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 September 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 November 9, 2016
Common Stock, Par Value $0.01
 
6,513,694



Centrue Financial Corporation
Form 10-Q Index
September 30, 2016
 
 
Page
 
 
 
 
 
 

CENTRUE FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PAR VALUE AND SHARE DATA)
 



 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and cash equivalents
$
44,745

 
$
27,655

Securities available-for-sale
183,646

 
171,440

Restricted securities
10,098

 
9,116

Loans held for sale
—

 
735

Loans, net of allowance for loan loss: 2016 - $9,021; 2015 - $8,591
657,774

 
624,956

Branch assets held for sale
—

 
16,673

Bank-owned life insurance
35,768

 
35,103

Mortgage servicing rights
2,052

 
2,129

Premises and equipment, net
16,500

 
16,852

Intangible assets, net
166

 
880

Other real estate owned, net
5,541

 
8,401

Deferred tax assets, net
35,432

 
38,180

Other assets
8,361

 
9,098

Total assets
$
1,000,083

 
$
961,218

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
149,537

 
$
164,137

Interest-bearing
611,414

 
554,367

Total deposits
760,951

 
718,504

Federal funds purchased and securities sold under agreements to repurchase
13,093

 
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
4,328

 
5,815

Total liabilities
874,201

 
839,937

 
 
 
 
Commitments and contingent liabilities
—

 
—

 
 
 
 
Stockholders' equity
 
 
 
Series D Fixed Rate, Non-Cumulative Perpetual Preferred Stock,
 
 
 
2,636 shares authorized and issued at September 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 September 30, 2016 and December 31, 2015
66

 
66

Surplus
140,687

 
140,609

Retained earnings (accumulated deficit)
896

 
(2,958
)
Accumulated other comprehensive loss
(2,277
)
 
(2,946
)
 
142,008

 
137,407

Treasury stock, at cost, 67,850 shares at September 30, 2016
 
 
 
and December 31, 2015
(16,126
)
 
(16,126
)
Total stockholders' equity
125,882

 
121,281

Total liabilities and stockholders' equity
$
1,000,083

 
$
961,218


See Accompanying Notes to Consolidated Financial Statements

1
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Loans
$
7,185

 
$
6,476

 
$
21,287

 
$
18,868

Securities
 
 
 
 
 
 
 
Taxable
679

 
794

 
2,242

 
2,020

Exempt from federal income taxes
23

 
46

 
68

 
122

Federal funds sold and other
41

 
20

 
106

 
67

Total interest income
7,928

 
7,336

 
23,703

 
21,077

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Deposits
376

 
316

 
955

 
940

Federal funds purchased and securities sold under
 
 
 
 
 
 
 
agreements to repurchase
7

 
13

 
30

 
37

Federal Home Loan Bank advances
178

 
138

 
578

 
368

Series B mandatory redeemable preferred stock
3

 
4

 
11

 
12

Subordinated debentures
148

 
128

 
435

 
413

Notes payable
—

 
—

 
—

 
84

Total interest expense
712

 
599

 
2,009

 
1,854

 
 
 
 
 
 
 
 
Net interest income
7,216

 
6,737

 
21,694

 
19,223

Provision for loan losses
—

 
—

 
300

 
—

Net interest income after provision for loan losses
7,216

 
6,737

 
21,394

 
19,223

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Service charges
1,010

 
1,075

 
2,927

 
3,010

Mortgage banking income
331

 
315

 
810

 
972

Electronic banking services
624

 
651

 
1,924

 
1,895

Bank-owned life insurance
224

 
232

 
665

 
683

Securities gains, net
79

 
196

 
139

 
297

Income from real estate
53

 
114

 
277

 
434

Gain on sale of OREO
24

 
47

 
99

 
50

Gain on sale of branches
—

 
—

 
1,877

 
—

Gain on sale of other assets
100

 
—

 
102

 
—

Gain on extinguishment of debt
—

 
—

 
—

 
1,750

Other income
54

 
608

 
184

 
750

 
2,499

 
3,238

 
9,004

 
9,841







2
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
4,176

 
4,086

 
12,745

 
12,394

Occupancy, net
648

 
706

 
2,050

 
2,142

Furniture and equipment
282

 
259

 
813

 
746

Marketing
56

 
105

 
143

 
263

Supplies and printing
51

 
50

 
168

 
170

Telephone
216

 
204

 
639

 
592

Data processing
472

 
442

 
1,311

 
1,258

FDIC insurance
62

 
281

 
373

 
925

Loan processing and collection costs
107

 
225

 
256

 
638

OREO carrying costs
104

 
187

 
398

 
655

OREO valuation adjustment
56

 
47

 
86

 
195

Amortization of intangible assets
238

 
238

 
714

 
714

Other expenses
1,273

 
2,012

 
4,023

 
4,286

 
7,741

 
8,842

 
23,719

 
24,978

 
 
 
 
 
 
 
 
Income before income taxes
$
1,974

 
$
1,133

 
$
6,679

 
$
4,086

Income tax expense
919

 
45

 
2,578

 
78

Net income
$
1,055

 
$
1,088

 
$
4,101

 
$
4,008

 
 
 
 
 
 
 
 
Preferred stock dividends
82

 
395

 
247

 
1,401

Discount on redemption of preferred stock
—

 
—

 
—

 
(13,668
)
Net income for common stockholders
$
973

 
$
693

 
$
3,854

 
$
16,275

 
 
 
 
 
 
 
 
Basic earnings per common share(1)
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68

Diluted earnings per common share(1)
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income:
 
 
 
 
 
 
 
Net income
$
1,055

 
$
1,088

 
$
4,101

 
$
4,008

 
 
 
 
 
 
 
 
Change in unrealized gains
 
 
 
 
 
 
 
on securities available for sale
(137
)
 
425

 
1,234

 
130

Reclassification adjustment for losses (gains)
 
 
 
 
 
 
 
recognized in income
(79
)
 
(196
)
 
(139
)
 
(297
)
Net unrealized gains (loss)
(216
)
 
229

 
1,095

 
(167
)
Tax effect
(84
)
 
1

 
426

 
—

Other comprehensive income (loss)
(132
)
 
228

 
669

 
(167
)
Total comprehensive income
$
923

 
$
1,316

 
$
4,770

 
$
3,841





(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

3
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
 


 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
4,101

 
4,008

Adjustments to reconcile net income
 
 
 
 to net cash provided by operating activities
 
 
 
Depreciation
848

 
868

Amortization of intangible assets
714

 
714

Amortization of mortgage servicing rights, net
219

 
257

Amortization of bond premiums, net
1,157

 
1,045

Share based compensation
77

 
—

Provision for loan losses
300

 
—

Provision for deferred income taxes
2,322

 
—

Earnings on bank-owned life insurance
(665
)
 
(683
)
OREO valuation adjustment
86

 
195

Securities gains, net
(139
)
 
(297
)
Gain on sale of OREO
(99
)
 
(50
)
Gain on extinguishment of debt
—

 
(1,750
)
Gain on sale of branches
(1,877
)
 
—

Gain on sale of other assets
(102
)
 
—

Proceeds from sales of loans held for sale
18,813

 
26,561

Origination of loans held for sale
(17,578
)
 
(21,901
)
Gain on sale of loans
(500
)
 
(664
)
Change in assets and liabilities
 
 
 
Decrease in other assets
316

 
92

Decrease in other liabilities
(173
)
 
(4,449
)
Net cash provided by operating activities
7,820

 
3,946

Cash flows from investing activities
 
 
 
Proceeds from paydowns of securities available for sale
29,192

 
24,794

Proceeds from calls and maturities of securities available for sale
9,765

 
3,530

Proceeds from sales of securities available for sale
36,198

 
49,584

Purchases of securities available for sale
(87,243
)
 
(149,842
)
Redemption of Federal Reserve Bank stock
72

 
179

Purchase of Federal Home Loan Bank stock
—

 
(1,229
)
Purchase of Federal Reserve Bank stock
(1,054
)
 
(1,119
)
Net increase in loans
(34,753
)
 
(62,434
)
Purchase of premises and equipment
(411
)
 
(483
)
Proceeds from sale of OREO
3,048

 
639

Sale of branches, net of premium received
(31,444
)
 
—

Net cash used in investing activities
(76,630
)
 
(136,381
)


4
CENTRUE FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
 


 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from financing activities
 
 
 
Net increase in deposits (1)
92,784

 
10,711

Net decrease in federal funds purchased
 
 
 
and securities sold under agreements to repurchase
(5,637
)
 
(7,822
)
Net proceeds (repayments) of advances from the Federal Home Loan Bank
(1,000
)
 
85,000

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
(247
)
 
(395
)
Net cash provided by financing activities
85,900

 
128,954

Net decrease in cash and cash equivalents
17,090

 
(3,481
)
Cash and cash equivalents
 
 
 
Beginning of period
27,655

 
49,167

End of period
$
44,745

 
$
45,686

Supplemental disclosures of cash flow information
 
 
 
Cash payments for
 
 
 
Interest
$
2,004

 
$
6,710

Income taxes
232

 
81

Transfers from loans to other real estate owned
28

 
292

Transfers from loan portfolio and sold in secondary market
—

 
315

Loan transfers to branch assets held for sale
1,607

 
—


(1) Deposits impacted by branch sales during 2016. See Note 10 for additional information.

5
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 nine months ended September 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

6
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. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.
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. In evaluating this standard, management has determined that the majority of revenue earned by the Company are from revenue streams not included in the scope of this standard and thus no material impact is expected with the adoption of this standard.
Note 2. Earnings Per Share
A reconciliation of the numerators and denominators for earnings per common share computations for the three and nine months ended September 30, 2016 and 2015 is presented below. 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 September 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, 3,190 shares and 1,554 shares were considered dilutive for the three and nine month periods ended September 30, 2016, respectively.

7
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Basic Earnings Per Common Share
 
 
 
 
 
 
 
Net income
$
1,055

 
$
1,088

 
$
4,101

 
$
4,008

Preferred stock dividends
(82
)
 
(395
)
 
(247
)
 
(1,401
)
Discount on redemption of preferred stock
—

 
—

 
—

 
13,668

Net income for common shareholders
$
973

 
$
693

 
$
3,854

 
$
16,275

Weighted average common shares outstanding
6,513,694

 
6,485,218

 
6,513,694

 
4,420,000

Basic earnings per common share
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68

Diluted Earnings Per Common Share
 
 
 
 
 
 
 
Weighted average common shares outstanding
6,513,694

 
6,485,218

 
6,513,694

 
4,420,000

Add: dilutive effect of restricted stock units
3,190

 
—

 
1,554

 
—

Weighted average common and dilutive
 
 
 
 
 
 
 
potential shares outstanding
6,516,884

 
6,485,218

 
6,515,248

 
4,420,000

Diluted earnings per common share
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68



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 $183.6 million at September 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 $10.1 million at September 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 September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government agencies
$
12,680

 
$
—

 
$
(89
)
 
$
12,591

States and political subdivisions
13,062

 
76

 
(11
)
 
13,127

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
139,627

 
165

 
(438
)
 
139,354

Collateralized residential mortgage obligations:
 
 
 
 
 
 
 
Agency
15,549

 
62

 
(1
)
 
15,610

Equity securities
2,673

 
291

 
—

 
2,964

 
$
183,591

 
$
594

 
$
(539
)
 
$
183,646


8
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from calls and maturities
$
—

 
$
2,000

 
$
9,765

 
$
3,530

Proceeds from sales
16,528

 
34,959

 
36,198

 
49,584

Realized gains
79

 
272

 
159

 
397

Realized losses
—

 
(76
)
 
(20
)
 
(100
)
Net impairment loss recognized in earnings
—

 
—

 
—

 
—


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.
 
September 30, 2016
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
4,311

 
$
4,321

Due after one year through five years
6,033

 
6,041

Due after five years through ten years
15,398

 
15,356

Due after ten years
—

 
—

U.S. government agency residential mortgage-backed securities
139,627

 
139,354

Collateralized residential mortgage obligations
15,549

 
15,610

Equity
2,673

 
2,964

 
$
183,591

 
$
183,646


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:

9
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


 
September 30, 2016
 
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
$
12,591

 
$
(89
)
 
$
—

 
$
—

 
$
12,591

 
$
(89
)
States and political subdivisions
5,586

 
(11
)
 
—

 
—

 
5,586

 
(11
)
U.S. government agency residential
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
63,962

 
(355
)
 
13,412

 
(83
)
 
77,374

 
(438
)
Collateralized residential mortgage


 


 


 


 


 


obligations: Agency
3,612

 
(1
)
 
—

 
—

 
3,612

 
(1
)
Total temporarily impaired
$
85,751

 
$
(456
)
 
$
13,412

 
$
(83
)
 
$
99,163

 
$
(539
)
 
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
)


10
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
 
September 30, 2016
 
December 31, 2015
Commercial
$
68,046

 
67,360

Agricultural & AG RE
45,520

 
50,121

Construction, land & development
32,046

 
26,016

Commercial RE
427,761

 
391,918

1-4 family mortgages
90,260

 
95,227

Consumer
3,162

 
2,905

Total Loans
$
666,795

 
633,547

Allowance for loan losses
(9,021
)
 
(8,591
)
Loans, net
$
657,774

 
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:
September 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
 
$
23,659

 
$
42,225

 
$
45,188

 
$
31,905

 
$
192,864

 
$
224,941

 
$
560,782

Special Mention
 
712

 
740

 
—

 
—

 
1,931

 
7,342

 
10,725

Substandard
 
165

 
545

 
332

 
141

 
251

 
432

 
1,866

Doubtful
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
24,536

 
$
43,510

 
$
45,520

 
$
32,046

 
$
195,046

 
$
232,715

 
$
573,373


11
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
September 30, 2016
 
 
 
 
 
Unrated
$
46,719

 
$
38,144

 
$
84,863

Special mention
3,208

 
93

 
3,301

Substandard
1,334

 
762

 
2,096

Doubtful
—

 
—

 
—

Total
$
51,261

 
$
38,999

 
$
90,260


 
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 September 30, 2016 and 2015 follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,185

 
$
103

 
$
452

 
$
5,243

 
$
1,933

 
$
9

 
$
8,925

Charge-offs
(20
)
 
—

 
—

 
—

 
(73
)
 
—

 
(93
)
Recoveries
91

 
—

 
4

 
24

 
69

 
1

 
189

Provision
12

 
5

 
152

 
(234
)
 
70

 
(5
)
 
—

Ending Balance
$
1,268

 
$
108

 
$
608

 
$
5,033

 
$
1,999

 
$
5

 
$
9,021


12
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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,036

 
$
65

 
$
396

 
$
5,185

 
$
1,951

 
$
12

 
$
8,645

Charge-offs
—

 
—

 
—

 
(24
)
 
(325
)
 
(1
)
 
(350
)
Recoveries
54

 
2

 
16

 
9

 
24

 
3

 
108

Provision
(121
)
 
(1
)
 
66

 
35

 
25

 
(4
)
 
—

Ending Balance
$
969

 
$
66

 
$
478

 
$
5,205

 
$
1,675

 
$
10

 
$
8,403

An analysis of activity in the allowance for loan losses for the nine months ended September 30, 2016 and 2015 follows:
 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
648

 
$
97

 
$
523

 
$
5,681

 
$
1,628

 
$
14

 
$
8,591

Charge-offs
(38
)
 
—

 
—

 
(520
)
 
(170
)
 
(3
)
 
(731
)
Recoveries
160

 
55

 
28

 
495

 
120

 
3

 
861

Provision
498

 
(44
)
 
57

 
(623
)
 
421

 
(9
)
 
300

Ending Balance
$
1,268

 
$
108

 
$
608

 
$
5,033

 
$
1,999

 
$
5

 
$
9,021


 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,117

 
$
69

 
$
711

 
$
3,999

 
$
2,075

 
$
10

 
$
7,981

Charge-offs
(357
)
 
—

 
(3
)
 
(639
)
 
(455
)
 
(4
)
 
(1,458
)
Recoveries
144

 
2

 
43

 
1,616

 
45

 
30

 
1,880

Provision
65

 
(5
)
 
(273
)
 
229

 
10

 
(26
)
 
—

Ending Balance
$
969

 
$
66

 
$
478

 
$
5,205

 
$
1,675

 
$
10

 
$
8,403


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 September 30, 2016 and December 31, 2015:

13
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


September 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
$
553

 
$
—

 
$
57

 
$
314

 
$
582

 
$
2

 
$
1,508

Loans collectively evaluated for impairment
715

 
108

 
551

 
4,719

 
1,417

 
3

 
7,513

Total allowance balance:
$
1,268

 
$
108

 
$
608

 
$
5,033

 
$
1,999

 
$
5

 
$
9,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
711

 
$
341

 
$
141

 
$
686

 
$
2,097

 
$
2

 
$
3,978

Loans collectively evaluated for impairment
67,335

 
45,179

 
31,905

 
427,075

 
88,163

 
3,160

 
662,817

Total loans balance:
$
68,046

 
$
45,520

 
$
32,046

 
$
427,761

 
$
90,260

 
$
3,162

 
$
666,795

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 September 30, 2016 and December 31, 2015, respectively. Specific reserves were immaterial at September 30, 2016 and December 31, 2015. At September 30, 2016 nonaccrual TDR loans were $0.23 million and $0.24 million at December 31, 2015. There were no TDRs on accrual at September 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 September 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

14
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 September 30, 2016 and September 30, 2015, there were no loans modified as troubled debt restructurings. During the nine months ended September 30, 2016, there were no loans modified as troubled debt restructurings, compared to the same nine month period ended September 30, 2015 when there were two senior lien 1-4 family residential loan modified as troubled debt restructurings with a pre-modification and post-modification recorded investment of $0.1 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 nine months ended September 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 nine months ended September 30, 2016 and the nine months ended September 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.

15
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


The following tables present data on impaired loans:
September 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
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Line of credit
 
—

 
—

 
—

 
—

 
—

 
—

Agricultural & AG RE
 
341

 
341

 
—

 
85

 
18

 
5

Construction, land & development
 
79

 
257

 
—

 
20

 
—

 
—

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
3

 
3

 
—

 
9

 
—

 
2

Non-owner occupied
 
—

 
—

 
—

 
—

 
—

 
—

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
252

 
252

 
—

 
218

 
—

 
—

Jr. lien & lines of credit
 
192

 
192

 
—

 
119

 
4

 
4

Consumer
 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
867

 
1,045

 
—

 
451

 
22

 
11

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Closed-end
 
$
164

 
$
164

 
$
102

 
$
165

 
$
2

 
$
2

Line of credit
 
547

 
547

 
451

 
286

 
20

 
19

Agricultural & AG RE
 
—

 
—

 
—

 
80

 
—

 
—

Construction, land & development
 
62

 
62

 
57

 
115

 
3

 
1

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
252

 
252

 
113

 
415

 
10

 
7

Non-owner occupied
 
431

 
431

 
201

 
2,129

 
—

 
—

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
1,082

 
1,100

 
284

 
1,079

 
15

 
14

Jr. lien & lines of credit
 
571

 
571

 
298

 
419

 
12

 
12

Consumer
 
2

 
2

 
2

 
2

 
—

 
—

Subtotal
 
3,111

 
3,129

 
1,508

 
4,690

 
62

 
55

Total
 
$
3,978

 
$
4,174

 
$
1,508

 
$
5,141

 
$
84

 
$
66


16
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 September 30, 2016 compared to $0.1 million at December 31, 2015.

17
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:
September 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
 
$
—

 
$
—

 
$
108

 
$
108

 
$
24,428

 
$
24,536

Line of credit
 
—

 
—

 
—

 
—

 
43,510

 
43,510

Agricultural & AG RE
 
331

 
—

 
—

 
331

 
45,189

 
45,520

Construction, land
& development
 
—

 
—

 
79

 
79

 
31,967

 
32,046

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
173

 
—

 
20

 
193

 
194,853

 
195,046

Non-owner occupied
 
—

 
—

 
432

 
432

 
232,283

 
232,715

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
—

 
296

 
965

 
1,261

 
50,000

 
51,261

Jr. lien & lines of credit
 
214

 
35

 
718

 
967

 
38,032

 
38,999

Consumer
 
—

 
—

 
—

 
—

 
3,162

 
3,162

Total
 
$
718

 
$
331

 
$
2,322

 
$
3,371

 
$
663,424

 
$
666,795


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 September 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

18
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)
September 30, 2016
 
 
 
 
 
 
 
U.S. government agencies
$
12,591

 
$
—

 
$
12,591

 
$
—

State and political subdivisions
13,127

 
—

 
8,109

 
5,018

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
139,354

 
—

 
139,354

 
—

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Agency
15,610

 
—

 
15,610

 
—

Equities
2,964

 
—

 
2,964

 
—

Available-for-sale securities
$
183,646

 
$
—

 
$
178,628

 
$
5,018



19
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 nine 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
(3
)
Included in other comprehensive income
—

Ending Balance, September 30
$
5,018


For the period ended September 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.


20
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)
September 30, 2016
 
 
 
 
 
 
 
Impaired loans
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
Line of credit
114

 
—

 
—

 
114

CRE - all other
 
 
 
 
 
 
 
Owner occupied
$
139

 
$
—

 
$
—

 
$
139

1-4 family residential
 
 
 
 
 
 
 
Senior lien
131

 
—

 
—

 
131

Jr. lien & lines of credit
—

 
—

 
—

 
—

OREO property
 
 
 
 
 
 
 
CRE - construction, land & development
2,765

 
—

 
—

 
2,765

CRE - all other
 
 
 
 
 
 
 
Non-owner occupied
1,301

 
—

 
—

 
1,301

1-4 family residential
 
 
 
 
 
 
 
Senior lien
167

 
—

 
—

 
167


 
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.

21
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


Impaired loans carried at fair value had a net carrying amount of $0.4 million at September 30, 2016, which is made up of the outstanding balance of $1.0 million with $0.6 million specific loan loss allocation. The effect of these impaired loans carried at fair value on the provision for loans losses was $0.6 million for the nine month period. In 2015 impaired loans carried at fair value had a net carrying amount of $0.6 million which was made up of the outstanding balance of $0.9 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 September 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 September 30, 2016 and December 31, 2015:
September 30, 2016
Fair
Value
 
Valuation Technique
 
Unobservable Inputs
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
Impaired loans
 
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
 
Commercial
 
 
 
 
 
 
 
Line of credit
$
114

 
 
 
 
 
20% - 100% (78%)
CRE - all other
 
 
 
 
 
 

Owner occupied
$
139

 
 
 
 
 
10% - 55% (41%)
1-4 family residential
 
 
 
 
 
 

Senior lien
131

 
 
 
 
 
10% - 60% (54%)
OREO property
 
 
 
 
 
 
 
CRE - construction, land & development
2,765

 
 
 
 
 
5% - 70% (35%)
CRE - all other
 
 
 
 
 
 
 
Non-owner occupied
1,301

 
 
 
 
 
5% - 50% (18%)
1-4 family residential
 
 
 
 
 
 
 
Senior lien
167

 
 
 
 
 
6% - 55% (54%)




22
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 September 30, 2016 Using
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
44,745

 
$
44,745

 
$
—

 
$
—

 
$
44,745

Securities
183,646

 
—

 
178,628

 
5,018

 
183,646

Restricted securities
10,098

 
—

 
—

 
—

 
NA

Loans held for sale
—

 
—

 
—

 
—

 
—

Net loans
657,774

 
—

 
—

 
663,761

 
663,761

Accrued interest receivable
2,275

 
—

 
684

 
1,591

 
2,275

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
760,951

 
$
—

 
$
761,198

 
$
—

 
$
761,198

Federal funds purchased and
 
 
 
 
 
 
 
 
 
securities sold under
 
 
 
 
 
 
 
 
 
agreements to repurchase
13,093

 
—

 
13,093

 
—

 
13,093

Federal Home Loan Bank advances
75,000

 
—

 
75,397

 
—

 
75,397

Subordinated debentures
20,620

 
—

 
—

 
16,511

 
16,511

Series B mandatory redeemable
 
 
 
 
 
 
 
 
 
preferred stock
209

 
—

 
211

 
—

 
211

Accrued interest payable
241

 
—

 
168

 
73

 
241



23
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 September 30, 2016 and December 31, 2015; $44.7 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.
(c) Loans
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.

24
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 September 30, 2016 and December 31, 2015 are as follows:

 
 
September 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
 
0.48

 
49,000

 
3.64

 
5,000

2019
 
1.41

 
10,000

 
—

 
—

2020
 
—

 
—

 
—

 
—

Thereafter
 
2.46

 
5,000

 
—

 
—

 
 
0.83

 
$
75,000

 
0.96

 
$
76,000


At September 30, 2016 and December 31, 2015 no FHLB advances had any call provisions. The Company had two variable rate advances at September 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 September 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 September 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.

25
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 September 30, 2016 and December 31, 2015.
Below is a summary of items included in the deferred tax inventory as of September 30, 2016 and December 31, 2015:

 
September 30, 2016
 
December 31, 2015
Deferred tax assets
 
 
 
Allowance for loan losses
$
3,510

 
$
3,342

Deferred compensation, other
430

 
74

Stock based expense
117

 
87

Net operating loss carryforwards
30,924

 
34,180

Securities available-for-sale
—

 
405

Deferred tax credits
1,030

 
823

OREO valuation allowance
922

 
1,059

Depreciation
211

 
—

Other
205

 
255

Total deferred tax assets
37,349

 
40,225

Deferred tax liabilities
 
 
 
Depreciation
$
—

 
$
(58
)
Adjustments arising from acquisitions
(95
)
 
(146
)
Mortgage servicing rights
(799
)
 
(828
)
Securities available-for-sale
(21
)
 
—

Federal Home Loan Bank dividend received in stock
(450
)
 
(450
)
Deferred loan fees & costs
(388
)
 
(399
)
Prepaid expenses
(164
)
 
(164
)
Total deferred tax liabilities
(1,917
)
 
(2,045
)
Valuation allowance
—

 
—

Net deferred tax assets
$
35,432

 
$
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 units of restricted stock granted at a grant date fair value of $16.72 per unit for the nine months ended September 30, 2016. At September 30, 2016, none of the restricted stock units were vested. There were 40,443 shares of restricted stock granted for the year ended December 31, 2015.

26
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


There was no compensation cost charged against income for the stock options portion of the equity incentive plans for the nine months ended September 30, 2016 and for the year ended December 31, 2015. There was $0.08 million compensation cost charged against income for the restricted stock portion of the equity incentive plan for the nine months ended September 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 nine months ended September 30, 2016 and the year ended December 31, 2015.
A status summary of the option plan as of September 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

 
0.4 years
 
$
—

Vested or expected to vest
498

 
$
578.10

 
0.4 years
 
$
—

Options exercisable at period end
498

 
$
578.10

 
0.4 years
 
$
—


Options outstanding at September 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
September 30, 2016
 
 
 
 
 
 
 
$390.01 - $578.10
498

 
0.4 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 September 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

27
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


effect on our financial statements.  As of September 30, 2016, Centrue Bank met all capital adequacy requirements to which they were subject, including the guidelines to be considered “well capitalized.”
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 September 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 September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
126,049

 
16.2
%
 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
122,180

 
15.7

 
62,338

 
8.0
 
77,923

 
10.0
Common equity tier I (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
106,820

 
13.7

 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
113,159

 
14.5

 
35,065

 
4.5
 
50,650

 
6.5
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
117,028

 
15.0

 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
113,159

 
14.5

 
46,754

 
6.0
 
62,338

 
8.0
Tier I leverage ratio (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
117,028

 
12.2

 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
113,159

 
11.8

 
38,302

 
4.0
 
47,878

 
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



28
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 



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 gain of $1.1 million.
Note 11. Subsequent Events
On October 27, 2016, the Company completed the settlement of one of its $10.3 million trust preferred issuances for $9.3 million plus accrued interest. This transaction has created a gain on debt extinguishment of $1.0 million that will be recognized in the fourth quarter of 2016.

29
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


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 nine months ended September 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.
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.
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. Information about our critical accounting policies and estimates that are of particular significance to the Company are included under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes during 2016 to the critical accounting policies listed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.


30
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


Results of Operations
Net Income
Net income for the three months ended September 30, 2016 equaled $1.1 million or $0.15 per common diluted share as compared to net income of $1.1 million or $0.11 per common diluted share in the third quarter of 2015. For the first nine months of 2016, the Company had net income of $4.1 million or $0.59 per common diluted share as compared to net income of $4.0 million or $3.68 per common diluted share for the same period in 2015.
The results for the first nine 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 nine 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 third quarter 2016 totaled $7.2 million, representing an increase of $0.4 million or 5.88% compared to $6.8 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 3.38% for the third quarter of 2016, representing an increase of four basis points from the 3.34% recorded in the third quarter of 2015. The improvement in the net interest margin is being driven by the growth in the loan portfolio.
Fully tax equivalent net interest income for the nine months ended September 30, 2016 totaled $21.7 million, representing an increase of $2.4 million or 12.44% compared to $19.3 million earned during the same period in 2015. The net interest margin was 3.45% for the nine months ended September 30, 2016, representing an increase of three basis points from 3.42% recorded in the same period of 2015. The increase in net interest income and the net interest margin was driven by the same factor impacting the third quarter.


31
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
 
Three Months Ended September 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
$
1,059

 
$
37

 
13.90
%
 
$
2,011

 
$
17

 
3.35
%
 
$
(45
)
 
$
65

 
$
20

Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable(1)
184,543

 
679

 
1.46

 
196,193

 
794

 
1.61

 
(115
)
 
—

 
(115
)
Exempt from federal income taxes(1)(2)
4,052

 
34

 
3.34

 
7,145

 
70

 
3.89

 
(36
)
 
—

 
(36
)
Total securities (tax equivalent)
188,595

 
713

 
1.50

 
203,338

 
864

 
1.69

 
(151
)
 
—

 
(151
)
Federal funds sold and other
620

 
4

 
2.57

 
620

 
3

 
1.92

 
—

 
1

 
1

Loans(3)(4)(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
97,826

 
1,018

 
4.14

 
104,347

 
1,062

 
4.04

 
(96
)
 
52

 
(44
)
Real estate
558,673

 
6,121

 
4.36

 
490,627

 
5,368

 
4.34

 
706

 
47

 
753

Installment and other
3,553

 
51

 
5.71

 
2,911

 
48

 
6.54

 
(2
)
 
5

 
3

Gross loans (tax equivalent)
660,052

 
7,190

 
4.33

 
597,885

 
6,478

 
4.30

 
608

 
104

 
712

Total interest-earnings assets
850,326

 
7,944

 
3.72

 
803,854

 
7,362

 
3.63

 
412

 
170

 
582

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
44,212

 
 
 
 
 
46,200

 
 
 
 
 
 
 
 
 
 
Premises and equipment, net
16,572

 
 
 
 
 
22,341

 
 
 
 
 
 
 
 
 
 
Other assets
78,740

 
 
 
 
 
47,308

 
 
 
 
 
 
 
 
 
 
Total nonearning assets
139,524

 
 
 
 
 
115,849

 
 
 
 
 
 
 
 
 
 
Total assets
$
989,850

 
 
 
 
 
$
919,703

 
 
 
 
 
 
 
 
 
 
LIABILITIES & STOCKHOLDERS’
EQUITY
Interest-bearing liabilities
NOW accounts
131,874

 
33

 
0.10

 
131,685

 
30

 
0.09

 
(2
)
 
5

 
3

Money market accounts
131,684

 
90

 
0.27

 
119,833

 
54

 
0.18

 
(12
)
 
48

 
36

Savings deposits
118,885

 
3

 
0.01

 
124,089

 
3

 
0.01

 
—

 
—

 
—

Time deposits
205,375

 
250

 
0.48

 
193,727

 
229

 
0.47

 
32

 
(11
)
 
21

Federal funds purchased and repurchase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
12,871

 
7

 
0.22

 
18,510

 
13

 
0.28

 
(5
)
 
(1
)
 
(6
)
Advances from FHLB
90,261

 
178

 
0.78

 
75,000

 
138

 
0.73

 
22

 
18

 
40

Notes payable
20,829

 
151

 
2.88

 
20,888

 
132

 
2.51

 
(13
)
 
32

 
19

Total interest-bearing liabilities
711,779

 
712

 
0.40

 
683,732

 
599

 
0.35

 
22

 
91

 
113

Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
148,105

 
 
 
 
 
147,363

 
 
 
 
 
 
 
 
 
 
Other liabilities
4,692

 
 
 
 
 
5,114

 
 
 
 
 
 
 
 
 
 
Total noninterest-bearing liabilities
152,797

 
 
 
 
 
152,477

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
125,274

 
 
 
 
 
83,494

 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
989,850

 
 
 
 
 
$
919,703

 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
 
 
$
7,232

 
 
 
 
 
$
6,763

 
 
 
$
390

 
$
79

 
$
469

Net interest income (tax equivalent)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total earning assets
 
 
 
 
3.38
%
 
 
 
 
 
3.34
%
 
 
 
 
 
 
Interest-bearing liabilities to earning assets
 
 
 
 
83.71
%
 
 
 
 
 
85.06
%
 
 
 
 
 
 
(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 third quarter 2016 there was $14 in tax equivalent interest included in gross loans and $10 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.


32
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
 
Nine Months Ended September 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
$
2,399

 
$
93

 
5.18
%
 
$
2,983

 
$
51

 
2.29
%
 
$
(39
)
 
$
81

 
$
42

Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable(1)
176,708

 
2,242

 
1.69

 
168,089

 
2,020

 
1.61

 
59

 
163

 
222

Exempt from federal income taxes(1)(2)
4,057

 
103

 
3.39

 
5,905

 
185

 
4.19

 
(64
)
 
(18
)
 
(82
)
Total securities (tax equivalent)
180,765

 
2,345

 
1.73

 
173,994

 
2,205

 
1.69

 
(5
)
 
145

 
140

Federal funds sold and other
620

 
13

 
2.80

 
2,543

 
16

 
0.84

 
(28
)
 
25

 
(3
)
Loans(3)(4)(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
104,084

 
3,211

 
4.12

 
101,279

 
3,087

 
4.08

 
73

 
51

 
124

Real estate
550,634

 
17,940

 
4.35

 
471,568

 
15,664

 
4.44

 
2,451

 
(175
)
 
2,276

Installment and other
3,203

 
146

 
6.09

 
2,932

 
132

 
6.02

 
5

 
9

 
14

Gross loans (tax equivalent)
657,921

 
21,297

 
4.32

 
575,779

 
18,883

 
4.38

 
2,529

 
(115
)
 
2,414

Total interest-earnings assets
841,705

 
23,748

 
3.77

 
755,299

 
21,155

 
3.74

 
2,457

 
136

 
2,593

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
41,519

 
 
 
 
 
46,262

 
 
 
 
 
 
 
 
 
 
Premises and equipment, net
19,784

 
 
 
 
 
22,446

 
 
 
 
 
 
 
 
 
 
Other assets
80,818

 
 
 
 
 
48,528

 
 
 
 
 
 
 
 
 
 
Total nonearning assets
142,121

 
 
 
 
 
117,236

 
 
 
 
 
 
 
 
 
 
Total assets
$
983,826

 
 
 
 
 
$
872,535

 
 
 
 
 
 
 
 
 
 
LIABILITIES & STOCKHOLDERS’
EQUITY
Interest-bearing liabilities
NOW accounts
129,912

 
84

 
0.09

 
118,842

 
67

 
0.08

 
1

 
16

 
17

Money market accounts
116,489

 
191

 
0.22

 
119,721

 
159

 
0.18

 
(23
)
 
55

 
32

Savings deposits
125,967

 
11

 
0.01

 
122,587

 
10

 
0.01

 
—

 
1

 
1

Time deposits
202,490

 
669

 
0.44

 
197,760

 
704

 
0.48

 
13

 
(48
)
 
(35
)
Federal funds purchased and repurchase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
15,042

 
30

 
0.27

 
17,856

 
37

 
0.28

 
(6
)
 
(1
)
 
(7
)
Advances from FHLB
89,500

 
578

 
0.86

 
49,737

 
368

 
0.99

 
235

 
(25
)
 
210

Notes payable
20,868

 
446

 
2.85

 
24,230

 
509

 
2.81

 
(76
)
 
13

 
(63
)
Total interest-bearing liabilities
700,268

 
2,009

 
0.38

 
650,733

 
1,854

 
0.38

 
144

 
11

 
155

Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
154,858

 
 
 
 
 
148,838

 
 
 
 
 
 
 
 
 
 
Other liabilities
5,287

 
 
 
 
 
6,804

 
 
 
 
 
 
 
 
 
 
Total noninterest-bearing liabilities
160,145

 
 
 
 
 
155,642

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
123,413

 
 
 
 
 
66,160

 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
983,826

 
 
 
 
 
$
872,535

 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
 
 
$
21,739

 
 
 
 
 
$
19,301

 
 
 
$
2,313

 
$
125

 
$
2,438

Net interest income (tax equivalent)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total earning assets
 
 
 
 
3.45
%
 
 
 
 
 
3.42
%
 
 
 
 
 
 
Interest-bearing liabilities to earning assets
 
 
 
 
83.20
%
 
 
 
 
 
86.16
%
 
 
 
 
 
 
(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 $32 in tax equivalent interest included in gross loans and $46 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.


33
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


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 third quarter 2016 and 2015. As for the first nine 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 third quarter 2016 was driven by the following factors:
•
Trends in, and the level of, recoveries realized
•
Continued improvements in asset quality metrics
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 $2.5 million for the three months ended September 30, 2016, compared to $3.2 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 income from service charges and from real estate owned.
For the nine months ended September 30, 2016, noninterest income totaled $9.0 million, compared to $9.8 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 $0.5 million. The $0.5 million decrease is attributed to a decrease in mortgage banking income along with the same reasons as stated for the quarter.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee benefits, occupancy, and other operating expense. Total noninterest expense for the third quarter of 2016 was $7.7 million, compared to $8.8 million recorded during the same period in 2015. Excluding OREO valuation adjustments and other irregularly occurring items from both periods, noninterest expense levels decreased by $0.1 million, or 1.3%. This $0.1 million decrease was mainly driven by lower FDIC insurance premiums, loan processing and collection costs, marketing and OREO carrying costs.
For the nine months ended September 30, 2016, noninterest expense totaled $23.7 million, compared to $25.0 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 $0.2 million, or 0.8%. This $0.2 million decrease was attributed to the same reasons as stated above.
Applicable Income Taxes
The Company recorded $2.6 million in income tax expense for the nine months ended September 30, 2016 on pre-tax income of $6.7 million, resulting in an effective tax rate of 38.8%. This increase from the 35.3% for the six months ended June 30, 2016 was due to the execution of a tax planning strategy. 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 nine months ended September 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 nine months ended September 30, 2015.



34
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


Financial Condition
General
Following are highlights of the September 30, 2016 balance sheet when compared to December 31, 2015:
Securities. The primary strategic objective of the Company’s $183.6 million securities available-for-sale from September 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 $183.6 million at September 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 $10.1 million at September 30, 2016 and $9.1 million at December 31, 2015.
Loans. Total loans, including loans held for sale, equaled $666.8 million, representing an increase of $21.7 million, or 3.36% 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 and paydowns on existing loans. Competition for new commercial loan opportunities and loan renewals continues to be strong and pressures loan yields.
Deposits. Total deposits equaled $761.0 million at September 30, 2016 compared to $718.5 million recorded at December 31, 2015. The September 30, 2016 deposit balance represents an increase of $42.5 million or 5.92% from December 31, 2015. The net increase from year-end 2015 was largely related to an increase in brokered deposits and public fund accounts. On June 17, 2016, the Company sold three branches which included $51.7 million of deposits.
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. In addition to our credit administration department, 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.

35
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


The following table sets forth a summary of nonperforming assets:
 
September 30,
 
December 31,
 
2016
 
2015
Nonaccrual loans (including TDRs)
$
2,322

 
$
6,007

TDRs still accruing interest
—

 
—

Loans 90 days past due and still accruing interest
—

 
—

Total nonperforming loans
$
2,322

 
$
6,007

Other real estate owned
5,541

 
8,401

Total nonperforming assets
$
7,863

 
$
14,408

 
 
 
 
Nonperforming loans to total end of period loans
0.35
%
 
0.93
%
Nonperforming assets to total end of period loans
1.18

 
2.23

Nonperforming assets to total end of period assets
0.79

 
1.50

Total nonperforming assets declined $6.5 million to $7.9 million, or 0.79% of total assets, at September 30, 2016 from $14.4 million at December 31, 2015. Total nonperforming assets included $5.5 million of foreclosed assets and repossessed real estate, and $2.3 million of nonaccrual loans at September 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 $3.7 million from December 31, 2015 to September 30, 2016, driven by the resolution of a large non-performing loan relationship.
The level of nonperforming loans to end of period loans was 0.35% as of September 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 388.50% for the period ended September 30, 2016 from 143.02% for the year ended December 31, 2015.
Allowance for Loan Losses
At September 30, 2016, the allowance for loan losses was $9.0 million, or 1.35% 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 nine months ended September 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 $17.1 million from December 31, 2015 to September 30, 2016.

36
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


For the period ended September 30, 2016, the Company experienced a positive net cash flow of $85.9 million in financing activities primarily due to the net increase in deposits. In contrast, net cash outflows of $76.6 million were used by investing activities due to the sale of branches and a net increase in loans. Net cash provided by operating activities was $7.8 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 September 30, 2016:
 
Payments Due by Period
 
Within 1
Year
 
1-3 Years
 
4-5 Years
 
After
5 Years
 
Total
Contractual Obligations
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
170,389

 
$
37,060

 
$
6,519

 
$
—

 
$
213,968

Operating leases
312

 
499

 
—

 
—

 
811

Series B mandatory redeemable preferred stock
—

 
209

 
—

 
—

 
209

Subordinated debentures
—

 
—

 
—

 
20,620

 
20,620

FHLB advances
—

 
70,000

 
5,000

 
—

 
75,000

Total contractual cash obligations
$
170,701

 
$
107,768

 
$
11,519

 
$
20,620

 
$
310,608

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 September 30, 2016, the Company had $142.7 million in outstanding loan commitments including outstanding commitments for various lines of credit and $2.1 million of standby letters of credit.
Capital Resources
Stockholders' Equity
Stockholders' equity at September 30, 2016 was $125.9 million, an increase of $4.6 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 a decrease in accumulated other comprehensive loss. Preferred dividends of $0.2 million where paid on Series D preferred stock during the period ended September 30, 2016.

37
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


Capital Measurements
As reflected in the following table, the Bank was considered “well-capitalized” under regulatory defined capital ratios as of September 30, 2016. Capital ratios shown for September 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 September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
126,049

 
16.2
%
 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
122,180

 
15.7

 
62,338

 
8.0
 
77,923

 
10.0
Common equity tier I (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
106,820

 
13.7

 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
113,159

 
14.5

 
35,065

 
4.5
 
50,650

 
6.5
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
117,028

 
15.0

 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
113,159

 
14.5

 
46,754

 
6.0
 
62,338

 
8.0
Tier I leverage ratio (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
117,028

 
12.2

 
N/A

 
N/A
 
N/A

 
N/A
Centrue Bank
113,159

 
11.8

 
38,302

 
4.0
 
47,878

 
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;

38
CENTRUE FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


•
asset/liability matching risks and liquidity risks;
•
the ability to successfully acquire low cost deposits or funding;
•
the ability to successfully execute strategies to increase noninterest income;
•
the ability to successfully grow non-commercial real estate loans;
•
the ability of the Company to continue to realize cost savings and revenue generation opportunities in connection with the synergies of centralizing operations;
•
the ability to adopt and implement new regulatory requirements as dictated by the SEC, FASB or other rule-making bodies which govern our industry;
•
changes in the general economic or industry conditions, nationally or in the communities in which the Company conducts business;
•
the Company’s ability to raise additional capital, if available, to sustain growth or operating results;
•
the Company’s ability to dispose of OREO at reasonable values;
•
the Company's reliance on third parties for information such as appraisal values, credit scores, and IT capabilities.


39
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 September 30, 2016 and December 31, 2015, respectively:
 
Change in Net Interest Income Over One Year Horizon
 
September 30, 2016
 
December 31, 2015
 
Change
 
Change
 
$
 
%
 
$
 
%
+300 bp
$
1,266

 
4.42
 %
 
$
1,966

 
6.89
 %
+200 bp
888

 
3.10

 
1,264

 
4.43

+100 bp
445

 
1.55

 
649

 
2.27

Base
—

 
—

 
—

 
—

- 100 bp
(1,435
)
 
(5.01
)
 
(1,550
)
 
(5.43
)
As shown above, the effect of an immediate 200 basis point increase in interest rates as of September 30, 2016 would increase the Company’s net interest income by $0.9 million or 3.10%. The effect of an immediate 100 basis point decrease in rates would decrease the Company’s net interest income by $1.4 million or 5.01%.


40
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.


41

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 September 30, 2016 and December 31, 2015; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and September 30, 2015; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and September 30, 2015; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and September 30, 2015; and (v) Notes to Unaudited Consolidated Financial Statements.

42

SIGNATURES


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

 
 
CENTRUE FINANCIAL CORPORATION
 
 
 
 
 
 
 
Date:
November 9, 2016
By:
 
/s/ Kurt R. Stevenson
 
 
 
 
 
Kurt R. Stevenson
 
 
 
 
 
President and Chief Executive Officer
 

 
 
CENTRUE FINANCIAL CORPORATION
 
 
 
 
 
 
 
Date:
November 9, 2016
By:
 
/s/ Daniel R. Kadolph
 
 
 
 
 
Daniel R. Kadolph
 
 
 
 
 
Executive Vice President and Chief Financial Officer
 


43