Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
Commission File Number: 0-28846
Centrue Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware
 
36-3145350
 
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification number)
122 W. Madison Street, Ottawa, IL 61350
(Address of principal executive offices including zip code)
(815) 431-8400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ü] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ü] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ ü]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ü].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares outstanding at November 9, 2016
Common Stock, Par Value $0.01
 
6,513,694



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

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



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

 
$
27,655

Securities available-for-sale
183,646

 
171,440

Restricted securities
10,098

 
9,116

Loans held for sale
—

 
735

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

 
624,956

Branch assets held for sale
—

 
16,673

Bank-owned life insurance
35,768

 
35,103

Mortgage servicing rights
2,052

 
2,129

Premises and equipment, net
16,500

 
16,852

Intangible assets, net
166

 
880

Other real estate owned, net
5,541

 
8,401

Deferred tax assets, net
35,432

 
38,180

Other assets
8,361

 
9,098

Total assets
$
1,000,083

 
$
961,218

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

 
$
164,137

Interest-bearing
611,414

 
554,367

Total deposits
760,951

 
718,504

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

 
18,730

Federal Home Loan Bank advances
75,000

 
76,000

Series B mandatory redeemable preferred stock
209

 
268

Subordinated debentures
20,620

 
20,620

Other liabilities
4,328

 
5,815

Total liabilities
874,201

 
839,937

 
 
 
 
Commitments and contingent liabilities
—

 
—

 
 
 
 
Stockholders' equity
 
 
 
Series D Fixed Rate, Non-Cumulative Perpetual Preferred Stock,
 
 
 
2,636 shares authorized and issued at September 30, 2016 and
 
 
 
December 31, 2015; aggregate liquidation preference of $2,636
2,636

 
2,636

Common stock, $0.01 par value; 215,000,000 shares authorized;
 
 
 
6,581,544 shares issued at September 30, 2016 and December 31, 2015
66

 
66

Surplus
140,687

 
140,609

Retained earnings (accumulated deficit)
896

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

 
137,407

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

 
121,281

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

 
$
961,218


See Accompanying Notes to Consolidated Financial Statements

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

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

 
$
6,476

 
$
21,287

 
$
18,868

Securities
 
 
 
 
 
 
 
Taxable
679

 
794

 
2,242

 
2,020

Exempt from federal income taxes
23

 
46

 
68

 
122

Federal funds sold and other
41

 
20

 
106

 
67

Total interest income
7,928

 
7,336

 
23,703

 
21,077

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Deposits
376

 
316

 
955

 
940

Federal funds purchased and securities sold under
 
 
 
 
 
 
 
agreements to repurchase
7

 
13

 
30

 
37

Federal Home Loan Bank advances
178

 
138

 
578

 
368

Series B mandatory redeemable preferred stock
3

 
4

 
11

 
12

Subordinated debentures
148

 
128

 
435

 
413

Notes payable
—

 
—

 
—

 
84

Total interest expense
712

 
599

 
2,009

 
1,854

 
 
 
 
 
 
 
 
Net interest income
7,216

 
6,737

 
21,694

 
19,223

Provision for loan losses
—

 
—

 
300

 
—

Net interest income after provision for loan losses
7,216

 
6,737

 
21,394

 
19,223

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Service charges
1,010

 
1,075

 
2,927

 
3,010

Mortgage banking income
331

 
315

 
810

 
972

Electronic banking services
624

 
651

 
1,924

 
1,895

Bank-owned life insurance
224

 
232

 
665

 
683

Securities gains, net
79

 
196

 
139

 
297

Income from real estate
53

 
114

 
277

 
434

Gain on sale of OREO
24

 
47

 
99

 
50

Gain on sale of branches
—

 
—

 
1,877

 
—

Gain on sale of other assets
100

 
—

 
102

 
—

Gain on extinguishment of debt
—

 
—

 
—

 
1,750

Other income
54

 
608

 
184

 
750

 
2,499

 
3,238

 
9,004

 
9,841







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

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

 
4,086

 
12,745

 
12,394

Occupancy, net
648

 
706

 
2,050

 
2,142

Furniture and equipment
282

 
259

 
813

 
746

Marketing
56

 
105

 
143

 
263

Supplies and printing
51

 
50

 
168

 
170

Telephone
216

 
204

 
639

 
592

Data processing
472

 
442

 
1,311

 
1,258

FDIC insurance
62

 
281

 
373

 
925

Loan processing and collection costs
107

 
225

 
256

 
638

OREO carrying costs
104

 
187

 
398

 
655

OREO valuation adjustment
56

 
47

 
86

 
195

Amortization of intangible assets
238

 
238

 
714

 
714

Other expenses
1,273

 
2,012

 
4,023

 
4,286

 
7,741

 
8,842

 
23,719

 
24,978

 
 
 
 
 
 
 
 
Income before income taxes
$
1,974

 
$
1,133

 
$
6,679

 
$
4,086

Income tax expense
919

 
45

 
2,578

 
78

Net income
$
1,055

 
$
1,088

 
$
4,101

 
$
4,008

 
 
 
 
 
 
 
 
Preferred stock dividends
82

 
395

 
247

 
1,401

Discount on redemption of preferred stock
—

 
—

 
—

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

 
$
693

 
$
3,854

 
$
16,275

 
 
 
 
 
 
 
 
Basic earnings per common share(1)
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68

Diluted earnings per common share(1)
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income:
 
 
 
 
 
 
 
Net income
$
1,055

 
$
1,088

 
$
4,101

 
$
4,008

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

 
1,234

 
130

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

 
1,095

 
(167
)
Tax effect
(84
)
 
1

 
426

 
—

Other comprehensive income (loss)
(132
)
 
228

 
669

 
(167
)
Total comprehensive income
$
923

 
$
1,316

 
$
4,770

 
$
3,841





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

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


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

 
4,008

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

 
868

Amortization of intangible assets
714

 
714

Amortization of mortgage servicing rights, net
219

 
257

Amortization of bond premiums, net
1,157

 
1,045

Share based compensation
77

 
—

Provision for loan losses
300

 
—

Provision for deferred income taxes
2,322

 
—

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

 
195

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

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

Gain on sale of other assets
(102
)
 
—

Proceeds from sales of loans held for sale
18,813

 
26,561

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

 
92

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

 
3,946

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

 
24,794

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

 
3,530

Proceeds from sales of securities available for sale
36,198

 
49,584

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

 
179

Purchase of Federal Home Loan Bank stock
—

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

 
639

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

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


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


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

 
10,711

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

Repayment of Notes Payable
—

 
(8,500
)
Net proceeds from the issuance of Common Stock
—

 
68,960

Redemption of Series C Cumulative Perpetual Preferred Stock
—

 
(19,000
)
Dividends paid on preferred stock
(247
)
 
(395
)
Net cash provided by financing activities
85,900

 
128,954

Net decrease in cash and cash equivalents
17,090

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

 
49,167

End of period
$
44,745

 
$
45,686

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

 
$
6,710

Income taxes
232

 
81

Transfers from loans to other real estate owned
28

 
292

Transfers from loan portfolio and sold in secondary market
—

 
315

Loan transfers to branch assets held for sale
1,607

 
—


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

5
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 



Note 1. Summary of Significant Accounting Policies
Centrue Financial Corporation is a bank holding company organized under the laws of the State of Delaware.  When we use the terms “Centrue,” the “Company,” “we,” “us,” and “our,” we mean Centrue Financial Corporation, a Delaware corporation, and its consolidated subsidiary. When we use the term the “Bank,” we are referring to our wholly owned banking subsidiary, Centrue Bank. The Company and the Bank provide a full range of banking services to individual and corporate customers located in markets extending from the far western and southern suburbs of the Chicago metropolitan area across Central Illinois and metropolitan St. Louis.  These services include demand, time, and savings deposits; business and consumer lending; and mortgage banking. The Company is subject to competition from other financial institutions and nonfinancial institutions providing financial services.  Additionally, the Company and the Bank are subject to regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.
Basis of presentation
The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities and other-than-temporary impairment of securities, the determination of the allowance for loan losses and valuation of other real estate owned.
For further information with respect to significant accounting policies followed by the Company in the preparation of its consolidated financial statements, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of the Company and Centrue Bank. Intercompany balances and transactions have been eliminated in consolidation and certain 2015 amounts have been reclassified to conform to the 2016 presentation. The annualized results of operations during the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the year ending December 31, 2016. All financial information in the following tables is in thousands (000s), except share and per share data. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included.
Reverse Stock Split
Common shares and per share amounts for all periods shown have been restated to reflect the impact of the 1:30 reverse stock split the Company completed effective May 29, 2015.
Capital Event
On March 31, 2015, the Company completed the issuance of $76.0 million of new common stock in a private placement offering, $68.2 million of net proceeds after issuance and registration costs of $7.8 million. A total of 6.3 million shares were sold in the offering at a price of $12.00 per share. In conjunction with the stock offering the Company used the proceeds in part to pay $4.9 million in accrued but unpaid interest on its subordinated debentures, redeemed all $32.7 million of Series C Preferred Stock for $19.0 million, settled $10.3 million in notes payable with a financial institution for $8.5 million and made a $36.0 million capital contribution into Centrue Bank. The remaining proceeds have been and will be used for general corporate purposes.
Recent Accounting Pronouncements
In June 2016 the FASB issued accounting standards update 2016-13 Financial Instruments - Credit Losses, commonly referred to as CECL. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (HTM) debt securities. Under the provisions of the update credit losses recognized on available for sale (AFS) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL oblige organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional

6
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


vintage disclosures. For public business entities that are SEC filers the amendments of the update are effective beginning January 1, 2020. Management is in the process of evaluating the impact of CECL on the Company’s financial position, results of operations and cash flows as well as its required disclosures.
In March 2016, the FASB issued an update (ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting.) The guidance in this update affects any entity that issues share-based payment awards to its employees and is intended to simplify several aspects of the accounting for share-based payment awards including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position.
In February 2016, the FASB issued an update (ASU No. 2016-02, Leases) creating FASB Topic 842, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued an update, ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance in this update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently determining the impact of this new guidance on the consolidated financial statements.
In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update will become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. In evaluating this standard, management has determined that the majority of revenue earned by the Company are from revenue streams not included in the scope of this standard and thus no material impact is expected with the adoption of this standard.
Note 2. Earnings Per Share
A reconciliation of the numerators and denominators for earnings per common share computations for the three and nine months ended September 30, 2016 and 2015 is presented below. Common shares, options, and per share amounts for all periods shown have been restated to reflect the impact of the 1:30 reverse stock split the Company completed effective May 29, 2015. Options to purchase 498 and 3,488 shares of common stock were outstanding for September 30, 2016 and 2015, respectively; but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price and, therefore, were anti-dilutive. Of the 33,321 shares of restricted stock units issued, 3,190 shares and 1,554 shares were considered dilutive for the three and nine month periods ended September 30, 2016, respectively.

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


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

 
$
1,088

 
$
4,101

 
$
4,008

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

 
—

 
—

 
13,668

Net income for common shareholders
$
973

 
$
693

 
$
3,854

 
$
16,275

Weighted average common shares outstanding
6,513,694

 
6,485,218

 
6,513,694

 
4,420,000

Basic earnings per common share
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68

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

 
6,485,218

 
6,513,694

 
4,420,000

Add: dilutive effect of restricted stock units
3,190

 
—

 
1,554

 
—

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

 
6,485,218

 
6,515,248

 
4,420,000

Diluted earnings per common share
$
0.15

 
$
0.11

 
$
0.59

 
$
3.68



Note 3. Securities
The primary strategic objective related to the Company's securities portfolio is to assist with liquidity and interest rate risk management. The fair value of the securities classified as available-for-sale was $183.6 million at September 30, 2016 compared to $171.4 million at December 31, 2015. The carrying value of securities classified as restricted (Federal Reserve and Federal Home Loan Bank stock) was $10.1 million at September 30, 2016 compared to $9.1 million at December 31, 2015. The Company does not have any securities classified as trading or held-to-maturity.
The following table summarizes the fair value of available-for-sale securities, the related gross unrealized gains and losses recognized in accumulated other comprehensive income, and the amortized cost at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government agencies
$
12,680

 
$
—

 
$
(89
)
 
$
12,591

States and political subdivisions
13,062

 
76

 
(11
)
 
13,127

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

 
165

 
(438
)
 
139,354

Collateralized residential mortgage obligations:
 
 
 
 
 
 
 
Agency
15,549

 
62

 
(1
)
 
15,610

Equity securities
2,673

 
291

 
—

 
2,964

 
$
183,591

 
$
594

 
$
(539
)
 
$
183,646


8
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 





December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government agencies
$
14,629

 
$
13

 
$
(35
)
 
$
14,607

States and political subdivisions
10,190

 
16

 
(25
)
 
10,181

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
127,039

 
7

 
(1,017
)
 
126,029

Collateralized residential mortgage obligations:
 
 
 
 
 
 
 
Agency
17,990

 
—

 
(157
)
 
17,833

Equity securities
2,632

 
158

 
—

 
2,790

 
$
172,480

 
$
194

 
$
(1,234
)
 
$
171,440

The amounts below include the activity for available-for-sale securities related to sales, maturities and calls:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from calls and maturities
$
—

 
$
2,000

 
$
9,765

 
$
3,530

Proceeds from sales
16,528

 
34,959

 
36,198

 
49,584

Realized gains
79

 
272

 
159

 
397

Realized losses
—

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

 
—

 
—

 
—


The amortized cost and fair value of the investment securities portfolio are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date and equity securities are shown separately.
 
September 30, 2016
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
4,311

 
$
4,321

Due after one year through five years
6,033

 
6,041

Due after five years through ten years
15,398

 
15,356

Due after ten years
—

 
—

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

 
139,354

Collateralized residential mortgage obligations
15,549

 
15,610

Equity
2,673

 
2,964

 
$
183,591

 
$
183,646


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

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


 
September 30, 2016
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government agencies
$
12,591

 
$
(89
)
 
$
—

 
$
—

 
$
12,591

 
$
(89
)
States and political subdivisions
5,586

 
(11
)
 
—

 
—

 
5,586

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

 
(355
)
 
13,412

 
(83
)
 
77,374

 
(438
)
Collateralized residential mortgage


 


 


 


 


 


obligations: Agency
3,612

 
(1
)
 
—

 
—

 
3,612

 
(1
)
Total temporarily impaired
$
85,751

 
$
(456
)
 
$
13,412

 
$
(83
)
 
$
99,163

 
$
(539
)
 
December 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government agencies
$
10,394

 
$
(35
)
 
$
—

 
$
—

 
$
10,394

 
$
(35
)
States and political subdivisions
6,057

 
(25
)
 
—

 
—

 
6,057

 
(25
)
U.S. government agency residential
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
124,411

 
(1,017
)
 
—

 
—

 
124,411

 
(1,017
)
Collateralized residential mortgage
 
 
 
 
 
 
 
 
 
 
 
obligations: Agency
17,833

 
(157
)
 
—

 
—

 
17,833

 
(157
)
Total temporarily impaired
$
158,695

 
$
(1,234
)
 
$
—

 
$
—

 
$
158,695

 
$
(1,234
)


10
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


Note 4. Loans
The major classifications of loans follow:

 
Aggregate Principal Amount
 
September 30, 2016
 
December 31, 2015
Commercial
$
68,046

 
67,360

Agricultural & AG RE
45,520

 
50,121

Construction, land & development
32,046

 
26,016

Commercial RE
427,761

 
391,918

1-4 family mortgages
90,260

 
95,227

Consumer
3,162

 
2,905

Total Loans
$
666,795

 
633,547

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

 
624,956


The credit quality indicator utilized by the Company to internally analyze the loan portfolio is the internal risk rating. Internal risk ratings of 0 to 5 are considered pass credits, a risk rating of a 6 is special mention, a risk rating of a 7 is substandard, and a risk rating of an 8 is doubtful. Loans classified as pass credits have no material weaknesses and are performing as agreed. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following table presents the commercial loan portfolio by internal risk rating:
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
Commercial Real Estate
 
 
Internal Risk
Rating
 
Closed-end
 
Lines of
Credit
 
Agriculture &
AG RE
 
Construction,
Land &
Development
 
Owner-
Occupied
 
Non-Owner
Occupied
 
Total
Pass
 
$
23,659

 
$
42,225

 
$
45,188

 
$
31,905

 
$
192,864

 
$
224,941

 
$
560,782

Special Mention
 
712

 
740

 
—

 
—

 
1,931

 
7,342

 
10,725

Substandard
 
165

 
545

 
332

 
141

 
251

 
432

 
1,866

Doubtful
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
24,536

 
$
43,510

 
$
45,520

 
$
32,046

 
$
195,046

 
$
232,715

 
$
573,373


11
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
Commercial Real Estate
 
 
Internal Risk
Rating
 
Closed-end
 
Lines of
Credit
 
Agriculture &
AG RE
 
Construction,
Land &
Development
 
Owner-
Occupied
 
Non-Owner
Occupied
 
Total
Pass
 
$
24,303

 
$
42,374

 
$
50,121

 
$
25,825

 
$
164,538

 
$
203,679

 
$
510,840

Special Mention
 
304

 
250

 
—

 
64

 
7,701

 
11,512

 
19,831

Substandard
 
129

 
—

 
—

 
127

 
412

 
4,076

 
4,744

Doubtful
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
24,736

 
$
42,624

 
$
50,121

 
$
26,016

 
$
172,651

 
$
219,267

 
$
535,415


The following table presents the Retail Residential Loan Portfolio by Internal Risk Rating:
 
Residential -- 1-4 family
 
Senior Lien
 
Jr. Lien & Lines of
Credit
 
Total
September 30, 2016
 
 
 
 
 
Unrated
$
46,719

 
$
38,144

 
$
84,863

Special mention
3,208

 
93

 
3,301

Substandard
1,334

 
762

 
2,096

Doubtful
—

 
—

 
—

Total
$
51,261

 
$
38,999

 
$
90,260


 
Residential -- 1-4 family
 
Senior Lien
 
Jr. Lien & Lines of
Credit
 
Total
December 31, 2015
 
 
 
 
 
Unrated
$
48,319

 
$
41,380

 
$
89,699

Special mention
4,011

 
168

 
4,179

Substandard
1,036

 
313

 
1,349

Doubtful
—

 
—

 
—

Total
$
53,366

 
$
41,861

 
$
95,227


The retail residential loan portfolio is generally unrated. Delinquency is a typical factor in adversely risk rating a credit to a special mention or substandard.
An analysis of activity in the allowance for loan losses for the three months ended September 30, 2016 and 2015 follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,185

 
$
103

 
$
452

 
$
5,243

 
$
1,933

 
$
9

 
$
8,925

Charge-offs
(20
)
 
—

 
—

 
—

 
(73
)
 
—

 
(93
)
Recoveries
91

 
—

 
4

 
24

 
69

 
1

 
189

Provision
12

 
5

 
152

 
(234
)
 
70

 
(5
)
 
—

Ending Balance
$
1,268

 
$
108

 
$
608

 
$
5,033

 
$
1,999

 
$
5

 
$
9,021


12
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,036

 
$
65

 
$
396

 
$
5,185

 
$
1,951

 
$
12

 
$
8,645

Charge-offs
—

 
—

 
—

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

 
2

 
16

 
9

 
24

 
3

 
108

Provision
(121
)
 
(1
)
 
66

 
35

 
25

 
(4
)
 
—

Ending Balance
$
969

 
$
66

 
$
478

 
$
5,205

 
$
1,675

 
$
10

 
$
8,403

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

 
$
97

 
$
523

 
$
5,681

 
$
1,628

 
$
14

 
$
8,591

Charge-offs
(38
)
 
—

 
—

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

 
55

 
28

 
495

 
120

 
3

 
861

Provision
498

 
(44
)
 
57

 
(623
)
 
421

 
(9
)
 
300

Ending Balance
$
1,268

 
$
108

 
$
608

 
$
5,033

 
$
1,999

 
$
5

 
$
9,021


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

 
$
69

 
$
711

 
$
3,999

 
$
2,075

 
$
10

 
$
7,981

Charge-offs
(357
)
 
—

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

 
2

 
43

 
1,616

 
45

 
30

 
1,880

Provision
65

 
(5
)
 
(273
)
 
229

 
10

 
(26
)
 
—

Ending Balance
$
969

 
$
66

 
$
478

 
$
5,205

 
$
1,675

 
$
10

 
$
8,403


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

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


September 30, 2016
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
553

 
$
—

 
$
57

 
$
314

 
$
582

 
$
2

 
$
1,508

Loans collectively evaluated for impairment
715

 
108

 
551

 
4,719

 
1,417

 
3

 
7,513

Total allowance balance:
$
1,268

 
$
108

 
$
608

 
$
5,033

 
$
1,999

 
$
5

 
$
9,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
711

 
$
341

 
$
141

 
$
686

 
$
2,097

 
$
2

 
$
3,978

Loans collectively evaluated for impairment
67,335

 
45,179

 
31,905

 
427,075

 
88,163

 
3,160

 
662,817

Total loans balance:
$
68,046

 
$
45,520

 
$
32,046

 
$
427,761

 
$
90,260

 
$
3,162

 
$
666,795

December 31, 2015
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
80

 
$
—

 
$
10

 
$
1,178

 
$
325

 
$
1

 
$
1,594

Loans collectively evaluated for impairment
568

 
97

 
513

 
4,503

 
1,303

 
13

 
6,997

Total allowance balance:
$
648

 
$
97

 
$
523

 
$
5,681

 
$
1,628

 
$
14

 
$
8,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
129

 
$
—

 
$
127

 
$
4,488

 
$
1,348

 
$
1

 
$
6,093

Loans collectively evaluated for impairment
67,231

 
50,121

 
25,889

 
387,430

 
93,879

 
2,904

 
627,454

Total loans balance:
$
67,360

 
$
50,121

 
$
26,016

 
$
391,918

 
$
95,227

 
$
2,905

 
$
633,547


Troubled Debt Restructurings:
The Company had troubled debt restructurings (“TDRs”) of $0.23 million and $0.24 million as of September 30, 2016 and December 31, 2015, respectively. Specific reserves were immaterial at September 30, 2016 and December 31, 2015. At September 30, 2016 nonaccrual TDR loans were $0.23 million and $0.24 million at December 31, 2015. There were no TDRs on accrual at September 30, 2016 and December 31, 2015. The Company had no commitments to lend additional amounts to a customer with an outstanding loan that is classified as TDR as of September 30, 2016 and December 31, 2015.
Over the course of a period, the terms of certain loans may be modified as troubled debt restructurings. The modification of the terms of such loans may include one or a combination of the following: a reduction of the stated interest rate of the loan to a below market rate or the payment modification to interest only. A modification involving a reduction of the stated interest rate of the

14
CENTRUE FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 


loan would be for periods ranging from 6 months to 16 months. During the three months ended September 30, 2016 and September 30, 2015, there were no loans modified as troubled debt restructurings. During the nine months ended September 30, 2016, there were no loans modified as troubled debt restructurings, compared to the same nine month period ended September 30, 2015 when there were two senior lien 1-4 family residential loan modified as troubled debt restructurings with a pre-modification and post-modification recorded investment of $0.1 million.
 
 
 
 
 
 
 
 
 
 
 
 
The troubled debt restructurings described above did not have a material impact to the allowance for loan losses and did not result in any additional charge-offs during the nine months ended September 30, 2015.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In the nine months ended September 30, 2016 and the nine months ended September 30, 2015 there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification.
The Company evaluates loan modifications to determine if the modification constitutes a troubled debt restructure. A loan modification constitutes a troubled debt restructure if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its loans with the Company’s debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting guidelines. TDRs are separately identified for impairment disclosures. If a loan is considered to be collateral dependent loan, the TDR is reported, net, at the fair value of the collateral.

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


The following tables present data on impaired loans:
September 30, 2016
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Cash Basis
Interest
Recognized
Loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Closed-end
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Line of credit
 
—

 
—

 
—

 
—

 
—

 
—

Agricultural & AG RE
 
341

 
341

 
—

 
85

 
18

 
5

Construction, land & development
 
79

 
257

 
—

 
20

 
—

 
—

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
3

 
3

 
—

 
9

 
—

 
2

Non-owner occupied
 
—