Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016
Commission File Number: 0-28846
Centrue Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware
 
36-3145350
 
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification number)
122 W. Madison Street, Ottawa, IL 61350
(Address of principal executive offices including zip code)
(815) 431-8400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ü] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ü] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ ü]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ü].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Shares outstanding at August 8, 2016
Common Stock, Par Value $0.01
 
6,513,694




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


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



 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and cash equivalents
$
27,024

 
$
27,655

Securities available-for-sale
160,582

 
171,440

Restricted securities
10,027

 
9,116

Loans held for sale
187

 
735

Loans, net of allowance for loan loss: 2016 - $8,925; 2015 - $8,591
648,829

 
624,956

Branch assets held for sale

 
16,673

Bank-owned life insurance
35,544

 
35,103

Mortgage servicing rights
2,065

 
2,129

Premises and equipment, net
16,682

 
16,852

Intangible assets, net
404

 
880

Other real estate owned, net
6,765

 
8,401

Deferred tax assets, net
36,235

 
38,180

Other assets
8,313

 
9,098

Total assets
$
952,657

 
$
961,218

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
146,765

 
$
164,137

Interest-bearing
569,659

 
554,367

Total deposits
716,424

 
718,504

Federal funds purchased and securities sold under agreements to repurchase
10,605

 
18,730

Federal Home Loan Bank advances
75,000

 
76,000

Series B mandatory redeemable preferred stock
209

 
268

Subordinated debentures
20,620

 
20,620

Other liabilities
4,805

 
5,815

Total liabilities
827,663

 
839,937

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
Stockholders' equity
 
 
 
Series D Fixed Rate, Non-Cumulative Perpetual Preferred Stock,
 
 
 
2,363 shares authorized and issued at June 30, 2016 and
 
 
 
December 31, 2015; aggregate liquidation preference of $2,636
2,636

 
2,636

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

 
66

Surplus
140,640

 
140,609

Accumulated deficit
(77
)
 
(2,958
)
Accumulated other comprehensive loss
(2,145
)
 
(2,946
)
 
141,120

 
137,407

Treasury stock, at cost, 67,850 shares at June 30, 2016
 
 
 
and December 31, 2015
(16,126
)
 
(16,126
)
Total stockholders' equity
124,994

 
121,281

Total liabilities and stockholders' equity
$
952,657

 
$
961,218


See Accompanying Notes to Consolidated Financial Statements

1

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Loans
$
7,073

 
$
6,305

 
$
14,102

 
$
12,392

Securities
 
 
 
 
 
 
 
Taxable
734

 
632

 
1,563

 
1,226

Exempt from federal income taxes
22

 
43

 
45

 
76

Federal funds sold and other
33

 
27

 
65

 
47

Total interest income
7,862

 
7,007

 
15,775

 
13,741

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Deposits
316

 
304

 
579

 
624

Federal funds purchased and securities sold under
 
 
 
 
 
 
 
agreements to repurchase
11

 
11

 
23

 
24

Federal Home Loan Bank advances
170

 
113

 
400

 
230

Series B mandatory redeemable preferred stock
4

 
4

 
8

 
8

Subordinated debentures
145

 
129

 
287

 
285

Notes payable

 

 

 
84

Total interest expense
646

 
561

 
1,297

 
1,255

 
 
 
 
 
 
 
 
Net interest income
7,216

 
6,446

 
14,478

 
12,486

Provision for loan losses

 

 
300

 

Net interest income after provision for loan losses
7,216

 
6,446

 
14,178

 
12,486

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Service charges
972

 
1,007

 
1,917

 
1,935

Mortgage banking income
279

 
377

 
479

 
657

Electronic banking services
667

 
653

 
1,300

 
1,244

Bank-owned life insurance
218

 
228

 
441

 
451

Securities gains, net
23

 
74

 
60

 
101

Income from real estate
114

 
167

 
224

 
320

Gain on sale of OREO
27

 
1

 
75

 
3

Gain on sale of branches
1,877

 

 
1,877

 

Gain on sale of other assets
2

 

 
2

 

Gain on extinguishment of debt

 

 

 
1,750

Other income
63

 
69

 
130

 
142

 
4,242

 
2,576

 
6,505

 
6,603







2

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
4,265

 
4,066

 
8,569

 
8,308

Occupancy, net
722

 
668

 
1,402

 
1,436

Furniture and equipment
275

 
246

 
531

 
487

Marketing
52

 
123

 
87

 
158

Supplies and printing
59

 
52

 
117

 
120

Telephone
219

 
204

 
423

 
388

Data processing
416

 
410

 
839

 
816

FDIC insurance
154

 
247

 
311

 
644

Loan processing and collection costs
91

 
242

 
149

 
413

OREO carrying costs
203

 
176

 
294

 
468

OREO valuation adjustment
14

 
87

 
30

 
148

Amortization of intangible assets
238

 
238

 
476

 
476

Other expenses
1,404

 
1,194

 
2,750

 
2,274

 
8,112

 
7,953

 
15,978

 
16,136

 
 
 
 
 
 
 
 
Income before income taxes
$
3,346

 
$
1,069

 
$
4,705

 
$
2,953

Income tax expense
1,218

 
16

 
1,659

 
33

Net income
$
2,128

 
$
1,053

 
$
3,046

 
$
2,920

 
 
 
 
 
 
 
 
Preferred stock dividends
83

 

 
165

 
1,006

Discount on redemption of preferred stock

 

 

 
(13,668
)
Net income for common stockholders
$
2,045

 
$
1,053

 
$
2,881

 
$
15,582

 
 
 
 
 
 
 
 
Basic earnings per common share(1)
$
0.31

 
$
0.16

 
$
0.44

 
$
4.62

Diluted earnings per common share(1)
$
0.31

 
$
0.16

 
$
0.44

 
$
4.62

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss):
 
 
 
 
 
 
 
Net income
$
2,128

 
$
1,053

 
$
3,046

 
$
2,920

 
 
 
 
 
 
 
 
Change in unrealized gains (losses)
 
 
 
 
 
 
 
on securities available for sale
176

 
(1,113
)
 
1,371

 
(295
)
Reclassification adjustment for losses (gains)
 
 
 
 
 
 
 
recognized in income
(23
)
 
(74
)
 
(60
)
 
(101
)
Net unrealized gains (loss)
153

 
(1,187
)
 
1,311

 
(396
)
Tax effect
59

 
(1
)
 
510

 
(1
)
Other comprehensive income (loss)
94

 
(1,186
)
 
801

 
(395
)
Total comprehensive income (loss)
$
2,222

 
$
(133
)
 
$
3,847

 
$
2,525





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

3

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


 
Six Months Ended
June 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
3,046

 
2,920

Adjustments to reconcile net income
 
 
 
 to net cash provided by operating activities
 
 
 
Depreciation
587

 
577

Amortization of intangible assets
476

 
476

Amortization of mortgage servicing rights, net
140

 
176

Amortization of bond premiums, net
660

 
665

Share based compensation
31

 

Provision for loan losses
300

 

Provision for deferred income taxes
1,541

 

Earnings on bank-owned life insurance
(441
)
 
(451
)
OREO valuation adjustment
30

 
148

Securities gains, net
(60
)
 
(101
)
Gain on sale of OREO
(75
)
 
(3
)
Gain on extinguishment of debt

 
(1,750
)
Gain on sale of loans
(269
)
 
(460
)
Gain on sale of branches
(1,877
)
 

Gain on sale of other assets
(2
)
 

Proceeds from sales of loans held for sale
10,299

 
19,474

Origination of loans held for sale
(9,482
)
 
(14,972
)
Change in assets and liabilities
 
 
 
Decrease in other assets
338

 
1,480

Increase (decrease) in other liabilities
271

 
(5,469
)
Net cash provided by operating activities
5,513

 
2,710

Cash flows from investing activities
 
 
 
Proceeds from paydowns of securities available for sale
17,164

 
16,034

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

 
1,530

Proceeds from sales of securities available for sale
19,670

 
14,625

Purchases of securities available for sale
(35,002
)
 
(89,174
)
Redemption of Federal Reserve Bank stock
72

 
179

Purchase of Federal Reserve Bank stock
(982
)
 
(1,117
)
Net increase in loans
(25,808
)
 
(36,890
)
Purchase of premises and equipment
(332
)
 
(384
)
Proceeds from sale of OREO
1,785

 
424

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

Net cash used in investing activities
(45,112
)
 
(94,773
)


4

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


 
Six Months Ended
June 30,
 
2016
 
2015
Cash flows from financing activities
 
 
 
Net increase in deposits
48,257

 
1,294

Net decrease in federal funds purchased
 
 
 
and securities sold under agreements to repurchase
(8,124
)
 
(9,126
)
Net proceeds (repayments) of advances from the Federal Home Loan Bank
(1,000
)
 
45,000

Repayment of Notes Payable

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

 
68,960

Redemption of Series C Cumulative Perpetual Preferred Stock

 
(19,000
)
Dividends paid on preferred stock
(165
)
 

Net cash provided by financing activities
38,968

 
78,628

Net decrease in cash and cash equivalents
(631
)
 
(13,435
)
Cash and cash equivalents
 
 
 
Beginning of period
27,655

 
49,167

End of period
$
27,024

 
$
35,732

Supplemental disclosures of cash flow information
 
 
 
Cash payments for
 
 
 
Interest
$
1,279

 
$
6,117

Income taxes
143

 
2

Transfers from loans to other real estate owned
28

 
98

Transfers from loan portfolio and sold in secondary market

 
315

Loan transfers to branch assets held for sale
1,607

 


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 six months ended June 30, 2016 are not necessarily indicative of the results expected for the year ending December 31, 2016. All financial information in the following tables is in thousands (000s), except share and per share data. In the opinion of management, all normal and recurring adjustments which are necessary to fairly present the results for the interim periods presented have been included.
Reverse Stock Split
Common shares and per share amounts for all periods shown have been restated to reflect the impact of the 1:30 reverse stock split the Company completed effective May 29, 2015.
Capital Event
On March 31, 2015, the Company completed the issuance of $76.0 million of new common stock in a private placement offering, $68.2 million of net proceeds after issuance and registration costs of $7.8 million. A total of 6.3 million shares were sold in the offering at a price of $12.00 per share. In conjunction with the stock offering the Company used the proceeds in part to pay $4.9 million in accrued but unpaid interest on its subordinated debentures, redeemed all $32.7 million of Series C Preferred Stock for $19.0 million, settled $10.3 million in notes payable with a financial institution for $8.5 million and made a $36.0 million capital contribution into Centrue Bank. The remaining proceeds have been and will be used for general corporate purposes.
Recent Accounting Pronouncements
In June 2016 the FASB issued accounting standards update 2016-13 Financial Instruments - Credit Losses, commonly referred to as CECL. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (HTM) debt securities. Under the provisions of the update credit losses recognized on available for sale (AFS) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL oblige organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional

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. Management is currently evaluating the impact on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued an update (ASU No. 2016-02, Leases) creating FASB Topic 842, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued an update, ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance in this update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently determining the impact of this new guidance on the consolidated financial statements.
In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update will become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Management is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
Note 2. Earnings Per Share
A reconciliation of the numerators and denominators for earnings per common share computations for the three and six months ended June 30, 2016 and 2015 is presented below (shares in thousands). Common shares, options, and per share amounts for all periods shown have been restated to reflect the impact of the 1:30 reverse stock split the Company completed effective May 29, 2015. Options to purchase 498 and 3,488 shares of common stock were outstanding for June 30, 2016 and 2015, respectively; but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price and, therefore, were anti-dilutive. Of the 33,321 shares of restricted stock units issued, 536 shares and 269 shares were considered dilutive for the three and six month periods ended June 30, 2016, respectively.

7

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


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Basic Earnings Per Common Share
 
 
 
 
 
 
 
Net income
$
2,128

 
$
1,053

 
$
3,046

 
$
2,920

Preferred stock dividends
(83
)
 

 
(165
)
 
(1,006
)
Discount on redemption of preferred stock

 

 

 
13,668

Net income for common shareholders
$
2,045

 
$
1,053

 
$
2,881

 
$
15,582

Weighted average common shares outstanding
6,513,694

 
6,484,457

 
6,513,694

 
3,370,276

Basic earnings per common share
$
0.31

 
$
0.16

 
$
0.44

 
$
4.62

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

 
6,484,457

 
6,513,694

 
3,370,276

Add: dilutive effect of restricted stock units
536

 

 
269

 

Weighted average common and dilutive
 
 
 
 
 
 
 
potential shares outstanding
6,514,230

 
6,484,457

 
6,513,963

 
3,370,276

Diluted earnings per common share
$
0.31

 
$
0.16

 
$
0.44

 
$
4.62



Note 3. Securities
The primary strategic objective related to the Company's securities portfolio is to assist with liquidity and interest rate risk management. The fair value of the securities classified as available-for-sale was $160.6 million at June 30, 2016 compared to $171.4 million at December 31, 2015. The carrying value of securities classified as restricted (Federal Reserve and Federal Home Loan Bank stock) was $10.0 million at June 30, 2016 compared to $9.1 million at December 31, 2015. The Company does not have any securities classified as trading or held-to-maturity.
The following table summarizes the fair value of available-for-sale securities, the related gross unrealized gains and losses recognized in accumulated other comprehensive income, and the amortized cost at June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
States and political subdivisions
$
13,074

 
$
72

 
$
(16
)
 
$
13,130

U.S. government agency residential
 
 
 
 
 
 
 
mortgage-backed securities
128,196

 
218

 
(326
)
 
128,088

Collateralized residential mortgage obligations:
 
 
 
 
 
 
 
Agency
16,382

 
71

 

 
16,453

Equity securities
2,659

 
252

 

 
2,911

 
$
160,311

 
$
613

 
$
(342
)
 
$
160,582


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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from calls and maturities
$
9,650

 
$
1,420

 
$
9,765

 
$
1,530

Proceeds from sales
14,654

 
9,640

 
19,670

 
14,625

Realized gains
43

 
79

 
80

 
125

Realized losses
(20
)
 
(5
)
 
(20
)
 
(24
)
Net impairment loss recognized in earnings

 

 

 


9

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


The amortized cost and fair value of the investment securities portfolio are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date and equity securities are shown separately.
 
June 30, 2016
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
3,934

 
$
3,942

Due after one year through five years
6,420

 
6,430

Due after five years through ten years
2,720

 
2,758

Due after ten years

 

U.S. government agency residential mortgage-backed securities
128,196

 
128,088

Collateralized residential mortgage obligations
16,382

 
16,453

Equity
2,659

 
2,911

 
$
160,311

 
$
160,582


Securities with unrealized losses not recognized in income are as follows presented by length of time individual securities have been in a continuous unrealized loss position:
 
June 30, 2016
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
States and political subdivisions
$
5,466

 
$
(16
)
 
$

 
$

 
$
5,466

 
$
(16
)
U.S. government agency residential
 
 
 
 
 
 
 
 
 
 
 
mortgage-backed securities
62,028

 
(211
)
 
14,048

 
(115
)
 
76,076

 
(326
)
Total temporarily impaired
$
67,494

 
$
(227
)
 
$
14,048

 
$
(115
)
 
$
81,542

 
$
(342
)
 
December 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government agencies
$
10,394

 
$
(35
)
 
$

 
$

 
$
10,394

 
$
(35
)
States and political subdivisions
6,057

 
(25
)
 

 

 
6,057

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

 
(1,017
)
 

 

 
124,411

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

 
(157
)
 

 

 
17,833

 
(157
)
Total temporarily impaired
$
158,695

 
$
(1,234
)
 
$

 
$

 
$
158,695

 
$
(1,234
)


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
 
June 30, 2016
 
December 31, 2015
Commercial
$
71,699

 
67,360

Agricultural & AG RE
44,071

 
50,121

Construction, land & development
22,207

 
26,016

Commercial RE
424,928

 
391,918

1-4 family mortgages
91,629

 
95,227

Consumer
3,220

 
2,905

Total Loans
$
657,754

 
633,547

Allowance for loan losses
(8,925
)
 
(8,591
)
Loans, net
$
648,829

 
624,956


The credit quality indicator utilized by the Company to internally analyze the loan portfolio is the internal risk rating. Internal risk ratings of 0 to 5 are considered pass credits, a risk rating of a 6 is special mention, a risk rating of a 7 is substandard, and a risk rating of an 8 is doubtful. Loans classified as pass credits have no material weaknesses and are performing as agreed. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following table presents the commercial loan portfolio by internal risk rating:
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
Commercial Real Estate
 
 
Internal Risk
Rating
 
Closed-end
 
Lines of
Credit
 
Agriculture &
AG RE
 
Construction,
Land &
Development
 
Owner-
Occupied
 
Non-Owner
Occupied
 
Total
Pass
 
$
24,930

 
$
45,509

 
$
43,752

 
$
22,065

 
$
196,035

 
$
219,473

 
$
551,764

Special Mention
 
287

 
250

 

 

 
837

 
7,520

 
8,894

Substandard
 
173

 
550

 
319

 
142

 
622

 
441

 
2,247

Doubtful
 

 

 

 

 

 

 

Total
 
$
25,390

 
$
46,309

 
$
44,071

 
$
22,207

 
$
197,494

 
$
227,434

 
$
562,905


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
June 30, 2016
 
 
 
 
 
Unrated
$
47,289

 
$
38,928

 
$
86,217

Special mention
3,291

 
94

 
3,385

Substandard
1,372

 
655

 
2,027

Doubtful

 

 

Total
$
51,952

 
$
39,677

 
$
91,629


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

 
$
41,380

 
$
89,699

Special mention
4,011

 
168

 
4,179

Substandard
1,036

 
313

 
1,349

Doubtful

 

 

Total
$
53,366

 
$
41,861

 
$
95,227


The retail residential loan portfolio is generally unrated. Delinquency is a typical factor in adversely risk rating a credit to a special mention or substandard.
An analysis of activity in the allowance for loan losses for the three months ended June 30, 2016 and 2015 follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
752

 
$
119

 
$
516

 
$
5,541

 
$
2,042

 
$
4

 
$
8,974

Charge-offs
(18
)
 

 

 
(17
)
 
(88
)
 

 
(123
)
Recoveries
25

 
1

 
5

 
26

 
15

 
2

 
74

Provision
426

 
(17
)
 
(69
)
 
(307
)
 
(36
)
 
3

 

Ending Balance
$
1,185

 
$
103

 
$
452

 
$
5,243

 
$
1,933

 
$
9

 
$
8,925


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
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,139

 
$
50

 
$
437

 
$
4,018

 
$
2,342

 
$
9

 
$
7,995

Charge-offs
(357
)
 

 

 
(614
)
 
(63
)
 
(2
)
 
(1,036
)
Recoveries
64

 

 
6

 
1,585

 
12

 
19

 
1,686

Provision
190

 
15

 
(47
)
 
196

 
(340
)
 
(14
)
 

Ending Balance
$
1,036

 
$
65

 
$
396

 
$
5,185

 
$
1,951

 
$
12

 
$
8,645

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

 
$
97

 
$
523

 
$
5,681

 
$
1,628

 
$
14

 
$
8,591

Charge-offs
(18
)
 

 

 
(520
)
 
(97
)
 
(3
)
 
(638
)
Recoveries
69

 
55

 
24

 
471

 
51

 
2

 
672

Provision
486

 
(49
)
 
(95
)
 
(389
)
 
351

 
(4
)
 
300

Ending Balance
$
1,185

 
$
103

 
$
452

 
$
5,243

 
$
1,933

 
$
9

 
$
8,925


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

 
$
69

 
$
711

 
$
3,999

 
$
2,075

 
$
10

 
$
7,981

Charge-offs
(357
)
 

 
(3
)
 
(615
)
 
(130
)
 
(3
)
 
(1,108
)
Recoveries
90

 

 
27

 
1,607

 
21

 
27

 
1,772

Provision
186

 
(4
)
 
(339
)
 
194

 
(15
)
 
(22
)
 

Ending Balance
$
1,036

 
$
65

 
$
396

 
$
5,185

 
$
1,951

 
$
12

 
$
8,645


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

13

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


June 30, 2016
Commercial
 
Agriculture
& AG RE
 
Construction,
Land &
Development
 
Commercial
RE
 
1-4 Family
Residential
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
564

 
$

 
$
58

 
$
333

 
$
402

 
$
3

 
$
1,360

Loans collectively evaluated for impairment
621

 
103

 
394

 
4,910

 
1,531

 
6

 
7,565

Total allowance balance:
$
1,185

 
$
103

 
$
452

 
$
5,243

 
$
1,933

 
$
9

 
$
8,925

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
723

 
$
319

 
$
142

 
$
1,063

 
$
2,027

 
$
3

 
$
4,277

Loans collectively evaluated for impairment
70,976

 
43,752

 
22,065

 
423,865

 
89,602

 
3,217

 
653,477

Total loans balance:
$
71,699

 
$
44,071

 
$
22,207

 
$
424,928

 
$
91,629

 
$
3,220

 
$
657,754

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

 
$

 
$
10

 
$
1,178

 
$
325

 
$
1

 
$
1,594

Loans collectively evaluated for impairment
568

 
97

 
513

 
4,503

 
1,303

 
13

 
6,997

Total allowance balance:
$
648

 
$
97

 
$
523

 
$
5,681

 
$
1,628

 
$
14

 
$
8,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
129

 
$

 
$
127

 
$
4,488

 
$
1,348

 
$
1

 
$
6,093

Loans collectively evaluated for impairment
67,231

 
50,121

 
25,889

 
387,430

 
93,879

 
2,904

 
627,454

Total loans balance:
$
67,360

 
$
50,121

 
$
26,016

 
$
391,918

 
$
95,227

 
$
2,905

 
$
633,547


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

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 June 30, 2016 and June 30, 2015, there were no loans modified as troubled debt restructurings. During the six months ended June 30, 2016, there were no loans modified as troubled debt restructurings, compared to the same six month period ended June 30, 2015 when there was one senior lien 1-4 family residential loan modified as troubled debt restructurings with a pre-modification and post-modification recorded investment of $0.03 million.
 
 
 
 
 
 
 
 
 
 
 
 
The troubled debt restructurings described above did not have a material impact to the allowance for loan losses and did not result in any additional charge-offs during the six months ended June 30, 2015.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In the six months ended June 30, 2016 and the six months ended June 30, 2015 there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification.
The Company evaluates loan modifications to determine if the modification constitutes a troubled debt restructure. A loan modification constitutes a troubled debt restructure if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its loans with the Company’s debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting guidelines. TDRs are separately identified for impairment disclosures. If a loan is considered to be collateral dependent loan, the TDR is reported, net, at the fair value of the collateral.
The following tables present data on impaired loans:

15

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


June 30, 2016
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Cash Basis
Interest
Recognized
Loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Closed-end
 
$

 
$

 
$

 
$
7

 
$

 
$

Line of credit
 

 

 

 

 

 

Agricultural & AG RE
 

 

 

 

 

 

Construction, land & development
 

 

 

 

 

 

CRE - all other
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
22

 
22

 

 
10

 
2

 
3

Non-owner occupied
 

 

 

 

 

 

1-4 family residential
 
 
 
 
 
 
 
 
 
 
 
 
Senior lien
 
262

 
284

 

 
231

 

 

Jr. lien & lines of credit
 
196

 
196

 

 
99

 
2

 
2

Consumer