 1.16
Ratio of allowance for loan losses
to total nonperforming loans 91.78 194.72 91.78 194.72
Ratio of allowance for loan losses
to average loans 1.16 1.18 1.15 1.22
Note 5. Stock Option Plans
In 1999, the Company adopted the 1999 Option Plan. Under the 1999 Option Plan,
nonqualified options may be granted to employees and eligible directors of the
Company and its subsidiaries to purchase the Company's common stock at 100% of
the fair market value on the date the option is granted. The Company has
authorized 50,000 shares for issuance under the 1999 Option Plan. During 1999,
40,750 of these shares were granted and are 100% fully vested. The options have
an exercise period of ten years from the date of grant. There are 9,250 shares
available for grant under this plan.
In April 2003, the Company adopted the 2003 Option Plan. Under the 2003 Option
Plan, as amended on April 24, 2007, nonqualified options, incentive stock
options, 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, as
amended on April 24, 2007, 570,000 shares of the Company's unissued common stock
have been reserved for issuance upon the exercise of options and rights granted
under the 2003 Option Plan. The options have an exercise period of ten years
from the date of grant. There are 209,000 shares remaining for grants under this
plan.
The Company's compensation committee awarded 5,000 restricted common stock
awards on November 14, 2006 which were available under the restricted stock
portion of the plan. The restricted shares were issued out of treasury shares
with an aggregate grant date fair value of $90. The awards were granted using
the fair value as the last sale price as quoted on the NASDAQ Stock Market on
the date of grant of $18.03. The awarded shares vest at a rate of 20% of the
initially awarded amount per year, beginning on the first anniversary date of
the award and are contingent upon continuous service by the recipient through
the vesting date. Currently, there are 1,000 shares of the restricted stock that
have vested.
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9.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans (continued)
A summary of the status of the option plans as of September 30, 2008, and
changes during the period ended on those dates is presented below:
September 30, 2008
---------------------------------------------------------
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life Value
------------ ------------ ------------ ------------
Outstanding at January 1, 2008 574,024 $ 18.71
Granted 138,000 17.96
Exercised (15,445) 16.17
Forfeited (38,460) 20.60
------------ ------------
Outstanding at end of period 658,119 $ 18.72 4.8 years $ 58
============ ============ ========= ============
Vested or expected to vest 648,380 $ 18.72 4.7 years $ 58
============ ============ ========= ============
Options exercisable at period end 453,919 $ 18.74 4.3 years $ 58
============ ============ ========= ============
Options outstanding at September 30, 2008 and December 31, 2007 were as follows:
Outstanding Exercisable
--------------------------- ---------------------------
Weighted-
Average Weighted-
Remaining Average
Contractual Exercise
Range of Exercise Prices Number Life Number Price
-------------------------------------- ------------ ------------ ------------ ------------
September 30, 2008:
$ 11.25 - $ 13.00 46,381 1.8 years 46,381 $ 11.60
13.88 - 18.63 257,938 4.8 years 164,938 16.40
19.03 - 23.31 353,800 5.3 years 242,600 21.70
------------ ------------ ------------ ------------
658,119 4.8 years 453,919 $ 18.74
============ ============ ============ ============
December 31, 2007:
11.25 - 13.00 46,381 2.6 years 46,381 11.60
13.88 - 18.63 143,443 3.2 years 143,443 15.60
19.03 - 23.31 384,200 5.9 years 260,600 21.86
------------ ------------ ------------ ------------
574,024 5.0 years 450,424 $ 18.81
============ ============ ============ ============
Information related to the stock option plan during the quarter ended September
30, 2008 and 2007 was as follows:
September 30, September 30,
2008 2007
------------ ------------
Intrinsic value of options exercised $ -- $ 12
Cash received from option exercises -- 42
Tax benefit realized from option
exercises -- 16
The compensation cost that has been charged against income for the stock options
portion of the Equity Incentive Plan was $304 and $72 for the nine months ended
September 30, 2008 and 2007. The compensation cost that has been charged against
income for the restricted stock portion of the Equity Incentive Plan was $14 and
$0 for the nine months ended September 30, 2008 and 2007.
--------------------------------------------------------------------------------
10.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans (continued)
The fair value of each option award is estimated on the date of grant using a
closed form option valuation (Black-Scholes) model that uses the assumptions
noted in the table below. Expected volatilities are based on historical
volatilities of the Company's common stock. The Company uses historical data to
estimate option exercise and post-vesting termination behavior. (Employee and
management options are tracked separately.) The expected term of options granted
is based on historical data and represents the period of time that options
granted are expected to be outstanding, which takes into account that the
options are not transferable. The risk-free interest rate for the expected term
of the option is based on the U.S. Treasury yield curve in effect at the time of
the grant. During the period, there were no options granted.
September 30, December 31,
2008 2007
------------ --------------
Fair value $ -- $4.41 - 4.65
Risk-free interest rate -- 4.06% - 4.95%
Expected option life (years) -- 6
Expected stock price volatility -- 23.33% - 23.67%
Dividend yield -- 2.57 - 2.64%
Unrecognized stock option compensation expense related to unvested awards (net
of estimated forfeitures) for the remainder of 2008 and beyond is estimated as
follows:
Amount
------------
October, 2008 - December, 2008 $ 48
2009 172
2010 172
2011 160
2012 104
2013 5
------------
Total $ 661
============
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. Business Acquisitions and Divestures
On March 28, 2008 the Company completed the sale of its Hanover and Elizabeth
branches to Apple River State Bank headquartered in Apple River, Illinois. Apple
River assumed approximately $22,700 in deposits and acquired $14,700 in loans,
and $401 in premises and equipment. The net gain on the sale was $482.
On June 6, 2008 the Company completed the sale of its Manlius and Tampico
branches to Peoples National Bank headquartered in Kewanee, Illinois. Peoples
National assumed approximately $29,500 in deposits and acquired $17,600 in
loans, and $214 in premises and equipment. The net gain on the sale was $629.
On August 29, 2008 the Company completed the sale of its Asset Management
product line to Vezzetti Capital Management. There was no gain or loss recorded
on this transaction.
On September 18, 2008 the Company completed the sale of its brokerage product
line. The net loss on sale was $29.
--------------------------------------------------------------------------------
11.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 8. Segment Information
The Company utilizes a line of business ("LOB") reporting structure. The
reportable segments are determined by the products and services offered,
primarily distinguished between retail, commercial, treasury, wealth management,
and other operations. Loans, and deposits generate the revenues in the
commercial segments; deposits, loans, secondary mortgage sales and servicing
generates the revenue in the retail segment; investment income generates the
revenue in the treasury segment; brokerage, and trust services generate the
revenue in the wealth management segment and holding company services generate
revenue in the other operations segment. The "net allocations" line represents
the allocation of the costs that are overhead being spread to the specific
segments.
The accounting policies used with respect to segment reporting are the same as
those described in the summary of significant accounting policies as forth in
Note 1. Segment performance is evaluated using net income.
Information reported internally for performance assessment follows.
Three Months Ended
September 30, 2008
---------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Total
Segment Segment Segment Management Operations Company
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 3,437 $ 6,596 $ 815 $ (7) $ (859) $ 9,982
Other revenue 2,834 259 -- 219 282 3,594
Other expense 2,711 599 41 262 3,357 6,970
Noncash items
Depreciation 369 2 -- 2 291 664
Provision for loan losses -- 1,225 -- -- -- 1,225
Other intangibles 458 -- -- 30 -- 488
Net allocations 436 2,669 360 182 (3,647) --
Income tax expense 758 779 137 (87) (155) 1,430
Segment profit (loss) $ 1,539 $ 1,581 $ 277 $ (177) $ (421) $ 2,799
Goodwill $ 11,926 $ 12,405 $ -- $ 163 $ -- $ 24,494
Segment assets $ 262,272 $ 774,190 $ 247,073 $ 209 $ 58,438 $ 1,342,182
Three Months Ended
September 30, 2007
---------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Total
Segment Segment Segment Management Operations Company
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 3,080 $ 6,686 $ 496 $ (146) $ (32) $ 10,084
Other revenue 2,319 1,004 -- 664 381 4,368
Other expense 2,361 605 50 485 3,823 7,324
Noncash items
Depreciation 423 4 -- 3 315 745
Provision for loan losses -- -- -- -- -- --
Other intangibles 560 -- -- 2 -- 562
Net allocations 662 2,861 409 207 (4,139) --
Income tax expense 460 1,393 12 (59) 176 1,982
Segment profit (loss) $ 933 $ 2,827 $ 25 $ (120) $ 174 $ 3,839
Goodwill $ 11,863 $ 12,339 $ -- $ 1,201 $ -- $ 25,403
Segment assets $ 360,840 $ 710,319 $ 283,930 $ 1,573 $ 6,584 $ 1,363,246
--------------------------------------------------------------------------------
12.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 8. Segment Information (continued)
Nine Months Ended
September 30, 2008
---------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Total
Segment Segment Segment Management Operations Company
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 10,286 $ 20,045 $ 1,780 $ 351 $ (2,773) $ 29,689
Other revenue 9,267 893 848 907 909 12,824
Other expense 9,024 2,354 151 908 10,743 23,180
Noncash items
Depreciation 1,363 5 -- 8 931 2,307
Provision for loan losses -- 2,857 -- -- -- 2,857
Other intangibles 1,446 -- -- 726 -- 2,172
Net allocations 1,266 8,670 1,153 584 (11,673) --
Income tax expense 2,130 2,327 437 (319) (527) 4,048
Segment profit (loss) $ 4,324 $ 4,725 $ 887 $ (649) $ (1,338) $ 7,949
Goodwill $ 11,926 $ 12,405 $ -- $ 163 $ -- $ 24,494
Segment assets $ 262,272 $ 774,190 $ 247,073 $ 209 $ 58,438 $ 1,342,182
Nine Months Ended
September 30, 2007
---------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Total
Segment Segment Segment Management Operations Company
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 11,005 $ 17,158 $ 1,340 $ (52) $ (553) $ 28,898
Other revenue 7,494 1,848 (26) 1,453 1,046 11,815
Other expense 8,727 2,283 164 1,283 11,850 24,307
Noncash items
Depreciation 1,373 12 1 12 946 2,344
Provision for loan losses 394 (168) -- -- -- 226
Other intangibles 1,769 -- -- 5 -- 1,774
Net allocations 1,664 9,228 1,264 640 (12,796) --
Income tax expense 1,509 2,525 (38) (178) 1 3,819
Segment profit (loss) $ 3,063 $ 5,126 $ (77) $ (361) $ 492 $ 8,243
Goodwill $ 11,863 $ 12,339 $ -- $ 1,201 $ -- $ 25,403
Segment assets $ 360,840 $ 710,319 $ 283,930 $ 1,573 $ 6,584 $ 1,363,246
Note 9. Borrowed Funds and Debt Obligations
On March 31, 2008, the Company entered into a new loan agreement with Bank of
America which provides for up to an aggregate principal amount of $35,250 in
borrowings. The loan agreement consists of three credit facilities. The first
credit facility consists of a $25,000 secured revolving line of credit which
matures in December 2008. The second credit facility consists of a $250 secured
term facility, which will mature in March 2015. The third credit facility
consists of $10,000 in subordinated debt, which also matures in March 2015. The
interest rate on the term and subordinated debt credit facilities is three month
LIBOR plus 295 basis points. The interest rate on the revolving credit facility
is three month LIBOR plus 125 basis points. Repayment of each of the three
credit facilities is interest only on a quarterly basis, with the principal
amount of the loan due at maturity. The revolving and term credit facilities are
secured by a pledge of the stock of Centrue Bank. The subordinated debt credit
facility is unsecured and is intended to qualify as tier II capital for
regulatory purposes. The loan agreement contains customary covenants, including
but not limited to, Centrue Bank's maintenance of its status as
well-capitalized, minimum return on average assets on an annual basis of 0.50%,
maximum nonperforming assets to primary capital below 20%, and minimum loan loss
reserves to total loans of 1.00%. The Company is using these credit facilities
for general working capital purposes. The loan agreement contains no penalty for
early repayment of either the revolving credit facility or the subordinated debt
credit facility. As of September 30, 2008, the outstanding balance on these
lines is $19,865 and the company is in compliance with all covenants.
--------------------------------------------------------------------------------
13.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 10. Fair Value
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard was effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued staff
position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays
the effective date of FAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008 and interim periods within those fiscal years. In October, 2008 the FASB
issued staff position (FSP) 157-3, Determining the Fair Value of a Financial
Asset when the Market for that Asset is Not Active. This FSP clarifies the
definition of fair market value. The impact of adoption was not material.
Statement 157 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs to reflect a reporting
entity's own assumptions about the assumptions that market participants
would use to price and asset or liability.
The fair value of securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges (Level 1 inputs) or
matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the
specific securities but rather by relying on the securities' relationship to
other benchmark quoted securities (Level 2 inputs).
The Level 3 investments consist of Trust Preferred Securities which are issued
by financial institutions and insurance companies. Using previously priced Level
2 inputs, the decline in value in the level of observable inputs and market
activity in this class of investments by the measurement date has been
significant and resulted in unreliable external pricing. Broker pricing and
bid/ask spreads, when available, vary widely. The once active, allocated market
has become comparatively inactive.
The Bank has developed an internal model for pricing these securities.
Information such as historical and current performance of the underlying
collateral, deferral/default rates, collateral coverage ratios, break in yield
calculations, cash flow projections, liquidity and credit premiums required by a
market participant, and financial trend analysis with respect to the individual
issuing financial institutions and insurance companies, are utilized in
determining individual security valuations. Due to current 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.
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
--------------------------------------------------------------------------------
14.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 10. Fair Value (continued)
Fair Value measurements at
September 30 Using
------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
For Identical Observable Unobservable
September 30, Assets Inputs Inputs
2008 (Level 1) (Level 2) (Level 3)
------------ ------------ ------------ ------------
Assets:
Available-for-sale securities $ 205,549 $ -- $ 183,639 $ 21,910
The table below presents a reconciliation and income statement classification of
gains and losses for all assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the nine months ended
September 30, 2008:
Securities
Available for
Sale
------------
Beginning balance, January 1, 2008 $ --
Total gains or losses (realized/unrealized) included in earnings
Interest income on loans --
Interest income on securities --
Other changes in fair value --
Gains (losses) on sales of securities --
Included in other comprehensive income
Purchases, issuances, and settlements --
Transfers into Level 3 $ (21,910)
No changes in unrealized gains or losses were recorded through earnings for the
three and nine month periods ended September 30, 2008.
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
Fair Value measurements at
September 30 Using
------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
For Identical Observable Unobservable
September 30, Assets Inputs Inputs
2008 (Level 1) (Level 2) (Level 3)
------------ ------------ ------------ ------------
Assets:
Impaired loans $ 13,052 $ -- $ 13,052 $ --
Impaired loans, which are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a carrying amount of $16,058 with
a valuation allowance of $3,006, resulting in an additional provision for loan
losses of $366 for the period. During the quarter the fair value of impaired
loans decreased by $7,718 as it was transferred to other owned real estate.
The majority of our impaired loans are collateralized by real estate. The
carrying value for these real estate secured impaired loans was based upon
information in independent appraisals obtained on the underlying collateral.
--------------------------------------------------------------------------------
15.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 11. Participation in the Treasury Capital Purchase Program
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of
2008 (EESA), which provides the U. S. Secretary of Treasury with broad authority
to implement certain actions to help restore stability and liquidity to U. S.
markets. One of the provisions resulting from the Act is the Treasury Capital
Purchase Program (CPP), which provides direct equity investment of perpetual
preferred stock by the Treasury in qualified financial institutions. The program
is voluntary and requires an institution to comply with a number of restrictions
and provisions, including limits on executive compensation, stock redemptions
and declaration of dividends. Applications must be submitted by November 14,
2008 and are subject to approval by the Treasury. The CPP provides for a minimum
investment of one percent of Risk-Weighted Assets, with a maximum investment
equal to the lesser of three percent of Total Risk-Weighted Assets. The
perpetual preferred stock investment will have a dividend rate of 5% per year,
until the fifth anniversary of the Treasury investment, and a dividend of 9%,
thereafter. The CPP also requires the Treasury to receive warrants for common
stock equal to 15% of the capital invested by the Treasury. The Company is
applying for participation in this program. Participation in the program is not
automatic and is subject to approval by the Treasury.
Note 12. Recent Accounting Developments
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective of SFAS 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting principles. The new standard was
effective for the Company on January 1, 2008. The Company did not elect the fair
value option for any financial assets or financial liabilities as of January 1,
2008.
In January 2007, the FASB issued Derivatives Implementation Group Issue B40,
Application of Paragraph 13 (b) to Securitized Interests in Prepayable Financial
Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded
derivative test of paragraph 13 (b) of SFAS No. 133 for instruments that would
otherwise require bifurcation if the test is met solely because of a prepayment
feature included within the securitized interest and prepayment is not
controlled by the security holder. SFAS No. 155 and DIG Issue B40 did not have a
material impact on the Company's consolidated financial position or results of
operations.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a
liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants' employment or retirement. The
required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit
depending on contractual terms of the underlying agreement. This issue was
effective for fiscal years beginning after December 15, 2007. Due to the
adoption of this item, the Company recorded an entry of $730 to reduce the
beginning balance for retained earnings as of January 1, 2008.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written
Loan Commitments Recorded at Fair Value through Earnings ("SAB 109").
Previously, SAB 105, Application of Accounting Principles to Loan Commitments,
stated that in measuring the fair value of a derivative loan commitment, a
company should not incorporate the expected net future cash flows related to the
associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that
the expected net future cash flows related to the associated servicing of the
loan should be included in measuring fair value for all written loan commitments
that are accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment, and SAB
--------------------------------------------------------------------------------
16.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Note 12. Recent Accounting Developments (continued)
109 retains that view. SAB 109 was effective for derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
impact of this standard was not material.
On March 19, 2008, the FASB issued FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS 161), which is intended to
improve financial reporting for derivative instruments and hedging activities.
Additional disclosures will be required that require disclosure of the fair
values of derivative instruments and their gains and losses in tabular format.
It also requires disclosure of derivatives features that are credit
risk-related. These changes will enable investors to better understand their
effects on an entity's financial position, financial performance and cash flows.
It was effective for financial statements for fiscal years and interim periods
beginning after November 15, 2008. The impact of this statement will not have a
material effect on the Company's consolidated financial statements.
--------------------------------------------------------------------------------
17.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Centrue Financial Corporation (the "Company") is a bank holding company
organized under the laws of the State of Delaware. The Company provides a full
range of 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. The Company is subject
to competition from other financial institutions, including banks, thrifts and
credit unions, as well as nonfinancial institutions providing financial
services. Additionally, the Company and its subsidiary Centrue Bank (the "Bank")
are subject to regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory agencies.
The following discussion provides an analysis of the Company's results of
operations and financial condition for the three and nine months ended September
30, 2008 as compared to the same period in 2007. In the opinion of management,
all normal and recurring adjustments which are necessary to fairly present the
results for the interim periods presented have been included. The preparation of
financial statements requires management to make estimates and assumptions that
affect the recorded amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2007. The annualized results of operations during the three and nine months
ended September 30, 2008 are not necessarily indicative of the results expected
for the year ending December 31, 2008. All financial information is in thousands
(000s), except shares and per share data.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. By their nature, changes in these assumptions and estimates
could significantly affect the Company's financial position or results of
operations. Actual results could differ from those estimates. Those critical
accounting policies that are of particular significance to the Company are
discussed in Note 1 of the Company's 2007 Annual Report on Form 10-K.
Securities: Available-for-sale securities are those that the Company
intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value with unrealized gains or losses,
net of the related deferred income tax effect, reported in other comprehensive
income. Declines in the fair value of securities below their cost that are other
than temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: the length of time and extent
that fair value has been less than cost, the financial condition and near term
prospects of the issuer, and the Company's ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value. Securities are written down to fair value when a decline in fair value is
not temporary.
--------------------------------------------------------------------------------
18.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
Goodwill and other intangible assets: Goodwill results from business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Goodwill is assessed at least annually for impairment and any such impairment
will be recognized in the period identified. Other intangible assets consist of
core deposit and acquired customer relationship intangible assets arising from
whole bank, and branch company acquisitions. They are initially measured at fair
value and then are amortized over their estimated useful lives, which is ten
years.
Income taxes: Deferred tax assets and liabilities are recognized for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities. Deferred taxes are recognized for the
estimated taxes ultimately payable or recoverable based on enacted tax laws.
Changes in enacted tax rates and laws are reflected in the financial statements
in the periods they occur.
General
Third Quarter 2008 Highlights:
o Risk-based capital and tier-1 leverage ratios were at 11.70% and 8.30%,
respectively, up from 11.17% and 7.93% that was reported at June 30,
2008.
o The net interest margin increased 3 basis points to its highest level
in four quarters largely due to the prudent management of funding
costs. The margin was reported at 3.37% as compared to 3.34% recorded
in the second quarter 2008 and increased 12 basis points from 3.25%
reported in the first quarter 2008.
o The efficiency ratio dropped to its lowest level in 16 quarters as it
improved to 58.85%, a decrease from 59.42% recorded in the third
quarter 2007 and 64.76% reported in the second quarter 2008.
o The loan portfolio increased $16,600 or 1.7% from year-end 2007.
Excluding $32,300 in loans related to branch sales recorded in the
first and second quarters of 2008, loans grew $48,900 or 5.1% since
year-end 2007.
o As part of an ongoing effort to redeploy capital to more profitable
business units, the Company completed the sale of asset management and
the brokerage business units. We anticipate completing the sale of the
Trust product line during the fourth quarter.
o Nonperforming assets remained relatively stable from June 30 levels,
marginally increasing from $24,100 or 1.76% of assets recorded at June
30, 2008 to $24,900 or 1.87% of assets at quarter end.
--------------------------------------------------------------------------------
19.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Results of Operations
Net Income
Net Income for the third quarter ended September 30, 2008 equaled $2,799 or
$0.46 per diluted share. Comparatively, net income was $2,705 or $0.44 per
diluted share for the second quarter of 2008 and $3,838 or $0.60 per diluted
share in the third quarter of 2007. This represents an increase of 4.5% in
diluted earnings per share over second quarter 2008 results and a decrease of
23.3% in diluted earnings per share in comparison to third quarter 2007 results.
The decrease, when compared to third quarter 2007, was primarily related to $591
($362, net of tax) in nonrecurring income and no recorded provision to the
allowance for loan losses in the third quarter 2007.
For the nine months ended September 30, 2008, net income equaled $7,949 or $1.29
per diluted share as compared to $8,243 or $1.26 per diluted share in the same
period during 2007. This represents an increase of 2.4% in diluted earnings per
share.
Return on average assets was 0.83% for the third quarter of 2008 compared to
1.13% for the same period in 2007. Return on average assets was 0.78% for the
nine month period ended September 30, 2008 compared to 0.83% for the same period
in 2007.
Return on average stockholders' equity was 9.64% for the third quarter of 2008
compared to 12.78% for the same period 2008. Return on average stockholder's
equity was 9.04% for the nine month period ended September 30, 2008 compared to
9.29% for the same period in 2007.
Net Interest Income/ Margin
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as
"volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
Fully tax equivalent net interest income for the three months ended September
30, 2008 decreased 0.9% to $10,225 as compared $10,315 for the same period in
2007. The deterioration of net interest income was due to the decline in the net
interest margin.
The net interest margin, on a tax equivalent basis, was 3.37% for the third
quarter of 2008 as compared to 3.40% for the same period in 2007. The decline in
the net interest margin was related to the Company's asset-sensitivity and the
open market interest rate environment.
Between late September 2007 and May 2008, the Federal Open Market Committee
(FOMC) reduced rates seven times for a cumulative reduction of 325 basis points.
With most of the Company's floating rate loans repricing within 30 days of a
rate change, loan yields began to reflect the downward pricing beginning in the
fourth quarter of 2007 and continued through the first six months of 2008.
--------------------------------------------------------------------------------
20.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Most of the corresponding decreases in funding costs did not begin until the
first quarter of 2008. However, funding costs typically take 90 to 120 days to
reprice. Thus, funding costs continued to lag loan repricing for most of the
second quarter of 2008, as market interest rates stabilized. The disparity
between repricing of loans and the repricing of funding costs narrowed
substantially during the third quarter. Management anticipates that the FOMC's
50-basis-point rate reduction on October 8, and potential further rate cuts,
will continue to compress the margin.
Fully tax equivalent net interest income for the nine months ended September 30,
2008 increased 2.8% to $30,444 as compared to $29,628 for the same period in
2007. Net interest income increased largely due to strong growth in average
earning assets and decreases in rates paid on interest-bearing funding which
dropped in response to the current rate environment.
--------------------------------------------------------------------------------
21.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYIS OF NET INTEREST INCOME
For the Three Months Ended September 30,
--------------------------------------------------------------
2008 2007
----------------------------- -----------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average -------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
---------- -------- ---- ---------- -------- ---- ------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ 2,179 $ 2 0.37% $ 751 $ 6 3.11% $ 4 $ (8) $ (4)
Securities
Taxable 179,204 2,134 4.75 232,740 3,084 5.26 (720) (230) (950)
Non-taxable 38,882 548 5.61 40,830 560 5.44 (30) 18 (12)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Total securities
(tax equivalent) 218,086 2,682 4.89 273,570 3,644 5.28 (750) (212) (962)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Federal funds sold 769 12 6.21 8,140 106 5.16 (113) 19 (94)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Loans
Commercial 181,255 2,749 6.03 173,798 3,571 8.15 49 (871) (822)
Real estate 797,900 12,478 6.22 737,008 14,242 7.66 834 (2,598) (1,764)
Installment
and other 7,841 151 7.67 10,801 223 8.20 (78) 6 (72)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Gross loans
(tax equivalent) 986,996 15,378 6.20 921,607 18,036 7.76 805 (3,463) (2,658)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-
earnings assets 1,208,030 18,074 5.95 1,204,068 21,792 7.18 (54) (3,664) (3,718)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 26,357 34,749
Premises and equipment, net 33,472 35,978
Other assets 69,965 73,592
---------- ----------
Total nonearning assets 129,794 144,319
Total assets $1,337,824 $1,348,387
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 104,196 $ 274 1.04 $ 107,173 $ 409 1.51 (5) (130) (135)
Money market accounts 155,965 886 2.26 123,762 1,230 3.94 298 (642) (344)
Savings deposits 86,303 59 0.27 94,065 153 0.65 (8) (86) (94)
Time deposits 543,434 5,006 3.67 636,757 7,942 4.95 (962) (1,973) (2,935)
Federal funds purchased
and repurchase
agreements 42,482 189 1.76 48,494 536 4.39 (37) (311) (348)
Advances from FHLB 123,862 838 2.69 57,792 636 4.37 533 (331) 202
Notes payable 42,218 597 5.63 32,714 571 6.92 126 (100) 26
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-
bearing
liabilities 1,098,460 7,849 2.84 1,100,757 11,477 4.14 (55) (3,573) (3,628)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Noninterest-bearing
liabilities
Noninterest-bearing deposits 113,282 116,705
Other liabilities 10,561 11,804
---------- ----------
Total noninterest-
bearing
liabilities 123,843 128,509
---------- ----------
Stockholders' equity 115,521 119,121
---------- ----------
Total liabilities and
stockholders' equity $1,337,824 $1,348,387
========== ==========
Net interest income
(tax equivalent) $ 10,225 $ 10,315 $ 1 $ (91) $ (90)
======== ======== ======= ======== ========
Net interest income
(tax equivalent)
to total earning
assets 3.37% 3.40%
==== ====
Interest-bearing
liabilities to
earning assets 90.93% 91.42%
========== ==========
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances; overdraft loans are
excluded in the balances.
(4) Loan fees are included in the specific loan category.
--------------------------------------------------------------------------------
22.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYIS OF NET INTEREST INCOME
For the Nine Months Ended September 30,
--------------------------------------------------------------
2008 2007
----------------------------- -----------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average -------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
---------- -------- ---- ---------- -------- ---- ------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ 2,668 $ 11 0.55% $ 2,339 $ 27 1.56% $ 1 $ (17) $ (16)
Securities
Taxable 183,117 6,666 4.88 243,102 9,584 5.27 (2,325) (593) (2,918)
Non-taxable 39,134 1,677 5.72 40,936 1,687 5.51 (85) 75 (10)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Total securities
(tax equivalent) 222,251 8,343 5.01 284,038 11,271 5.31 (2,410) (518) (2,928)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Federal funds sold 2,543 83 4.34 9,048 353 5.22 (225) (45) (270)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Loans
Commercial 201,767 9,613 6.36 177,030 10,830 8.18 1,022 (2,239) (1,217)
Real estate 787,267 38,681 6.56 698,895 39,535 7.56 4,158 (5,012) (854)
Installment
and other 9,851 497 6.74 11,553 741 8.57 (262) 18 (244)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Gross loans
(tax equivalent) 998,885 48,791 6.52 887,478 51,106 7.70 4,918 (7,233) (2,315)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-
earnings assets 1,226,347 57,228 6.23 1,182,903 62,757 7.09 2,284 (7,813) (5,529)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 29,708 31,618
Premises and equipment, net 34,442 35,739
Other assets 69,216 74,181
---------- ----------
Total nonearning assets 133,366 141,538
Total assets $1,359,713 $1,324,441
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 107,722 $ 968 1.20 $ 105,151 $ 1,305 1.66 $ 44 $ (381) $ (337)
Money market accounts 159,126 3,313 2.78 120,846 3,347 3.70 973 (1,007) (34)
Savings deposits 88,870 262 0.39 99,352 507 0.68 (39) (206) (245)
Time deposits 555,681 17,048 4.10 613,642 22,835 4.98 (1,758) (4,029) (5,787)
Federal funds purchased
and repurchase
agreements 44,087 675 2.04 41,898 1,409 4.50 7 (741) (734)
Advances from FHLB 118,772 2,786 3.13 58,905 1,909 4.33 1,564 (687) 877
Notes payable 40,870 1,732 5.66 31,841 1,817 7.63 540 (625) (85)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Total interest-
bearing
liabilities 1,115,128 26,784 3.21 1,071,635 33,129 4.13 1,331 (7,676) (6,345)
---------- -------- ---- ---------- -------- ---- ------- -------- --------
Noninterest-bearing
liabilities
Noninterest-bearing deposits 116,220 122,957
Other liabilities 10,882 11,277
---------- ----------
Total noninterest-
bearing
liabilities 127,102 134,234
---------- ----------
Stockholders' equity 117,483 118,572
---------- ----------
Total liabilities and
stockholders' equity $1,359,713 $1,324,441
========== ==========
Net interest income
(tax equivalent) $ 30,444 $ 29,628 $ 953 $ (137) $ 816
======== ======== ======= ======== ========
Net interest income
(tax equivalent)
to total earning
assets 3.32% 3.35%
==== ====
Interest-bearing
liabilities to
earning assets 90.93% 90.59%
========== ==========
(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 balances; Overdraft loans are excluded
in the balances.
(4) Loan fees are included in the specific loan category.
--------------------------------------------------------------------------------
23.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
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.
Credit quality performance in the third quarter was generally consistent with
management's expectations, reflecting the negative impact of the continued
economic weakness across our markets. These economic factors influenced the
performance of net charge-offs and non-accrual loans, as well as an expected
commensurate increase in the provision that increased our allowance for loan
losses.
Due largely to the deterioration of the overall economic conditions and workout
activities on previously identified relationships (see "Nonperforming Asset"
section for further discussion), the Company recorded a $1,225 provision for
loan losses versus no provision in the same quarter of 2007. For the nine months
ended September 30, 2008, the Company recorded a $2,857 provision for loan
losses as compared to recognizing a provision of $226 in the 2007 period.
The following factors have impacted 2008 provision levels:
o growth in loan portfolio;
o increase in action list loans since year-end;
o identifying and addressing problem credits based on the recent
deteriorating economic conditions.
Net charge-offs for the third quarter 2008 were $1,306 or 0.13% of average loans
as compared to $545 or 0.05% reported in the second quarter 2008 and $(24) in
net charge-offs reported in the third quarter 2007. Net charge-offs for the nine
months ended September 30, 2008 were $2,151 or 0.22% of average loans as
compared to $209 or 0.02% of average loans for the comparable period in 2007.
Management remains watchful of credit quality issues. Should the economic
climate deteriorate from current levels, borrowers may experience difficulty,
and the level of nonperforming loans, charge-offs and delinquencies could rise
and require further increases in the provision. See "Nonperforming Assets" and
"Other Potential Problem Loans" for further information.
--------------------------------------------------------------------------------
24.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues from
bank-related service charges on deposits and mortgage revenues. Also included in
this category are revenues generated by the Company's brokerage, trust and asset
management services as well as increases in cash surrender value on bank-owned
life insurance. The following table summarizes the Company's noninterest income:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Service charges 1,980 1,725 5,491 5,063
Trust income 176 243 661 704
Mortgage banking income 349 399 1,184 1,282
Brokerage commissions and fees 73 416 241 646
Bank owned life insurance (BOLI) 260 252 767 740
Securities gains (losses), net -- -- 848 (33)
Gain on sale of OREO 122 459 360 1,047
Gain (loss) on sale of Other Assets (33) (4) 1,078 (4)
Other income 667 877 2,194 2,370
------------ ------------ ------------ ------------
Total noninterest income $ 3,594 $ 4,367 $ 12,824 $ 11,815
============ ============ ============ ============
Noninterest income decreased $773 during the third quarter 2008 to $3,594 as
compared to $4,367 for the same period in 2007. Excluding $89 in net gains on
sale of assets and OREO properties from the third quarter 2008 and $774 in OREO
gains and gross fees generated from one U.S. Internal Revenue Code Section 1031
exchange brokerage transaction from the third quarter 2007, noninterest income
decreased $88 or 2.5%. The decrease was primarily the result of a volume related
reduction in revenue generated from the mortgage banking division and the sale
of the trust and brokerage business lines. These decreases were partially offset
by an improvement in overdraft fees received on customer accounts with
insufficient funds.
Noninterest income totaled $12,824 for the nine months ended September 30, 2008,
compared to $11,815 for the same period in 2007. Excluding all net gains on sale
of assets, OREO, and net securities gains for both periods, noninterest income
decreased $267 or 2.3%. The change for the nine months ended September 30, 2008
was largely reflective of the same reasons discussed for the third quarter.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Salaries and employee benefits $ 3,554 $ 3,891 $ 12,876 $ 14,183
Occupancy expense, net 761 1,028 2,718 2,988
Furniture and equipment expense 649 616 2,055 1,938
Marketing 355 325 906 738
Supplies and printing 101 137 331 474
Telephone 172 198 614 586
Data processing 378 308 912 1,167
Amortization of intangible assets 488 562 2,172 1,774
Other expenses 1,664 1,566 5,075 4,577
------------ ------------ ------------ ------------
Total noninterest expense $ 8,122 $ 8,631 $ 27,659 $ 28,425
============ ============ ============ ============
--------------------------------------------------------------------------------
25.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Noninterest expense decreased $509 to $8,122 for the three months ended
September 30, 2008 as compared to $8,631 for the same period in 2007. Excluding
nonrecurring reductions of $376 in 2008 and an increase of $19 in 2007,
noninterest expense levels decreased $105 or 1.2%. The decrease was reported
across most categories and was predominantly due to the impact of selling four
branches during 2008 which lead to reductions in the number of full-time
equivalent employees, occupancy, telephone and data line expense.
Noninterest expense totaled $27,659 for the nine months ended September 30,
2008, decreasing by $766 or 2.7% from the same period in 2007. Excluding
nonrecurring charges of $1,373 for 2008 and $819 for 2007, noninterest expense
levels decreased $1,320 or 4.8% for the first nine months of 2008 as compared to
2007. The change for the nine months ended September 30, 2008 was largely
reflective of the same reasons discussed for the third quarter.
Applicable Income Taxes
Income tax expense for the periods included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses. The following table shows the Company's income before
income taxes, as well as applicable income taxes and the effective tax rate for
the three and nine months ended September 30, 2008 and 2007.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Income before income taxes $ 4,229 $ 5,820 $ 11,997 $ 12,062
Applicable income taxes 1,430 1,982 4,048 3,819
Effective tax rates 33.8% 34.1% 33.7% 31.7%
The Company recorded an income tax expense of $1,430 and $1,982 for the three
months ended September 30, 2008 and 2007, respectively. Effective tax rates
equaled 33.8% and 34.1% respectively, for such periods. The Company recorded
income tax expense of $4,048 and $3,819 for the nine months ended September 30,
2008 and 2007, respectively. Effective tax rates equaled 33.7% and 31.7%
respectively, for such periods.
The Company's effective tax rate was lower than statutory rates due to several
factors. First, the Company derives interest income from municipal securities
and loans, which are exempt from federal tax and certain U. S. government agency
securities, which are exempt from state tax. Also, the Company derives income
from bank owned life insurance policies, which is exempt from federal and state
tax. The increase in the effective tax rates over the prior year is driven by
the higher pretax income and a decline in tax-exempt interest leading to higher
federal taxes. In regard to the increased state tax expense, the growth in the
Missouri branch and the changes in the Illinois tax code regarding apportionment
rules resulted in higher state taxes for the applicable states.
Earnings Review by Business Segment
The Company's internal reporting and planning process focuses on four primary
lines of business: Retail, Commercial, Treasury and Wealth Management. See Note
7 of the Notes to Unaudited Consolidated Financial Statements for the
presentation of the condensed income statement and total assets for each
Segment.
The financial information presented was derived from the Company's internal
profitability reporting system that is used by management to monitor and manage
the financial performance of the Company. This information is based on internal
management accounting policies which have been developed to reflect the
underlying economics of the Segments and, to the extent practicable, to portray
the Segment as if it operated on a stand alone basis. Thus, each Segment, in
addition to its direct revenues and expenses, assets and liabilities, includes
an allocation of shared support function expenses. The Retail, Commercial,
Treasury, and Wealth Management Segments also include funds transfer adjustments
--------------------------------------------------------------------------------
26.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
to appropriately reflect the cost of funds on loans made and funding credits on
deposits generated. Apart from these adjustments, the accounting policies used
are similar to those described in Note 1 of the Notes to Consolidated Financial
Statements.
Since there are no comprehensive authorities for management accounting
equivalent to U.S. generally accepted accounting principles, the information
presented is not necessarily comparable with similar information from other
financial institutions. In addition, methodologies used to measure, assign and
allocate certain items may change from time-to-time to reflect, among other
things, accounting estimate refinements, changes in risk profiles, changes in
customers or product lines and changes in management structure.
Retail Segment. The Retail Segment ("Retail") provides retail banking
services to individual customers through the Company's branch locations in
Illinois and Missouri. The services provided by this Segment include direct
lending, checking, savings, money market, CD accounts, safe deposit rental,
ATM's and other traditional and electronic banking services.
Retail generated $1,539 of net income in the third quarter of 2008 as compared
to $933 during same period in 2007. Year to date Retail Segment net income was
$4,324 as compared to $3,063 for the same period in 2007. Retail assets were
$262,272 at September 30, 2008, $306,156 at December 31, 2007 and $360,840 as of
September 30, 2007.
For the third quarter of 2008, net income increased due to stronger revenues on
electronic banking services, deposit service fees and a gain on sale of OREO was
recorded whereas in 2007 a loss was recorded as a valuation adjustment on a
property. Additionally, expenses are lower due to reduced salaries and benefits,
lower marketing expenditures, lower occupancy expenses and supplies costs
declined. These positive variances were slightly offset by higher IT costs,
debit card expenses, and other deposit account expenses.
The change in net income for the nine months ended September 30, 2008 was
reflective of the same reasons discussed for the third quarter.
Commercial Segment. The Commercial Segment ("Commercial") provides
commercial banking services to business customers served through the Company's
full service branch channels located in Illinois and Missouri. The services
provided by this Segment include lending, business checking and deposits, cash
management, and other traditional as well as electronic commercial banking
services.
Commercial had $1,581 of net income in the third quarter of 2008 as compared to
$2,827 during same period in 2007. Year to date Commercial Segment net income
was $4,725 as compared to $5,126 for the same period in 2007. Commercial assets
were $774,190 at September 30, 2008, $741,861 at December 31, 2007 and $710,319
as of September 30, 2007.
Net income for the third quarter of 2008 decreased as compared to the same
period in 2007 due to recording a provision for loan loss of $1,225 in 2008
while recording no provision in 2007. Additionally, there was a large gain on
sale of OREO recorded and service revenue was higher during the third quarter of
2007 leading to a decrease in noninterest income between these periods.
Offsetting these negative variances is lower income tax related to lower pre-tax
earnings in the third quarter of 2008.
For the nine months ended September 30, 2008, the change in net income was
largely due to the items noted above, specifically the higher provision taken as
discussed in "Provision for Loan Losses" section.
Treasury Segment. The Treasury Segment ("Treasury") is responsible for
managing the investment portfolio and acquiring funding for loan activity.
Treasury had a net income of $277 in the third quarter of 2008 and $25 during
the same period in 2007. Year to date Treasury Segment net income was $887 as
--------------------------------------------------------------------------------
27.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
compared to a net loss of $(77) for the same period in 2007. Treasury assets
were $247,073 at September 30, 2008, $268,484 at December 31, 2007 and $283,930
as of September 30, 2007.
Treasury's net income for third quarter increased in comparison to 2007 results
due to the improvement in the margin attributable to lower funding costs on
wholesale funds. Additionally, since assets were lower than in 2007, net
allocated expenses were lower due to the decreased asset base. These positive
variances were slightly offset by increased tax expenses due to higher pretax
income.
Net income for the first nine months of 2008 increased in comparison to 2007 due
to the improved margin on the investment portfolio caused by lower funding costs
and due to the net gain on sale of $848 related to securities being called
during the first quarter of 2008. Furthermore, net allocated expenses were lower
which is attributed to the decreased asset base. These positive variances were
slightly offset by higher income taxes due to higher pretax earnings for the
first nine months.
Wealth Management Segment. The Wealth Management Segment ("Wealth")
provides trust services, estate administration, financial planning, employee
benefit plan administration, asset management, and brokerage transaction
services.
Wealth had a loss of $(177) during the third quarter 2008 as compared to $(120)
in same period in 2007. Year to date Wealth generated a loss of $(649) as
compared to $(361) for the same period in 2007. Wealth assets were $209 at
September 30, 2008, $1,289 at December 31, 2007 and $1,573 as of September 30,
2007. The decline when compared to December 31, 2007 was largely related to $724
in goodwill impairment taken in the second and third quarters of 2008.
Earnings for the period were worse than previous due to the decline in revenue
experienced with the announced sale of the asset management and brokerage
product lines which caused production in these areas to decline. This revenue
drop was partially offset by a corresponding decrease in expenses. Additionally,
a $30 write-down of goodwill for the trust business line was recorded in the
third quarter and a $29 net loss on the sale of the brokerage line was recorded.
The tax benefit was also larger due to the larger loss which offset some of the
decline. The results for the first nine months of 2008 decreased over the same
period in 2007 due to the write-down of $724 of goodwill during the first three
quarters of 2008. Revenue also declined more than the drop in expenses
experienced as discussed above. These negative variances were slightly offset by
a higher tax benefit related to the losses experienced during the period.
Financial Condition
General
Following are highlights of the September 30, 2008 balance sheet when compared
to December 31, 2007:
Securities. The primary strategic objective of the Company's $215,960
securities portfolio is to assist with liquidity and interest rate risk
management. In managing the security portfolio, the Company minimizes any credit
risk and avoids investments in sophisticated and complex investment products.
The Company does not hold any securities containing sub-prime mortgages or
Fannie Mae or Freddie Mac equities.
As of September 30, 2008, the Company held trust preferred securities with a
total book value of $28,002 and a fair value of $21,910. Our investments in
trust-preferred securities receive principal and interest payments from several
pools of subordinated capital debentures with each pool containing issuance by a
minimum of 23 banks, or in a few instances capital notes from insurance
companies. Each of these securities carries an investment grade rating, and all
have met their scheduled interest payments. We presently anticipate the full
receipt of both principal and interest in accordance with our original purchase
assumptions. The unrealized loss on these securities of $6,092 reflects the
market's temporary negative bias toward any credit instrument other than
--------------------------------------------------------------------------------
28.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Treasury securities given the current interest rate and liquidity environment.
Management believes that the decline in fair market value was attributable to
interest rate factors, general market risk repricing, and lack of liquidity in
the capital markets verses an underlying collateral or credit quality issues of
a particular investment. We do not believe any individual unrealized losses as
of September 30, 2008 represent other-than-temporary impairment based on our
analysis of EITF 99-20 and the following factors:
o To date, all scheduled payments have been received.
o No holdings have been downgraded below investment grade by any of the
rating agencies.
o We have no knowledge that any of our direct investments consists of sub
prime loans.
o We have obtained updated cash flow projections on all of our Trust
Preferred issuances. Based on our review of these analyses, these
instruments have projected cash flows that sufficiently cover the
regularly scheduled payments.
o The Company has both the intent and ability to hold each of the
securities shown in the table for the time necessary to recover its
amortized cost.
In the event that the economic downturn continues and exceeds current
expectations, there may be concerns with a portion of the underlying credits.
Loans. Outstanding loans totaled $973,933 at September 30, 2008 which
is a modest decrease from the $1,003,689 recorded at June 30, 2008 and a modest
increase from the $957,285 recorded at December 31, 2007, representing an
increase of $16,648 or 1.7%. The loan growth experienced for the first nine
months was largely generated in the St. Louis market and was concentrated in
commercial real estate and commercial and industrial lending activities.
Excluding $32,300 in loans related to branch sales recorded in the first and
second quarters of 2008, loans grew $48,900 or 5.1% since year-end 2007. The
Company has no direct exposure to subprime mortgages.
Deposit. Total deposits totaled $1,008,725 at September 30, 2008
compared to $1,010,723 recorded at June 30, 2008 and $1,033,022 at December 31,
2007. The decrease from year-end levels was predominantly a shift away from
higher costing time deposits. During the third quarter, there was a shift from
core deposits due largely to uncertain economic conditions. These funds were
replaced with reasonably priced brokered time deposits with short maturities.
Excluding $52,200 in deposits related to branch sales recorded in the first and
second quarters of 2008, deposits increased $27,900 or 2.7% since year-end 2007.
This increase was due to an overall increase in core deposits which grew 0.9%.
Nonperforming Assets
If a loan is placed on nonaccrual status, the loan does not generate current
period income for the Company. Loans are placed on nonaccrual status when there
are serious doubts regarding the collectability of all principal and interest
due under the terms of the loans. Amounts received on nonaccrual loans generally
are applied first to principal and then to interest after all principal has been
collected. A loan is generally transferred to nonaccrual status if it is not in
the process of collection and is delinquent in payment of either principal or
interest beyond 90 days. Other nonperforming assets consist of real estate
acquired through loan foreclosures or other workout situations and other assets
acquired through repossessions.
The classification of a loan as nonaccrual does not necessarily indicate that
the principal is uncollectible, in whole or in part. The Bank makes a
determination as to collectability on a case-by-case basis. The Bank considers
both the adequacy of the collateral and the other resources of the borrower in
determining the steps to be taken to collect nonaccrual loans. The final
determination as to the steps taken is made based upon the specific facts of
each situation. Alternatives that are typically considered to collect nonaccrual
loans are foreclosure, collection under guarantees, loan restructuring or
judicial collection actions.
--------------------------------------------------------------------------------
29.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired and past due loans to prevent further deterioration of
these loans. The Company has an independent loan review function which is
separate from the lending function and is responsible for the review of new and
existing loans.
The following table summarizes nonperforming assets and loans past due 90 days
or more for the previous five quarters.
2008 2007
------------------------------------------ ---------------------------
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
------------ ------------ ------------ ------------ ------------
Nonaccrual loans $ 12,487 $ 19,808 $ 4,057 $ 4,090 $ 5,573
Loans 90 days past due and still accruing interest -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total nonperforming loans 12,487 19,808 4,057 4,090 5,573
Other real estate owned 12,445 4,317 1,153 2,937 4,620
------------ ------------ ------------ ------------ ------------
Total nonperforming assets $ 24,932 $ 24,125 $ 5,210 $ 7,027 $ 10,193
============ ============ ============ ============ ============
Nonperforming loans to total end of period loans 1.28 % 1.97 % 0.44 % 0.43 % 0.60 %
Nonperforming assets to total end of period loans 2.56 % 2.40 % 0.57 % 0.73 % 1.09 %
Nonperforming assets to total end of period assets 1.87 % 1.76 % 0.38 % 0.51 % 0.75 %
The level of nonperforming loans at September 30, 2008 decreased to $12,487
versus $19,808 that existed at June 30, 2008 and increased in comparison to the
$4,090 that existed as of December 31, 2007. As previously disclosed in its
quarterly report on Form 10-Q for the first quarter 2008 filed on May 9, 2008,
the Company continues an ongoing review of its commercial real estate loan
portfolio that previously identified two large relationships. Action plans were
implemented which resulted in $20,000 related to these loans being classified as
nonperforming assets in the second quarter 2008.
The outstanding loan balance for one relationship, totaling $16,300, was
transferred to other real estate owned during the quarter. The underlying
collateral was moved to other real estate owned at a carrying value of $15,100,
and a $1,200 write-down was taken based on management's analysis of the fair
value of the asset at the time of the transfer. Since then, part of the property
was sold for $6,800 in net proceeds, reducing the other real estate owned
carrying value to $8,300. Marketing efforts continue for the remaining parcel.
The second relationship has one parcel that was transferred to other real estate
owned with a carrying value of $3,700. We have entered into a contract to sell
this property with a closing expected in the fourth quarter of 2008 with no loss
anticipated. The remaining portion of the relationship is a $7,300 loan which is
currently being restructured.
The level of nonperforming loans to total end of period loans was 1.28% at
September 30, 2008, as compared to 0.43% at December 31, 2007 and 1.97% at June
30, 2008. The reserve coverage ratio (allowance to nonperforming loans) was
reported at 91.78% as of September 30, 2008 as compared to 262.96% as of
December 31, 2007 and 58.27% as of June 30, 2008.
Other Potential Problem Loans
The Company has other potential problem loans that are currently performing, but
where some concerns exist as to the ability of the borrower to comply with
present loan repayment terms. Excluding nonperforming loans and loans that
management has classified as impaired, these other potential problem loans
totaled $768 at September 30, 2008 as compared to $1,485 at December 31, 2007
and $963 at September 30, 2007. The classification of these loans, however, does
not imply that management expects losses on each of these loans, but believes
that a higher level of scrutiny and close monitoring is prudent under the
circumstances. Such classifications relate to specific concerns for each
individual borrower and do not relate to any concentration risk common to all
loans in this group.
--------------------------------------------------------------------------------
30.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Allowance for Loan Losses
At September 30, 2008, the allowance for loan losses was $11,461 or 1.18% of
total loans as compared to $10,755 or 1.12% at December 31, 2007. In originating
loans, the Company recognizes that credit losses will be experienced and the
risk of loss will vary with, among other things, the following:
o general economic conditions;
o the type of loan being made;
o the creditworthiness of the borrower over the term of the loan;
o in the case of a collateralized loan, the quality of the collateral for
such a loan.
The allowance for loan losses represents the Company's estimate of the allowance
necessary to provide for probable incurred losses in the loan portfolio by
analyzing the following:
o ultimate collectibility of the loans in its portfolio;
o incorporating feedback provided by internal loan staff;
o the independent loan review function;
o results of examinations performed by regulatory agencies.
The Company regularly evaluates the adequacy of the allowance for loan losses.
Commercial credits are graded using a system that is in compliance with
regulatory classifications by the loan officers and the loan review function
validates the officers' grades. In the event that the loan review function
downgrades the loan, it is included in the allowance analysis at the lower
grade. To establish the appropriate level of the allowance, a sample of loans
(including impaired and nonperforming loans) are reviewed and classified as to
potential loss exposure.
Based on an estimation computed pursuant to the requirements of Financial
Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components:
o specific credit allocation established for expected losses resulting
from analysis developed through specific credit allocations on
individual loans for which the recorded investment in the loan exceeds
its fair value;
o general portfolio allocation based on historical loan loss experience
for each loan category;
o subjective reserves based on general economic conditions as well as
specific economic factors in the markets in which the Company operates.
The specific credit allocation component of the allowance for loan losses is
based on a regular analysis of loans over a fixed-dollar amount where the
internal credit rating is at or below a predetermined classification. The fair
value of the loan is determined based on either the present value of expected
future cash flows discounted at the loan's effective interest rate, the market
price of the loan, or, if the loan is collateral dependent, the fair value of
the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan losses is
determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
--------------------------------------------------------------------------------
31.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years.
Management remains watchful of credit quality issues. Should the economic
climate deteriorate from current levels, borrowers may experience difficulty,
and the level of nonperforming loans, charge-offs and delinquencies could rise
and require further increases in the provision.
Liquidity
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth together with repayments and maturities
of loans and investments, the Company utilizes other short-term funding sources
such as brokered time deposits, securities sold under agreements to repurchase,
overnight federal funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities and Federal Home Loan Bank advances.
The Company monitors and manages its liquidity position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls and anticipated depository
buildups or runoffs.
The Company classifies all of its securities as available-for-sale, thereby
maintaining significant liquidity. The Company's liquidity position is further
enhanced by structuring its loan portfolio interest payments as monthly and by
the significant representation of retail credit and residential mortgage loans
in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash flows from
operating activities, cash flows from investing activities and cash flows from
financing activities. Cash flows provided by operating activities and financing
activities offset by those used in investing activities, resulted in a net
decrease in cash and cash equivalents of $10,986 from December 31, 2007 to
September 30, 2008.
During the first nine months of 2008, the Company experienced net cash inflows
of $28,641 in financing activities primarily due to an increase in deposits and
$13,426 in operating activities. In contrast, net cash outflows of $53,053 were
used in investing activities largely due to the net growth in loans.
--------------------------------------------------------------------------------
32.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations and commitments and
off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off balance
sheet instruments as of September 30, 2008.
Payments Due by Period
--------------------------------------------------------------------------
Within 1 After
Year 1 - 3 Years 4 - 5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Contractual Obligations
Short-term debt $ 9,615 $ -- $ -- $ 250 $ 9,865
Long-term debt 160 2,345 2,285 6,000 10,790
Certificates of deposit 496,260 62,653 9,430 145 568,488
Operating leases 287 603 613 306 1,809
Severance payments 25 -- -- -- 25
Series B mandatory redeemable
preferred stock -- 831 -- -- 831
Subordinated debentures -- -- -- 20,620 20,620
FHLB advances 98,031 28,200 -- 5,062 131,293
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 604,378 $ 94,632 $ 12,328 $ 32,383 $ 743,721
============ ============ ============ ============ ============
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 $ 195,955 $ 32,978 $ 2,144 $ 25,908 $ 256,985
Standby letters of credit 5,626 6,098 -- 2,771 14,495
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 201,581 $ 39,076 $ 2,144 $ 28,679 $ 271,480
============ ============ ============ ============ ============
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors. Stockholders' equity
at September 30, 2008 was $118,248, a decrease of $628 or 0.53%, from December
31, 2007. The change in stockholders' equity was largely the result of a
decrease in accumulated other comprehensive income due to a reduction in the
fair market value of available-for-sales securities, postretirement liability
adjustment related to the adoption of FASB Issue No. 06-4 on January 1, 2008 and
modest stock repurchase activity transacted in the first quarter 2008. Average
quarterly equity as a percentage of average quarterly assets was 8.63% at
September 30, 2008, compared to 8.75% at December 31, 2007. Book value per
common share equaled $19.53 at September 30, 2008 compared to $19.50 at December
31, 2007.
The unrealized losses in these trust preferred securities are related to recent
events in the market more so than to current levels of interest rates. Recent
market events have lowered investor demand for these securities, which has
resulted in lower prices, causing these securities to have unrealized losses. As
a result of the new FASB Staff Position No. 157-3, issued October 10, 2008, the
Company has moved to a Level 3 fair value calculation that includes risk
adjustments that market participants would make, including adjustments for
credit and liquidity risks. We have not recognized any impairment charges
related to our securities portfolio.
--------------------------------------------------------------------------------
33.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Stock Repurchase
The Company did not repurchase shares of stock during the quarter ended
September 30, 2008. The 2006 repurchase program approved on November 13, 2006
authorized the Company to repurchase up to 5% or 370,000 shares of common stock.
This plan was completed in the fourth quarter 2007. The 2007 repurchase program
approved on July 24, 2007 authorized the Company to repurchase an additional
500,000 shares, or approximately 8% of the Company's currently issued and
outstanding shares, in the open market or privately negotiated transactions over
an 18 month period commencing immediately following the completion of the 2006
stock repurchase program. The expiration date of this program is January 24,
2009. Unless terminated earlier by resolution of our board of directors, the
program will expire on the earlier of such expiration date or when we have
repurchased all shares authorized for repurchase under the program.
Capital Measurements
As discussed in Note 8, the Company's current debt agreements include a covenant
that require the Bank to maintain the status of being well capitalized which is
a ratio of 10.0% for total risk based capital. The Bank is expected to meet a
minimum risk-based capital to risk-weighted assets ratio of 8%, of which at
least one-half (or 4%) must be in the form of Tier 1 (core) capital. The
remaining one-half (or 4%) may be in the form of Tier 1 (core) or Tier 2
(supplementary) capital. The amount of loan loss allowance that may be included
in capital is limited to 1.25% of risk-weighted assets. The ratio of Tier 1
(core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary)
capital to risk-weighted assets for the Company was 9.9% and 11.8%,
respectively, at September 30, 2008. The Company is currently, and expects to
continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Company's capital ratios:
December 31, Minimum Well
Sep 30, ----------------------- Capital Capitalized
2008 2007 2006 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 108,209 $ 101,831 $ 99,869
Tier 2 risk-based capital 21,461 10,755 10,835
---------- ---------- ----------
Total capital $ 129,670 $ 112,586 $ 110,704
========== ========== ==========
Risk-weighted assets $1,110,608 $1,102,602 $ 926,874
========== ========== ==========
Capital ratios:
Tier 1 risk-based capital 9.7 % 9.2 % 10.8 % 4.0% 6.0%
Total risk-based capital 11.7 % 10.2 % 11.9 % 8.0% 10.0%
Leverage ratio 8.3 % 7.7 % 7.9 % 4.0% 5.0%
Recent Regulatory and Accounting Developments
See Note 11 to the Unaudited Consolidated Financial Statements for information
concerning recent regulatory and accounting developments.
--------------------------------------------------------------------------------
34.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934 as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identified by the use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "planned" or "potential" or similar
expressions.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could effect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any
forward-looking statements.
Among the factors that could have an impact on the Company's ability to achieve
operating results and the growth plan goals are as follows:
o management's ability to reduce and effectively manage interest rate
risk and the impact of interest rates in general on the volatility of
the Company's net interest income;
o fluctuations in the value of the Company's investment securities;
o the Company's ability to ultimately collect on any downgraded loan
relationships;
o the Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace;
o credit risks and risks from concentrations (by geographic area and by
industry) within the Company's loan portfolio and individual large
loans;
o volatility of rate sensitive deposits;
o operational risks, including data processing system failures or fraud;
o asset/liability matching risks and liquidity risks;
o the ability to successfully acquire low cost deposits or funding;
o the ability to successfully execute strategies to increase noninterest
income;
o the ability to successfully grow non-commercial real estate loans;
o the ability of the Company to continue to realize cost savings and
revenue generation opportunities in connection with the synergies of
centralizing operations;
o the ability to adopt and implement new regulatory requirements as
dictated by the SEC, FASB or other rule-making bodies which govern our
industry;
o changes in the general economic or industry conditions, nationally or
in the communities in which the Company conducts business.
--------------------------------------------------------------------------------
35.
CENTRUE FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity Management
The Company performs a net interest income analysis as part of its
asset/liability management practices. The net interest income analysis measures
the change in net interest income in the event of hypothetical changes in
interest rates. This analysis assesses the risk of changes in net interest
income in the event of a sudden and sustained 100 to 200 basis point increase in
market interest rates or a 100 to 200 basis point decrease in market rates. The
interest rates scenarios are used for analytical purposes and do not necessarily
represent management's view of future market movements. The tables below present
the Company's projected changes in net interest income for the various rate
shock levels at September 30, 2008 and December 31, 2007, respectively:
Change in Net Interest Income Over One Year Horizon
----------------------------------------------------------
September 30, 2008 December 31, 2007
---------------------------- ---------------------------
Change Change
---------------------------- ---------------------------
$ % $ %
------------ ------------- ------------ ------------
+200 bp $ 710 1.90% $ 305 0.74%
+100 bp 520 1.39 509 1.23
Base -- -- -- --
-100 bp (714) (1.91) (1,410) (3.41)
-200 bp (2,801) (7.51) (3,109) (7.51)
As shown above, the Company's model at September 30, 2008, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $710 or 1.90%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $2,801 or 7.51%.
Management continues to position our balance sheet to maximize the net interest
margin. Throughout the year, steps were taken to lower our funding costs in
reaction to FOMC rate reductions. The mix of our funding portion of the balance
sheet has been adjusted to align it with our asset sensitive portion of the
balance sheet to create better spreads in various sectors. With these changes,
we have been able to reposition our funding and align it better with the shorter
end of the yield curve which minimizes our exposure to the volatility found at
the longer end of the yield curve.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates and should not be relied upon as
indicative of actual results. Actual values may differ from those projections
set forth above, should market conditions vary from the assumptions used in
preparing the analysis. Further, the computations do not contemplate actions the
Company may undertake in response to changes in interest rates.
--------------------------------------------------------------------------------
36.
CENTRUE FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
--------------------------------------------------------------------------------
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended). Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic
filings with the Securities and Exchange Commission. It should be noted that in
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company has designed its disclosure controls and procedures to reach a level
of reasonable assurance of achieving the desired control objectives and, based
on the evaluation described above, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at reaching that level of reasonable assurance.
There was no change in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended) during the Company's most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
--------------------------------------------------------------------------------
37.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company may be involved in various legal
proceedings from time to time. The Company does not believe it is currently
involved in any claim or action the ultimate disposition of which would have a
material adverse effect on the Company's financial statements.
Item 1A. Risk Factors
The Company did not experience any material changes in the Risk Factors during
the Company's most recently completed fiscal quarter. For specific information
about the risks facing the Company refer to the Company's Annual Report on Form
10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of the Company's common
stock by the Company during the quarter ended September 30, 2008.
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May Yet
Total Number of Average Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
------------------- ------------------ ------------------- -------------------- ---------------------
07/01/08 - -- $ -- -- 395,078
07/31/08
08/01/08 - -- $ -- -- 395,078
08/31/08
09/01/08 - -- $ -- -- 395,078
09/30/08
Total (1) -- $ -- -- 395,078
(1) The Company repurchased no shares during the quarter ended September 30,
2008. The 2006 repurchase program approved on November 13, 2006
authorized the Company to repurchase up to 5% or 370,000 shares of
common stock. This plan was completed in the fourth quarter 2007. The
2007 repurchase program approved on July 24, 2007 authorized the Company
to repurchase an additional 500,000 shares, or approximately 8% of the
Company's currently issued and outstanding shares, in the open market or
privately negotiated transactions over an 18 month period commencing
immediately following the completion of the 2006 stock repurchase
program. The expiration date of this program is January 24, 2009. Unless
terminated earlier by resolution of our board of directors, the program
will expire on the earlier of such expiration date or when we have
repurchased all shares authorized for repurchase under the program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
--------------------------------------------------------------------------------
38.
Item 6. Exhibits
Exhibits:
31.1 Certification of Thomas A. Daiber, President and Principal
Executive Officer, required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson, Senior Executive Vice
President and Principal Financial and Accounting Officer
required by Rule 13a - 14(a).
32.1(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's President and Principal Executive
Officer.
32.2(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Senior Executive Vice President and
Principal Financial and Accounting Officer.
________________
(1) This certification is not "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
--------------------------------------------------------------------------------
39.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTRUE FINANCIAL CORPORATION
Date: November 7, 2008 By: /s/ Thomas A. Daiber
-------------------------------------
Thomas A. Daiber
President and Principal Executive
Officer
Date: November 7, 2008 By: /s/ Kurt R. Stevenson
-------------------------------------
Kurt R. Stevenson
Senior Executive Vice President and
Principal Financial and Accounting
Officer
--------------------------------------------------------------------------------
40.