Edgar Filing: CENTRUE FINANCIAL CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

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 incorporation or organization)		(I.R.S. Employer Identification number)

122 W. Madison Street, Ottawa, IL 61350

(Address of principal executive offices including zip code)

(815) 431-8400

(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 [ü] No [ ]

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

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



Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[ ü]

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

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



Class		Shares outstanding at August 8, 2016
Common Stock, Par Value $0.01		6,513,694

Centrue Financial Corporation

Form 10-Q Index

June 30, 2016



		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Income and Comprehensive Income	2
	Consolidated Statements of Cash Flows	4
	Notes to the Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	42
SIGNATURES		43

CENTRUE FINANCIAL CORPORATION

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT FOR PAR VALUE AND SHARE DATA)



	June 30, 2016			December 31, 2015
ASSETS
Cash and cash equivalents	$	27,024		$	27,655
Securities available-for-sale	160,582			171,440
Restricted securities	10,027			9,116
Loans held for sale	187			735
Loans, net of allowance for loan loss: 2016 - $8,925; 2015 - $8,591	648,829			624,956
Branch assets held for sale	—			16,673
Bank-owned life insurance	35,544			35,103
Mortgage servicing rights	2,065			2,129
Premises and equipment, net	16,682			16,852
Intangible assets, net	404			880
Other real estate owned, net	6,765			8,401
Deferred tax assets, net	36,235			38,180
Other assets	8,313			9,098
Total assets	$	952,657		$	961,218
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing	$	146,765		$	164,137
Interest-bearing	569,659			554,367
Total deposits	716,424			718,504
Federal funds purchased and securities sold under agreements to repurchase	10,605			18,730
Federal Home Loan Bank advances	75,000			76,000
Series B mandatory redeemable preferred stock	209			268
Subordinated debentures	20,620			20,620
Other liabilities	4,805			5,815
Total liabilities	827,663			839,937

Commitments and contingent liabilities	—			—

Stockholders' equity
Series D Fixed Rate, Non-Cumulative Perpetual Preferred Stock,
2,363 shares authorized and issued at June 30, 2016 and
December 31, 2015; aggregate liquidation preference of $2,636	2,636			2,636
Common stock, $0.01 par value; 215,000,000 shares authorized;
6,581,544 shares issued at June 30, 2016 and December 31, 2015	66			66
Surplus	140,640			140,609
Accumulated deficit	(77		)	(2,958		)
Accumulated other comprehensive loss	(2,145		)	(2,946		)
	141,120			137,407
Treasury stock, at cost, 67,850 shares at June 30, 2016
and December 31, 2015	(16,126		)	(16,126		)
Total stockholders' equity	124,994			121,281
Total liabilities and stockholders' equity	$	952,657		$	961,218

See Accompanying Notes to Consolidated Financial Statements

CENTRUE FINANCIAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Interest income
Loans	$	7,073	$	6,305	$	14,102	$	12,392
Securities
Taxable	734		632		1,563		1,226
Exempt from federal income taxes	22		43		45		76
Federal funds sold and other	33		27		65		47
Total interest income	7,862		7,007		15,775		13,741

Interest expense
Deposits	316		304		579		624
Federal funds purchased and securities sold under
agreements to repurchase	11		11		23		24
Federal Home Loan Bank advances	170		113		400		230
Series B mandatory redeemable preferred stock	4		4		8		8
Subordinated debentures	145		129		287		285
Notes payable	—		—		—		84
Total interest expense	646		561		1,297		1,255

Net interest income	7,216		6,446		14,478		12,486
Provision for loan losses	—		—		300		—
Net interest income after provision for loan losses	7,216		6,446		14,178		12,486

Noninterest income
Service charges	972		1,007		1,917		1,935
Mortgage banking income	279		377		479		657
Electronic banking services	667		653		1,300		1,244
Bank-owned life insurance	218		228		441		451
Securities gains, net	23		74		60		101
Income from real estate	114		167		224		320
Gain on sale of OREO	27		1		75		3
Gain on sale of branches	1,877		—		1,877		—
Gain on sale of other assets	2		—		2		—
Gain on extinguishment of debt	—		—		—		1,750
Other income	63		69		130		142
	4,242		2,576		6,505		6,603

CENTRUE FINANCIAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Noninterest expense
Salaries and employee benefits	4,265			4,066			8,569			8,308
Occupancy, net	722			668			1,402			1,436
Furniture and equipment	275			246			531			487
Marketing	52			123			87			158
Supplies and printing	59			52			117			120
Telephone	219			204			423			388
Data processing	416			410			839			816
FDIC insurance	154			247			311			644
Loan processing and collection costs	91			242			149			413
OREO carrying costs	203			176			294			468
OREO valuation adjustment	14			87			30			148
Amortization of intangible assets	238			238			476			476
Other expenses	1,404			1,194			2,750			2,274
	8,112			7,953			15,978			16,136

Income before income taxes	$	3,346		$	1,069		$	4,705		$	2,953
Income tax expense	1,218			16			1,659			33
Net income	$	2,128		$	1,053		$	3,046		$	2,920

Preferred stock dividends	83			—			165			1,006
Discount on redemption of preferred stock	—			—			—			(13,668		)
Net income for common stockholders	$	2,045		$	1,053		$	2,881		$	15,582

Basic earnings per common share⁽¹⁾	$	0.31		$	0.16		$	0.44		$	4.62
Diluted earnings per common share⁽¹⁾	$	0.31		$	0.16		$	0.44		$	4.62


Total comprehensive income (loss):
Net income	$	2,128		$	1,053		$	3,046		$	2,920

Change in unrealized gains (losses)
on securities available for sale	176			(1,113		)	1,371			(295		)
Reclassification adjustment for losses (gains)
recognized in income	(23		)	(74		)	(60		)	(101		)
Net unrealized gains (loss)	153			(1,187		)	1,311			(396		)
Tax effect	59			(1		)	510			(1		)
Other comprehensive income (loss)	94			(1,186		)	801			(395		)
Total comprehensive income (loss)	$	2,222		$	(133	)	$	3,847		$	2,525

⁽¹⁾ Share and per share amounts have been adjusted to reflect the Company's 1:30 reverse stock split effective May 29, 2015

See Accompanying Notes to Consolidated Financial Statements

CENTRUE FINANCIAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)



	Six Months Ended June 30,
	2016		2015
Cash flows from operating activities
Net income	3,046		2,920
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation	587		577
Amortization of intangible assets	476		476
Amortization of mortgage servicing rights, net	140		176
Amortization of bond premiums, net	660		665
Share based compensation	31		—
Provision for loan losses	300		—
Provision for deferred income taxes	1,541		—
Earnings on bank-owned life insurance	(441	)	(451	)
OREO valuation adjustment	30		148
Securities gains, net	(60	)	(101	)
Gain on sale of OREO	(75	)	(3	)
Gain on extinguishment of debt	—		(1,750	)
Gain on sale of loans	(269	)	(460	)
Gain on sale of branches	(1,877	)	—
Gain on sale of other assets	(2	)	—
Proceeds from sales of loans held for sale	10,299		19,474
Origination of loans held for sale	(9,482	)	(14,972	)
Change in assets and liabilities
Decrease in other assets	338		1,480
Increase (decrease) in other liabilities	271		(5,469	)
Net cash provided by operating activities	5,513		2,710
Cash flows from investing activities
Proceeds from paydowns of securities available for sale	17,164		16,034
Proceeds from calls and maturities of securities available for sale	9,765		1,530
Proceeds from sales of securities available for sale	19,670		14,625
Purchases of securities available for sale	(35,002	)	(89,174	)
Redemption of Federal Reserve Bank stock	72		179
Purchase of Federal Reserve Bank stock	(982	)	(1,117	)
Net increase in loans	(25,808	)	(36,890	)
Purchase of premises and equipment	(332	)	(384	)
Proceeds from sale of OREO	1,785		424
Sale of branches, net of premium received	(31,444	)	—
Net cash used in investing activities	(45,112	)	(94,773	)

CENTRUE FINANCIAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)



	Six Months Ended June 30,
	2016			2015
Cash flows from financing activities
Net increase in deposits	48,257			1,294
Net decrease in federal funds purchased
and securities sold under agreements to repurchase	(8,124		)	(9,126		)
Net proceeds (repayments) of advances from the Federal Home Loan Bank	(1,000		)	45,000
Repayment of Notes Payable	—			(8,500		)
Net proceeds from the issuance of Common Stock	—			68,960
Redemption of Series C Cumulative Perpetual Preferred Stock	—			(19,000		)
Dividends paid on preferred stock	(165		)	—
Net cash provided by financing activities	38,968			78,628
Net decrease in cash and cash equivalents	(631		)	(13,435		)
Cash and cash equivalents
Beginning of period	27,655			49,167
End of period	$	27,024		$	35,732
Supplemental disclosures of cash flow information
Cash payments for
Interest	$	1,279		$	6,117
Income taxes	143			2
Transfers from loans to other real estate owned	28			98
Transfers from loan portfolio and sold in secondary market	—			315
Loan transfers to branch assets held for sale	1,607			—

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Note 1. Summary of Significant Accounting Policies

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

Basis of presentation

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

For further information with respect to significant accounting policies followed by the Company in the preparation of its consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of the Company and Centrue Bank. Intercompany balances and transactions have been eliminated in consolidation and certain 2015 amounts have been reclassified to conform to the 2016 presentation. The annualized results of operations during the three and six months ended June 30, 2016 are not necessarily indicative of the results expected for the year ending December 31, 2016. All financial information in the following tables is in thousands (000s), except share and per share data. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included.

Reverse Stock Split

Common shares and per share amounts for all periods shown have been restated to reflect the impact of the 1:30 reverse stock split the Company completed effective May 29, 2015.

Capital Event

On March 31, 2015, the Company completed the issuance of $76.0 million of new common stock in a private placement offering, $68.2 million of net proceeds after issuance and registration costs of $7.8 million. A total of 6.3 million shares were sold in the offering at a price of $12.00 per share. In conjunction with the stock offering the Company used the proceeds in part to pay $4.9 million in accrued but unpaid interest on its subordinated debentures, redeemed all $32.7 million of Series C Preferred Stock for $19.0 million, settled $10.3 million in notes payable with a financial institution for $8.5 million and made a $36.0 million capital contribution into Centrue Bank. The remaining proceeds have been and will be used for general corporate purposes.

Recent Accounting Pronouncements

In June 2016 the FASB issued accounting standards update 2016-13 Financial Instruments - Credit Losses, commonly referred to as CECL. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (HTM) debt securities. Under the provisions of the update credit losses recognized on available for sale (AFS) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL oblige organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

vintage disclosures. For public business entities that are SEC filers the amendments of the update are effective beginning January 1, 2020. Management is in the process of evaluating the impact of CECL on the Company’s financial position, results of operations and cash flows as well as its required disclosures.

In March 2016, the FASB issued an update (ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting.) The guidance in this update affects any entity that issues share-based payment awards to its employees and is intended to simplify several aspects of the accounting for share-based payment awards including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued an update (ASU No. 2016-02, Leases) creating FASB Topic 842, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact on the consolidated financial statements and related disclosures.

In January 2016, the FASB issued an update, ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance in this update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently determining the impact of this new guidance on the consolidated financial statements.

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update will become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Management is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Note 2. Earnings Per Share

A reconciliation of the numerators and denominators for earnings per common share computations for the three and six months ended June 30, 2016 and 2015 is presented below (shares in thousands). Common shares, options, and per share amounts for all periods shown have been restated to reflect the impact of the 1:30 reverse stock split the Company completed effective May 29, 2015. Options to purchase 498 and 3,488 shares of common stock were outstanding for June 30, 2016 and 2015, respectively; but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price and, therefore, were anti-dilutive. Of the 33,321 shares of restricted stock units issued, 536 shares and 269 shares were considered dilutive for the three and six month periods ended June 30, 2016, respectively.

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
Basic Earnings Per Common Share
Net income	$	2,128		$	1,053	$	3,046		$	2,920
Preferred stock dividends	(83		)	—		(165		)	(1,006		)
Discount on redemption of preferred stock	—			—		—			13,668
Net income for common shareholders	$	2,045		$	1,053	$	2,881		$	15,582
Weighted average common shares outstanding	6,513,694			6,484,457		6,513,694			3,370,276
Basic earnings per common share	$	0.31		$	0.16	$	0.44		$	4.62
Diluted Earnings Per Common Share
Weighted average common shares outstanding	6,513,694			6,484,457		6,513,694			3,370,276
Add: dilutive effect of restricted stock units	536			—		269			—
Weighted average common and dilutive
potential shares outstanding	6,514,230			6,484,457		6,513,963			3,370,276
Diluted earnings per common share	$	0.31		$	0.16	$	0.44		$	4.62

Note 3. Securities

The primary strategic objective related to the Company's securities portfolio is to assist with liquidity and interest rate risk management. The fair value of the securities classified as available-for-sale was $160.6 million at June 30, 2016 compared to $171.4 million at December 31, 2015. The carrying value of securities classified as restricted (Federal Reserve and Federal Home Loan Bank stock) was $10.0 million at June 30, 2016 compared to $9.1 million at December 31, 2015. The Company does not have any securities classified as trading or held-to-maturity.

The following table summarizes the fair value of available-for-sale securities, the related gross unrealized gains and losses recognized in accumulated other comprehensive income, and the amortized cost at June 30, 2016 and December 31, 2015:



	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
States and political subdivisions	$	13,074	$	72	$	(16	)	$	13,130
U.S. government agency residential
mortgage-backed securities	128,196		218		(326		)	128,088
Collateralized residential mortgage obligations:
Agency	16,382		71		—			16,453
Equity securities	2,659		252		—			2,911
	$	160,311	$	613	$	(342	)	$	160,582

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government agencies	$	14,629	$	13	$	(35	)	$	14,607
States and political subdivisions	10,190		16		(25		)	10,181
U.S. government agency residential
mortgage-backed securities	127,039		7		(1,017		)	126,029
Collateralized residential mortgage obligations:
Agency	17,990		—		(157		)	17,833
Equity securities	2,632		158		—			2,790
	$	172,480	$	194	$	(1,234	)	$	171,440

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Proceeds from calls and maturities	$	9,650		$	1,420		$	9,765		$	1,530
Proceeds from sales	14,654			9,640			19,670			14,625
Realized gains	43			79			80			125
Realized losses	(20		)	(5		)	(20		)	(24		)
Net impairment loss recognized in earnings	—			—			—			—

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

The amortized cost and fair value of the investment securities portfolio are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date and equity securities are shown separately.



	June 30, 2016
	Amortized Cost		Fair Value
Due in one year or less	$	3,934	$	3,942
Due after one year through five years	6,420		6,430
Due after five years through ten years	2,720		2,758
Due after ten years	—		—
U.S. government agency residential mortgage-backed securities	128,196		128,088
Collateralized residential mortgage obligations	16,382		16,453
Equity	2,659		2,911
	$	160,311	$	160,582

Securities with unrealized losses not recognized in income are as follows presented by length of time individual securities have been in a continuous unrealized loss position:



	June 30, 2016
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
States and political subdivisions	$	5,466	$	(16	)	$	—	$	—		$	5,466	$	(16	)
U.S. government agency residential
mortgage-backed securities	62,028		(211		)	14,048		(115		)	76,076		(326		)
Total temporarily impaired	$	67,494	$	(227	)	$	14,048	$	(115	)	$	81,542	$	(342	)



	December 31, 2015
	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. government agencies	$	10,394	$	(35	)	$	—	$	—	$	10,394	$	(35	)
States and political subdivisions	6,057		(25		)	—		—		6,057		(25		)
U.S. government agency residential
mortgage-backed securities	124,411		(1,017		)	—		—		124,411		(1,017		)
Collateralized residential mortgage
obligations: Agency	17,833		(157		)	—		—		17,833		(157		)
Total temporarily impaired	$	158,695	$	(1,234	)	$	—	$	—	$	158,695	$	(1,234	)

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Note 4. Loans

The major classifications of loans follow:



	Aggregate Principal Amount
	June 30, 2016			December 31, 2015
Commercial	$	71,699		67,360
Agricultural & AG RE	44,071			50,121
Construction, land & development	22,207			26,016
Commercial RE	424,928			391,918
1-4 family mortgages	91,629			95,227
Consumer	3,220			2,905
Total Loans	$	657,754		633,547
Allowance for loan losses	(8,925		)	(8,591	)
Loans, net	$	648,829		624,956

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

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



June 30, 2016
	Commercial								Commercial Real Estate
Internal Risk Rating	Closed-end		Lines of Credit		Agriculture & AG RE		Construction, Land & Development		Owner- Occupied		Non-Owner Occupied		Total
Pass	$	24,930	$	45,509	$	43,752	$	22,065	$	196,035	$	219,473	$	551,764
Special Mention	287		250		—		—		837		7,520		8,894
Substandard	173		550		319		142		622		441		2,247
Doubtful	—		—		—		—		—		—		—
Total	$	25,390	$	46,309	$	44,071	$	22,207	$	197,494	$	227,434	$	562,905

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



December 31, 2015
	Commercial								Commercial Real Estate
Internal Risk Rating	Closed-end		Lines of Credit		Agriculture & AG RE		Construction, Land & Development		Owner- Occupied		Non-Owner Occupied		Total
Pass	$	24,303	$	42,374	$	50,121	$	25,825	$	164,538	$	203,679	$	510,840
Special Mention	304		250		—		64		7,701		11,512		19,831
Substandard	129		—		—		127		412		4,076		4,744
Doubtful	—		—		—		—		—		—		—
Total	$	24,736	$	42,624	$	50,121	$	26,016	$	172,651	$	219,267	$	535,415

The following table presents the Retail Residential Loan Portfolio by Internal Risk Rating:



	Residential -- 1-4 family
	Senior Lien		Jr. Lien & Lines of Credit		Total
June 30, 2016
Unrated	$	47,289	$	38,928	$	86,217
Special mention	3,291		94		3,385
Substandard	1,372		655		2,027
Doubtful	—		—		—
Total	$	51,952	$	39,677	$	91,629



	Residential -- 1-4 family
	Senior Lien		Jr. Lien & Lines of Credit		Total
December 31, 2015
Unrated	$	48,319	$	41,380	$	89,699
Special mention	4,011		168		4,179
Substandard	1,036		313		1,349
Doubtful	—		—		—
Total	$	53,366	$	41,861	$	95,227

The retail residential loan portfolio is generally unrated. Delinquency is a typical factor in adversely risk rating a credit to a special mention or substandard.

An analysis of activity in the allowance for loan losses for the three months ended June 30, 2016 and 2015 follows:




	Commercial			Agriculture & AG RE			Construction, Land & Development			Commercial RE			1-4 Family Residential			Consumer		Total
June 30, 2016
Beginning Balance	$	752		$	119		$	516		$	5,541		$	2,042		$	4	$	8,974
Charge-offs	(18		)	—			—			(17		)	(88		)	—		(123		)
Recoveries	25			1			5			26			15			2		74
Provision	426			(17		)	(69		)	(307		)	(36		)	3		—
Ending Balance	$	1,185		$	103		$	452		$	5,243		$	1,933		$	9	$	8,925

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)




	Commercial			Agriculture & AG RE		Construction, Land & Development			Commercial RE			1-4 Family Residential			Consumer			Total
June 30, 2015
Beginning Balance	$	1,139		$	50	$	437		$	4,018		$	2,342		$	9		$	7,995
Charge-offs	(357		)	—		—			(614		)	(63		)	(2		)	(1,036		)
Recoveries	64			—		6			1,585			12			19			1,686
Provision	190			15		(47		)	196			(340		)	(14		)	—
Ending Balance	$	1,036		$	65	$	396		$	5,185		$	1,951		$	12		$	8,645

An analysis of activity in the allowance for loan losses for the six months ended June 30, 2016 and 2015 follows:



	Commercial			Agriculture & AG RE			Construction, Land & Development			Commercial RE			1-4 Family Residential			Consumer			Total
June 30, 2016
Beginning Balance	$	648		$	97		$	523		$	5,681		$	1,628		$	14		$	8,591
Charge-offs	(18		)	—			—			(520		)	(97		)	(3		)	(638		)
Recoveries	69			55			24			471			51			2			672
Provision	486			(49		)	(95		)	(389		)	351			(4		)	300
Ending Balance	$	1,185		$	103		$	452		$	5,243		$	1,933		$	9		$	8,925



	Commercial			Agriculture & AG RE			Construction, Land & Development			Commercial RE			1-4 Family Residential			Consumer			Total
June 30, 2015
Beginning Balance	$	1,117		$	69		$	711		$	3,999		$	2,075		$	10		$	7,981
Charge-offs	(357		)	—			(3		)	(615		)	(130		)	(3		)	(1,108		)
Recoveries	90			—			27			1,607			21			27			1,772
Provision	186			(4		)	(339		)	194			(15		)	(22		)	—
Ending Balance	$	1,036		$	65		$	396		$	5,185		$	1,951		$	12		$	8,645

The following is an analysis on the balance in the allowance for loan losses and the recorded investment in impaired loans by portfolio segment based on impairment method as of June 30, 2016 and December 31, 2015:

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



June 30, 2016	Commercial		Agriculture & AG RE		Construction, Land & Development		Commercial RE		1-4 Family Residential		Consumer		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	564	$	—	$	58	$	333	$	402	$	3	$	1,360
Loans collectively evaluated for impairment	621		103		394		4,910		1,531		6		7,565
Total allowance balance:	$	1,185	$	103	$	452	$	5,243	$	1,933	$	9	$	8,925

Loan balances:
Loans individually evaluated for impairment	$	723	$	319	$	142	$	1,063	$	2,027	$	3	$	4,277
Loans collectively evaluated for impairment	70,976		43,752		22,065		423,865		89,602		3,217		653,477
Total loans balance:	$	71,699	$	44,071	$	22,207	$	424,928	$	91,629	$	3,220	$	657,754



December 31, 2015	Commercial		Agriculture & AG RE		Construction, Land & Development		Commercial RE		1-4 Family Residential		Consumer		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	80	$	—	$	10	$	1,178	$	325	$	1	$	1,594
Loans collectively evaluated for impairment	568		97		513		4,503		1,303		13		6,997
Total allowance balance:	$	648	$	97	$	523	$	5,681	$	1,628	$	14	$	8,591

Loan balances:
Loans individually evaluated for impairment	$	129	$	—	$	127	$	4,488	$	1,348	$	1	$	6,093
Loans collectively evaluated for impairment	67,231		50,121		25,889		387,430		93,879		2,904		627,454
Total loans balance:	$	67,360	$	50,121	$	26,016	$	391,918	$	95,227	$	2,905	$	633,547

Troubled Debt Restructurings:

The Company had troubled debt restructurings (“TDRs”) of $0.23 million and $0.24 million as of June 30, 2016 and December 31, 2015, respectively. Specific reserves were immaterial at June 30, 2016 and December 31, 2015. At June 30, 2016 nonaccrual TDR loans were $0.23 million and $0.24 million at December 31, 2015. There were no TDRs on accrual at June 30, 2016 and December 31, 2015. The Company had no commitments to lend additional amounts to a customer with an outstanding loan that is classified as TDR as of June 30, 2016 and December 31, 2015.

Over the course of a period, the terms of certain loans may be modified as troubled debt restructurings. The modification of the terms of such loans may include one or a combination of the following: a reduction of the stated interest rate of the loan to a below market rate or the payment modification to interest only. A modification involving a reduction of the stated interest rate of the

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

loan would be for periods ranging from 6 months to 16 months. During the three months ended June 30, 2016 and June 30, 2015, there were no loans modified as troubled debt restructurings. During the six months ended June 30, 2016, there were no loans modified as troubled debt restructurings, compared to the same six month period ended June 30, 2015 when there was one senior lien 1-4 family residential loan modified as troubled debt restructurings with a pre-modification and post-modification recorded investment of $0.03 million.

The troubled debt restructurings described above did not have a material impact to the allowance for loan losses and did not result in any additional charge-offs during the six months ended June 30, 2015.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In the six months ended June 30, 2016 and the six months ended June 30, 2015 there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification.

The Company evaluates loan modifications to determine if the modification constitutes a troubled debt restructure. A loan modification constitutes a troubled debt restructure if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its loans with the Company’s debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting guidelines. TDRs are separately identified for impairment disclosures. If a loan is considered to be collateral dependent loan, the TDR is reported, net, at the fair value of the collateral.

The following tables present data on impaired loans:

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



June 30, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Loans with no related allowance recorded:
Commercial
Closed-end	$	—	$	—	$	—	$	7	$	—	$	—
Line of credit	—		—		—		—		—		—
Agricultural & AG RE	—		—		—		—		—		—
Construction, land & development	—		—		—		—		—		—
CRE - all other
Owner occupied	22		22		—		10		2		3
Non-owner occupied	—		—		—		—		—		—
1-4 family residential
Senior lien	262		284		—		231		—		—
Jr. lien & lines of credit	196		196		—		99		2		2
Consumer	—		—		—		—		—		—
Subtotal	480		502		—		347		4		5

Loans with an allowance recorded:
Commercial
Closed-end	$	173	$	173	$	106	$	144	$	2	$	2
Line of credit	550		550		458		150		13		12
Agricultural & AG RE	319		319		—		80		17		7
Construction, land & development	142		433		58		153		2		—
CRE - all other
Owner occupied	600		600		124		469		7		8
Non-owner occupied	441		441		209		2,928		—		—
1-4 family residential
Senior lien	1,110		1,127		253		1,063		11		8
Jr. lien & lines of credit	459		459		149		323		4		4
Consumer	3		3		3		1		—		—
Subtotal	3,797		4,105		1,360		5,311		56		41
Total	$	4,277	$	4,607	$	1,360	$	5,658	$	60	$	46

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



December 31, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Loans with no related allowance recorded:
Commercial
Closed-end	$	2	$	2	$	—	$	15	$	1	$	1
Line of credit	—		—		—		—		—		—
Agricultural & AG RE	—		—		—		—		—		—
Construction, land & development	—		—		—		299		—		—
CRE - all other
Owner occupied	6		6		—		78		—		—
Non-owner occupied	—		—		—		—		—		—
1-4 family residential
Senior lien	176		176		—		277		—		—
Jr. lien & lines of credit	71		71		—		88		3		3
Consumer	—		—		—		—		—		—
Subtotal	255		255		—		757		4		4

Loans with an allowance recorded:
Commercial
Closed-end	$	127	$	127	$	80	$	199	$	2	$	2
Line of credit	—		—		—		—		—		—
Agricultural & AG RE	—		—		—		—		—		—
Construction, land & development	127		419		10		120		—		—
CRE - all other
Owner occupied	406		541		100		586		11		9
Non-owner occupied	4,076		4,955		1,078		4,101		17		17
1-4 family residential
Senior lien	859		984		215		1,003		14		10
Jr. lien & lines of credit	242		242		110		230		5		5
Consumer	1		—		1		—		—		—
Subtotal	5,838		7,268		1,594		6,239		49		43
Total	$	6,093	$	7,523	$	1,594	$	6,996	$	53	$	47

The Company determined that there were $1.7 million of loans that were classified as impaired but were considered to be performing (i.e., loans which are accruing interest) loans at June 30, 2016 compared to $0.1 million at December 31, 2015.

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

The following table represents information related to loan portfolio aging:



June 30, 2016	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days Past Due or Nonaccrual		Total Past Due		Current		Total Loans
Commercial
Closed-end	$	—	$	—	$	114	$	114	$	25,276	$	25,390
Line of credit	30		100		—		130		46,179		46,309
Agricultural & AG RE	—		—		—		—		44,071		44,071
Construction, land & development	—		—		79		79		22,128		22,207
CRE - all other
Owner occupied	361		—		391		752		196,742		197,494
Non-owner occupied	—		—		441		441		226,993		227,434
1-4 family residential
Senior lien	21		166		891		1,078		50,874		51,952
Jr. lien & lines of credit	226		113		610		949		38,728		39,677
Consumer	—		—		—		—		3,220		3,220
Total	$	638	$	379	$	2,526	$	3,543	$	654,211	$	657,754



December 31, 2015	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days Past Due or Nonaccrual		Total Past Due		Current		Total Loans
Commercial
Closed-end	$	58	$	—	$	130	$	188	$	24,548	$	24,736
Line of credit	—		—		—		—		42,624		42,624
Agricultural & AG RE	—		—		—		—		50,121		50,121
Construction, land & development	—		—		127		127		25,889		26,016
CRE - all other
Owner occupied	985		—		412		1,397		171,254		172,651
Non-owner occupied	—		—		4,076		4,076		215,191		219,267
1-4 family residential
Senior lien	1,481		21		994		2,496		50,870		53,366
Jr. lien & lines of credit	230		258		268		756		41,105		41,861
Consumer	1		1		—		2		2,903		2,905
Total	$	2,755	$	280	$	6,007	$	9,042	$	624,505	$	633,547

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. There were no loans past due over 90 days and still accruing interest at June 30, 2016 or at December 31, 2015.

Note 5. Fair Value

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

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

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are defined as follows:

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

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

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

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

Securities

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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



	Carrying Amount		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
U.S. government agencies	$	—	$	—	$	—	$	—
State and political subdivisions	13,130		—		8,114		5,016
U.S. government agency residential
mortgage-backed securities	128,088		—		128,088		—
Collateralized mortgage obligations:
Agency	16,453		—		16,453		—
Equities	2,911		—		2,911		—
Available-for-sale securities	$	160,582	$	—	$	155,566	$	5,016

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)




	Carrying Amount		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2015
U.S. government agencies	$	14,607	$	—	$	14,607	$	—
State and political subdivisions	10,181		—		5,160		5,021
U.S. government agency residential
mortgage-backed securities	126,029		—		126,029		—
Collateralized mortgage obligations:
Agency	17,833		—		17,833		—
Equities	2,790		—		2,790		—
Available-for-sale securities	$	171,440	$	—	$	166,419	$	5,021

There were no transfers between Level 1 and Level 2 during the first six months of 2016 and all of 2015.

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

The following table reconciles the beginning and ending balances of the assets of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.



	Securities Available for Sale
	2016
Beginning balance, January 1	$	5,021
Transfers into Level 3	—
Total gains or losses (realized/unrealized) included in earnings
Sales	—
Security impairment	—
Payment received	—
Other changes in fair value	(5		)
Included in other comprehensive income	—
Ending Balance, June 30	$	5,016

For the period ended June 30, 2016, the Company had $5.0 million of local school district bonds that are measured at fair value on a recurring basis using unobservable inputs. The fair value was obtained from third party sources, and was not adjusted by management.

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Assets Measured at Fair Value on a Non-Recurring Basis

The following table summarizes, by measurement hierarchy, financial assets of the Company that are measured at fair value on a non-recurring basis.



	Carrying Amount		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
Impaired loans
Commercial
Closed-end	$	92	$	—	$	—	$	92
1-4 family residential
Senior lien	396		—		—		396
OREO property
CRE - construction, land & development	1,744		—		—		1,744
CRE - all other
Owner occupied	183		—		—		183
Non-owner occupied	880		—		—		880
1-4 family residential
Senior lien	64		—		—		64



	Carrying Amount		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2015
Impaired loans
1-4 family residential
Senior lien	$	572	$	—	$	—	$	572
OREO property
CRE - construction, land & development	1,140		—		—		1,140
CRE - all other
Non-owner occupied	468		—		—		468
1-4 family residential
Senior lien	131		—		—		131

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

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

Impaired loans carried at fair value had a net carrying amount of $0.5 million at June 30, 2016, which is made up of the outstanding balance of $1.1 million with $0.6 million specific loan loss allocation. The effect of these impaired loans carried at fair value on

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

the provision for loans losses was $0.6 million for the six month period. In 2015 impaired loans carried at fair value had a carrying amount of $0.6 million with a specific loan loss allocation of $0.3 million during 2015, resulting in an additional provision for loan losses of $0.1 million for the year ended December 31, 2015. The majority of the Bank's impaired loans are collateralized by real estate.

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any write-downs in the carrying value of a property at the time of acquisition are charged against the allowance for loan losses. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Management periodically reviews the carrying value of other real estate owned. Any write-downs of the properties subsequent to acquisition, as well as gains or losses on disposition and income or expense from the operations of other real estate owned, are recognized in operating results in the period they are realized. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

OREO properties measured at fair value, less costs to sell, had a net carrying amount of $2.9 million which is made up of the outstanding balance of $3.6 million, net of a valuation allowance of $0.7 million at June 30, 2016. This compares to 2015 when OREO properties with an outstanding balance of $2.9 million was written down to a fair value of $1.7 million.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015:



June 30, 2016	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Impaired loans			Sales comparison approach	Adjustment for differences between comparable sales
Commercial
Closed-end	$	92			20% - 100% (82%)
1-4 family residential
Senior lien	396				10% - 60% (32%)
OREO property
CRE - construction, land & development	1,744				5% - 70% (26%)
CRE - all other
Owner occupied	183				5% - 50% (15%)
Non-owner occupied	880				5% - 50% (21%)
1-4 family residential
Senior lien	64				6% - 55% (23%)

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



December 31, 2015	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Impaired loans			Sales comparison approach	Adjustment for differences between comparable sales
1-4 family residential
Senior lien	$	572			10% - 60% (17%)
OREO property
CRE - construction, land & development	1,140				5% - 70% (27%)
CRE - all other
Non-owner occupied	468				5% - 50% (16%)
1-4 family residential
Senior lien	131				6% - 55% (30%)

The estimated fair values of the Company’s financial instruments are as follows:



			Fair Value measurements at June 30, 2016 Using
	Carrying Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	27,024	$	27,024	$	—	$	—	$	27,024
Securities	160,582		—		155,566		5,016		160,582
Restricted securities	10,027		—		—		—		NA
Loans held for sale	187		—		193		—		193
Net loans	648,829		—		—		655,336		655,336
Accrued interest receivable	2,279		—		428		1,851		2,279
Financial liabilities
Deposits	$	716,424	$	—	$	716,732	$	—	$	716,732
Federal funds purchased and
securities sold under
agreements to repurchase	10,605		—		10,605		—		10,605
Federal Home Loan Bank advances	75,000		—		75,475		—		75,475
Subordinated debentures	20,620		—		—		15,671		15,671
Series B mandatory redeemable
preferred stock	209		—		210		—		210
Accrued interest payable	253		—		237		16		253

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



			Fair Value measurements at December 31, 2015 Using
	Carrying Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	27,655	$	27,655	$	—	$	—	$	27,655
Securities	171,440		—		166,419		5,021		171,440
Restricted securities	9,116		—		—		—		NA
Loans held for sale	735		—		760		—		760
Net loans	624,956		—		—		629,017		629,017
Accrued interest receivable	3,012		—		402		2,610		3,012
Financial liabilities
Deposits	$	718,504	$	—	$	718,689	$	—	$	718,689
Federal funds purchased and
securities sold under
agreements to repurchase	18,730		—		18,730		—		18,730
Federal Home Loan Bank advances	76,000		—		76,271		—		76,271
Notes payable	—		—		—		—		—
Subordinated debentures	20,620		—		—		13,933		13,933
Series B mandatory redeemable
preferred stock	268		—		273		—		273
Accrued interest payable	235		—		169		66		235

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

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

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. As of June 30, 2016 and December 31, 2015; $27.0 million and $27.7 million was classified as Level 1.

(b) Restricted securities

It is not practical to determine the fair value of restricted securities due to the restrictions placed on its transferability.

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

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(d) Deposits

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

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(e) Short-term Borrowings

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

(f) Other Borrowings

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

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

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification which is consistent with the underlying asset/liability they are associated with.

(h) Off-balance Sheet Instruments

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

Note 6. Borrowed Funds and Debt Obligations

The scheduled maturities of advances from the FHLB at June 30, 2016 and December 31, 2015 are as follows:



	June 30, 2016				December 31, 2015
Year	Average Interest Rate		Amount		Average Interest Rate		Amount

2016	—	%	—		0.70	%	60,000
2017	1.14		11,000		1.14		11,000
2018	0.41		49,000		3.64		5,000
2019	1.41		10,000		—		—
2020	—		—		—		—
Thereafter	2.46		5,000		—		—
	0.79		$	75,000	0.96		$	76,000

At June 30, 2016 and December 31, 2015 no FHLB advances had any call provisions. The Company had two variable rate advances at June 30, 2016, both at 0.25%, and none at year-end 2015. The remaining advances are at fixed rates ranging from 1.06% to 2.46% at June 30, 2016 and 0.21% to 3.64% at year-end 2015.

In connection with the Company completing a $76.0 million recapitalization event on March 31, 2015, a settlement of obligations involving a financial institution was reached in which the Company recognized a gain of $1.8 million representing the difference between the fair value of the consideration issued in the settlement transaction and the carrying value of the amounts due to a financial institution. As a result, the gain has been included as ‘‘Gain on extinguishment of debt’’ within income from continuing operations in the accompanying Consolidated Statements of Income for the period ended March 31, 2015 and year ended December 31, 2015. See Note 1 for additional disclosure related to the recapitalization event.

As of June 30, 2016 and December 31, 2015, the Company had no outstanding loan agreements.

Note 7. Income Taxes

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

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

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

After evaluating all of the factors previously summarized and considering the weight of the positive evidence compared to the negative evidence, the Company has determined that no valuation allowance was necessary as of June 30, 2016 and December 31, 2015.

Below is a summary of items included in the deferred tax inventory as of June 30, 2016 and December 31, 2015:



	June 30, 2016			December 31, 2015
Deferred tax assets
Allowance for loan losses	$	3,473		$	3,342
Deferred compensation, other	313			74
Stock based expense	87			87
Net operating loss carryforwards	32,072			34,180
Securities available-for-sale	—			405
Deferred tax credits	941			823
OREO valuation allowance	923			1,059
Depreciation	178			—
Other	236			255
Total deferred tax assets	38,223			40,225
Deferred tax liabilities
Depreciation	$	—		$	(58	)
Adjustments arising from acquisitions	(189		)	(146		)
Mortgage servicing rights	(804		)	(828		)
Securities available-for-sale	(105		)	—
Federal Home Loan Bank dividend received in stock	(450		)	(450		)
Deferred loan fees & costs	(382		)	(399		)
Prepaid expenses	(164		)	(164		)
Total deferred tax liabilities	(2,094		)	(2,045		)
Valuation allowance	—			—
Net deferred tax assets	$	36,129		$	38,180

Note 8. Share Based Compensation

In April 2003, the Company adopted the 2003 Option Plan. Under the 2003 Option Plan, as amended on April 24, 2007, nonqualified options, incentive stock options, restricted stock and/or stock appreciation rights may be granted to employees and outside directors of the Company and its subsidiaries to purchase the Company's common stock at an exercise price to be determined by the executive and compensation committee. Pursuant to the 2003 Option Plan, 19,000 shares of the Company's unissued common stock had been reserved and were available for issuance upon the exercise of options and rights granted under the 2003 Option Plan. The granted options have an exercise period of seven to ten years from the date of grant.

In May 2015, the Company adopted the 2015 Stock Compensation Plan. Under the 2015 Stock Compensation Plan 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 compensation committee. A total of 430,000 shares have been made available under the 2015 Stock Compensation Plan. There are currently 356,236 shares available to grant.

There were 33,321 shares of restricted stock granted for the six months ended June 30, 2016. There were 40,443 shares of restricted stock granted for the year ended December 31, 2015.

There was no compensation cost charged against income for the stock options portion of the equity incentive plans for the six months ended June 30, 2016 and for the year ended December 31, 2015. There was $0.03 million compensation cost charged

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

against income for the restricted stock portion of the equity incentive plan for the six months ended June 30, 2016 and $0.5 million charged for the year ended December 31, 2015.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock prior to its deregistration. 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. There were no options granted for the six months ended June 30, 2016 and the year ended December 31, 2015.

A status summary of the option plan as of June 30, 2016 and changes during the period ended on that date are presented below:



	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2016	3,156		$	338.72
Granted	—		—
Exercised	—		—
Forfeited	(2,658	)	293.87
Outstanding at end of period	498		$	578.10	0.7 years	$	—
Vested or expected to vest	498		$	578.10	0.7 years	$	—
Options exercisable at period end	498		$	578.10	0.7 years	$	—

Options outstanding at June 30, 2016 and year-end 2015 were as follows:



	Outstanding		Exercisable
Range of Exercise Prices	Number	Weighted Average Remaining Contractual Life	Number	Weighted Average Exercise Price
June 30, 2016
$390.01 - $578.10	498	0.7 years	498	$	578.10

December 31, 2015:
$157.20 - $390.00	2,160	0.2 years	2,160	$	228.33
390.01 - 578.10	996	0.9 years	996	578.10
	3,156	0.4 years	3,156	$	338.72

As of June 30, 2016, there was $0.5 million of total unrecognized compensation cost related to non-vested shares granted under the 2015 Stock Compensation Plan.

Note 9. Regulatory Matters

The Company and Centrue Bank are subject to regulatory capital requirements administered by federal and state banking agencies that involve the quantitative measure of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. Quantitative measures established by regulations to ensure capital adequacy require the Company and Centrue Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 capital and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and, for the Bank, Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). Failure to meet minimum capital requirements may cause regulatory bodies to initiate certain discretionary and/or mandatory actions that, if undertaken, may have a direct material effect on our financial statements. The Company, as a financial holding company, is required to be “adequately capitalized” in the capital categories shown in the table below. As of June 30, 2016, Centrue Bank met all capital adequacy requirements to which they were subject, including the guidelines to be considered “well capitalized.”

CENTRUE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

On July 2, 2013, the Federal Reserve Board and the FDIC approved rules that implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act. The rules include a common equity Tier 1 capital ratio and conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. Capital ratios shown for June 30, 2016 are in excess of the Basel III 2016 phase-in level for the capital conservation buffer.

On February 16, 2016 the Company received a formal order terminating the written agreement between the Company, the Bank, and the Federal Reserve Bank of Chicago and the Illinois Department of Financial and Professional Regulation.



	Actual				To Be Adequately Capitalized		To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount	Ratio	Amount	Ratio
As of June 30, 2016
Total capital (to risk-weighted assets)
Centrue Financial	$	123,787	16.5	%	N/A	N/A	N/A	N/A
Centrue Bank	119,700		15.9		60,094	8.0	75,117	10.0
Common equity tier I (to risk-weighted assets)
Centrue Financial	$	105,078	14.0		N/A	N/A	N/A	N/A
Centrue Bank	110,775		14.8		33,803	4.5	48,826	6.5
Tier I capital (to risk-weighted assets)
Centrue Financial	$	114,862	15.3		N/A	N/A	N/A	N/A
Centrue Bank	110,775		14.8		45,070	6.0	60,094	8.0
Tier I leverage ratio (to average assets)
Centrue Financial	$	114,862	12.2		N/A	N/A	N/A	N/A
Centrue Bank	110,775		11.7		37,767	4.0	47,209	5.0



	Actual				To Be Adequately Capitalized				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount	Ratio
As of December 31, 2015
Total capital (to risk-weighted assets)
Centrue Financial	$	118,359	15.6	%	$	60,525	8.0	%	N/A	N/A
Centrue Bank	117,807		15.6		60,463		8.0		75,579	10.0
Common equity tier I (to risk-weighted assets)
Centrue Financial	$	107,678	14.2		$	34,045	4.5		N/A	N/A
Centrue Bank	109,216		14.5		34,011		4.5		49,126	6.5
Tier I capital (to risk-weighted assets)
Centrue Financial	$	109,768	14.5		$	45,394	6.0		N/A	N/A
Centrue Bank	109,216		14.5		45,347		6.0		60,463	8.0
Tier I leverage ratio (to average assets)
Centrue Financial	$	109,768	12.1		$	36,284	4.0		N/A	N/A
Centrue Bank	109,216		12.0		36,505		4.0		45,631	5.0

Note 10. Business Acquisitions and Divestitures

On June 17, 2016, Centrue Bank completed the sales of its Fairview Heights, Aviston and St. Rose, Illinois branches. The sales resulted in a reduction of $51.7 million of deposits, $13.1 million of loans and $5.1 million of fixed assets. These transactions generated a net after tax gain of $1.1 million.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

The following management discussion and analysis (“MD&A”) is intended to address the significant factors affecting the Company’s results of operations and financial condition for the three and six months ended June 30, 2016 as compared to the same period in 2015. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included. The preparation of financial statements requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware corporation, and its consolidated subsidiaries. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank.

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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the Company's financial position or results of operations. Actual results could differ from those estimates. Those critical accounting policies that are of particular significance to the Company are discussed in Note 1 of the Company’s 2015 Annual Report on Form 10-K.

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

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

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

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

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

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

•

Specific Component. The specific credit allocation component is based on an analysis of individual impaired loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification for which the recorded investment in the loan exceeds its fair value. The fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values;

•

Historical Loss Component. The Company calculates the Historical Loss for thirteen defined portfolio segments (primarily by Call Report codes) looking back over the past twelve quarters (three years). For the non-consumer loan types, the Bank utilizes a migration analysis whereby losses incurred are allocated by the assigned risk rating at the start of each twelve month period analyzed. As the level of charge offs has stabilized/improved, the analysis of the consumer and residential loans has returned to the traditional historical loss analysis. This is being done based on the relatively homogeneous nature of these loans, as well as the fact that consumer and residential loans generally do not have assigned risk ratings; and

•

Qualitative Component. The qualitative component requires qualitative judgment and estimates reserves based on general economic conditions as well as specific economic factors believed to be relevant to the markets in which the Company operates. The process for determining the allowance (which management believes adequately considers all of the potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change.

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

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

General

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

On June 17, 2016, Centrue Bank completed the sales of its Fairview Heights, Aviston, and St. Rose, Illinois branches. The sales resulted in a reduction of $51.7 million of deposits, $13.1 million of loans and $5.1 million of fixed assets. These transactions generated a net after tax gain of $1.1 million.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Results of Operations

Net Income

Net income for the three months ended June 30, 2016 equaled $2.1 million or $0.31 per common diluted share as compared to net income of $1.1 million or $0.16 per common diluted share in the second quarter of 2015. For the first six months of 2016, the Company had net income of $3.0 million or $0.44 per common diluted share as compared to net income of $2.9 million or $4.62 per common diluted share for the same period in 2015.

The results for the first six months of 2016 were positively impacted by the sale of three branches generating a net after tax gain on sale of $1.1 million. During the first six months of 2015, the Company had a $1.8 million gain on extinguishment of debt, representing the difference between the fair value of the consideration issued in the settlement transaction and the carrying value of the amounts due to a financial institution in connection with the settlement obligation.

Net Interest Income/ Margin

Net interest income is the difference between income earned on interest-earning assets and the interest expense incurred for the funding sources used to finance these assets. Changes in net interest income generally occur due to fluctuations in the volume of earning assets and paying liabilities and rates earned and paid, respectively, on those assets and liabilities. The net yield on total interest-earning assets, also referred to as net interest margin, represents net interest income divided by average interest-earning assets. Net interest margin measures how efficiently the Company uses its earning assets and underlying capital. The Company’s long-term objective is to manage those assets and liabilities to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risks. For purposes of this discussion, both net interest income and margin have been adjusted to a fully tax equivalent basis for certain tax-exempt securities and loans.

Fully tax equivalent net interest income for the second quarter 2016 totaled $7.2 million, representing an increase of $0.7 million or 10.77% compared to $6.5 million for the same period in 2015. This increase in income is primarily due to an increase in interest earning assets.

The net interest margin was 3.49% for the second quarter of 2016, representing an increase of one basis point from the 3.48% recorded in the second quarter of 2015. The improvement in the net interest margin is being driven by the growth in the loan portfolio and improving yields in the securities portfolio.

Fully tax equivalent net interest income for the six months ended June 30, 2016 totaled $14.5 million, representing an increase of $2.0 million or 15.69% compared to $12.5 million earned during the same period in 2015. The net interest margin was 3.48% for the six months ended June 30, 2016, representing an increase of 2 basis points from 3.46% recorded in the same period of 2015. The increase in net interest income and the net interest margin was driven by the same factors impacting the second quarter.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
	Three Months Ended June 30,
	2016						2015
	Average Balance		Interest/Income Expense		Average Rate		Average Balance		Interest/Income Expense		Average Rate		Change due to:
													Volume			Rate			Net
ASSETS
Interest-earning assets
Interest-earning deposits	$	1,129	$	29	10.33	%	$	3,419	$	22	2.58	%	$	(32	)	$	39		$	7
Securities
Taxable⁽¹⁾	167,453		734		1.76		162,781		632		1.56		(1		)	103			102
Exempt from federal income taxes⁽¹⁾⁽²⁾	4,056		35		3.47		6,513		66		4.06		(24		)	(7		)	(31		)
Total securities (tax equivalent)	171,509		769		1.8		169,294		698		1.65		(25		)	96			71
Federal funds sold and other	620		4		2.59		1,444		5		1.39		(5		)	4			(1		)
Loans^(3)(4)(5)
Commercial	105,912		1,072		4.07		99,268		1,019		4.12		62			(9		)	53
Real estate	551,341		5,954		4.34		469,538		5,247		4.48		838			(131		)	707
Installment and other	2,952		52		7.08		2,846		46		6.48		(29		)	35			6
Gross loans (tax equivalent)	660,205		7,078		4.31		571,652		6,312		4.43		871			(105		)	766
Total interest-earnings assets	833,463		7,880		3.8		745,809		7,037		3.78		809			34			843
Noninterest-earning assets
Cash and cash equivalents	41,796						47,790
Premises and equipment, net	20,952						22,478
Other assets	80,808						47,956
Total nonearning assets	143,556						118,224
Total assets	$	977,019					$	864,033



LIABILITIES & STOCKHOLDERS’
EQUITY
Interest-bearing liabilities
NOW accounts	129,100		25		0.08		114,630		19		0.07		—			6			6
Money market accounts	107,685		49		0.18		117,820		51		0.17		(6		)	4			(2		)
Savings deposits	130,774		4		0.01		124,030		3		0.01		—			1			1
Time deposits	209,557		238		0.46		199,898		231		0.46		(1		)	8			7
Federal funds purchased and repurchase
Agreements	14,987		11		0.30		15,971		11		0.28		(1		)	1			—
Advances from FHLB	76,714		170		0.89		32,308		113		1.40		77			(20		)	57
Notes payable	20,887		149		2.87		20,888		133		2.55		(10		)	26			16
Total interest-bearing liabilities	689,704		646		0.38		625,545		561		0.36		59			26			85
Noninterest-bearing liabilities
Noninterest-bearing deposits	159,024						150,097
Other liabilities	5,395						5,322
Total noninterest-bearing liabilities	164,419						155,419
Stockholders’ equity	122,896						83,069
Total liabilities and stockholders’ equity	$	977,019					$	864,033
Net interest income (tax equivalent)			$	7,234					$	6,476			$	750		$	8		$	758
Net interest income (tax equivalent)
to total earning assets					3.49	%					3.48	%
Interest-bearing liabilities to earning assets					82.75	%					83.87	%

⁽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 tax exempt securities and loans are reflected on a tax equivalent basis based upon a statutory federal income tax

rate of 34%.

⁽³⁾ In second quarter 2016 there was $10 in tax equivalent interest included in gross loans and $19 in the same period in 2015.

⁽⁴⁾ Nonaccrual loans are included in the average balances; overdraft loans are excluded in the balances.

⁽⁵⁾ Loan fees are included in the specific loan category.

⁽⁶⁾ Average balances are derived from daily balances.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
	Six Months Ended June 30, 2016
	2016						2015
	Average Balance		Interest/Income Expense		Average Rate		Average Balance		Interest/Income Expense		Average Rate		Change due to:
													Volume			Rate			Net
ASSETS
Interest-earning assets
Interest-earning deposits	$	3,076	$	56	3.66	%	$	3,477	$	34	1.97	%	$	(9	)	$	31		$	22
Securities
Taxable⁽¹⁾	172,747		1,563		1.82		153,804		1,226		1.61		143			194			337
Exempt from federal income taxes⁽¹⁾⁽²⁾	4,060		69		3.42		5,274		116		4.44		(25		)	(22		)	(47		)
Total securities (tax equivalent)	176,807		1,632		1.86		159,078		1,342		1.70		118			172			290
Federal funds sold and other	620		9		2.92		3,521		13		0.74		(20		)	16			(4		)
Loans^(3)(4)(5)
Commercial	107,247		2,194		4.11		99,720		2,025		4.10		158			11			169
Real estate	546,570		11,819		4.35		461,881		10,296		4.50		1,827			(304		)	1,523
Installment and other	3,027		95		6.31		2,943		85		5.82		(21		)	31			10
Gross loans (tax equivalent)	656,844		14,108		4.32		564,544		12,406		4.43		1,964			(262		)	1,702
Total interest-earnings assets	837,347		15,805		3.80		730,620		13,795		3.81		2,053			(43		)	2,010
Noninterest-earning assets
Cash and cash equivalents	40,158						46,294
Premises and equipment, net	21,409						22,499
Other assets	81,867						49,148
Total nonearning assets	143,434						117,941
Total assets	$	980,781					$	848,561



LIABILITIES & STOCKHOLDERS’
EQUITY
Interest-bearing liabilities
NOW accounts	128,920		51		0.08		112,314		37		0.07		2			12			14
Money market accounts	108,808		100		0.18		119,665		105		0.18		(12		)	7			(5		)
Savings deposits	129,547		7		0.01		121,824		6		0.01		—			1			1
Time deposits	201,032		421		0.42		199,810		476		0.48		(18		)	(37		)	(55		)
Federal funds purchased and repurchase
Agreements	16,139		23		0.29		17,523		24		0.28		(2		)	1			(1		)
Advances from FHLB	89,115		400		0.90		36,896		230		1.26		211			(41		)	170
Notes payable	20,888		295		2.84		25,928		377		2.93		(62		)	(20		)	(82		)
Total interest-bearing liabilities	694,449		1,297		0.38		633,960		1,255		0.40		119			(77		)	42
Noninterest-bearing liabilities
Noninterest-bearing deposits	158,272						149,588
Other liabilities	5,588						7,664
Total noninterest-bearing liabilities	163,860						157,252
Stockholders’ equity	122,472						57,349
Total liabilities and stockholders’ equity	$	980,781					$	848,561
Net interest income (tax equivalent)			$	14,508					$	12,540			$	1,934		$	34		$	1,968
Net interest income (tax equivalent)
to total earning assets					3.48	%					3.46	%
Interest-bearing liabilities to earning assets					82.93	%					86.77	%

⁽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 tax exempt securities and loans are reflected on a tax equivalent basis based upon a statutory federal income tax

rate of 34%.

⁽³⁾ In 2016 there was $18 in tax equivalent interest included in gross loans and $36 in the same period in 2015.

⁽⁴⁾ Nonaccrual loans are included in the average balances; overdraft loans are excluded in the balances.

⁽⁵⁾ Loan fees are included in the specific loan category.

⁽⁶⁾ Average balances are derived from daily balances.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Provision for Loan Losses

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

There was no provision for loan losses taken during both the second quarter 2016 and 2015. As for the first six months of 2016, the Company recorded $0.3 million for provision for loan losses in comparison to none for the same period in 2015. The lack of need for a provision charge in the second quarter 2016 was driven by the following factors:


•	Resolution of a specific non-performing loan relationship;


•	Improvements in Asset Quality metrics;


•	A decrease in outstanding loans from the beginning of the quarter;

Management continues to update collateral values and evaluate the level of specific allocations for impaired loans. As impaired loans have moved through the liquidation process, many of the previously established specific allocations have been charged off.

Noninterest Income

Noninterest income consists of a wide variety of fee-based revenues, including bank-related service charges on deposits, mortgage revenues and increases in cash surrender value on bank-owned life insurance. Noninterest income totaled $4.2 million for the three months ended June 30, 2016, compared to $2.6 million for the same period in 2015. Excluding gains related to the sale of branches, OREO, securities and other irregularly occurring income, noninterest income decreased $0.2 million. The $0.2 million decrease is mainly attributed to a decrease in the mortgage banking income and income from real estate owned.

For the six months ended June 30, 2016, noninterest income totaled $6.5 million, compared to $6.6 million for the same period in 2015. Excluding gains related to the sale of branches, OREO, securities and other non-recurring gains, noninterest income decreased $0.2 million. The $0.2 million decrease is attributed to the same reasons as stated for the quarter.

Nonninterest Expense

Noninterest expense is comprised primarily of compensation and employee benefits, occupancy, and other operating expense. Total noninterest expense for the second quarter of 2016 was $8.1 million, compared to $8.0 million recorded during the same period in 2015. Excluding OREO valuation adjustments and other irregularly occurring items from both periods, noninterest expense levels increased by $0.2 million, or 2.5%. This $0.2 million increase was mainly driven by higher salaries and employee benefits.

For the six months ended June 30, 2016, noninterest expense totaled $16.0 million, compared to $16.1 million for the same period in 2015. Excluding OREO valuation adjustments recorded in both periods and other non-recurring items, noninterest expense levels decreased by $0.1 million, or 0.6%. This $0.1 million decrease was a direct result of lower FDIC insurance, loan processing and collection costs, and OREO carrying costs.

Applicable Income Taxes

The Company recorded $1.7 million in income tax expense for the six months ended June 30, 2016 on pre-tax income of $4.7 million, resulting in an effective tax rate of 35.3%. The Company’s effective tax rate was lower than the combined statutory rate of 38.9% due to several factors. First, the Company derives interest income from municipal securities and loans, which are exempt from federal tax and certain U.S. government agency securities, which are exempt from state tax. Second, the Company derives income from bank owned life insurance policies, which is exempt from federal and state tax. Finally, state income taxes are recorded net of the federal tax benefit, which lowers the combined effective tax rate.

The Company recorded an immaterial tax expense for the six months ended June 30, 2015 despite having a full valuation allowance on its deferred tax assets. This was due to estimated Alternative Minimum Tax due on taxable income that could not be offset with net operating loss carry-forwards or credits per IRS guidelines. Excluding this expense, no tax expense or benefit was recorded for the six months ended June 30, 2015.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Financial Condition

General

Following are highlights of the June 30, 2016 balance sheet when compared to December 31, 2015:

Securities. The primary strategic objective of the Company’s $160.6 million securities available-for-sale from June 30, 2016, which excludes restricted securities, is to minimize interest rate risk, maintain sufficient liquidity, and maximize return. In managing the securities portfolio, the Company minimizes any credit risk and avoids investments in sophisticated and complex investment products. The portfolio includes several callable agency debentures, adjustable rate mortgage pass-throughs, municipal bonds and collateralized mortgage obligations. Collateralized mortgage obligations currently owned are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The Company does not have any securities classified as trading or held-to-maturity.

The Company’s financial planning anticipates income streams generated by the securities portfolio based on normal maturity and reinvestment. Securities classified as available-for-sale, carried at fair value, were $160.6 million at June 30, 2016 compared to $171.4 million at December 31, 2015. The Company also holds Federal Reserve Board and Federal Home Loan Bank stock which are classified as restricted securities of $10.0 million at June 30, 2016 and $9.1 million at December 31, 2015.

Loans. Total loans, including loans held for sale, equaled $657.9 million, representing an increase of $12.1 million, or 1.87% from December 31, 2015. The net increase from year-end 2015 was related to a combination of new organic loan growth and deeper lending relationships with existing customers that outpaced the $13.1 million in loans that were sold as part of the branch sales. Competition for new commercial loan opportunities and loan renewals continues to be strong and pressures loan yields.

Deposits. Total deposits equaled $716.4 million at June 30, 2016 compared to $718.5 million recorded at December 31, 2015. The June 30, 2016 deposit balance represents a decrease of $2.1 million or 0.29% from December 31, 2015. The net decrease from year-end 2015 was largely related to the branch sales completed on June 17, 2016 in which $51.7 million of deposits were sold. The sales of these deposits were replaced by an increase in brokered deposits and public fund accounts.

Nonperforming Assets

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

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

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

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

The following table sets forth a summary of nonperforming assets:



	June 30,			December 31,
	2016			2015
Nonaccrual loans (including TDRs)	$	2,526		$	6,007
TDRs still accruing interest	—			—
Loans 90 days past due and still accruing interest	—			—
Total nonperforming loans	$	2,526		$	6,007
Other real estate owned	6,765			8,401
Total nonperforming assets	$	9,291		$	14,408

Nonperforming loans to total end of period loans	0.38		%	0.93		%
Nonperforming assets to total end of period loans	1.41			2.23
Nonperforming assets to total end of period assets	0.98			1.50

Total nonperforming assets declined $5.1 million to $9.3 million, or 0.98% of total assets, at June 30, 2016 from $14.4 million at December 31, 2015. Total nonperforming assets included $6.8 million of foreclosed assets and repossessed real estate, and $2.5 million of nonaccrual loans at June 30, 2016 compared to $8.4 million of foreclosed assets and $6.0 million of nonaccrual loans at December 31, 2015.

Nonperforming Loans

Nonperforming loans (nonaccrual, 90 days past due and troubled debt restructures) decreased $3.5 million from December 31, 2015 to June 30, 2016, driven by the resolution of a large non-performing loan relationship.

The level of nonperforming loans to end of period loans was 0.38% as of June 30, 2016 as compared to 0.93% as of December 31, 2015. As a result of the decrease in the nonperforming loans, the allowance to nonperforming loan coverage ratio increased to 353.33% for the period ended June 30, 2016 from 143.02% for the year ended December 31, 2015.

Allowance for Loan Losses

At June 30, 2016, the allowance for loan losses was $8.9 million, or 1.36% of total loans, as compared to $8.6 million, or 1.33% of total loans, at December 31, 2015. The Company recorded $0.3 million of provision to the allowance for loan losses for the six months ended June 30, 2016. Management believes we are recognizing losses in our portfolio through provisions and charge-offs as credit developments warrant.

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 and financing activities offset by cash flows used in investing activities resulted in a net decrease in cash and cash equivalents of $0.6 million from December 31, 2015 to June 30, 2016.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

For the period ended June 30, 2016, the Company experienced a positive net cash flow of $39.0 million in financing activities primarily due to the net increase in deposits. In contrast, net cash outflows of $45.1 million were used by investing activities due to the sale of branches. Net cash provided by operating activities was $5.5 million.

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, 2016:



	Payments Due by Period
	Within 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
Contractual Obligations
Certificates of deposit	$	157,175	$	39,618	$	7,290	$	—	$	204,083
Operating leases	311		550		28		—		889
Series B mandatory redeemable preferred stock	—		209		—		—		209
Subordinated debentures	—		—		—		20,620		20,620
FHLB advances	39,000		31,000		5,000		—		75,000
Total contractual cash obligations	$	196,486	$	71,377	$	12,318	$	20,620	$	300,801

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, often including obtaining collateral at exercise of the commitment. At June 30, 2016, the Company had $133.7 million in outstanding loan commitments including outstanding commitments for various lines of credit and $2.0 million of standby letters of credit.

Capital Resources

Stockholders' Equity

Stockholders' equity at June 30, 2016 was $125.0 million, an increase of $3.7 million from $121.3 million at December 31, 2015. The change in stockholders’ equity during 2016 was the result of net income for the period and an increase in accumulated other comprehensive income.

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Capital Measurements

As reflected in the following table, the Bank was considered “well-capitalized” under regulatory defined capital ratios as of June 30, 2016. Capital ratios shown for June 30, 2016 are in excess of the BASEL III 2016 phase-in level for the capital conservation buffer. See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure on the capital threshold levels:



	Actual				To Be Adequately Capitalized		To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount	Ratio	Amount	Ratio
As of June 30, 2016
Total capital (to risk-weighted assets)
Centrue Financial	$	123,787	16.5	%	N/A	N/A	N/A	N/A
Centrue Bank	119,700		15.9		60,094	8.0	75,117	10.0
Common equity tier I (to risk-weighted assets)
Centrue Financial	$	105,078	14.0		N/A	N/A	N/A	N/A
Centrue Bank	110,775		14.8		33,803	4.5	48,826	6.5
Tier I capital (to risk-weighted assets)
Centrue Financial	$	114,862	15.3		N/A	N/A	N/A	N/A
Centrue Bank	110,775		14.8		45,070	6.0	60,094	8.0
Tier I leverage ratio (to average assets)
Centrue Financial	$	114,862	12.2		N/A	N/A	N/A	N/A
Centrue Bank	110,775		11.7		37,767	4.0	47,209	5.0

Recent Accounting Developments

See Note 1 to the Unaudited Consolidated Financial Statements for information concerning recent accounting developments.

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

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

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

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


•	management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of the Company’s net interest income;


•	fluctuations in the value of the Company’s investment securities;


•	the Company’s ability to ultimately collect on any downgraded loan relationships;


•	the Company’s ability to respond and adapt to economic conditions in our geographic market;


•	the Company’s ability to adapt successfully to technological changes to compete effectively in the marketplace;


•	credit risks and risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio and individual large loans;


•	volatility of rate sensitive deposits;


•	operational risks, including data processing system failures, fraud or cyber attacks;


•	asset/liability matching risks and liquidity risks;

CENTRUE FINANCIAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)


•	the ability to successfully acquire low cost deposits or funding;


•	the ability to successfully execute strategies to increase noninterest income;


•	the ability to successfully grow non-commercial real estate loans;


•	the ability of the Company to continue to realize cost savings and revenue generation opportunities in connection with the synergies of centralizing operations;


•	the ability to adopt and implement new regulatory requirements as dictated by the SEC, FASB or other rule-making bodies which govern our industry;


•	changes in the general economic or industry conditions, nationally or in the communities in which the Company conducts business;


•	the Company’s ability to raise additional capital, if available, to sustain growth or operating results;


•	the Company’s ability to dispose of OREO at reasonable values;


•	the Company's reliance on third parties for information such as appraisal values, credit scores, and IT capabilities.

CENTRUE FINANCIAL CORPORATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity Management

The Company performs a net interest income analysis as part of its asset/liability management practices. The net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 100, 200 and 300 basis point increase in market interest rates or a 100 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, 2016 and December 31, 2015, respectively:



	Change in Net Interest Income Over One Year Horizon
	June 30, 2016					December 31, 2015
	Change					Change
	$			%		$			%
+300 bp	$	1,610		5.68	%	$	1,966		6.89	%
+200 bp	1,100			3.89		1,264			4.43
+100 bp	607			2.14		649			2.27
Base	—			—		—			—
- 100 bp	(1,291		)	(4.56	)	(1,550		)	(5.43	)

As shown above, the effect of an immediate 200 basis point increase in interest rates as of June 30, 2016 would increase the Company’s net interest income by $1.1 million or 3.89%. The effect of an immediate 100 basis point decrease in rates would decrease the Company’s net interest income by $1.3 million or 4.56%.

CENTRUE FINANCIAL CORPORATION

ITEM 4. CONTROLS AND PROCEDURES

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.

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 affect 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 registration statement on Form S-1 filed with the SEC on October 15, 2015 and the Company Annual Report on Form 10-K filed March 15, 2016.

Item 2. Recent Sales of Unregistered Securities

On July 29, 2014, the Company issued to (i) Dennis McDonnell and Kathleen McDonnell, the Dennis J. McDonnell Trust dated as of May 9, 1991, and the Dennis J. McDonnell IRA (all related persons under Section 382(l)(3) constructive ownership rules); (ii) Jim Miller; and (iii) Wayne Whalen and Paul Wolff, and WPW Associates, L.P. (both related persons under Section 382(l)(3) constructive ownership rules) 2,635.5462 newly issued shares of Fixed Rate Non-Voting Perpetual Non-Cumulative Preferred Stock, Series D of the Company (the “Series D Preferred”), in exchange for 2,762.24 shares of 7.500% Series A Convertible Preferred Stock and 50,993 shares of Common Stock. The shares of Series D Preferred were issued in reliance on the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, and in connection with this exchange (i) the Company was the issuer of both the shares surrendered and the Series D Preferred issued in the exchange; (ii) the only consideration from the security holders for the exchange was surrender of the Common Stock and 7.500% Series A Convertible Preferred Stock referenced above; (iii) all of the recipients of the Series D Preferred were existing stockholders of the Company; and (iv) the Company paid no fees or commissions to any third party in connection with the exchange or the solicitation of the exchange.

On March 31, 2015, 6,333,333 shares of Common Stock were issued to seventy-two (72) investors. Sandler O’Neil & Partners, L.P and Boenning & Scattergood, Inc. assisted the Company in completing the private placement and were paid commissions of $4,826,150. The proceeds of the offering were used to pay the expenses of the offering, to pay commissions to Sandler O’Neil & Partners, L.P and Boenning & Scattergood, Inc. the proceeds of the issuance were used to repay $4,925,000 of TRuPs preferred dividends; and $27,500,000 was used to retire and redeem senior debt, sub debt, preferred stock, dividends and warrants. The offers, sales and issuances of the securities issued on March 31, 2015 were exempt from registration under Section 4(a)(2) of the Securities Act of 1933 and Regulation D promulgated thereunder, and a Form D was filed for the issuance. The recipients represented to the Company that they acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, appropriate legends were affixed to the securities issued in these transactions and the recipients represented to us that they were accredited investors as defined in Rule 501 promulgated under the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits:



31.1		Certification of Kurt R. Stevenson, President and Chief Executive Officer, required by Rule 13a - 14(a).
31.2		Certification of Daniel R. Kadolph, Executive Vice President and Chief Financial Officer required by Rule 13a - 14(a).
32.1		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and June 30, 2015; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and June 30, 2015; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and June 30, 2015; and (v) Notes to Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		CENTRUE FINANCIAL CORPORATION

Date:	August 8, 2016	By:	/s/ Kurt R. Stevenson
			Kurt R. Stevenson
			President and Chief Executive Officer



		CENTRUE FINANCIAL CORPORATION

Date:	August 8, 2016	By:	/s/ Daniel R. Kadolph
			Daniel R. Kadolph
			Executive Vice President and Chief Financial Officer