10-Q

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, 2015
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 13, 2015
Common Stock, Par Value $0.01
 
6,513,694




Centrue Financial Corporation
Form 10-Q Index
September 30, 2015
 
 
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,
2015
 
December 31,
2014
ASSETS
 
 
 
Cash and cash equivalents
$
45,686

 
$
49,167

Securities available-for-sale
206,430

 
135,371

Restricted securities
8,271

 
6,102

Loans held for sale
214

 
364

Loans, net of allowance for loan loss: 2015 - $8,403;
 
 
 
2014 - $7,981
603,515

 
545,219

Bank-owned life insurance
34,877

 
34,194

Mortgage servicing rights
2,171

 
2,240

Premises and equipment, net
22,241

 
22,626

Intangible assets, net
1,117

 
1,831

Other real estate owned, net
9,755

 
10,256

Other assets
9,399

 
9,719

Total assets
$
943,676

 
$
817,089

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
160,998

 
$
144,633

Interest-bearing
548,537

 
554,191

Total deposits
709,535

 
698,824

Federal funds purchased and securities sold under agreements to repurchase
18,869

 
26,691

Federal Home Loan Bank advances
105,000

 
20,000

Notes payable

 
10,250

Series B mandatory redeemable preferred stock
268

 
268

Subordinated debentures
20,620

 
20,620

Other liabilities
5,636

 
10,108

Total liabilities
859,928

 
786,761

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
Stockholders' equity
 
 
 
Series C Fixed Rate, Cumulative Perpetual Preferred Stock, no shares authorized
 
 
 
in 2015; 32,668 shares authorized and issued 2014;
 
 
 
aggregate liquidation preference of $32,668

 
32,668

Series D Fixed Rate, Non-Cumulative Perpetual Preferred Stock,
 
 
 
2,636 shares authorized and issued 2015 and 2014;
 
 
 
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 2015;
 
 
 
215,000,000 shares authorized; 248,452 shares issued at 2014
66

 
2

Surplus
147,626

 
78,955

Accumulated deficit
(41,469
)
 
(58,750
)
Accumulated other comprehensive loss
(2,218
)
 
(2,051
)
 
106,641

 
53,460

Treasury stock, at cost, 96,326 shares at September 30, 2015
 
 
 
and 97,330 at December 31, 2014
(22,893
)
 
(23,132
)
Total stockholders' equity
83,748

 
30,328

Total liabilities and stockholders' equity
$
943,676

 
$
817,089


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,
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Loans
$
6,476

 
$
6,304

 
$
18,868

 
$
18,796

Securities
 
 
 
 
 
 
 
Taxable
794

 
543

 
2,020

 
1,766

Exempt from federal income taxes
46

 
62

 
122

 
188

Federal funds sold and other
20

 
38

 
67

 
98

Total interest income
7,336

 
6,947

 
21,077

 
20,848

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Deposits
316

 
498

 
940

 
1,637

Federal funds purchased and securities sold under
 
 
 
 
 
 
 
agreements to repurchase
13

 
14

 
37

 
39

Federal Home Loan Bank advances
138

 
117

 
368

 
340

Series B mandatory redeemable preferred stock
4

 
4

 
12

 
12

Subordinated debentures
128

 
152

 
413

 
447

Notes payable

 
86

 
84

 
254

Total interest expense
599

 
871

 
1,854

 
2,729

 
 
 
 
 
 
 
 
Net interest income
6,737

 
6,076

 
19,223

 
18,119

Provision for loan losses

 
675

 

 
2,275

Net interest income after provision for loan losses
6,737

 
5,401

 
19,223

 
15,844

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Service charges
1,075

 
1,154

 
3,010

 
3,289

Mortgage banking income
315

 
377

 
972

 
1,164

Electronic banking services
651

 
644

 
1,895

 
1,868

Bank-owned life insurance
232

 
229

 
683

 
668

Securities gains, net
196

 
410

 
297

 
788

Income from real estate
114

 
141

 
434

 
462

Gain on sale of OREO
47

 
166

 
50

 
588

Gain on sale of other assets

 

 

 
750

Gain on extinguishment of debt

 

 
1,750

 

Other income
608

 
83

 
750

 
243

 
3,238

 
3,204

 
9,841

 
9,820







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,
 
2015
 
2014
 
2015
 
2014
Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
4,086

 
3,796

 
12,394

 
11,490

Occupancy, net
706

 
677

 
2,142

 
2,139

Furniture and equipment
259

 
241

 
746

 
731

Marketing
105

 
61

 
263

 
174

Supplies and printing
50

 
59

 
170

 
180

Telephone
204

 
174

 
592

 
573

Data processing
442

 
476

 
1,258

 
1,282

FDIC insurance
281

 
473

 
925

 
1,428

Loan processing and collection costs
225

 
80

 
638

 
481

OREO carrying costs
187

 
277

 
655

 
801

OREO valuation adjustment
47

 
443

 
195

 
839

Amortization of intangible assets
238

 
238

 
714

 
714

Other expenses
2,012

 
1,037

 
4,286

 
3,327

 
8,842

 
8,032

 
24,978

 
24,159

 
 
 
 
 
 
 
 
Income before income taxes
$
1,133

 
$
573

 
$
4,086

 
$
1,505

Income tax expense
45

 

 
78

 

Net income
$
1,088

 
$
573

 
$
4,008

 
$
1,505

 
 
 
 
 
 
 
 
Preferred stock dividends
395

 
808

 
1,401

 
2,585

Discount on redemption of preferred stock

 

 
(13,668
)
 

Net income (loss) for common stockholders
$
693

 
$
(235
)
 
$
16,275

 
$
(1,080
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.11

 
$
(1.41
)
 
$
3.68

 
$
(5.68
)
Diluted earnings (loss) per common share
$
0.11

 
$
(1.41
)
 
$
3.68

 
$
(5.68
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss):
 
 
 
 
 
 
 
Net income
$
1,088

 
$
573

 
$
4,008

 
$
1,505

 
 
 
 
 
 
 
 
Change in unrealized gains (losses)
 
 
 
 
 
 
 
on securities available for sale
424

 
34

 
130

 
(24
)
Reclassification adjustment for gains
 
 
 
 
 
 
 
recognized in income
(196
)
 
(410
)
 
(297
)
 
(788
)
Net unrealized gains (loss)
228

 
(376
)
 
(167
)
 
(812
)
Tax effect


 


 


 


Other comprehensive income (loss)
228

 
(376
)
 
(167
)
 
(812
)
Total comprehensive income
$
1,316

 
$
197

 
$
3,841

 
$
693






See Accompanying Notes to Consolidated Financial Statements

3

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


 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
4,008

 
$
1,505

Adjustments to reconcile net income (loss)
 
 
 
 to net cash provided by operating activities
 
 
 
Depreciation
868

 
883

Amortization of intangible assets
714

 
714

Amortization of mortgage servicing rights, net
257

 
216

Amortization of bond premiums, net
1,045

 
1,050

Provision for loan losses

 
2,275

Earnings on bank-owned life insurance
(683
)
 
(668
)
OREO valuation allowance
195

 
839

Securities gains, net
(297
)
 
(788
)
Gain on sale of OREO
(50
)
 
(588
)
Gain on extinguishment of debt
(1,750
)
 

Gain on sale of loans
(664
)
 
(782
)
Proceeds from sales of loans held for sale
26,561

 
28,977

Origination of loans held for sale
(21,901
)
 
(27,841
)
Change in assets and liabilities
 
 
 
(Increase) decrease in other assets
92

 
(1,332
)
Increase (decrease) in other liabilities
(4,449
)
 
238

Net cash provided by operating activities
3,946

 
4,698

Cash flows from investing activities
 
 
 
Proceeds from paydowns of securities available for sale
24,794

 
20,721

Proceeds from calls and maturities of securities available for sale
3,530

 
280

Proceeds from sales of securities available for sale
49,584

 
20,926

Purchases of securities available for sale
(149,842
)
 
(20,590
)
Redemption of Federal Reserve Bank stock
179

 
13

Purchase of Federal Home Loan Bank stock
(1,229
)
 

Purchase of Federal Reserve Bank stock
(1,119
)
 
(53
)
Net increase in loans
(62,434
)
 
(11,573
)
Purchase of premises and equipment
(483
)
 
(650
)
Proceeds from sale of OREO
639

 
3,260

Net cash (used in) provided by investing activities
(136,381
)
 
12,334



4

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


 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Net increase (decrease) in deposits
10,711

 
(25,405
)
Net increase (decrease) in federal funds purchased
 
 
 
and securities sold under agreements to repurchase
(7,822
)
 
753

Net proceeds of advances from the Federal Home Loan Bank
85,000

 
(5,000
)
Repayment of Notes Payable
(8,500
)
 

Net proceeds from the issuance of Common Stock
68,960

 

Purchase of Treasury Stock

 
(1,255
)
Redemption of Series A Convertible Preferred Stock

 
(500
)
Redemption of Series C Cumulative Perpetual Preferred Stock
(19,000
)
 

Issuance of Series D Non-Cumulative Perpetual Preferred Stock

 
2,636

Dividends paid on preferred stock
(395
)
 
(881
)
Net cash provided by (used in) financing activities
128,954

 
(29,652
)
Net (decrease) in cash and cash equivalents
(3,481
)
 
(12,620
)
Cash and cash equivalents
 
 
 
Beginning of period
49,167

 
70,748

End of period
$
45,686

 
$
58,128

Supplemental disclosures of cash flow information
 
 
 
Cash payments for
 
 
 
Interest
$
6,710

 
$
2,442

Income taxes
81

 
5

Transfers from loans to other real estate owned
292

 
481


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 down to the metropolitan St. Louis area.  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 registration statement filed with the SEC on October 15, 2015 which includes the audited financial statements and notes for the year ended December 31, 2014. The consolidated financial statements include the accounts of the Company and Centrue Bank. Intercompany balances and transactions have been eliminated in consolidation and certain 2014 amounts have been reclassified to conform to the 2015 presentation. The annualized results of operations during the three and nine months ended September 30, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015. 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. 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 MB Financial 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 April 2015, the FASB issued an update, ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract. This amendment is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. Early adoption is permitted. The amendment may be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company intends to adopt the accounting standard during 2016, as required, with no material impact.
In June of 2014, the FASB issued an update, ASU No. 2014-11 Transfers and Servicing (Topic 860), guidance that requires repurchase-to-maturity transactions to be accounted for as secured borrowings and with additional disclosures. The guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. If the derecognition criteria are met as outlined in the guidance, the initial transfer will generally be accounted for as a sale and the repurchase agreement will generally be accounted for as a secured borrowing. The guidance is effective for annual reporting periods beginning after December 15, 2014 and interim reporting periods after December 15, 2015. Management

6

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


is evaluating the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
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, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
Note 2. Earnings Per Share
A reconciliation of the numerators and denominators for earnings per common share computations for the three and nine months ended September 30, 2015 and 2014 is presented below (shares in thousands). Common shares, options, and per share amounts for all periods shown have been restated to reflect the impact of the thirty for one stock split the Company completed effective May 29, 2015. Options to purchase 3,488 and 6,083 shares of common stock were outstanding for September 30, 2015 and 2014, 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.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Basic Earnings (Loss) Per Common Share
 
 
 
 
 
 
 
Net income
$
1,088

 
$
573

 
$
4,008

 
$
1,505

Preferred stock dividends
(395
)
 
(808
)
 
(1,401
)
 
(2,585
)
Discount on redemption of preferred stock

 

 
13,668

 

Net income (loss) for common shareholders
$
693

 
$
(235
)
 
$
16,275

 
(1,080
)
Weighted average common shares outstanding
6,485,218

 
166,641

 
4,420,000

 
190,160

Basic earnings per common share
$
0.11

 
$
(1.41
)
 
$
3.68

 
$
(5.68
)
Diluted Earnings Per Common Share
 
 
 
 
 
 
 
Weighted average common shares outstanding
6,485,218

 
166,641

 
4,420,000

 
190,160

Weighted average common and dilutive
 
 
 
 
 
 
 
potential shares outstanding
6,485,218

 
166,641

 
4,420,000

 
190,160

Diluted earnings (loss) per common share
$
0.11

 
$
(1.41
)
 
$
3.68

 
$
(5.68
)

On November 4, 2015 restricted stock awards totaling 28,476 shares of common stock were granted and issued. These additional shares are excluded from the above weighted average common and dilutive potential shares outstanding.

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 $206.4 million at September 30, 2015 compared to $135.4 million at December 31, 2014. The carrying value of securities classified as restricted (Federal Reserve and Federal Home Loan Bank stock) was $8.3 million at September 30, 2015 compared to $6.1 million at December 31, 2014. The Company does not have any securities classified as trading or held-to-maturity.


7

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


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, 2015 and December 31, 2014:
 
September 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government agencies
$
40,727

 
$
205

 
$
(8
)
 
$
40,924

States and political subdivisions
14,894

 
60

 
(64
)
 
14,890

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
129,055

 
179

 
(270
)
 
128,964

Collateralized residential mortgage obligations:
 
 
 
 
 
 
 
Agency
18,876

 
22

 
(22
)
 
18,876

Equity securities
2,619

 
157

 

 
2,776

Corporate

 

 

 

 
$
206,171

 
$
623

 
$
(364
)
 
$
206,430




December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government agencies
$
21,274

 
$
6

 
$
(171
)
 
$
21,109

States and political subdivisions
8,951

 
78

 
(1
)
 
9,028

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
99,338

 
551

 
(221
)
 
99,668

Collateralized residential mortgage obligations:
 
 
 
 
 
 
 
Agency
38

 

 

 
38

Equity securities
2,579

 
157

 

 
2,736

Collateralized debt obligations:
 
 
 
 
 
 
 
Single issue
765

 

 
(3
)
 
762

Corporate
2,000

 
30

 

 
2,030

 
$
134,945

 
$
822

 
$
(396
)
 
$
135,371

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,
 
2015
 
2014
 
2015
 
2014
Proceeds from calls and maturities
$
2,000

 
$

 
$
3,530

 
$
280

Proceeds from sales
34,959

 
9,471

 
49,584

 
20,926

Realized gains
272

 
410

 
397

 
839

Realized losses
(76
)
 

 
(100
)
 
(51
)
Net impairment loss recognized in earnings

 

 

 


8

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


The amortized cost and fair value of the investment securities portfolio are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date and equity securities are shown separately.
 
September 30, 2015
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
2,108

 
$
2,113

Due after one year through five years
29,998

 
30,080

Due after five years through ten years
23,332

 
23,436

Due after ten years
183

 
185

U.S. government agency residential mortgage-backed securities
129,055

 
128,964

Collateralized residential mortgage obligations
18,876

 
18,876

Equity
2,619

 
2,776

 
$
206,171

 
$
206,430


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:
 
September 30, 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
$
4,692


$
(8
)

$


$


$
4,692


$
(8
)
States and political subdivisions
$
3,620

 
$
(64
)
 
$

 
$

 
$
3,620

 
$
(64
)
U.S. government agency residential
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
73,623

 
(270
)
 

 

 
73,623

 
(270
)
Collateralized residential mortgage

















obligations: Agency
11,765


(22
)





11,765


(22
)
Corporate











Total temporarily impaired
$
93,700

 
$
(364
)
 
$

 
$

 
$
93,700

 
$
(364
)
 
December 31, 2014
 
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
$
18,212

 
$
(157
)
 
$
1,986

 
$
(14
)
 
$
20,198

 
$
(171
)
States and political subdivisions
386

 
(1
)
 

 

 
386

 
(1
)
U.S. government agency residential
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
34,809

 
(211
)
 
2,148

 
(10
)
 
36,957

 
(221
)
Collateralized debt obligations: Single issue

 

 
762

 
(3
)
 
762

 
(3
)
Total temporarily impaired
$
53,407

 
$
(369
)
 
$
4,896

 
$
(27
)
 
$
58,303

 
$
(396
)



9

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, 2015
 
December 31, 2014
 
 
 
 
Commercial
$
66,110

 
61,561

Agricultural & AG RE
46,323

 
53,193

Construction, land & development
24,844

 
13,860

Commercial RE
372,654

 
315,213

1-4 family mortgages
98,732

 
106,472

Consumer
3,255

 
2,901

Total Loans
$
611,918

 
553,200

Allowance for loan losses
(8,403
)
 
(7,981
)
Loans, net
$
603,515

 
545,219


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, 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
 
$
23,369

 
$
42,002

 
$
46,323

 
$
24,627

 
$
151,251

 
$
197,354

 
$
484,926

Special Mention
 
329

 
250

 

 

 
7,870

 
7,760

 
16,209

Substandard
 
160

 

 

 
217

 
475

 
7,944

 
8,796

Doubtful
 

 

 

 

 

 

 

Total
 
$
23,858

 
$
42,252

 
$
46,323

 
$
24,844

 
$
159,596

 
$
213,058

 
$
509,931


10

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


December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
18,379

 
$
42,076

 
$
53,193

 
$
13,038

 
$
139,617

 
$
157,340

 
$
423,643

Special Mention
 
392

 
250

 

 

 
1,225

 
6,620

 
8,487

Substandard
 
464

 

 

 
822

 
1,480

 
8,931

 
11,697

Doubtful
 

 

 

 

 

 

 

Total
 
$
19,235

 
$
42,326

 
$
53,193

 
$
13,860

 
$
142,322

 
$
172,891

 
$
443,827


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, 2015
 
 
 
 
 
Unrated
$
49,015

 
$
43,979

 
$
92,994

Special mention
3,961

 
157

 
4,118

Substandard
1,322

 
298

 
1,620

Doubtful

 

 

Total
$
54,298

 
$
44,434

 
$
98,732


 
Residential -- 1-4 family
 
Senior Lien
 
Jr. Lien & Lines of
Credit
 
Total
December 31, 2014
 
 
 
 
 
Unrated
$
55,142

 
$
45,299

 
$
100,441

Special mention
3,807

 
120

 
3,927

Substandard
1,719

 
385

 
2,104

Doubtful

 

 

Total
$
60,668

 
$
45,804

 
$
106,472


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.

11

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


An analysis of activity in the allowance for loan losses for the three months ended September 30, 2015 and 2014 follows:
 
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

 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
2,432

 
$
60

 
$
924

 
$
6,936

 
$
2,080

 
$
29

 
$
12,461

Charge-offs
(431
)
 

 
(5
)
 
(283
)
 
(88
)
 
(1
)
 
(808
)
Recoveries
68

 
1

 

 
410

 
53

 
3

 
535

Provision
15

 
3

 
96

 
416

 
149

 
(4
)
 
675

Ending Balance
$
2,084

 
$
64

 
$
1,015

 
$
7,479

 
$
2,194

 
$
27

 
$
12,863


An analysis of activity in the allowance for loan losses for the nine months ended September 30, 2015 and 2014 follows:
 
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


 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,413

 
$
70

 
$
1,127

 
$
6,834

 
$
2,162

 
$
31

 
$
11,637

Charge-offs
(920
)
 

 
(118
)
 
(559
)
 
(308
)
 
(6
)
 
(1,911
)
Recoveries
288

 
1

 
34

 
473

 
61

 
5

 
862

Provision
1,303

 
(7
)
 
(28
)
 
731

 
279

 
(3
)
 
2,275

Ending Balance
$
2,084

 
$
64

 
$
1,015

 
$
7,479

 
$
2,194

 
$
27

 
$
12,863



12

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


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, 2015 and December 31, 2014:
September 30, 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
$
86

 
$

 
$
65

 
$
675

 
$
365

 
$

 
$
1,191

Loans collectively evaluated for impairment
883

 
66

 
413

 
4,530

 
1,310

 
10

 
7,212

Total allowance balance:
$
969

 
$
66

 
$
478

 
$
5,205

 
$
1,675

 
$
10

 
$
8,403

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
160

 
$

 
$
217

 
$
4,106

 
$
1,620

 
$

 
$
6,103

Loans collectively evaluated for impairment
65,950

 
46,323

 
24,627

 
368,548

 
97,112

 
3,255

 
605,815

Total loans balance:
$
66,110

 
$
46,323

 
$
24,844

 
$
372,654

 
$
98,732

 
$
3,255

 
$
611,918

December 31, 2014
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
430

 
$

 
$
126

 
$
216

 
$
783

 
$

 
$
1,555

Loans collectively evaluated for impairment
687

 
69

 
585

 
3,783

 
1,292

 
10

 
6,426

Total allowance balance:
$
1,117

 
$
69

 
$
711

 
$
3,999

 
$
2,075

 
$
10

 
$
7,981

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
464

 
$

 
$
822

 
$
5,961

 
$
2,056

 
$

 
$
9,303

Loans collectively evaluated for impairment
61,097

 
53,193

 
13,038

 
309,252

 
104,416

 
2,901

 
543,897

Total loans balance:
$
61,561

 
$
53,193

 
$
13,860

 
$
315,213

 
$
106,472

 
$
2,901

 
$
553,200

Troubled Debt Restructurings:
The Company had troubled debt restructurings (“TDRs”) of $0.15 million and $0.02 million as of September 30, 2015 and December 31, 2014, respectively. Specific reserves were immaterial at September 30, 2015 and December 31, 2014. At September 30, 2015 nonaccrual TDR loans were $0.13 million and $0.02 million at December 31, 2014. There were $0.03 million TDRs on accrual at September 30, 2015 compared to none at December 31, 2014. 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, 2015 and December 31, 2014.

13

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


During the nine month period ended September 30, 2015, the terms of a certain loans were 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 loan would be for periods ranging from 6 months to 16 months. During the nine month period ended September 30, 2015, there were two TDR added in a total amount of $0.1 million compared to the year ended December 31, 2014 in which two loans were added as TDRs in the amount of $5.0 million. The $5.0 million of TDRs added in 2014 were subsequently sold in the fourth quarter of 2014.
During the three months ending September 30, 2015 there was one 1-4 family residential loan modified as a troubled debt restructuring with a recorded investment of $0.1 million; compared to the same three month period ended September 30, 2014 when there were no loans modified as troubled debt restructurings. The following tables present loans by class modified as troubled debt restructurings that occurred during the nine months ending September 30, 2015 and 2014:
 
For the Nine Months Ended September 30, 2015
 
Number of Loans
 
Pre-Modification
Recorded Investment
 
Post-Modification
Recorded Investment
1-4 family residential
 
 
 
 
 
Senior lien
2

 
127

 
127

Total
2

 
$
127

 
$
127

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 ending September 30, 2015.

 
For the Nine Months Ended September 30, 2014
 
Number of Loans
 
Pre-Modification
Recorded Investment
 
Post-Modification
Recorded Investment
Construction, land & development
1

 
$
5,013

 
$
5,013

1-4 family residential
 
 
 
 
 
Jr. lien & lines of credit
1

 
34

 
34

Total
2

 
$
5,047

 
$
5,047


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 ending September 30, 2014.
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 ending September 30, 2015 and the nine months ending September 30, 2014 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.


14

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, 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
 
$
24

 
$
24

 
$

 
$
16

 
$
1

 
$
1

Line of credit
 

 

 

 

 

 

Agricultural & AG RE
 

 

 

 

 

 

Construction, land & development
 

 

 

 
461

 

 

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
9

 
9

 

 
131

 

 

Non-owner occupied
 

 

 

 
1,089

 

 

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
305

 
305

 

 
319

 
1

 
1

Jr. lien & lines of credit
 
111

 
111

 

 
114

 
4

 
4

Consumer
 

 

 

 

 

 

Subtotal
 
449

 
449

 

 
2,130

 
6

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Closed-end
 
$
136

 
$
136

 
$
86

 
$
282

 
$
2

 
$
2

Line of credit
 

 

 

 

 

 

Agricultural & AG RE
 

 

 

 

 

 

Construction, land & development
 
217

 
508

 
65

 
132

 
1

 
1

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
467

 
735

 
186

 
676

 
11

 
7

Non-owner occupied
 
3,630

 
4,509

 
489

 
3,236

 
9

 
9

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
1,017

 
1,342

 
332

 
1,120

 
12

 
11

Jr. lien & lines of credit
 
187

 
187

 
33

 
222

 
2

 
2

Consumer
 

 

 

 

 

 

Subtotal
 
5,654

 
7,417

 
1,191

 
5,668

 
37

 
32

Total
 
$
6,103

 
$
7,866

 
$
1,191

 
$
7,798

 
$
43

 
$
38


15

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


December 31, 2014
 
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
 
$
5

 
$
5

 
$

 
$
15

 
$

 
$

Line of credit
 

 

 

 

 

 

Agricultural & AG RE
 

 

 

 

 

 

Construction, land & development
 
648

 
1,122

 

 
221

 
11

 
11

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
221

 
261

 

 
3,337

 
10

 
9

Non-owner occupied
 
4,354

 
4,753

 

 
4,084

 
74

 
74

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
319

 
319

 

 
1,931

 
5

 
4

Jr. lien & lines of credit
 
120

 
120

 

 
142

 
6

 
6

Consumer
 

 

 

 

 

 

Subtotal
 
5,667

 
6,580

 

 
9,730

 
106

 
104

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Closed-end
 
$
459

 
$
459

 
$
430

 
$
1,228

 
$
4

 
$
4

Line of credit
 

 

 

 
940

 

 

Agricultural & AG RE
 

 

 

 

 

 

Construction, land & development
 
174

 
332

 
126

 
3,833

 

 

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
766

 
901

 
138

 
3,305

 
2

 

Non-owner occupied
 
620

 
620

 
78

 
7,737

 
2

 

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
1,352

 
1,352

 
660

 
2,032

 
36

 
32

Jr. lien & lines of credit
 
265

 
276

 
123

 
268

 
10

 
9

Consumer
 

 

 

 

 

 

Subtotal
 
3,636

 
3,940

 
1,555

 
19,343

 
54

 
45

Total
 
$
9,303

 
$
10,520

 
$
1,555

 
$
29,073

 
$
160

 
$
149

The Company determined that there were $0.1 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, 2015 compared to $1.6 million at December 31, 2014.

16

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, 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
 
$
373

 
$
49

 
$
160

 
$
582

 
$
23,276

 
$
23,858

Line of credit
 

 

 

 

 
42,252

 
42,252

Agricultural & AG RE
 
33

 

 

 
33

 
46,290

 
46,323

Construction, land
& development
 

 

 
217

 
217

 
24,627

 
24,844

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 

 
371

 
475

 
846

 
158,750

 
159,596

Non-owner occupied
 

 
461

 
3,629

 
4,090

 
208,968

 
213,058

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
1,480

 
48

 
1,298

 
2,826

 
51,472

 
54,298

Jr. lien & lines of credit
 
416

 

 
231

 
647

 
43,787

 
44,434

Consumer
 
2

 

 

 
2

 
3,253

 
3,255

Total
 
$
2,304

 
$
929

 
$
6,010

 
$
9,243

 
$
602,675

 
$
611,918


December 31, 2014
 
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
 
$
38

 
$

 
$
450

 
$
488

 
$
18,747

 
$
19,235

Line of credit
 

 

 

 

 
42,326

 
42,326

Agricultural & AG RE
 
150

 

 

 
150

 
53,043

 
53,193

Construction, land
& development
 
231

 

 
822

 
1,053

 
12,807

 
13,860

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
319

 
175

 
739

 
1,233

 
141,089

 
142,322

Non-owner occupied
 
153

 

 
4,354

 
4,507

 
168,384

 
172,891

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
1,172

 
277

 
1,068

 
2,517

 
58,151

 
60,668

Jr. lien & lines of credit
 
423

 
64

 
316

 
803

 
45,001

 
45,804

Consumer
 

 

 

 

 
2,901

 
2,901

Total
 
$
2,486

 
$
516

 
$
7,749

 
$
10,751

 
$
542,449

 
$
553,200


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, 2015 or for the year ending December 31, 2014.

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

17

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


based on the reliability of the input assumptions. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements and the categorization of where an asset or liability falls within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are defined as follows:
Level 1 - Unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2 - Observable inputs other than level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities
Available for Sale Securities. The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). If the securities could not be priced using quoted market prices, observable market activity or comparable trades, the financial market was considered not active and the assets were classified as Level 3.
Single Issue Trust Preferred. In 2010 the Company purchased single-issue trust preferred securities that are classified as available for sale. With respect to these securities, the Company looks at rating agency actions, payment history, the capital levels of the banks and the financial performance as filed in regulatory reports. At December 31, 2014, the Company still held $0.8 million of these securities. During 2015, the last of the Company’s single-issue trust preferred securities were called and at September 30, 2015 none were held in the securities portfolio.
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, 2015
 
 
 
 
 
 
 
U.S. government agencies
$
40,924

 
$

 
$
40,924

 
$

State and political subdivisions
14,890

 

 
14,890

 

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
128,964

 

 
128,964

 

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Agency
18,876

 

 
18,876

 

Equities
2,776

 

 
2,776

 

Available-for-sale securities
$
206,430

 
$

 
$
206,430

 
$



18

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, 2014
 
 
 
 
 
 
 
U.S. government agencies
$
21,109

 
$

 
$
21,109

 
$

State and political subdivisions
9,028

 

 
9,028

 

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
99,668

 

 
99,668

 

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Agency
38

 

 
38

 

Equities
2,736

 

 
2,736

 

Collateralized debt obligations:
 
 
 
 
 
 
 
Single Issue
762

 

 
762

 

Corporate
2,030

 

 
2,030

 

Available-for-sale securities
$
135,371

 
$

 
$
135,371

 
$

There were no transfers between Level 1 and Level 2 during the first nine months of 2015 and all of 2014.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs
The following table reconciles the beginning and ending balances of the assets of the Company that are measured at fair value on a recurring basis using significant unobservable inputs. There currently are no liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.
 
Securities Available for Sale
 
CDOs
 
2015
 
2014
Beginning balance, January 1
$

 
$
169

Transfers into Level 3

 

Total gains or losses (realized/unrealized) included in earnings
 
 
 
Sales

 
(169
)
Security impairment

 

Payment received

 

Other changes in fair value

 

Included in other comprehensive income

 

Ending Balance, September 30
$

 
$


For the period ended September 30, 2015, the Company did not have any assets measured at fair value on a recurring basis using significant unobservable inputs.


19

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, 2015
 
 
 
 
 
 
 
Impaired loans
 
 
 
 
 
 
 
CRE - construction, land & development
$
151

 
$

 
$

 
$
151

OREO property
 
 
 
 
 
 
 
CRE - construction, land & development
3,585

 

 

 
3,585

CRE - all other
 
 
 
 
 
 
 
Owner occupied
455

 

 

 
455

Non-owner occupied
1,461

 

 

 
1,461

1-4 family residential
 
 
 
 
 
 
 
Senior lien
169

 

 

 
169


 
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, 2014
 
 
 
 
 
 
 
Impaired loans
 
 
 
 
 
 
 
CRE - all other
 
 
 
 
 
 
 
Owner occupied
$
184

 
$

 
$

 
$
184

Non-owner occupied
542

 

 

 
542

1-4 family residential
 
 
 
 
 
 
 
Senior lien
201

 

 

 
201

OREO property
 
 
 
 
 
 
 
CRE - construction, land & development
2,823

 

 

 
2,823

CRE - all other
 
 
 
 
 
 
 
Owner occupied
488

 

 

 
488

Non-owner occupied
1,111

 

 

 
1,111

1-4 family residential
 
 
 
 
 
 
 
Senior lien
47

 

 

 
47


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.

20

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


Impaired loans had a carrying amount of $0.2 million at September 30, 2015, with no specific loan loss allocation and no effect on the provision for loan losses for the nine month period. In 2014 impaired loans had a carrying amount of $0.9 million with a specific loan loss allocation of $0.5 million during 2014, resulting in an additional provision for loan losses of $0.5 million for the year ended December 31, 2014. 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 $5.7 million which is made up of the outstanding balance of $7.5 million, net of a valuation allowance of $1.8 million at September 30, 2015. This compares to 2014 when OREO properties with an outstanding balance of $6.0 million was written down to a fair value of $4.5 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, 2015 and December 31, 2014:

September 30, 2015
Fair
Value
 
Valuation Technique
 
Unobservable Inputs
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
Impaired loans
 
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
 
CRE - construction, land & development
$
151

 
 
 
 
 
10% - 55% (49%)
OREO property
 
 
 
 
 
 
 
CRE - construction, land & development
3,585

 
 
 
 
 
5% - 70% (22%)
CRE - all other
 
 
 
 
 
 
 
Owner occupied
455

 
 
 
 
 
5% - 50% (15%)
Non-owner occupied
1,461

 
 
 
 
 
5% - 50% (17%)
1-4 family residential
 
 
 
 
 
 
 
Senior lien
169

 
 
 
 
 
6% - 55% (39%)




21

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


December 31, 2014
Fair
Value
 
Valuation Technique
 
Unobservable Inputs
 
Range
(Weighted Average)

 
 
 
 
 
 

Impaired loans
 
 
Sales comparison approach
 
Adjustment for differences between comparable sales
 

CRE - all other
 
 
 
 
 
 

Owner occupied
$
184

 
 
 
 
 
10% - 55% (19%)
Non-owner occupied
542

 
 
 
 
 
10% - 55% (11%)
1-4 family residential
 
 
 
 
 
 

Senior lien
201

 
 
 
 
 
10% - 60% (57%)
OREO property
 
 
 
 
 
 

CRE - construction, land & development
$
2,823

 
 
 
 
 
5% - 70% (25%)
CRE - all other
 
 
 
 
 
 

Owner occupied
488

 
 
 
 
 
15% - 55% (21%)
Non-owner occupied
1,111

 
 
 
 
 
5% - 50% (20%)
1-4 family residential
 
 
 
 
 
 

Senior lien
47

 
 
 
 
 
6% - 55% (38%)
The estimated fair values of the Company’s financial instruments are as follows:
 
 
 
Fair Value measurements at September 30, 2015 Using
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
45,686

 
$
45,686

 
$

 
$

 
$
45,686

Securities
206,430

 

 
206,430

 

 
206,430

Restricted securities
8,271

 

 

 

 
NA

Loans held for sale
214

 

 
230

 

 
230

Net loans
603,515

 

 

 
610,593

 
610,593

Accrued interest receivable
2,796

 

 
742

 
2,054

 
2,796

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
709,535

 
$

 
$
709,884

 
$

 
$
709,884

Federal funds purchased and
 
 
 
 
 
 
 
 
 
securities sold under
 
 
 
 
 
 
 
 
 
agreements to repurchase
18,869

 

 
18,869

 

 
18,869

Federal Home Loan Bank advances
105,000

 

 
105,421

 

 
105,421

Subordinated debentures
20,620

 

 

 
12,655

 
12,655

Series B mandatory redeemable
 
 
 
 
 
 
 
 
 
preferred stock
268

 

 
274

 

 
274

Accrued interest payable
286

 

 
274

 
12

 
286



22

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


 
 
 
Fair Value measurements at December 31, 2014 Using
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
49,167

 
$
44,167

 
$
5,000

 
$

 
$
49,167

Securities
135,371

 

 
135,371

 

 
135,371

Restricted securities
6,102

 

 

 

 
NA

Loans held for sale
364

 

 
379

 

 
379

Net loans
545,219

 

 

 
553,447

 
553,447

Accrued interest receivable
2,417

 

 
336

 
2,081

 
2,417

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
698,824

 
$

 
$
699,471

 
$

 
$
699,471

Federal funds purchased and
 
 
 
 
 
 
 
 
 
securities sold under
 
 
 
 
 
 
 
 
 
agreements to repurchase
26,691

 

 
26,691

 

 
26,691

Federal Home Loan Bank advances
20,000

 

 
20,546

 

 
20,546

Notes payable
10,250

 

 

 
10,264

 
10,264

Subordinated debentures
20,620

 

 

 
13,851

 
13,851

Series B mandatory redeemable
 
 
 
 
 
 
 
 
 
preferred stock
268

 

 
268

 

 
268

Accrued interest payable
5,142

 

 
369

 
4,773

 
5,142

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, 2015 and December 31, 2014; $45.7 million and $44.2 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.

23

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, 2015 and December 31, 2014 are as follows:

 
 
September 30, 2015
 
December 31, 2014
Year
 
Average
Interest
Rate
 
Amount
 
Average
Interest
Rate
 
Amount
 
 
 
 
 
 
 
 
 
2015
 
0.18
%
 
85,000

 
%
 

2016
 
1.66

 
15,000

 
1.66

 
15,000

2017
 

 

 

 

2018
 
3.64

 
5,000

 
3.64

 
5,000

 
 
0.56

 
$
105,000

 
2.16

 
$
20,000


At September 30, 2015 and December 31, 2014 no FHLB advances had any call provisions. The Company had no variable rate advances at September 30, 2015 and year-end 2014. The advances are at fixed rates ranging from 0.18% to 3.64% for the month ended September 30, 2015 and 1.66% to 3.64% at year-end 2014.
Notes payable consisted of the following for the periods ending at September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
Term note ($250) from MB Financial; interest due quarterly at the 90-day LIBOR plus 2.95% with a floor of 6.50% at year-end 2014; secured by 100% of the stock of Centrue Bank. The balance was settled on March 31, 2015.
$

 
$
250

Subordinated debt note ($10,000) from MB Financial; interest due quarterly at the 90-day LIBOR plus 2.95%, which was 3.19% at December 31, 2014. The balance was settled on March 31, 2015.
$

 
$
10,000

 
$

 
$
10,250

During the nine month period ended September 30, 2015, in connection with the Company completing a $76.0 million recapitalization event on March 31, 2015, a settlement of obligations involving MB Financial 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 MB Financial. As a result, the gain has been included as ‘‘Gain on

24

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


extinguishment of debt’’ within income from continuing operations in the accompanying Consolidated Statements of Income (Loss) for the period ended September 30, 2015. See Note 1 for additional disclosure related to the recapitalization event.
As of December 31, 2014, the Company had $10.3 million outstanding per a loan agreement dated March 31, 2008.
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.
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 a full valuation adjustment was necessary as of September 30, 2015 and December 31, 2014.
Below is a summary of items included in the deferred tax inventory as of September 30, 2015 and December 31, 2014:

 
September 30, 2015
 
December 31, 2014
Deferred tax assets
 
 
 
Allowance for loan losses
$
3,268

 
$
3,107

Deferred compensation, other
77

 
104

Stock based expense
130

 
130

Net operating loss carryforwards
35,204

 
36,955

Deferred tax credits
696

 
697

OREO valuation allowance
1,102

 
1,080

Donation carryforward
232

 
232

Capital loss carryforward

 
4

Other
45

 
45

Total deferred tax assets
40,754

 
42,354

Deferred tax liabilities
 
 
 
Depreciation
$
(50
)
 
$
(41
)
Adjustments arising from acquisitions
(227
)
 
(502
)
Mortgage servicing rights
(844
)
 
(872
)
Securities available-for-sale
(101
)
 
(166
)
Federal Home Loan Bank dividend received in stock
(450
)
 
(451
)
Deferred loan fees & costs
(397
)
 
(373
)
Prepaid expenses
(190
)
 
(190
)
Total deferred tax liabilities
(2,259
)
 
(2,595
)
Valuation allowance
(38,495
)
 
(39,759
)
Net deferred tax assets
$

 
$


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.

25

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


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 this plan.
No options or restricted stock were granted or exercised for the nine months ended September 30, 2015 and none were granted or exercised for the year ended December 31, 2014.
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, 2015 and for the year ended December 31, 2014.
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, 2015 and the year ended December 31, 2014.
A status summary of the option plan as of September 30, 2015 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, 2015
6,063

 
$
447.19

 
 
 
 
Granted

 

 
 
 
 
Exercised

 

 
 
 
 
Forfeited
(2,575
)
 
556.00

 
 
 
 
Outstanding at end of period
3,488

 
$
366.87

 
0.6 years
 
$

Vested or expected to vest
3,488

 
$
366.87

 
0.6 years
 
$

Options exercisable at period end
3,488

 
$
366.87

 
0.6 years
 
$


Options outstanding at September 30, 2015 and year-end 2014 were as follows:
 
Outstanding
 
Exercisable
Range of Exercise Prices
Number
 
Weighted
Average
Remaining
Contractual Life
 
Number
 
Weighted
Average
Exercise Price
September 30, 2015
 
 
 
 
 
 
 
$157.20 - $390.00
2,160

 
0.4 years
 
2,160

 
$
228.33

416.40 - 558.90

 
0.0 years
 

 

570.90 - 699.30
1,328

 
0.9 years
 
1,328

 
592.20

 
3,488

 
0.6 years
 
3,488

 
$
366.87

 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
$157.20 - $390.00
2,160

 
1.2 years
 
2,160

 
$
228.33

416.40 - 558.90
2,077

 
0.2 years
 
2,077

 
543.29

570.90 - 699.30
1,826

 
1.6 years
 
1,826

 
596.78

 
6,063

 
1.0 year
 
6,063

 
$
447.19

As of September 30, 2015 and December 31, 2014, there was no unrecognized compensation cost related to non-vested stock options granted under the 2003 Option Plan.

26

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


Note 9. Regulatory Matters
The Company and Centrue Bank are subject to regulatory capital requirements administered by federal and state banking agencies that involve the quantitative measure of their assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices.  Quantitative measures established by regulations to ensure capital adequacy require the Company and Centrue Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 capital and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and, for the Bank, Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).  Failure to meet minimum capital requirements may cause regulatory bodies to initiate certain discretionary and/or mandatory actions that, if undertaken, may have a direct material effect on our financial statements.  The Company, as a financial holding company, is required to be “adequately capitalized” in the capital categories shown in the table below.  As of September 30, 2015, the Company is "adequately capitalized." As of September 30, 2015, 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 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.  
 
Actual
 
To Be Adequately
Capitalized
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
113,922

 
15.7
%
 
$
58,027

 
8.0
%
 
N/A

 
N/A
Centrue Bank
112,249

 
15.5

 
57,929

 
8.0

 
72,411

 
10.0
Common equity tier I (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
82,883

 
11.4

 
$
32,640

 
4.5

 
N/A

 
N/A
Centrue Bank
103,846

 
14.3

 
32,585

 
4.5

 
47,067

 
6.5
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
105,519

 
14.6

 
$
43,521

 
6.0

 
N/A

 
N/A
Centrue Bank
103,846

 
14.3

 
43,447

 
6.0

 
57,929

 
8.0
Tier I leverage ratio (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
105,519

 
11.5

 
$
41,334

 
4.5

 
N/A

 
N/A
Centrue Bank
103,846

 
11.3

 
41,305

 
4.5

 
45,894

 
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, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
57,829

 
9.6
%
 
$
47,991

 
8.0
%
 
N/A

 
N/A
Centrue Bank
70,717

 
11.8

 
47,792

 
8.0

 
59,740

 
10.0
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
41,118

 
6.9

 
$
23,995

 
4.0

 
N/A

 
N/A
Centrue Bank
63,243

 
10.6

 
23,896

 
4.0

 
35,844

 
6.0
Tier I leverage ratio (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
41,118

 
4.9

 
$
33,345

 
4.0

 
N/A

 
N/A
Centrue Bank
63,243

 
7.6

 
33,231

 
4.0

 
41,539

 
5.0

27

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


In December 2009, the Company and the Bank entered into a written agreement (the “Agreement”) with the Federal Reserve-Chicago and the Illinois Department of Financial and Professional Regulation (“IDFPR”). The Agreement is based on the findings of the Federal Reserve-Chicago and the IDFPR during an examination that commenced in June 2009 (the “Examination”). Since the completion of the Examination, the boards of directors of the Company and the Bank have aggressively taken steps to address the findings of the Examination. The Company and the Bank have taken an active role in working with the Federal Reserve Board and the IDFPR to improve the condition of the Bank and have addressed the items included in the Agreement.
Under the terms of the Agreement, the Bank must prepare and submit written plans and/or reports to the regulators that address the following items: strengthening the Bank’s credit risk management practices; improving loan underwriting and loan administration; improving asset quality by enhancing the Bank’s position on problem loans through repayment, additional collateral or other means; reviewing and revising as necessary the Bank’s allowance for loan and lease losses policy; maintaining sufficient capital at the Bank; implementing an earnings plan and comprehensive budget to improve and sustain the Bank’s earnings; and improving the Bank’s liquidity position and funds management practices. While the Agreement remains in place, the Company and the Bank may not pay dividends and the Company may not increase debt or redeem any shares of its stock without the prior written consent of the regulators. Further, the Bank will comply with applicable laws and regulations. The Company and the Bank are in compliance with all the requirements specified in the Agreement. 
The Company and the Bank believe that the proactive steps that have been taken by the board of directors and by management will help the Company and the Bank address the Agreement and the concerns leading to the Agreement.


28

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


The 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 nine months ended September 30, 2015 as compared to the same period in 2014. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included. The preparation of financial statements requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware corporation, and its consolidated subsidiaries. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank.
The MD&A should be read in conjunction with the consolidated financial statements of the Company, and the accompanying notes thereto. Actual results could differ from those estimates. All financial information in the following tables is displayed in thousands (000s), except per share data.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the Company's financial position or results of operations. Actual results could differ from those estimates. Those critical accounting policies that are of particular significance to the Company are discussed in Note 1 of the Company’s registration statement filed with the SEC on October 15, 2015.
Securities: Securities are classified as available-for-sale when the Company may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields on alternative investments, and for other reasons. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. All of the Company’s securities are classified as available-for-sale. For all securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Due to the limited nature of the market for certain securities, the fair value and potential sale proceeds could be materially different in the event of a sale.
Realized securities gains or losses are reported in securities gains (losses), net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Declines in the fair value of available for sale securities below their amortized cost are evaluated to determine whether the loss is temporary or other-than-temporary. If the Company (a) has the intent to sell a debt security or (b) is more likely than not will be required to sell the debt security before its anticipated recovery, then the Company recognizes the entire unrealized loss in earnings as an other-than-temporary loss. If neither of these conditions are met, the Company evaluates whether a credit loss exists. The impairment is separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income.
The Company also evaluates whether the decline in fair value of an equity security is temporary or other-than-temporary. In determining whether an unrealized loss on an equity security is temporary or other-than-temporary, management considers various factors including the magnitude and duration of the impairment, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the equity security to forecasted recovery.
Allowance for Loan Losses: The allowance for loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
The allowance for loan losses is based on an estimation computed pursuant to the requirements of Financial Accounting Standards Board guidance and rules stating that the analysis of the allowance for loan losses consists of three components:

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)
 


Specific Component. The specific credit allocation component is based on an analysis of individual impaired loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification for which the recorded investment in the loan exceeds its fair value. The fair value of the loan is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values;
Historical Loss Component. The historical loss component is mathematically based using a modified loss migration analysis that examines historical loan loss experience for each loan category. The loss migration is performed quarterly and loss factors are updated regularly based on actual experience. The general portfolio allocation element of the allowance for loan losses also includes consideration of the amounts necessary for concentrations and changes in portfolio mix and volume. The methodology utilized by management to calculate the historical loss portion of the allowance adequacy analysis is based on historical losses. This historical loss period is based on a weighted twelve-quarter average (3 years); and
Qualitative Component. The qualitative component requires qualitative judgment and estimates reserves based on general economic conditions as well as specific economic factors believed to be relevant to the markets in which the Company operates. The process for determining the allowance (which management believes adequately considers all of the potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change.
To the extent actual outcomes differs from management estimates, additional provision for credit losses could be required that could adversely affect the Company’s earnings or financial position in future periods.
Other Real Estate Owned: Other real estate owned includes properties acquired in partial or total satisfaction of certain loans. Properties are recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any write-downs in the carrying value of a property at the time of acquisition are charged against the allowance for loan losses. Management periodically reviews the carrying value of other real estate owned. Any write-downs of the properties subsequent to acquisition, as well as gains or losses on disposition and income or expense from the operations of other real estate owned, are recognized in operating results in the period they are realized.
General
Centrue Financial Corporation is a bank holding company organized under the laws of the State of Delaware. The Company provides a full range of products and services to individual and corporate customers extending from the far western and southern suburbs of the Chicago metropolitan area across Central Illinois down to the metropolitan St. Louis area. These products and services include demand, time, and savings deposits; lending; mortgage banking, brokerage, asset management, and trust services. Brokerage, asset management, and trust services are provided to our customers on a referral basis to third party providers. The Company is subject to competition from other financial institutions, including banks, thrifts and credit unions, as well as nonfinancial institutions providing financial services. Additionally, the Company and its subsidiary, Centrue Bank, are subject to regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

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 (Loss)
Net income for the three months ended September 30, 2015 equaled $1.1 million or $0.11 per common diluted share as compared to net income of $0.6 million or $(1.41) per common diluted share in the third quarter of 2014. For the first nine months of 2015, the Company had net income of $4.0 million or $3.68 per common diluted share as compared to net income of $1.5 million or $(5.68) per common diluted share for the same period in 2014.
The results for the first nine months of 2015 were positively impacted by 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 MB Financial in connection with the settlement of obligations. During the first nine months of 2014, the Company recorded a $2.3 million provision for loan losses offset by a $0.8 million gain on sale of other assets.
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 2015 totaled $6.8 million, representing an increase of $0.7 million or 10.63% compared to $6.1 million for the same period in 2014. This increase in income is primarily due to an increase in interest earning assets and a reduction in the cost of funds.
The net interest margin was 3.34% for the third quarter of 2015, representing an increase of 1 basis point from the 3.33% recorded at the third quarter of 2014. The improvement in the net interest margin is being driven by the addition of new earnings assets, decreasing cost of funds and the reduction in nonperforming loans.
Fully tax equivalent net interest income for the nine months ended September 30, 2015 totaled $19.3 million, representing an increase of $1.1 million or 5.87% compared to $18.2 million earned during the same period in 2014. The net interest margin was 3.42% for the nine months ended September 30, 2015, representing an increase of 11 basis points from 3.31% recorded in the same period of 2014. The increase of net interest income and the net interest margin was driven by the same factors 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,
 
 
 
 
 
 
 
2015
 
2014
 
 
 
 
 
 
 
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
$
2,011

 
$
16

 
3.16
%
 
$
3,534

 
$
27

 
3.03
%
 
$
(9
)
 
$
(2
)
 
$
(11
)
Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable(1)
196,193

 
794

 
1.61

 
138,243

 
543

 
1.56

 
262

 
(11
)
 
251

Exempt from federal income taxes(1)(2)
7,145

 
70

 
3.89

 
6,412

 
94

 
5.82

 
64

 
(88
)
 
(24
)
Total securities (tax equivalent)
203,338

 
864

 
1.69

 
144,655

 
637

 
1.75

 
326

 
(99
)
 
227

Federal funds sold
620

 
4

 
2.56

 
5,620

 
11

 
0.78

 
(1
)
 
(6
)
 
(7
)
Loans(3)(4)(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
104,347

 
1,062

 
4.04

 
87,540

 
920

 
4.17

 
221

 
(79
)
 
142

Real estate
490,627

 
5,368

 
4.34

 
485,036

 
5,341

 
4.37

 
147

 
(120
)
 
27

Installment and other
2,911

 
48

 
6.54

 
2,908

 
48

 
6.55

 
7

 
(7
)
 

Gross loans (tax equivalent)
597,885

 
6,478

 
4.3

 
575,484

 
6,309

 
4.35

 
375

 
(206
)
 
169

Total interest-earnings assets
803,854

 
7,362

 
3.63

 
729,293

 
6,984

 
3.80

 
691

 
(313
)
 
378

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
46,200

 
 
 
 
 
71,664

 
 
 
 
 
 
 
 
 
 
Premises and equipment, net
22,341

 
 
 
 
 
22,939

 
 
 
 
 
 
 
 
 
 
Other assets
47,308

 
 
 
 
 
55,718

 
 
 
 
 
 
 
 
 
 
Total nonearning assets
115,849

 
 
 
 
 
150,321

 
 
 
 
 
 
 
 
 
 
Total assets
$
919,703

 
 
 
 
 
$
879,614

 
 
 
 
 
 
 
 
 
 
LIABILITIES & STOCKHOLDERS’
EQUITY
Interest-bearing liabilities
NOW accounts
131,685

 
30

 
0.09

 
130,939

 
35

 
0.11

 
1

 
(6
)
 
(5
)
Money market accounts
119,833

 
54

 
0.18

 
124,349

 
61

 
0.19

 
(2
)
 
(5
)
 
(7
)
Savings deposits
124,089

 
3

 
0.01

 
117,409

 
3

 
0.01

 

 

 

Time deposits
193,727

 
229

 
0.47

 
241,833

 
399

 
0.65

 
(78
)
 
(92
)
 
(170
)
Federal funds purchased and repurchase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
18,510

 
13

 
0.28

 
18,398

 
14

 
0.30

 

 
(1
)
 
(1
)
Advances from FHLB
75,000

 
138

 
0.73

 
33,913

 
117

 
1.37

 
99

 
(78
)
 
21

Notes payable
20,888

 
132

 
2.51

 
31,138

 
242

 
3.08

 
(38
)
 
(72
)
 
(110
)
Total interest-bearing liabilities
683,732

 
599

 
0.35

 
697,979

 
871

 
0.50

 
(18
)
 
(254
)
 
(272
)
Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
147,363

 
 
 
 
 
135,746

 
 
 
 
 
 
 
 
 
 
Other liabilities
5,114

 
 
 
 
 
9,471

 
 
 
 
 
 
 
 
 
 
Total noninterest-bearing liabilities
152,477

 
 
 
 
 
145,217

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
83,494

 
 
 
 
 
36,418

 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
919,703

 
 
 
 
 
$
879,614

 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
 
 
$
6,763

 
 
 
 
 
$
6,113

 
 
 
$
709

 
$
(59
)
 
$
650

Net interest income (tax equivalent)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total earning assets
 
 
 
 
3.34
%
 
 
 
 
 
3.33
%
 
 
 
 
 
 
Interest-bearing liabilities to earning assets
 
 
 
 
85.06
%
 
 
 
 
 
95.71
%
 
 
 
 
 
 
(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 2015 there was $10 in tax equivalent interest included in gross loans and $12 in 2014.
(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,
 
 
 
 
 
 
 
2015
 
2014
 
 
 
 
 
 
 
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
$
2,983

 
$
51

 
2.29
%
 
$
3,490

 
$
66

 
2.53
%
 
$
(2
)
 
$
(13
)
 
$
(15
)
Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable(1)
168,089

 
2,020

 
1.61

 
145,564

 
1,766

 
1.62

 
291

 
(37
)
 
254

Exempt from federal income taxes(1)(2)
5,905

 
185

 
4.19

 
6,505

 
284

 
5.84

 
67

 
(166
)
 
(99
)
Total securities (tax equivalent)
173,994

 
2,205

 
1.69

 
152,069

 
2,050

 
1.80

 
358

 
(203
)
 
155

Federal funds sold
2,543

 
16

 
0.84

 
5,620

 
32

 
0.76

 
(16
)
 

 
(16
)
Loans(3)(4)(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
101,279

 
3,087

 
4.08

 
94,393

 
2,929

 
4.15

 
274

 
(116
)
 
158

Real estate
471,568

 
15,664

 
4.44

 
477,517

 
15,757

 
4.41

 
(73
)
 
(20
)
 
(93
)
Installment and other
2,932

 
132

 
6.02

 
2,714

 
125

 
6.16

 
8

 
(1
)
 
7

Gross loans (tax equivalent)
575,779

 
18,883

 
4.38

 
574,624

 
18,811

 
4.38

 
209

 
(137
)
 
72

Total interest-earnings assets
755,299

 
21,155

 
3.74

 
735,803

 
20,959

 
3.81

 
549

 
(353
)
 
196

Noninterest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
46,262

 
 
 
 
 
61,487

 
 
 
 
 
 
 
 
 
 
Premises and equipment, net
22,446

 
 
 
 
 
23,018

 
 
 
 
 
 
 
 
 
 
Other assets
48,528

 
 
 
 
 
56,834

 
 
 
 
 
 
 
 
 
 
Total nonearning assets
117,236

 
 
 
 
 
141,339

 
 
 
 
 
 
 
 
 
 
Total assets
$
872,535

 
 
 
 
 
$
877,142

 
 
 
 
 
 
 
 
 
 
LIABILITIES & STOCKHOLDERS’
EQUITY
Interest-bearing liabilities
NOW accounts
118,842

 
67

 
0.08

 
117,505

 
75

 
0.09

 
4

 
(12
)
 
(8
)
Money market accounts
119,721

 
159

 
0.18

 
122,584

 
178

 
0.19

 
1

 
(20
)
 
(19
)
Savings deposits
122,587

 
10

 
0.01

 
118,267

 
9

 
0.01

 

 
1

 
1

Time deposits
197,760

 
704

 
0.48

 
256,457

 
1,375

 
0.72

 
(239
)
 
(432
)
 
(671
)
Federal funds purchased and repurchase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agreements
17,856

 
37

 
0.28

 
17,515

 
39

 
0.30

 
2

 
(4
)
 
(2
)
Advances from FHLB
49,737

 
368

 
0.99

 
28,407

 
340

 
1.60

 
238

 
(210
)
 
28

Notes payable
24,230

 
509

 
2.81

 
31,138

 
713

 
3.06

 
(160
)
 
(44
)
 
(204
)
Total interest-bearing liabilities
650,733

 
1,854

 
0.38

 
691,873

 
2,729

 
0.53

 
(154
)
 
(721
)
 
(875
)
Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
148,838

 
 
 
 
 
139,395

 
 
 
 
 
 
 
 
 
 
Other liabilities
6,804

 
 
 
 
 
9,673

 
 
 
 
 
 
 
 
 
 
Total noninterest-bearing liabilities
155,642

 
 
 
 
 
149,068

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
66,160

 
 
 
 
 
36,201

 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
872,535

 
 
 
 
 
877,142

 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
 
 
$
19,301

 
 
 
 
 
$
18,230

 
 
 
$
(2,023
)
 
$
(247
)
 
$
(2,270
)
Net interest income (tax equivalent)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total earning assets
 
 
 
 
3.42
%
 
 
 
 
 
3.31
%
 
 
 
 
 
 
Interest-bearing liabilities to earning assets
 
 
 
 
86.16
%
 
 
 
 
 
94.03
%
 
 
 
 
 
 
(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 2015 there was $46 in tax equivalent interest included in gross loans and $44 in 2014.
(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 for the third quarter 2015 compared to $0.7 million for the third quarter 2014. As for the first nine months of 2015, the Company did not record a provision for loans losses in comparison to $2.3 million for the first nine months of 2014. The lack of need for a provision charge during the period was driven by the following factors:
No material migrations of performing loans to nonperforming status from year-end 2014 to September 30, 2015;
Charge-offs during the period were offset by recoveries, resulting in net recoveries for the first nine months;
Asset quality significantly improved from the prior year as a result of bulk asset sale and successful troubled loan workout strategies;
Continued stabilization of collateral values.
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 $3.2 million for the three months ended September 30, 2015, compared to $3.2 million for the same period in 2014. Excluding gains related to the sale of OREO, securities and other irregularly occurring income, noninterest income decreased by $0.1 million or 3.9%. This $0.1 million decrease was primarily due to a decline in service charge income and mortgage banking income.
For the nine months ended September 30, 2015, noninterest income was flat at $9.8 million in comparison to the same time period in 2014. Excluding the above referenced irregularly occurring items, the 2015 period saw a decrease of $0.5 million or 6.5% in noninterest income compared to the same period in 2014.

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 2015 was $8.8 million, compared to $8.0 million recorded during the same period in 2014. Excluding OREO valuation adjustments and other irregularly occurring items from both periods, noninterest expense levels increased by $0.2 million, or 2.6%. This $0.2 million increase was largely recognized in the salary and benefits category but was offset by a substantial decrease in the FDIC insurance costs.
For the nine month period ended September 30, 2015, noninterest income was $25.0 million, compared to $24.2 million during the same period in the prior year. Excluding OREO valuation adjustments and other irregularly occurring items, noninterest expense increased by $0.5 million or 2.2% . The primary reason for this $0.5 million increase was attributed to the same reasons as stated above.
Applicable Income Taxes
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 and for the same period in 2014.

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, 2015 balance sheet when compared to December 31, 2014:
Securities. The primary strategic objective of the Company’s $206.4 million securities - available-for-sale from September 30, 2015, 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 $206.4 million at September 30, 2015 compared to $135.4 million at December 31, 2014. The Company also holds Federal Reserve Board and Federal Home Loan Bank stock which are classified as restricted securities of $8.3 million at September 30, 2015 and $6.1 million at December 31, 2014.
Loans. Total loans, including loans held for sale, equaled $612.1 million, representing an increase of $58.5 million, or 10.57% from December 31, 2014. The net increase from year-end 2014 was related to a combination of new loan growth and normal seasonal line draws. Competition for new commercial loan opportunities and loan renewals continues to be strong and pressures loan yields.
Deposits. Total deposits equaled $709.5 million at September 30, 2015 compared to $698.8 million recorded at December 31, 2014. The September 30, 2015 deposit balance represents an increase of $10.7 million or 1.53% from December 31, 2014. The net increase from year-end 2014 was largely related to initiatives aimed at deepening deposit relationships with loan customers and a general increase in deposits from existing account holders as noncore and brokered time deposits matured and were not replaced.
Nonperforming Assets
The Company's financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual status when there are serious doubts regarding the collectibility of all principal and interest due under the terms of the loans. If a loan is placed on nonaccrual status, the loan does not generate current period income for the Company and any amounts received are generally applied first to principal and then to interest. It is the policy of the Company not to renegotiate the terms of a loan because of a delinquent status. Rather, a loan is generally transferred to nonaccrual status if it is not in the process of collection and is delinquent in payment of either principal or interest beyond 90 days.
The classification of a loan as nonaccrual does not necessarily indicate that the principal is uncollectible, in whole or in part. The Bank makes a determination as to collectibility on a case-by-case basis and considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon the specific facts of each situation. Alternatives that are typically considered to collect nonaccrual loans are foreclosure, collection under guarantees, loan restructuring, or judicial collection actions.
Each of the Company's commercial loans is assigned a rating based upon an internally developed grading system. A separate credit administration department also reviews grade assignments on a quarterly basis. Management continuously monitors nonperforming, impaired, and past due loans in an effort to prevent further deterioration of these loans. The Company uses an independent third-party for loan 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 nonperforming assets:
 
September 30,
 
December 31,
 
2015
 
2014
Nonaccrual loans (including TDRs)
$
6,010

 
$
7,749

TDRs still accruing interest
25

 

Loans 90 days past due and still accruing interest

 

Total nonperforming loans
$
6,035

 
$
7,749

Other real estate owned
9,755

 
10,256

Total nonperforming assets
$
15,790

 
$
18,005

 
 
 
 
Nonperforming loans to total end of period loans
0.99
%
 
1.40
%
Nonperforming assets to total end of period loans
2.58

 
3.25

Nonperforming assets to total end of period assets
1.67

 
2.20

The Company’s level of nonperforming assets has declined significantly over the past two years mainly due to the sale of $35.2 million of troubled assets through the bulk asset sale completed on December 5, 2014 which included the sale of $9.5 million in nonaccrual loans and $7.7 million in OREO. Total nonperforming assets declined $2.2 million to $15.8 million, or 1.67% of total assets, at September 30, 2015 from $18.0 million at December 31, 2014. Total nonperforming assets included $0.03 million in accruing troubled debt restructures, $9.8 million of foreclosed assets and repossessed real estate, and $6.0 million of nonaccrual loans compared to $10.3 million of foreclosed assets and $7.7 million of nonaccrual loans at December 31, 2014.
Nonperforming Loans
Nonperforming loans (nonaccrual, 90 days past due and troubled debt restructures) decreased $1.7 million from December 31, 2014 to September 30, 2015, largely due to successful workout asset sale strategies.
The level of nonperforming loans to end of period loans was 0.99% as of September 30, 2015 as compared to 1.40% as of December 31, 2014. As a result of the decrease in the nonperforming loans, the allowance to nonperforming loan coverage ratio increased to 139.24% for the period ended September 30, 2015 from 102.99% for the year ended December 31, 2014.
Other Potential Problem Loans
The Company has other potential problem loans that are currently performing, but where some concerns exist regarding the nature of the borrowers’ projects in our current economic environment. As of September 30, 2015, management identified $0.1 million of loans that are currently performing but due to the economic environment facing these borrowers were classified by management as impaired. Impaired loans that are performing account for 1.51% of the loans deemed impaired during 2015. Excluding nonperforming loans and loans that management has classified as impaired, there are other potential problem loans that totaled $10.4 million at September 30, 2015 as compared to $8.5 million at December 31, 2014. The classification of these loans, however, does not imply that management expects losses on each of these loans, but believes that a higher level of scrutiny and closer monitoring is prudent under the circumstances. Such classifications relate to specific concerns for each individual borrower and do not relate to any concentration risk common to all loans in this group.
The Company proactively reviews loans for potential impairment regardless of the payment or performance status. This approach results in some relationships being classified as impaired but still performing.
Allowance for Loan Losses
At September 30, 2015, the allowance for loan losses was $8.4 million, or 1.37% of total loans, as compared to $8.0 million, or 1.44% of total loans, at December 31, 2014. The Company recorded no provision to the allowance for loan losses for the nine months ended September 30, 2015 largely due to net recoveries of $0.4 million, a decrease in levels of nonperforming loans, and stabilizing collateral values on troubled loans. 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

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)
 


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 financing activities offset by cash flows used in operating activities and investing activities resulted in a net decrease in cash and cash equivalents of $3.5 million from December 31, 2014 to September 30, 2015.
For the period ended September 30, 2015, the Company experienced a positive net cash flow of $129.0 million in financing activities primarily due to the net proceeds received from the issuance of common stock as part of the March 31, 2015 recapitalization and a net increase of $76.5 million in borrowings. In contrast, net cash outflows of $136.4 million were used by investing activities due to the purchase of available for sale securities and an overall increase in net loans. Net cash provided by operating activities was $3.9 million.

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)
 


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, 2015:
 
Payments Due by Period
 
Within 1
Year
 
1-3 Years
 
4-5 Years
 
After
5 Years
 
Total
Contractual Obligations
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
145,722

 
$
44,325

 
$
6,482

 
$

 
$
196,529

Operating leases
276

 
101

 

 

 
377

Series B mandatory redeemable preferred stock

 
268

 

 

 
268

Subordinated debentures

 

 

 
20,620

 
20,620

FHLB advances
100,000

 
5,000

 

 

 
105,000

Total contractual cash obligations
$
245,998

 
$
49,694

 
$
6,482

 
$
20,620

 
$
322,794

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, 2015, the Company had $133.0 million in outstanding loan commitments including outstanding commitments for various lines of credit and $2.6 million of standby letters of credit.

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)
 


Capital Resources
Stockholders' Equity
Stockholders' equity at September 30, 2015 was $83.7 million, an increase of $53.4 million from $30.3 million at December 31, 2014. The change in stockholders’ equity during 2015 was largely the result of a recapitalization through the issuance of 6.3 million shares of Centrue common stock with aggregate gross proceeds of $76.0 million and net proceeds of $69.0 million after issuance costs.
Capital Measurements
As reflected in the following table, the Bank was considered “well-capitalized” under regulatory defined capital ratios as of September 30, 2015. See Note 10 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, 2015
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
113,922

 
15.7
%
 
$
58,027

 
8.0
%
 
N/A

 
N/A
Centrue Bank
112,249

 
15.5

 
57,929

 
8.0

 
72,411

 
10.0
Common equity tier I (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
82,883

 
11.4

 
$
32,640

 
4.5

 
N/A

 
N/A
Centrue Bank
103,846

 
14.3

 
32,585

 
4.5

 
47,067

 
6.5
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
105,519

 
14.6

 
$
43,521

 
6.0

 
N/A

 
N/A
Centrue Bank
103,846

 
14.3

 
43,447

 
6.0

 
57,929

 
8.0
Tier I leverage ratio (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Centrue Financial
$
105,519

 
11.5

 
$
41,334

 
4.5

 
N/A

 
N/A
Centrue Bank
103,846

 
11.3

 
41,305

 
4.5

 
45,894

 
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;

39

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


the Company’s ability to respond and adapt to economic conditions in our geographic market;
the Company’s ability to adapt successfully to technological changes to compete effectively in the marketplace;
credit risks and risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio and individual large loans;
volatility of rate sensitive deposits;
operational risks, including data processing system failures or fraud;
asset/liability matching risks and liquidity risks;
the ability to successfully acquire low cost deposits or funding;
the ability to successfully execute strategies to increase noninterest income;
the ability to successfully grow non-commercial real estate loans;
the ability of the Company to continue to realize cost savings and revenue generation opportunities in connection with the synergies of centralizing operations;
the ability to adopt and implement new regulatory requirements as dictated by the SEC, FASB or other rule-making bodies which govern our industry;
changes in the general economic or industry conditions, nationally or in the communities in which the Company conducts business;
the Company’s ability to raise additional capital, if available, to sustain growth or operating results;
the Company’s ability to dispose of other real estate owned (“OREO”) at reasonable values;
the Company's reliance on third parties for information such as appraisal values, credit scores, and IT capabilities.


40

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, 2015 and December 31, 2014, respectively:
 
Change in Net Interest Income Over One Year Horizon
 
September 30, 2015
 
December 31, 2014
 
Change
 
Change
 
$
 
%
 
$
 
%
+300 bp
$
62

 
0.23
 %
 
$
1,561

 
6.53
 %
+200 bp
17

 
0.06

 
978

 
4.09

+100 bp
52

 
0.19

 
499

 
2.09

 
 
 
 
 
 
 
 
Base

 

 

 

 
 
 
 
 
 
 
 
- 100 bp
(923
)
 
(3.43
)
 
(1,091
)
 
(4.56
)
As shown above, the effect of an immediate 200 basis point increase in interest rates as of September 30, 2015 would increase the Company’s net interest income by $0.02 million or 0.1%. The effect of an immediate 100 basis point decrease in rates would decrease the Company’s net interest income by $(0.9) million or (3.4)%.


41

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.


42


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 filed with the SEC on October 15, 2015.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.
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
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s President and Chief Executive Officer.
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Executive Vice President and Chief Financial Officer.
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and September 30, 2014; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and September 30, 2014; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014; and (v) Notes to Unaudited Consolidated Financial Statements.


43


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 13, 2015
By:
 
/s/ Kurt R. Stevenson
 
 
 
 
 
Kurt R. Stevenson
 
 
 
 
 
President and Chief Executive Officer
 

 
 
CENTRUE FINANCIAL CORPORATION
 
 
 
 
 
 
 
Date:
November 13, 2015
By:
 
/s/ Daniel R. Kadolph
 
 
 
 
 
Daniel R. Kadolph
 
 
 
 
 
Executive Vice President and Chief Financial Officer
 


44