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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2007
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)
122 West Madison Street, Ottawa, Illinois 61350
(Address of principal executive offices including zip code)
(815) 431-2720
(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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at August 10, 2007
----------------------------- -------------------------------------
Common Stock, Par Value $1.00 6,363,922
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CENTRUE FINANCIAL CORPORATION
FORM 10-Q INDEX
JUNE 30, 2007
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets.........................1
o Unaudited Consolidated Statements of Income and
Comprehensive Income .......................................2
o Unaudited Consolidated Statements of Cash Flows...............4
o Notes to Unaudited Consolidated Financial Statements..........5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...............................................31
Item 4. Controls and Procedures ..........................................32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................33
Item 1A. Risk Factors......................................................33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......33
Item 3. Defaults Upon Senior Securities...................................33
Item 4. Submission of Matters to a Vote of Security Holders...............34
Item 5. Other Information.................................................34
Item 6. Exhibits..........................................................34
SIGNATURES..................................................................35
CENTRUE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2007 and December 31, 2006 (In Thousands, Except Share Data)
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June 30, December 31,
2007 2006
------------- -------------
ASSETS
Cash and cash equivalents $ 50,387 $ 40,195
Securities available-for-sale 276,710 298,692
Loans 912,168 836,944
Allowance for loan losses (10,828) (10,835)
------------- -------------
Net loans 901,340 826,109
Cash surrender value of life insurance 26,393 25,904
Mortgage servicing rights 3,309 3,510
Premises and equipment, net 35,950 35,403
Goodwill 25,439 25,396
Intangible assets, net 12,154 12,733
Other real estate 6,568 2,136
Other assets 15,136 12,947
------------- -------------
Total assets $ 1,353,386 $ 1,283,025
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 130,701 $ 125,585
Interest-bearing 957,421 901,025
------------- -------------
Total deposits 1,088,122 1,026,610
Federal funds purchased and securities sold
under agreements to repurchase 45,370 36,319
Advances from the Federal Home Loan Bank 57,731 63,147
Notes payable 10,917 9,015
Series B mandatory redeemable preferred stock 831 831
Subordinated debentures 20,620 20,620
Other liabilities 11,728 8,292
------------- -------------
Total liabilities 1,235,319 1,164,834
------------- -------------
Stockholders' equity
Series A convertible preferred stock 500 500
Common stock 7,434 7,412
Surplus 70,817 70,460
Retained earnings 55,162 52,469
Accumulated other comprehensive (loss) income (793) 235
------------- -------------
133,120 131,076
Treasury stock, at cost (15,053) (12,885)
------------- -------------
Total stockholders' equity 118,067 118,191
------------- -------------
Total liabilities and stockholders' equity $ 1,353,386 $ 1,283,025
============= =============
See Accompanying Notes to Unaudited Financial Statements
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1.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2007 and 2006
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Three months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Interest income
Loans $ 16,917 $ 7,194 $ 32,963 $ 14,349
Securities
Taxable 3,182 2,027 6,472 4,025
Exempt from federal income taxes 381 210 763 426
Federal funds sold and other 173 45 268 59
---------- ---------- ---------- ----------
Total interest income 20,653 9,476 40,466 18,859
Interest expense
Deposits 9,443 3,845 18,260 7,324
Federal funds purchased and securities sold
under agreements to repurchase 463 51 873 123
Advances from the Federal Home Loan Bank 628 455 1,273 936
Series B Mandatory Redeemable 12 13 25 25
Subordinated debentures 451 - 898 -
Notes payable 165 160 323 314
---------- ---------- ---------- ----------
Total interest expense 11,162 4,524 21,652 8,722
---------- ---------- ---------- ----------
Net interest income 9,491 4,952 18,814 10,137
Provision for loan losses 226 (300) 226 (1,100)
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 9,265 5,252 18,588 11,237
Noninterest income
Service charges 1,969 495 3,552 935
Trust income 232 199 461 418
Mortgage banking income 449 281 883 527
Brokerage commissions and fees 104 88 230 172
Bank owned life insurance (BOLI) 247 137 488 277
Securities gains (losses), net (33) (89) (33) (88)
Gain on sale of OREO 491 - 588 -
Other income 735 252 1,279 587
---------- ---------- ---------- ----------
4,194 1,363 7,448 2,828
Noninterest expenses
Salaries and employee benefits 5,144 2,359 10,292 5,405
Occupancy expense, net 1,019 215 1,960 754
Furniture and equipment expense 627 616 1,322 995
Marketing 221 96 413 206
Supplies and printing 156 65 337 160
Telephone 210 118 388 235
Other real estate owned expense 38 2 41 8
Amortization of intangible assets 591 31 1,212 60
Other expenses 1,840 1,300 3,829 1,973
---------- ---------- ---------- ----------
9,846 4,802 19,794 9,796
---------- ---------- ---------- ----------
See Accompanying Notes to Unaudited Financial Statements
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2.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2007 and 2006
(In Thousands, Except Per Share Data)
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Three months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 3,613 1,813 6,242 4,269
Income taxes 1,107 522 1,837 1,303
---------- ---------- ---------- ----------
Income from continuing operations 2,506 1,291 4,405 2,966
DISCONTINUED OPERATIONS:
Gain (loss) from discontinued operations - 5 - (43)
Income tax benefit - 2 - (17)
---------- ---------- ---------- ----------
Gain (loss) on discontinued operations - 3 - (26)
---------- ---------- ---------- ----------
Net income 2,506 1,294 4,405 2,940
========== ========== ========== ==========
Preferred stock dividends 52 52 104 104
---------- ---------- ---------- ----------
Net income for common stockholders $ 2,454 $ 1,242 $ 4,301 $ 2,836
========== ========== ========== ==========
Basic earnings per share from
continuing operations $ 0.38 $ 0.33 $ 0.67 $ 0.76
========== ========== ========== ==========
Diluted earnings per share from
continuing operations $ 0.38 $ 0.32 $ 0.66 $ 0.75
========== ========== ========== ==========
Basic earnings per share from
discontinued operations $ - $ - $ - $ (0.01)
========== ========== ========== ==========
Diluted earnings per share from
discontinued operations $ - $ - $ - $ (0.01)
========== ========== ========== ==========
Basic earnings per common share $ 0.38 $ 0.33 $ 0.67 $ 0.75
========== ========== ========== ==========
Diluted earnings per common share $ 0.38 $ 0.32 $ 0.66 $ 0.74
========== ========== ========== ==========
TOTAL COMPREHENSIVE INCOME:
Net Income $ 2,506 $ 1,294 $ 4,405 $ 2,940
Change in unrealized gains (losses) on
available for sale securities (1,201) (943) (1,028) (1,299)
---------- ---------- ---------- ----------
Other comprehensive income $ 1,305 $ 351 $ 3,377 $ 1,641
========== ========== ========== ==========
See Accompanying Notes to Unaudited Financial Statements
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3.
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2007 and 2006 (In Thousands)
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Six Months Ended
June 30,
------------------------------
2007 2006
------------- -------------
Cash flows from operating activities
Net income $ 4,405 $ 2,940
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 789 931
Amortization of intangible assets 1,212 87
Amortization of mortgage servicing rights, net 201 160
Amortization of bond premiums, net 109 244
Stock option expense 63 68
Federal Home Loan Bank stock dividend (36) (47)
Provision for loan losses 226 (1,100)
Provision for deferred income taxes (3,778) (310)
Tax benefit related to exercised options (122) (62)
Increase in cash surrender value (489) (277)
Loss on sale of securities 33 88
Gain (loss) on sale of loans (634) (353)
(Gain) loss on sale of OREO acquired in settlement of loans (588) -
Proceeds from sales of loans held for sale 43,149 27,395
Origination of loans held for sale (44,316) (25,796)
Change in assets and liabilities
Decrease (increase) in other assets 2,271 646
Increase (decrease) in other liabilities 3,126 569
------------- -------------
Net cash provided by operating activities 5,621 5,183
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 22,627 19,554
Proceeds from sales 2,497 16,594
Purchases (4,557) (25,012)
Purchase of loans - (19,513)
Net (increase) decrease in loans (81,374) 30,618
Purchase of premises and equipment (1,336) (758)
Sale of branch - (6,054)
Purchase of charter (633) -
Proceeds from sale of OREO acquired in settlement of loans 3,874 173
------------- -------------
Net cash provided by (used in) investing activities (58,902) 15,602
Cash flows from financing activities
Net increase (decrease) in deposits 61,502 (15,138)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 9,051 6,685
Payments on notes payable (348) (2,045)
Proceeds from notes payable 2,250 1,400
Net increase (decrease) in advances from the Federal Home Loan Bank (5,416) (3,300)
Dividends on common stock (1,610) (898)
Dividends on preferred stock (104) (104)
Proceeds from exercise of stock options 316 160
Purchase of treasury stock (2,168) (1,638)
------------- -------------
Net cash provided by (used in) financing activities 63,473 (14,878)
------------- -------------
Net increase (decrease) in cash and cash equivalents 10,192 5,907
Cash and cash equivalents
Beginning of period 40,195 24,358
------------- -------------
End of period $ 50,387 $ 30,265
============= =============
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 21,751 $ 4,575
Income taxes - 861
Transfers from loans to other real estate owned 7,718 1,307
See Accompanying Notes to Unaudited Financial Statements
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4.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Centrue Financial Corporation (the "Company") is a bank holding company for
Centrue Bank. During the fourth quarter of 2006, the former UnionBancorp
completed its merger with Centrue Financial Corporation with UnionBancorp being
the surviving entity in this merger. Upon completion of the merger, UnionBancorp
changed its name to Centrue Financial Corporation. The accompanying unaudited
interim consolidated financial statements of Centrue Financial Corporation (the
"Company") 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. Actual results could differ from those
estimates. Certain 2006 amounts have been reclassified to conform to the 2007
presentation.
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, 2006. The annualized results of operations during the three and six months
ended June 30, 2007 are not necessarily indicative of the results expected for
the year ending December 31, 2007. All financial information is in thousands
(000's), except shares and per share data. The consolidated financial statements
reflect the results of the Company's insurance unit of the Wealth Management
segment as a discontinued operation as described in Note 8.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share for the three and six months ended June 30, 2007 and
2006 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three and six months
ended June 30, 2007 and 2006 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE
Net income
available to common shareholders $ 2,454 $ 1,242 $ 4,301 $ 2,836
Weighted average common shares outstanding 6,414 3,743 6,438 3,765
---------- ---------- ---------- ----------
Basic Earnings Per Common Share $ 0.38 $ 0.33 $ 0.67 $ 0.75
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Weighted average common shares outstanding 6,414 3,743 6,438 3,765
Add: dilutive effect of assumed exercised
stock options 36 94 34 45
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 6,450 3,837 6,472 3,810
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.38 $ 0.32 $ 0.66 $ 0.74
========== ========== ========== ==========
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5.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NOTE 2. EARNINGS PER SHARE (continued)
There were approximately 321,200 and 60,000 options outstanding at June 30, 2007
and 2006, 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 Company's consolidated securities portfolio, which represented 24.0% of the
Company's 2007 second quarter average earning asset base, is managed to minimize
interest rate risk, maintain sufficient liquidity and maximize return. All of
the Company's securities are classified as available-for-sale and are carried at
fair value. The Company does not have any securities classified as trading or
held-to-maturity.
The following table describes the fair value, gross unrealized gains and losses
of securities available-for-sale at June 30, 2007 and December 31, 2006,
respectively:
June 30, 2007
----------------------------------------------------
Gross Gross %
Fair Unrealized Unrealized of
Value Gains Losses Portfolio
---------- ---------- ---------- ----------
U.S. government agencies $ 120,669 $ 33 $ (695) 43.6
States and political subdivisions 41,593 197 (374) 15.0
U.S. government mortgage-backed securities 56,131 282 (396) 20.3
Collateralized mortgage obligations 25,257 - (367) 9.1
Equity securities 27,326 310 - 9.9
Corporate 5,734 4 (20) 2.1
---------- ---------- ---------- ----------
$ 276,710 $ 826 $ (1,852) 100.0%
========== ========== ========== ==========
December 31, 2006
----------------------------------------------------
Gross Gross %
Fair Unrealized Unrealized of
Value Gains Losses Portfolio
---------- ---------- ---------- ----------
U.S. government agencies $ 126,039 $ 308 $ (245) 42.2
States and political subdivisions 41,471 329 (9) 13.9
U.S. government mortgage-backed securities 69,579 253 (393) 23.3
Collateralized mortgage obligations 27,237 44 (77) 9.1
Equity securities 25,602 171 - 8.6
Corporate 8,764 16 (13) 2.9
---------- ---------- ---------- ----------
$ 298,692 $ 1,121 $ (737) 100.0%
========== ========== ========== ==========
Management does not believe any individual unrealized losses as of June 30,
2007, identified in the preceding tables represent other-than-temporary
impairment. These unrealized losses are primarily attributable to changes in the
interest rates. 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.
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6.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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NOTE 3. SECURITIES (continued)
Sales of securities available-for-sale were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Proceeds $ 2,497 $ 16,594 $ 2,497 $ 16,594
Realized gains $ 4 $ 17 $ 4 $ 17
Realized losses $ (37) $ (106) $ (37) $ (105)
NOTE 4. LOANS
The following table describes the composition of loans by major categories
outstanding as of June 30, 2007 and December 31, 2006, respectively:
June 30, 2007 December 31, 2006
------------------------ ------------------------
$ % $ %
---------- ---------- ---------- ----------
Commercial $ 154,924 16.98% $ 154,829 18.50%
Agricultural 21,763 2.39 23,118 2.76
Real estate:
Commercial mortgages 351,919 38.58 274,909 32.85
Construction 138,174 15.15 116,608 13.93
Agricultural 24,726 2.71 27,624 3.30
1-4 family mortgages 208,689 22.88 226,884 27.11
Installment 10,985 1.20 11,998 1.43
Other 988 0.11 974 0.12
---------- ---------- ---------- ----------
Total loans 912,168 100.00% 836,944 100.00%
========== ==========
Allowance for loan losses (10,828) (10,835)
---------- ----------
Loans, net $ 901,340 $ 826,109
========== ==========
The following table presents data on impaired loans:
June 30, December 31,
2007 2006
------------- -------------
Impaired loans for which an allowance has been provided $ 6,481 $ 4,915
Impaired loans for which no allowance has been provided 4,698 16,450
------------- -------------
Total loans determined to be impaired $ 11,179 $ 21,365
============= =============
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 1,542 $ 1,562
============= =============
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7.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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NOTE 4. LOANS (continued)
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 collectibility of the loans in its portfolio;
incorporating feedback provided by internal loan staff; the independent loan
review function; and information provided by regulatory agencies.
The Company conducts a quarterly evaluation as to the adequacy of the allowance
for loan losses. Transactions in the allowance for loan losses for the three and
six months ended June 30, 2007 and 2006 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Beginning balance $ 10,607 $ 7,506 $ 10,835 $ 8,362
Charge-offs (191) (651) (689) (778)
Recoveries 186 293 456 364
Provision for loan losses 226 (300) 226 (1,100)
---------- ---------- ---------- ----------
Ending balance $ 10,828 $ 6,848 $ 10,828 $ 6,848
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 912,168 $ 403,455 $ 912,168 $ 403,455
========== ========== ========== ==========
Average loans $ 883,151 $ 407,360 $ 870,129 $ 410,594
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.00% 0.09% 0.03% 0.10%
Ratio of provision for loan losses
to average loans 0.03% (0.07)% 0.03% (0.27)%
Ratio of allowance for loan losses
to ending total loans 1.19% 1.70% 1.19% 1.70%
Ratio of allowance for loan losses
to total nonperforming loans 241.05% 244.05% 241.05% 244.05%
Ratio of allowance at end of period
to average loans 1.23% 1.68% 1.24% 1.67%
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8.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 and are available for issuance upon the exercise of options
and rights granted under the 2003 Option Plan. The options have an exercise
period of ten years from the date of grant. There are 455,000 shares available
for grant under this plan.
In addition to the Company plans described above, in conjunction with the
merger, all outstanding options of the former Centrue Financial were converted
into options to acquire Company common stock, as adjusted for the exchange
ratio. Following the merger, no additional options are issuable under any of the
former Centrue plans.
The fair value of each option award is estimated on the date of grant using a
closed option valuation (Black-Scholes) model that uses the assumptions noted in
the table below. Expected volatilities are based on historic volatilities of the
Company's common stock. The Company uses historical data to estimate option
exercise and post-vesting termination behavior. Employee and management options
are tracked separately. The expected term of options granted is based on
historical data and represents the period of time that options granted are
expected to be outstanding, which takes into account that the options are not
transferable. The risk-free interest rate for the expected term of the option is
based on the U.S. Treasury yield curve in effect at the time of the grant. The
fair value of options granted was determined using the following
weighted-average assumptions as of the grant date:
June 30, December 31,
2007 2006
------------- -------------
Fair value $ 4.62 $ 4.81
Risk-free interest rate 4.92% 4.95%
Expected option life (years) 6 6
Expected stock price volatility 23.70% 23.45%
Dividend yield 2.70% 2.47%
--------------------------------------------------------------------------------
9.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NOTE 5. STOCK OPTION PLANS (continued)
A summary of the status of the option plans as of June 30, 2007, and changes
during the period ended on those dates is presented below:
June 30, 2007
----------------------------------------------------
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life Value
---------- ---------- ---------- ----------
Outstanding at beginning of period 494,424 $ 18.61
Granted 58,000 19.27
Exercised (21,900) 14.44
Forfeited (2,500) 16.06
---------- ----------
Outstanding at end of period 528,024 $ 16.72 4.3 years $ 910
========== ========== ========== ==========
Options exercisable at period end 438,024 $ 18.73 4.6 years $ 906
========== ========== ========== ==========
Options outstanding at June 30, 2007 and December 31, 2006 were as follows:
Outstanding Exercisable
------------------------ ------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
-------------------------------------------------- ---------- ---------- ---------- ----------
JUNE 30, 2007:
$ 11.25 - $ 13.00 46,381 3.1 years 46,381 11.60
13.88 - 18.50 147,443 3.6 years 147,443 15.55
20.30 - 23.29 334,200 4.7 years 244,200 22.00
---------- ---------- ---------- ----------
528,024 4.3 years 438,024 $ 18.73
========== ========== ========== ==========
DECEMBER 31, 2006:
$ 7.25 - $ 9.75 7,000 0.2 years 7,000 $ 9.75
11.25 - 13.00 53,931 3.4 years 53,931 11.64
13.88 - 18.50 157,293 4.1 years 157,293 15.50
20.30 - 23.29 276,200 6.1 years 244,200 22.00
---------- ---------- ---------- ----------
494,424 5.1 years 462,424 $ 18.39
========== ========== ========== ==========
--------------------------------------------------------------------------------
10.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NOTE 5. STOCK OPTION PLANS (continued)
Information related to the stock option plan during the quarter ended June 30,
2007 and June 30, 2006 is as follows:
June 30, June 30,
2007 2006
----------- ----------
Intrinsic value of options exercised $ 75 $ 174
Cash received from option exercises 316 160
Tax benefit realized from option exercises 122 62
The Company recorded $69 and $68 in salaries and employee benefits stock
compensation expense during the six months ended June 30, 2007 and 2006.
Unrecognized stock option compensation expense related to unvested awards (net
of estimated forfeitures) for the remainder of 2007 and beyond is estimated as
follows:
Period Amount
----------------------------------- ----------
July, 2007 - December, 2007 $ 26
2008 63
2009 63
2010 63
2011 63
2012 52
2013 10
----------
Total $ 340
==========
NOTE 6. CONTINGENT LIABILITIES AND OTHER MATTERS
Neither the Company nor its subsidiary is involved in any pending legal
proceedings other than routine legal proceedings occurring in the normal course
of business, which, in the opinion of management, in the aggregate, are not
material to the Company's consolidated financial condition.
NOTE 7. SEGMENT INFORMATION
The Company's reporting was enhanced so that a line of business (LOB) reporting
structure was implemented as of January 1, 2005. The reportable segments are
determined by the products and services offered, primarily distinguished between
retail, commercial, treasury, wealth management, and operations & other. 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 (formerly known as the financial services segment); and holding company
services and discontinued operations associated with the sale of the insurance
unit 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. With the sale of the insurance unit, the results for
insurance were classified into the Other Operations segment from the Wealth
Management segment.
--------------------------------------------------------------------------------
11.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NOTE 7. SEGMENT INFORMATION (continued)
The merger with the former Centrue became effective on November 13, 2006, and as
such, the results for the former Centrue Bank are presented as a stand alone
segment ("Other Banking") since comparable discrete financial information is not
available for the results of this segment on the same reporting basis as the
rest of the Company.
The accounting policies used with respect to segment reporting are the same as
those described in the summary of significant accounting policies set forth in
Note 1. Segment performance is evaluated using net income. Information reported
internally for performance assessment follows.
Three Months Ended,
June 30, 2007
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Other Continuing
Segment Segment Segment Management Operations Banking Operations
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income (loss) $ 1,836 $ 3,176 $ 885 $ 69 $ (1,256) $ 4,781 $ 9,491
Other revenue 1,140 147 (35) 391 203 2,348 4,194
Other expense 1,282 558 60 343 2,497 3,753 8,493
Noncash items
Depreciation 182 3 - 3 262 312 762
Provision for loan losses - - - - - 226 226
Other intangibles - - - 1 - 590 591
Net allocations 1,126 1,197 109 126 (2,558) - -
Income tax expense (36) 489 132 (56) (92) 670 1,107
Segment profit (loss) 422 1,076 549 43 (1,162) 1,578 2,506
Goodwill 2,546 2,648 - 1,178 - 19,067 25,439
Segment assets 124,632 350,892 184,022 2,342 - 691,499 1,353,386
Three Months Ended,
June 30, 2006
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Other Continuing
Segment Segment Segment Management Operations Banking Operations
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income (loss) $ 1,926 $ 3,126 $ 86 $ 50 $ (236) $ - $ 4,952
Other revenue 908 110 (89) 565 203 - 1,697
Other expense 1,497 523 63 710 1,845 - 4,638
Noncash items
Depreciation 200 3 - 35 210 - 448
Provision for loan losses (100) (200) - - - - (300)
Other intangibles - - - 15 28 - 43
Net allocations 624 1,256 158 833 (2,271) - -
Income tax expense 207 540 (146) (128) 52 - 525
Segment profit (loss) 406 1,114 (78) (250) 102 - 1,294
Goodwill 2,512 2,631 - 1,820 - - 6,963
Segment assets 91,575 326,048 209,259 3,575 20,142 - 656,831
--------------------------------------------------------------------------------
12.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NOTE 7. SEGMENT INFORMATION (continued)
Six Months Ended,
June 30, 2007
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Other Continuing
Segment Segment Segment Management Operations Banking Operations
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income (loss) $ 3,614 $ 6,360 $ 1,009 $ 135 $ (1,730) $ 9,426 $ 18,814
Other revenue 2,024 251 (35) 775 371 4,062 7,448
Other expense 2,694 1,168 123 744 4,745 7,509 16,983
Noncash items
Depreciation 398 6 - 8 506 681 1,599
Provision for loan losses - - - - - 226 226
Other intangibles - - - 2 - 1,210 1,212
Net allocations 1,969 2,628 283 310 (5,190) - -
Income tax expense 24 895 31 (103) (179) 1,169 1,837
Segment profit (loss) 553 1,914 537 (51) (1,241) 2,693 4,405
Goodwill 2,546 2,648 - 1,178 - 19,067 25,439
Segment assets 124,632 350,892 184,022 2,342 - 691,499 1,353,386
Six Months Ended,
June 30, 2006
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Other Continuing
Segment Segment Segment Management Operations Banking Operations
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income (loss) $ 3,908 $ 6,389 $ 216 $ 106 $ (485) $ - $ 10,134
Other revenue 1,758 221 (88) 1,198 368 - 3,457
Other expense 2,936 1,167 131 1,374 3,837 - 9,445
Noncash items
Depreciation 443 6 - 73 409 - 931
Provision for loan losses 25 (1,125) - - - - (1,100)
Other intangibles - - - 30 57 - 87
Net allocations 1,471 2,469 318 466 (4,724) - -
Income tax expense 264 1,389 (252) (215) 102 - 1,288
Segment profit (loss) 527 2,704 (69) (424) 202 - 2,940
Goodwill 2,512 2,613 - 1,820 - - 6,963
Segment assets 91,575 326,048 209,259 3,575 - - 656,831
NOTE 8. DISCONTINUED OPERATIONS
During the third quarter of 2006, the Company sold the insurance unit from the
Wealth Management segment for $1,200. In accordance with FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144") the
results of operations of the insurance unit are reflected in the Company's
statements of income for the three and six months ended June 30, 2006 as
"discontinued operations." Approximately $1,030 of goodwill and intangibles
attributed to the insurance unit on the Company's balance sheet were written off
as a result of this transaction and factored into the loss on the sale of the
discontinued operations.
--------------------------------------------------------------------------------
13.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NOTE 8. DISCONTINUED OPERATIONS (continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net interest income $ - $ (1) $ - $ (3)
Noninterest income - 334 - 629
Noninterest expense - 328 - 669
---------- ---------- ---------- ----------
Loss from discontinued operations
Before income taxes - 5 - (43)
Income Tax / Benefit for taxes - 2 - (17)
---------- ---------- ---------- ----------
Net gain /(loss) from
discontinued operations $ - $ 3 $ - $ (26)
========== ========== ========== ==========
NOTE 9. RECENT ACCOUNTING DEVELOPMENTS
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements".
This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. The Company has not completed its evaluation
of the impact of the adoption of this standard.
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140".
This Statement permits fair value re-measurement for any hybrid financial
instruments, clarifies which instruments are subject to the requirements of
Statement No. 133, and establishes a requirement to evaluate interests in
securitized financial assets and other items. The new standard is effective for
financial assets acquired or issued after the beginning of the entity's first
fiscal year that begins after September 15, 2006. Adoption of this statement on
January 1, 2007 did not have a material impact on the Company's consolidated
financial position or results of operations.
In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140". This statement
provides the following: 1) revised guidance on when a servicing asset and
servicing liability should be recognized; 2) requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable; 3) permits an entity to elect to measure servicing assets
and servicing liabilities at fair value each reporting date and report changes
in fair value in earnings in the period in which the changes occur; 4) upon
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities for securities which are identified as
offsetting the entity's exposure to changes in the fair value of servicing
assets or liabilities that a servicer elects to subsequently measure at fair
value; and 5) requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of financial
position and additional footnote disclosure. This standard is effective as of
the beginning of an entity's first fiscal year that begins after September 15,
2006, with the effects of initial adoption being reported as a cumulative-effect
adjustment to retained earnings. We will continue to carry the mortgage
servicing asset at lower of cost or market, reviewing it quarterly for
impairment.
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. It is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company has decided not to early adopt SFAS159 and
is currently evaluating the impact of the adoption with respect to its current
practice of measuring fair value and disclosure of it in its financial
statements.
--------------------------------------------------------------------------------
14.
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
The Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB No. 109" ("FIN 48") as of January 1,
2007. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. A tax position is recognized as a benefit
only if it is "more likely than not" that the tax position would be sustained in
a tax examination, with a tax examination being presumed to follow. The amount
recognized is the largest amount of tax benefit that is greater then 50% likely
of being realized on examination. For tax positions not meeting the "more than
likely than not" test, no benefit is recorded. The adoption had no effect on the
Company's financial statements.
The Company is subject to U. S. federal income tax as well as income tax for the
states of Illinois and Missouri. The Company is no longer subject to examination
by taxing authorities for years before 2002. The Company does not expect the
total amount of unrecognized tax benefits to significantly increase in the next
twelve months.
--------------------------------------------------------------------------------
15.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Centrue Financial Corporation (the "Company") is a bank holding company for
Centrue Bank. During the fourth quarter of 2006, the former UnionBancorp
completed its merger with Centrue Financial Corporation with UnionBancorp being
the surviving entity in this merger. Upon completion of the merger, UnionBancorp
changed its name to Centrue Financial Corporation. The following discussion
provides an analysis of the Company's results of operations and financial
condition for the three and six months ended June 30, 2007 as compared to the
same period in 2006. 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. Certain 2006 amounts have been reclassified to conform to
the 2007 presentation.
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, 2006. The annualized results of operations during the three and six months
ended June 30, 2007 are not necessarily indicative of the results expected for
the year ending December 31, 2007. All financial information is in thousands
(000's), 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 2006 Annual Report on Form 10-K.
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.
--------------------------------------------------------------------------------
16.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
GENERAL
Centrue Financial Corporation is a bank holding company organized under the laws
of the state of Delaware. The Company derives most of its revenues and income
from the operations of its bank subsidiary, Centrue Bank (the "Bank"), but also
derives revenue from the Wealth Management Division of its bank subsidiary. The
Company provides a full range of services to individual and corporate customers
located in markets to the west and south of suburban Chicago, as well as in east
central and northwest Illinois, and in the St. Louis metropolitan area. These
products and services include demand, time, and savings deposits; lending;
mortgage banking; brokerage services; asset management; and trust services. The
Company is subject to competition from other financial institutions, including
banks, thrifts and credits unions, as well as nonfinancial institutions
providing financial services. Additionally, the Company and the Bank are subject
to regulations of certain regulatory agencies and undergo periodic examinations
by those regulatory agencies.
Second Quarter 2007 Highlights:
o Second quarter 2007 results included the following nonrecurring items:
o $576 in employment related expenses, including separation costs
and a previously announced executive officer contract payment;
o $140 in costs associated with accelerated depreciation related
to two branch closings and the core processing computer
conversion;
o $491 realized from the gain on sale of property held in other
real estate;
o The net impact to earnings after taxes was approximately $146 of
additional expense or $0.02 per diluted share.
o The loan portfolio increased $43,639 or 5.0% during the second quarter
largely due to growth experienced in the St. Louis market.
o Several positive asset quality trends were experienced:
o Action list loans decreased by 31.7% from $37,600 reported on
December 31, 2006 to $25,700 on June 30, 2007. The change from
the first quarter was a decrease by 20.5% or down from $32,327.
o Non-accrual loans decreased by 61.8% from $11,759 reported on
December 31, 2006 to $4,492 on June 30, 2007. Non-accrual loans
declined 52.3% from $9,416 since March 31, 2007.
o The delinquency ratio decreased from 2.44% at 2006 year-end to
1.18% recorded at June 30, 2007. This ratio was 2.03% at March
31, 2007.
o The net interest margin decreased 7 basis points to 3.30% as compared
to the same period in 2006 and 5 basis points from the first quarter of
2007, largely due to the inverted yield curve and competitive pressures
in pricing loans and deposits.
o Excluding the $716 of charges related to restructuring, noninterest
expense levels for the second quarter 2007 reflect a $1,307 or 12.5%
decrease compared to the same period in 2006 for the pro forma combined
companies. The former UnionBancorp reported $5,129 (adjusted for
discontinued operations), while the former Centrue reported $5,308 for
a combined total of $10,437. Excluding the charges related to
restructuring, year-to-date noninterest expense levels have decreased
$2,053 or 9.7% as compared to the pro forma combined level of $21,131
for the same period in 2006.
o On June 22, 2007, Centrue Financial Corporation was added to the
Russell Microcap(R) Index after the Russell Investment Group
reconstituted its comprehensive set of U.S. and global equity indexes.
The Company will hold its membership until Russell reconstitutes its
indexes in June of 2008. The Russell indexes capture the 4,000 largest
U.S. stocks, as ranked by total market capitalization. The Russell
Microcap is comprised of organizations falling in the lower half of
those 4,000 stocks.
--------------------------------------------------------------------------------
17.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
o The Company obtained a Missouri bank charter in June and converted its
Clayton, Missouri loan production office into a full-service branch.
Since beginning operations as a loan production office in September
2006, the Clayton branch has originated loans in excess of $100,000.
o In order to integrate operations and streamline its retail distribution
channel, the Company consolidated two in-store bank branches into
nearby main bank locations and is scheduled to close a third branch at
the end of August. These actions will result in 33 total remaining
branches.
o The Company successfully completed its core systems conversion and, by
the end of the third quarter, will have realized a net reduction of
over 100 full-time equivalent employees as compared to pro-forma
staffing levels at the beginning of 2006.
o The Company's Board of Directors, in a continuing effort to enhance
stockholder value, approved the payment of an 8.0% increase in the
quarterly cash dividend to $0.13 from $0.12 on the Company's common
stock during the quarter, marking the 88th consecutive quarter of
dividends paid to stockholders.
o The Company repurchased 110,918 shares of its common stock at a
weighted average cost of $19.17 per share under the Company's stock
repurchase plan.
RESULTS OF OPERATIONS
NET INCOME
Income from continuing operations for the second quarter ended June 30, 2007
equaled $2,506 or $0.38 per diluted share as compared to $1,291 or $0.33 per
diluted share in the same period of 2006. This represents increases of 94.1% in
net income and 15.2% in diluted per share earnings. For the six months ended
June 30, 2007, net income from continuing operations equaled $4,405 or $0.66 per
diluted share compared to $2,940 or $0.75 per diluted share in the same period
during 2006. This represents an increase of 49.8% in net income and a decrease
of 12.0% in diluted per share earnings. Results for the three months and six
months ended June 30, 2007 include the impact from the merger of Centrue
Financial Corporation and UnionBancorp, Inc. that occurred in November 2006.
Return on average assets was 0.76% for the second quarter of 2007 compared to
0.79% for the same period in 2006. Return on average assets was 0.68% for the
six month period ended June 30, 2007 compared to 0.89% for the same period in
2006.
Return on average stockholders' equity was 8.51% for the second quarter of 2007
compared to 7.93% for the same period in 2006. Return on average stockholder's
equity was 7.51% for the six month period ended June 30, 2007 compared to 9.03%
for the same period in 2006.
--------------------------------------------------------------------------------
18.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NET INTEREST INCOME/ MARGIN
Fully tax equivalent net interest income for the three months ended June 30,
2007 increased 91.8% to $9,740 as compared $5,078 for the same period in 2006.
The improvement in net interest income was largely related to an increase in
earning assets due to the addition of the former Centrue's loan and investment
portfolios. This was offset by increases in deposit balances, a shift in the mix
of funding liabilities from lower costing non-interest bearing deposits to
higher costing time deposits and compression in the net interest margin.
The net interest margin, on a tax equivalent basis, decreased 7 basis points to
3.30% as compared to the same period in 2006 and 5 basis points from the first
quarter of 2007. The primary drivers for the decrease were compressed loan
spreads, heightened competition for deposits and fixed rate term loans that were
repriced at similar or lower rates during the last twelve months in a flat to
inverted yield curve environment. Competitive pressures in pricing loans and
deposits are likely to maintain pressure on the margin throughout 2007.
Fully tax equivalent net interest income for the six months ended June 30, 2007
totaled $19,313, representing an increase of $8,921 or 85.8% compared to the
$10,392 earned during the same period in 2006. Net interest income increased
largely due to the factors described above impacting the second quarter results.
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.
--------------------------------------------------------------------------------
19.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30,
------------------------------------------------------------
2007 2006
------------------------------ ----------------------------
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 $ 5,898 $ 8 0.56% $ 211 $ 4 5.70% $ 8 $ (4) $ 4
Securities (1)
Taxable 243,915 3,196 5.26 175,260 2,025 4.64 901 270 1,170
Non-taxable (2) 40,956 563 5.51 18,317 319 6.93 311 (67) 244
----------- -------- ------- --------- -------- ------- ------- ------ --------
Total securities (tax equivalent) 284,861 3,759 5.29 193,577 2,344 4.86 1,212 203 1,415
----------- -------- ------- --------- -------- ------- ------- ------ --------
Federal funds sold 12,878 165 5.15 2,960 42 5.69 127 (4) 123
----------- -------- ------- --------- -------- ------- ------- ------ --------
Loans (3)(4)
Commercial 175,253 3,538 8.10 111,996 1,981 7.09 1,277 280 1,557
Real estate 695,691 12,934 7.36 285,000 4,986 7.02 7,599 349 7,948
Installment and other 12,207 498 16.36 10,364 246 9.52 75 177 252
----------- -------- ------- --------- -------- ------- ------- ------ --------
Gross loans (tax equivalent) 883,151 16,970 7.71 407,360 7,213 7.10 8,951 806 9,757
----------- -------- ------- --------- -------- ------- ------- ------ --------
Total interest-earning assets 1,186,788 20,902 7.06 604,108 9,603 6.38 10,298 1,001 11,299
----------- -------- ------- --------- -------- ------- ------- ------ --------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 30,185 17,735
Premises and equipment, net 35,724 13,740
Other assets 77,632 23,129
----------- ---------
Total nonearning assets 143,541 54,604
----------- ---------
Total assets $ 1,330,329 $ 658,712
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 105,629 $ 476 1.81% $ 69,410 $ 314 1.82% $ 163 $ (1) $ 162
Money market accounts 118,795 1,058 3.57 52,834 360 2.73 588 110 698
Savings deposits 101,525 173 0.69 37,050 68 0.74 109 (4) 105
Time deposits 616,306 7,735 5.03 308,770 3,103 4.03 3,860 772 4,632
Federal funds purchased and
repurchase agreements 40,695 463 4.56 3,955 51 5.17 418 (6) 412
Advances from FHLB 57,735 629 4.37 47,074 455 3.88 116 58 174
Notes payable 32,405 628 7.77 9,668 174 7.18 439 15 454
----------- -------- ------- --------- -------- ------- ------- ------ --------
Total interest-bearing liabilities 1,073,090 11,162 4.17 528,761 4,525 3.43 5,695 944 6,637
----------- -------- ------- --------- -------- ------- ------- ------ --------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 126,755 59,659
Other liabilities 12,304 4,843
----------- ---------
Total noninterest-bearing
liabilities 139,059 64,502
----------- ---------
Stockholders' equity 118,180 65,449
----------- ---------
Total liabilities and stockholders'
equity $ 1,330,329 $ 658,712
=========== =========
Net interest income (tax equivalent) $ 9,740 $ 5,078 $ 4,605 $ 57 $ 4,662
======== ======== ======= ====== ========
Net interest income (tax equivalent)
to total earning assets 3.30% 3.37%
======= =======
Interest-bearing liabilities to
earning assets 90.42% 87.53%
=========== =========
----------
(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.
(4) Overdraft loans are excluded in the average balances.
--------------------------------------------------------------------------------
20.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
------------------------------------------------------------
2007 2006
------------------------------ ----------------------------
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 $ 4,733 $ 21 0.91% $ 231 $ 7 6.11% $ 20 $ (6) $ 14
Securities (1)
Taxable 248,369 6,500 5.28 178,249 4,025 4.54 1,831 644 2,475
Non-taxable (2) 40,991 1,128 5.55 18,173 645 7.17 628 (145) 483
----------- -------- ------- --------- -------- ------- ------- ------ --------
Total securities (tax equivalent) 289,360 7,628 5.32 196,422 4,670 4.79 2,459 499 2,958
----------- -------- ------- --------- -------- ------- ------- ------ --------
Federal funds sold 9,509 247 5.45 2,263 52 5.26 195 - 195
----------- -------- ------- --------- -------- ------- ------- ------ --------
Loans (3)(4)
Commercial 178,673 7,260 8.19 115,016 4,042 7.09 2,586 632 3,218
Real estate 679,523 24,791 7.28 284,405 9,820 6.96 14,339 632 14,971
Installment and other 11,933 1,018 17.19 11,173 526 9.49 65 427 492
----------- -------- ------- --------- -------- ------- ------- ------ --------
Gross loans (tax equivalent) 870,129 33,069 7.66 410,594 14,388 7.07 16,990 1,691 18,681
----------- -------- ------- --------- -------- ------- ------- ------ --------
Total interest-earning assets 1,173,731 40,965 7.04 609,510 19,117 6.32 19,664 2,184 21,848
----------- -------- ------- --------- -------- ------- ------- ------ --------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 28,440 18,126
Premises and equipment, net 35,617 13,791
Other assets 74,481 23,624
----------- ---------
Total nonearning assets 138,538 55,541
----------- ---------
Total assets $ 1,312,269 $ 665,051
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 104,124 $ 896 1.74% $ 69,702 $ 596 1.73% $ 296 $ 4 $ 300
Money market accounts 119,364 2,117 3.58 54,305 709 2.63 1,154 254 1,408
Savings deposits 102,039 354 0.70 37,790 122 0.65 223 9 232
Time deposits 601,892 14,893 4.99 308,490 5,897 3.85 7,259 1,736 8,995
Federal funds purchased and
repurchase agreements 38,546 873 4.57 4,977 123 4.98 760 (10) 750
Advances from FHLB 59,471 1,273 4.32 48,205 938 3.92 241 95 336
Notes payable 31,397 1,246 8.00 10,356 340 6.62 835 71 906
----------- -------- ------- --------- -------- ------- ------- ------ --------
Total interest-bearing liabilities 1,056,833 21,652 4.13 533,825 8,725 3.30 10,768 2,159 12,927
----------- -------- ------- --------- -------- ------- ------- ------ --------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 126,134 60,689
Other liabilities 11,009 4,903
----------- ---------
Total noninterest-bearing
liabilities 137,143 65,592
----------- ---------
Stockholders' equity 118,293 65,634
----------- ---------
Total liabilities and stockholders'
equity $ 1,312,269 $ 665,051
=========== =========
Net interest income (tax equivalent) $ 19,313 $ 10,392 $ 8,896 $ 25 $ 8,921
======== ======== ======= ====== ========
Net interest income (tax equivalent)
to total earning assets 3.32% 3.44%
======= =======
Interest-bearing liabilities to
earning assets 90.04% 87.58%
=========== =========
----------
(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.
(4) Overdraft loans are excluded in the average balances.
--------------------------------------------------------------------------------
21.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Company recorded a $226 provision for loan losses for the second quarter of
2007 as compared to reporting a negative provision of ($300) in the 2006 period.
For the six months ended June 30, 2007, the Company recorded a $226 provision
for loan losses as compared to recognizing a negative provision of ($1,100) in
the 2006 period. Results for 2006 included negative provisions largely due to
the pay-off of one $4,400 loan relationship that was classified as impaired in
late 2005 with a specific reserve allocation of $1,500.
The following factors have impacted 2007 provision levels:
o decrease in action list loans since year-end;
o higher than anticipated recoveries;
o loans that were charged off during the first six months of 2007 had
previously established specific allocation; and
o loan growth during the first six months of 2007.
Nonperforming loans at June 30, 2007 totaled $4,492, a decrease of 61.8% as
compared to $11,759 as of December 31, 2006 and down 52.3% as compared to $9,416
as of March 31, 2007. Net charge-offs for the second quarter of 2007 were $5
compared with $358 for the comparable period in 2006. Annualized net charge-offs
for the period were 0.00% of average loans compared with 0.09% of average loans
for same period in 2006.
Net charge-offs for the six months ended June 30, 2007 were $233 compared with
$414 for the comparable period in 2006. Annualized net charge-offs for the
period were 0.03% of average loans compared with 0.10% of average loans for same
period in 2006.
See "Nonperforming Assets" and "Other Potential Problem Loans" for further
information.
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.
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.
--------------------------------------------------------------------------------
22.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NONINTEREST INCOME
The following table summarizes the Company's noninterest income:
Three Months Ende Six Months Ended
June 30, June 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Service charges $ 1,969 $ 495 $ 3,552 $ 935
Trust income 232 199 461 418
Mortgage banking income 449 281 883 527
Brokerage commissions and fees 104 88 230 172
Bank owned life insurance 247 137 488 277
Securities gains (losses), net (33) (89) (33) (88)
Gain (loss) on the sale of Oreo 491 - 588 -
Other income 735 252 1,279 587
-------- -------- -------- --------
Total noninterest income from
continuing operations $ 4,194 $ 1,363 $ 7,448 $ 2,828
Amounts reclassed to
discontinued operations - 334 - 629
-------- -------- -------- --------
Previously reported
noninterest income levels $ 4,194 $ 1,697 $ 7,448 $ 3,457
======== ======== ======== ========
Noninterest income from continuing operations increased $2,831 during the second
quarter of 2007 to $4,194 as compared to $1,363 for the same period in 2006.
Excluding $491 in gain on sale of OREO property, noninterest income increased
$2,340 or 171.7% during the second quarter of 2007 as compared to the same
period in 2006. The majority of the increase was related to revenue that was
associated with the November 2006 merger and also the result of improvements in
service charges on deposit accounts, fees received on items drawn on customer
accounts with insufficient funds and revenue generated from the mortgage banking
division.
Noninterest income from continuing operations totaled $7,448 for the six months
ended June 30, 2007, compared to $2,828 for the same time frame in 2006.
Excluding all net gains on sale of assets and net securities losses for both
periods, noninterest income increased $3,977 or 136.4%. The change was largely
reflective of the same items discussed regarding the second quarter.
--------------------------------------------------------------------------------
23.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
NONINTEREST EXPENSE
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Salaries and employee benefits $ 5,144 $ 2,359 $ 10,292 $ 5,405
Occupancy expense, net 1,019 215 1,960 754
Furniture and equipment expense 627 616 1,322 995
Marketing 221 96 413 206
Supplies and printing 156 65 337 160
Telephone 210 118 388 235
Other real estate owned expense 38 2 41 8
Amortization of intangible assets 591 31 1,212 60
Other expenses 1,840 1,300 3,829 1,973
-------- -------- -------- --------
Total noninterest expense from
continuing operations 9,846 4,802 19,794 9,796
Amounts reclassed to
discontinued operations - 327 - 667
-------- -------- -------- --------
Previously reported
noninterest expense levels $ 9,846 $ 5,129 $ 19,794 $ 10,463
======== ======== ======== ========
Noninterest expense for continuing operations increased $5,044 to $9,846 for the
three months ended June 30, 2007 as compared to $4,802 for the same period in
2006. Excluding the restructuring charges of $716, noninterest expense levels
increased $4,328 or 90.1% as compared to the same period in 2006. The increase
was reported across all categories and predominantly due to higher costs
associated with operating 21 additional branches resulting from the November
2006 merger. Also adversely impacting expense levels were core deposit
amortization, accelerated depreciation expense for assets being phased out and
restructuring related expenses.
Noninterest expense for continuing operations totaled $19,794 for the six months
ended June 30, 2007, increasing by $9,998 or 102.1% from the same period in
2006. The change was largely reflective of the same items discussed regarding
the second quarter.
APPLICABLE INCOME TAXES
Income tax expense for the periods included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses. The following table shows the Company's income before
income taxes, as well as applicable income taxes and the effective tax rate for
the three and six months ended June 30, 2007 and 2006.
--------------------------------------------------------------------------------
24.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Income from continuing
Operations before income taxes $ 3,613 $ 1,813 $ 6,242 $ 4,269
Applicable income taxes 1,107 522 1,837 1,303
Effective tax rates 30.6% 28.8% 29.4% 30.5%
The Company recorded an income tax expense of $1,107 and $522 for the three
months ended June 30, 2007 and 2006, respectively. Effective tax rates equaled
30.6% and 28.8% respectively, for such periods. The Company recorded income tax
expense of $1,837 and $1,303 for the six months ended June 30, 2007 and 2006,
respectively. Effective tax rates equaled 29.4% and 30.5% respectively, for such
periods.
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 Company's effective tax rate was lower than
statutory rates due to the Company deriving interest income from municipal
securities and loans, which are exempt from federal tax and certain U. S.
government agency securities, which are exempt from Illinois State tax.
Additionally, the Company has reduced tax expense through various tax planning
initiatives.
FINANCIAL CONDITION
GENERAL
As of June 30, 2007, the following are the highlights of the balance sheet when
compared to December 31, 2006:
o gross loans grew $75,224 or 9.0% due predominantly to growth
experienced in the St. Louis office;
o deposits grew 6.0% to $1,088,122 from $1,026,610 with a large portion
of the increase concentrated in time deposits;
o the loan to deposit ratio increased to 83.8% as of June 30, 2007 from
81.5% at December 31, 2006. This is the highest it has been in
seventeen quarters;
o non-interest bearing deposits increased to 12.0% of total deposits at
the end of second quarter from 11.4% as of March 31, 2007. This
compared to 12.2% as of December 31, 2006.
NONPERFORMING ASSETS
If a loan is placed on nonaccrual status, the loan does not generate current
period income for the Company. Loans are placed on nonaccrual status when there
are serious doubts regarding the collectibility of all principal and interest
due under the terms of the loans. Amounts received on nonaccrual loans generally
are applied first to principal and then to interest after all principal has been
collected. A loan is generally transferred to nonaccrual status if it is not in
the process of collection and is delinquent in payment of either principal or
interest beyond 90 days. Loans that are 90 days delinquent but are well secured
and in the process of collection are not included in nonperforming assets. Other
nonperforming assets consist of real estate acquired through loan foreclosures
or other workout situations and other assets acquired through repossessions.
--------------------------------------------------------------------------------
25.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
The classification of a loan as nonaccrual does not necessarily indicate that
the principal is uncollectible, in whole or in part. The Bank makes a
determination as to collectibility on a case-by-case basis. The Bank considers
both the adequacy of the collateral and the other resources of the borrower in
determining the steps to be taken to collect nonaccrual loans. The final
determination as to the steps taken is made based upon the specific facts of
each situation. Alternatives that are typically considered to collect nonaccrual
loans are foreclosure, collection under guarantees, loan restructuring or
judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired and past due loans to prevent further deterioration of
these loans. The Company has an independent loan review function which is
separate from the lending function and is responsible for the review of new and
existing loans.
The following table summarizes nonperforming assets and loans past due 90 days
or more for the previous five quarters.
2007 2006
------------------- ------------------------------
June 30, Mar 31, Dec 31, Sept 30, June 30,
-------- -------- -------- -------- --------
Non-accrual loans $ 4,492 $ 9,416 $ 11,759 $ 3,053 $ 2,289
Loans 90 days past due and still accruing interest - - - 168 517
-------- -------- -------- -------- --------
Total nonperforming loans 4,492 9,416 11,759 3,221 2,806
Other real estate owned 6,568 4,262 2,136 859 1,390
-------- -------- -------- -------- --------
Total nonperforming assets $ 11,060 $ 13,678 $ 13,895 $ 4,080 $ 4,196
======== ======== ======== ======== ========
Nonperforming loans to total end of period loans 0.49% 1.08% 1.40% 0.79% 0.70%
Nonperforming assets to total end of period loans 1.21 1.57 1.66 1.00 1.04
Nonperforming assets to total end of period assets 0.81 1.04 1.08 0.63 0.64
The level of nonperforming loans at June 30, 2007 decreased to $4,492 versus the
$9,416 that existed at March 31, 2007 and the $11,759 that existed as of
December 31, 2006. The decrease in nonperforming loans from December 31, 2006 to
June, 30, 2007 was largely related to the completion of work out plans
previously in place. Some of the work out plans for nonperforming real estate
loans resulted in the Company obtaining ownership of the collateral securing the
loans and are reflected in a $4,432 increase in other real estate owned.
The level of nonperforming loans to total end of period loans was 0.49% at June
30, 2007, as compared to 1.40% at December 31, 2006 and 1.08% at March 31, 2007.
The reserve coverage ratio (allowance to nonperforming loans) was reported at
241.05% as of June 30, 2007 as compared to 92.14% as of December 31, 2006 and
244.05% as of June 30, 2006.
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 $2,044 at June 30, 2007 as compared to $1,218 at June 30, 2006 and
$1,757 at December 31, 2006. 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.
--------------------------------------------------------------------------------
26.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
At June 30, 2007, the allowance for loan losses was $10,828 or 1.19% of total
loans as compared to $10,835 or 1.29% at December 31, 2006. 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.
--------------------------------------------------------------------------------
27.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years, and there were no reallocations.
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
increase in cash and cash equivalents of $10,192 from December 31, 2006 to June
30, 2007.
During the first six months of 2007, the Company experienced net cash inflows of
$63,473 in financing activities primarily due to an increase in deposits and
$5,621 in operating activities. In contrast, net cash outflows of $58,902 were
used in investing activities due to the growth in loans.
--------------------------------------------------------------------------------
28.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
The Company has entered into contractual obligations and commitments and
off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off balance
sheet instruments as of June 30, 2007.
Payments Due by Period
---------------------------------------------------------
Within 1 After
CONTRACTUAL OBLIGATIONS Year 1-3 Years 4-5 Years 5 Years Total
---------------------------------------- --------- --------- --------- --------- ---------
Short-term debt $ 9,974 $ - $ - $ - $ 9,974
Long-term debt 100 400 400 43 943
Certificates of deposit 479,506 149,765 7,992 1,271 638,534
Operating leases 202 843 900 475 2,420
Severance payments 454 - - - 454
Series B mandatory redeemable
preferred stock - 831 - - 831
Subordinated debentures - - - 20,620 20,620
FHLB advances 39,467 13,200 - 5,064 57,731
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 529,703 $ 165,039 $ 9,292 $ 27,473 $ 731,507
========= ========= ========= ========= =========
Amount of Commitment Expiration per Period
---------------------------------------------------------
Within 1 After
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Year 1-3 Years 4-5 Years 5 Years Total
---------------------------------------- --------- --------- --------- --------- ---------
Lines of credit $ 149,591 $ 61,392 $ 3,827 $ 16,344 $ 231,154
Standby letters of credit 9,220 165 - - 9,385
--------- --------- --------- --------- ---------
Total commercial commitments $ 158,811 $ 61,557 $ 3,827 $ 16,344 $ 240,539
========= ========= ========= ========= =========
CAPITAL RESOURCES
STOCKHOLDERS' EQUITY
The Company is committed to managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors. Stockholders' equity
at June 30, 2007 was $118,067, a decrease of $124 or 0.01%, from December 31,
2006. The decrease in stockholders' equity was largely the result of a decrease
in accumulated other comprehensive income and an increase in treasury stock
related to repurchase activity. Average quarterly equity as a percentage of
average quarterly assets was 8.88% at June 30, 2007, compared to 10.35% at
December 31, 2006. Book value per common share equaled $18.47 at June 30, 2007
compared to $18.23 at December 31, 2006.
STOCK REPURCHASE
On November 13, 2006, the Board of Directors approved a stock repurchase plan
whereby the Company may repurchase from time to time up to 5% or 370,000 of its
outstanding shares of common stock in the open market or in private transactions
over an 18 month period. Purchases are dependent upon market conditions and the
availability of shares. The repurchase program enables the Company to optimize
its use of capital relative to other investment alternatives and benefits both
the Company and the shareholders by enhancing earnings per share and return on
equity. During the second quarter of 2007, 110,918 shares were repurchased at a
weighted cost of $19.17.
--------------------------------------------------------------------------------
29.
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
CAPITAL MEASUREMENTS
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 10.3% and
11.1%, respectively, at June 30, 2007. 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 Wellum
June 30, ------------------------- Capital Capitalized
2007 2006 2005 Ratios Ratios
----------- ----------- ----------- ----------- -----------
Tier 1 risk-based capital $ 101,939 $ 99,869 $ 60,546
Tier 2 risk-based capital 10,828 10,834 6,266
----------- ----------- -----------
Total capital 112,767 110,703 66,812
Risk-weighted assets 1,016,677 927,043 501,342
Capital ratios
Tier 1 risk-based capital 10.3% 10.8% 12.1% 4.00% 6.00%
Tier 2 risk-based capital 11.1 11.9 13.3 8.00 10.00
Leverage ratio 7.6 7.9 9.0 4.00 5.00
RECENT REGULATORY AND ACCOUNTING DEVELOPMENTS
See Note 9 to the Unaudited Consolidated Financial Statements for information
concerning recent regulatory and accounting developments.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934 as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identified by the use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "planned" or "potential" or similar
expressions.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could effect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any
forward-looking statements.
--------------------------------------------------------------------------------
30.
CENTRUE FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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
long-standing loan relationships;
o the Company's ability to adapt successfully to technological changes
to compete effectively in the marketplace;
o credit risks and risks from concentrations (by geographic area and by
industry) within the Company's loan portfolio and individual large
loans;
o volatility of rate sensitive deposits;
o operational risks, including data processing system failures or fraud;
o asset/liability matching risks and liquidity risks;
o the ability to successfully acquire low cost deposits or funding;
o the ability to successfully execute strategies to increase noninterest
income;
o the ability to successfully grow non-commercial real estate loans;
o the ability of the Company to fully realize expected cost savings and
revenue generation opportunities in connection with the synergies of
merging with the former Centrue Bank;
o the ability to adopt and implement new regulatory requirements as
dictated by the SEC, FASB or other rule-making bodies which govern our
industry;
o changes in the general economic or industry conditions, nationally or
in the communities in which the Company conducts business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY MANAGEMENT
The Company performs a net interest income analysis as part of its
asset/liability management practices. The net interest income analysis measures
the change in net interest income in the event of hypothetical changes in
interest rates. This analysis assesses the risk of changes in net interest
income in the event of a sudden and sustained 100 to 200 basis point increase in
market interest rates or a 100 to 200 basis point decrease in market rates. The
interest rates scenarios are used for analytical purposes and do not necessarily
represent management's view of future market movements. The tables below present
the Company's projected changes in net interest income for the various rate
shock levels at June 30, 2007 and December 31, 2006, respectively:
Change in Net Interest Income Over One Year Horizon
---------------------------------------------------
June 30, 2007 December 31, 2006
------------------------ -----------------------
Dollar % Dollar %
Change Change Change Change
----------- ---------- ---------- ----------
(Dollars in Thousands)
+200 bp $ 732 1.74% $ 2,215 5.49%
+100 bp 385 0.92 1,157 2.87
Base - - - -
-100 bp (1,266) (3.01) (1,529) (3.79)
-200 bp (3,836) (9.13) (4,345) (10.77)
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31.
CENTRUE FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
As shown above, the Company's model at June 30, 2007, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by $732 or 1.74%. The effect of an immediate 200 basis point
decrease in rates would decrease the Company's net interest income by $3,836 or
9.13%.
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.
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.
--------------------------------------------------------------------------------
32.
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, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases of the Company's common
stock by the Company during the quarter ended June 30, 2007.
MAXIMUM
TOTAL NUMBER OF NUMBER OF
SHARES PURCHASED SHARES THAT
AS PART OF MAY YET BE
PUBLICLY PURCHASED UNDER
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS PROGRAMS
------------------------- ---------------- ---------------- ---------------- ----------------
04/01/07 - 04/30/07 -- -- -- 365,872
05/01/07 - 05/31/07 97,352 $ 19.18 97,352 268,520
06/01/07 - 06/30/07 13,566 $ 19.09 13,566 254,954
Total (1) 110,918 $ 19.17 110,918 254,954
----------
(1) The Company repurchased 110,918 shares at an average price per share
of $19.17 of our common stock during the quarter ended June 30, 2007
pursuant to the Company's current repurchase program. The current
repurchase program approved on November 12, 2006 authorized us to
repurchase 370,000 of the outstanding shares of our common stock. The
expiration date of this program is May 13, 2008. 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.
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33.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the April 24, 2007 annual meeting of stockholders, Thomas A. Daiber,
Dennis J. McDonnell, Mark L. Smith and Scott C. Sullivan were elected
to serve as Class III directors until 2010 and the 2003 Stock Option
Plan, as amended and restated, was approved. Continuing as Class I
directors until 2008 are Richard J. Berry, Walter E. Breipohl and
Randall E. Ganim. Continuing as Class II directors until 2009 are
Michael A. Griffith, Michael J. Hejna and John A. Shinkle.
There were 6,470,840 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
For Withheld
----------- -----------
Election of Directors
Thomas A. Daiber 5,464,638 77,998
Dennis J. McDonnell 5,466,049 76,587
Mark L. Smith 5,299,886 242,750
Scott C. Sullivan 5,457,334 85,302
For Against Abstain
----------- ----------- ----------
Approval of the amended and
restated 2003 Stock Option Plan 3,904,845 402,232 75,889
ITEM 5. OTHER INFORMATION
(a) Effective April 30, 2007, J. David Conterio, Executive Vice
President/Head of Wealth Management, left the Company. Mr.
Conterio's employment with the Company ceased because the position
of Head of Wealth Management was eliminated.
Pursuant to the Employment Security Agreement dated May 23, 2005,
between the Company and Mr. Conterio, the Company is obligated to
pay Mr. Conterio a one-time cash payment of $142,500 within thirty
days after the date his employment with the Company ceased.
(b) Not applicable
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.
--------------------------------------------------------------------------------
34.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CENTRUE FINANCIAL CORPORATION
Date: August 10, 2007 By: /s/ THOMAS A. DAIBER
--------------------------------------
Thomas A. Daiber
President and Principal Executive
Officer
Date: August 10, 2007 By: /s/ KURT R. STEVENSON
--------------------------------------
Kurt R. Stevenson
Senior Executive Vice President and
Principal Financial and
Accounting Officer
--------------------------------------------------------------------------------
35.