Edgar Filing: CENTRUE FINANCIAL CORP

Unassociated 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, 2010

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)

7700 Bonhomme Avenue, St. Louis, Missouri 63105

(Address of principal executive offices including zip code)

(314) 505-5500

(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 þ No o

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 o No o

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	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ.

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 15, 2010
Common Stock, Par Value $1.00		6,048,405

Centrue Financial Corporation

Form 10-Q Index

September 30, 2010

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	§ Unaudited Consolidated Balance Sheets	1
	§ Unaudited Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)	2
	§ Unaudited Consolidated Statements of Cash Flows	4
	§ Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	46

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	[Reserved]	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

SIGNATURES		48

Centrue Financial Corporation

Part I Financial Information

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

September 30, 2010 and December 31, 2009 (In Thousands, Except Share and Per Share Data)

	September 30,			December 31,
	2010			2009
ASSETS
Cash and cash equivalents	$	43,927		$	56,452
Securities available-for-sale		271,301			264,772
Restricted securities		10,925			10,711
Loans		764,585			885,095
Allowance for loan losses		(43,390	)		(40,909	)
Net loans		721,195			844,186
Bank-owned life insurance		30,138			29,365
Mortgage servicing rights		2,480			2,885
Premises and equipment, net		26,162			30,260
Goodwill		15,880			15,880
Other intangible assets, net		6,584			7,551
Other real estate owned		24,695			16,223
Other assets		26,397			34,399

Total assets	$	1,179,684		$	1,312,684

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing	$	112,793		$	119,313
Interest-bearing		845,239			935,376
Total deposits		958,032			1,054,689

Federal funds purchased and securities sold under agreements to repurchase		11,725			16,225
Federal Home Loan Bank advances		81,060			86,261
Notes payable		10,711			10,796
Series B mandatory redeemable preferred stock		268			268
Subordinated debentures		20,620			20,620
Other liabilities		12,220			11,211
Total liabilities		1,094,636			1,200,070

Commitments and contingent liabilities		—			—

Stockholders' equity

Series A convertible preferred stock (aggregate liquidation preference of $2,762)		500			500
Series C fixed rate, cumulative perpetual preferred stock (aggregate liquidation preference of $32,668)		30,655			30,190

Common stock, $1 par value, 15,000,000 shares authorized; 7,453,555 shares issued at September 30, 2010 and December 31, 2009		7,454			7,454
Surplus		74,748			74,741
Retained (deficit) earnings		(7,001	)		21,486
Accumulated other comprehensive income		806			439
		107,162			134,810

Treasury stock, at cost 1,405,150 shares at September 30, 2010 and 1,410,379 shares at December 31, 2009		(22,114	)		(22,196	)
Total stockholders' equity		85,048			112,614

Total liabilities and stockholders’ equity	$	1,179,684		$	1,312,684

See Accompanying Notes to Unaudited Financial Statements

Centrue Financial Corporation

Unaudited Consolidated Statements Of Income (Loss)

And Comprehensive Income (Loss)

Three Months and Nine Months Ended September 30, 2010 and 2009

(In Thousands, Except Per Share Data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Interest income
Loans	$	9,856		$	12,958		$	31,877		$	40,720
Securities
Taxable		1,377			2,041			4,723			6,697
Exempt from federal income taxes		247			312			783			937
Federal funds sold and other		28			24			93			51
Total interest income		11,508			15,335			37,476			48,405

Interest expense
Deposits		3,416			4,931			11,836			15,869

Federal funds purchased and securities sold under agreements to repurchase		7			39			37			111
Federal Home Loan Bank advances		573			595			1,733			1,708
Series B mandatory redeemable preferred stock		4			4			12			12
Subordinated debentures		270			257			783			821
Notes payable		99			101			279			382
Total interest expense		4,369			5,927			14,680			18,903

Net interest income		7,139			9,408			22,796			29,502
Provision for loan losses		7,250			14,500			24,150			29,799
Net interest income (loss) after
provision for loan losses		(111	)		(5,092	)		(1,354	)		(297	)

Noninterest income
Service charges		1,215			1,756			3,934			4,812
Mortgage banking income		628			351			1,114			1,860
Bank-owned life insurance		261			248			773			763
Electronic banking services		516			513			1,528			1,447
Securities gains		899			—			1,913			246
Total other-than-temporary impairment losses		(569	)		(4,822	)		(4,153	)		(11,193	)
Portion of loss recognized in other comprehensive income (before taxes)		71			1,690			131			2,144
Net impairment on securities		(498	)		(3,132	)		(4,022	)		(9,049	)
Gain on sale of OREO		24			130			34			166
Gain on sale of other assets		178			9			1,648			117
Other income		204			191			633			806
		3,427			66			7,555			1,168

See Accompanying Notes to Unaudited Financial Statements

Centrue Financial Corporation

Unaudited Consolidated Statements Of Income (Loss)

And Comprehensive Income (Loss)

Three Months and Nine Months Ended September 30, 2010 and 2009

(In Thousands, Except Per Share Data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Noninterest expenses
Salaries and employee benefits		3,547			3,931			11,019			12,379
Occupancy, net		647			777			2,378			2,547
Furniture and equipment		642			602			1,685			1,726
Marketing		91			191			280			579
Supplies and printing		106			108			302			344
Telephone		194			164			567			654
Data processing		388			374			1,167			1,136
FDIC insurance		842			538			2,549			1,877
Loan processing and collection costs		675			483			1,789			946
Goodwill impairment		—			—			—			8,451
OREO valuation adjustment		378			—			2,365			—
Amortization of intangible assets		307			375			967			1,182
Other expenses		1,462			1,448			4,307			4,312
		9,279			8,991			29,375			36,133

Income (loss) before income taxes	$	(5,963	)	$	(14,017	)	$	(23,174	)	$	(35,262	)
Income tax expense (benefit)		10,440			(5,605	)		3,414			(11,700	)
Net income (loss)	$	(16,403	)	$	(8,412	)	$	(26,588	)	$	(23,562	)

Preferred stock dividends		484			467			1,435			1,342
Net income (loss) for common stockholders	$	(16,887	)	$	(8,879	)	$	(28,023	)	$	(24,904	)

Basic earnings (loss) per common share	$	(2.79	)	$	(1.47	)	$	(4.64	)	$	(4.13	)
Diluted earnings (loss) per common share	$	(2.79	)	$	(1.47	)	$	(4.64	)	$	(4.13	)

Total comprehensive income (loss):
Net income (loss)	$	(16,403	)	$	(8,412	)	$	(26,588	)	$	(23,562	)
Change in unrealized gains (losses) on available for sale securities for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassifications and tax effect		(341	)		1,753			(3,067	)		(811	)
Change in unrealized gains (losses) on other securities available for sale, net of reclassifications and tax effect		661			2,501			1,557			(2,234	)
Reclassification adjustment: Net impairment loss recognized in earnings		498			3,132			4,022			9,049
(Gains) recognized in earnings		(899	)		—			(1,913	)		(246	)
Net unrealized gains (loss)		81			7,386			599			5,758
Tax expense (benefit)		(32	)		2,861			232			2,230
Other comprehensive income (loss)		(49	)		4,525			367			3,528
Total comprehensive income (loss)	$	(16,452	)	$	(3,887	)	$	(26,221	)	$	(20,034	)

See Accompanying Notes to Unaudited Financial Statements

Centrue Financial Corporation

Unaudited Consolidated Statements Of Cash Flows

Nine Months Ended September 30, 2010 and 2009 (In Thousands)

	Nine Months Ended
	September 30,
	2010			2009
Cash flows from operating activities
Net Income (Loss)	$	(26,588	)	$	(23,562	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation		1,927			1,997
Goodwill impairment		—			8,451
Amortization of intangible assets		967			1,182
Amortization of mortgage servicing rights, net		452			708
Amortization of bond premiums, net		2,084			533
Mortgage servicing rights valuation adjustment		225			—
Income tax valuation adjustment		12,816			—
Share based compensation		83			260
Provision for loan losses		24,150			29,799
Provision for deferred income taxes		(6,886	)		7,046
Earnings on bank-owned life insurance		(773	)		(763	)
Other than temporary impairment, securities		4,022			9,049
Securities losses (gains), net		(1,913	)		(246	)
OREO valuation allowance		2,365			—
(Gain) on sale of OREO		34			(166	)
(Gain) on sale of other assets, net		(469	)		(117	)
(Gain) loss on sale of loans		(1,102	)		(1,860	)
(Gain) loss on sale of branches		(1,179	)		—
Loss related to sale of Wealth Management		—			163
Proceeds from sales of loans held for sale		50,621			113,171
Origination of loans held for sale		(50,135	)		(110,883	)
Change in assets and liabilities
(Increase) decrease in other assets		3,191			(17,624	)
Increase (decrease) in other liabilities		(682	)		(1,372	)
Net cash provided by operating activities		13,210			15,766

Cash flows from investing activities
Proceeds from paydowns of securities available for sale		56,446			33,945
Proceeds from calls and maturities of securities available for sale		11,650			17,205
Proceeds from sales of securities available for sale		74,152			8,347
Purchases of securities available for sale		(152,431	)		(82,424	)
Net decrease (increase) in loans		82,107			63,811
(Purchase) disposal of premises and equipment		175			(387	)
Proceeds from sale of OREO		801			856
Sale of branch, net of premium received		(11,726	)		—
Net cash provided by (used in) investing activities		61,174			39,952

See Accompanying Notes to Unaudited Financial Statements

Centrue Financial Corporation

Unaudited Consolidated Statements Of Cash Flows

Nine Months Ended September 30, 2010 and 2009 (In Thousands)

	Nine Months Ended
	September 30,
	2010			2009
Cash flows from financing activities
Net increase (decrease) in deposits		(77,123	)		12,323
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		(4,500	)		(14,905	)
Repayment of advances from the Federal Home Loan Bank		(40,201	)		(244,023	)
Proceeds from advances from the Federal Home Loan Bank		35,000			180,000
Payments on notes payable		(85	)		(8,946	)
Dividends on common stock		—			(482	)
Dividends on preferred stock		—			(1,342	)
Net proceeds from preferred stock issued		—			32,668
Net cash provided by (used in) financing activities		(86,909	)		(44,707	)

Net increase (decrease) in cash and cash equivalents		(12,525	)		11,011

Cash and cash equivalents
Beginning of period		56,452			35,014
End of period	$	43,927		$	46,025

Supplemental disclosures of cash flow information
Cash payments for interest	$	14,454		$	18,799
Cash payments for income taxes		—			1,028
Transfers from loans to other real estate owned		11,650			1,959

See Accompanying Notes to Unaudited Financial Statements

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. Additionally, 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 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 accompanying unaudited interim consolidated financial statements of Centrue Financial Corporation have been prepared in conformity with U. S. Generally Accepted Accounting Principles (“GAAP”) and with general practice in the banking industry. In preparing the financial statements, management makes estimates and assumptions based on available information 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 income and expenses during the reporting period, and actual results could differ. The allowance for loan losses, carrying value of goodwill, other-than-temporary impairment of securities, value of mortgage servicing rights, deferred taxes, and fair values of financial instruments are particularly subject to change. Actual results could differ from those estimates.

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, 2009. The consolidated financial statements include the accounts of the Company and Bank. Intercompany balances and transactions have been eliminated in consolidation and certain 2009 amounts have been reclassified to conform to the 2010 presentation. These reclassifications did not have an impact on net income or stockholder’s equity. The annualized results of operations during the three and nine months ended September 30, 2010 are not necessarily indicative of the results expected for the year ending December 31, 2010. 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.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 2. Earnings (Loss) Per Share

Basic earnings (loss) per share for the three and nine months ended September 30, 2010 and 2009 were computed by dividing net income (loss) by the weighted average number of shares outstanding. Diluted earnings (loss) per share for the same periods were computed by dividing net income (loss) by the weighted average number of shares outstanding, adjusted for the dilutive effect of the stock options and warrants. Computations for basic and diluted earnings (loss) per share are provided as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Basic Earnings (Loss) Per Common Share
Net income (loss) for common shareholders	$	(16,887	)	$	(8,879	)	$	(28,023	)	$	(24,904	)
Weighted average common shares outstanding		6,046			6,043			6,044			6,033

Basic earnings (loss) per common share	$	(2.79	)	$	(1.47	)	$	(4.64	)	$	(4.13	)

Diluted Earnings (Loss) Per Common Share
Weighted average common shares outstanding		6,046			6,043			6,044			6,033
Add: dilutive effect of assumed exercised stock options		—			—			—			—

Add: dilutive effect of assumed exercised common stock warrants		—			—			—			—

Weighted average common and dilutive potential shares outstanding		6,046			6,043			6,044			6,033

Diluted earnings (loss) per common share	$	(2.79	)	$	(1.47	)	$	(4.64	)	$	(4.13	)

There were approximately 561,069 and 695,569 options and 508,320 and 508,320 warrants outstanding at September 30, 2010 and 2009, respectively that were not included in the computation of diluted earnings per share as they were anti-dilutive. The Company’s convertible preferred stock was not included in the computation of diluted earnings per share as it was anti-dilutive.

Note 3. Securities

The primary strategic objective related to the Company’s $282.2 million investment securities portfolio is to assist with liquidity and interest rate risk management. At September 30, 2010, the Company carried at fair value $271.3 million classified as available-for-sale compared to $264.8 million at December 31, 2009. The Company also holds $10.9 million and $10.7 million of Federal Reserve and Federal Home Loan Bank stock which are classified as restricted securities as of September 30, 2010 and December 31, 2009, respectively. The Company does not have any securities classified as trading or held-to-maturity.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 3. Securities (Continued)

The following tables represent the fair value of available-for-sale securities and the related, gross unrealized gains and losses recognized in accumulated other comprehensive income at September 30, 2010 and December 31, 2009:

	September 30, 2010
			Gross		Gross
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		Losses			Cost
U.S. government agencies	$	12,864	$	256	$	—		$	12,608
States and political subdivisions		31,014		1,033		(1	)		29,982
U.U.S. government agency residential mortgage-backed securities		185,980		2,777		(148	)		183,351
Collateralized residential mortgage obligations:
Agency		22,182		328		—			21,854
Private Label		6,712		39		(42	)		6,715
Equity securities		2,264		68		—			2,196
Collateralized debt obligations:
Single Issue		3,859		13		—			3,846
Pooled		6,426		45		(3,053	)		9,434

	$	271,301	$	4,559	$	(3,244	)	$	269,986

	December 31, 2009
			Gross		Gross
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		Losses			Cost
U.S. government agencies	$	3,966	$	216	$	—		$	3,750
States and political subdivisions		36,541		1,093		(25	)		35,473
U.U.S. government agency residential mortgage-backed securities		198,183		3,203		(249	)		195,229
Collateralized residential mortgage obligations:
Agency		3,261		53		—			3,208
Private Label		11,165		8		(137	)		11,294
Equity securities		1,898		55		(43	)		1,886
Collateralized debt obligations:
Single Issue		—		—		—			—
Pooled		9,758		—		(3,458	)		13,216

	$	264,772	$	4,628	$	(3,912	)	$	264,056

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Proceeds from calls/maturities	$	7,245		$	1,160		$	11,650		$	17,205
Proceeds from sales		39,293			—			74,152			8,347
Realized gains		937			—			1,951			246
Realized losses		(38	)		—			(38	)		—
Net impairment loss recognized in earnings		(498	)		(3,132	)		(4,022	)		(9,049	)
Tax benefit (provision) related to to net realized gains and losses		348			—			741			94

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 3. Securities (Continued)

The following table represents securities with unrealized losses not recognized in income presented by the length of time individual securities have been in a continuous unrealized loss position:

	September 30, 2010
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss

State and political subdivisions	$	—	$	—		$	354	$	(1	)	$	354	$	(1	)
U.S. government agency residential mortgage-backed securities		19,028		(148	)		—		—			19,028		(148	)
Collateralized residential mortgage obligations: Private Label		—		—			4,808		(42	)		4,808		(42	)
Collateralized debt obligations: Pooled		—		—			6,223		(3,053	)		6,223		(3,053	)

Total temporarily impaired	$	19,028	$	(148	)	$	11,385	$	(3,096	)	$	30,413	$	( 3,244	)

	December 31, 2009
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss

State and political subdivisions	$	444	$	(6	)	$	777	$	(19	)	$	1,221	$	(25	)
U.S. government agency residential mortgage-backed securities		40,920		(249	)		—		—			40,920		(249	)
Collateralized residential mortgage obligations: Private Label		—		—			9,841		(137	)		9,841		(137	)
Equities		—		—			51		(43	)		51		(43	)
Collateralized debt obligations: Pooled		—		—			9,758		(3,458	)		9,758		(3,458	)

Total temporarily impaired	$	41,364	$	(255	)	$	20,427	$	(3,657	)	$	61,791	$	(3,912	)

The fair values of securities classified as available-for-sale at September 30, 2010, by contractual maturity, are shown as follows. Securities not due at a single maturity date, including mortgage-backed securities, collateralized mortgage obligations, and equity securities are shown separately.

	Amortized
	Cost		Fair Value
Due in one year or less	$	11,442	$	11,598
Due after one year through five years		19,281		19,823
Due after five years through ten years		7,574		7,927
Due after ten years		17,573		14,815
U.S. government agency residential mortgage-backed securities		183,351		185,980
Collateralized residential mortgage obligations		28,569		28,894
Equity		2,196		2,264
	$	269,986	$	271,301

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 3. Securities (Continued)

The following table below presents a rollforward of the credit losses recognized in earnings for the three month period ended September 30, 2010:

Beginning balance, July 1, 2010	$	18,865
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		—
Additions/Subtractions
Amounts realized for securities sold during the period		—
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		—
Reduction for increase in cash flows expected to be collected that are recognized over the remaining life of the security		—
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		498

Ending balance, September 30, 2010	$	19,363

The following table below presents a rollforward of the credit losses recognized in earnings for the nine month period ended September 30, 2010:

Beginning balance, January 1, 2010	$	15,341
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		—
Additions/Subtractions
Amounts realized for securities sold during the period		—
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		—
Reduction for increase in cash flows expected to be collected that are recognized over the remaining life of the security		—
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		4,022

Ending balance, September 30, 2010	$	19,363

See Note 9 on Fair Value for additional information about our analysis on the security portfolio related to the fair value and other-than-temporary impairment disclosures of these instruments.

10.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 4. Loans

The following table describes the composition of loans by major categories outstanding as of September 30, 2010 and December 31, 2009, respectively:

	September 30, 2010					December 31, 2009
	$			%		$			%
Commercial	$	114,611		15.0	%	$	126,342		14.3	%
Agricultural		16,499		2.2			18,851		2.1
Real estate:
Commercial mortgages		390,400		51.0			437,995		49.5
Construction		89,236		11.7			128,351		14.5
Agricultural		9,517		1.2			9,602		1.1
1-4 family mortgages		140,671		18.4			159,325		18.0
Installment		3,177		0.4			4,093		0.4
Other		474		0.1			536		0.1

Total loans		764,585		100.0	%		885,095		100.0	%
Allowance for loan losses		(43,390	)				(40,909	)

Loans, net	$	721,195				$	844,186

The following table presents data on impaired loans:	September 30,		December 31,
	2010		2009
Impaired loans for which an allowance has been provided	$	117,544	$	129,655
Impaired loans for which no allowance has been provided		26,255		35,923

Total loans determined to be impaired	$	143,799	$	165,578

Allowance for loan loss allocated to impaired loans	$	32,106	$	26,717
Average recorded investment in impaired loans		153,477		116,260
Interest income recognized from impaired loans		3,224		11,376
Cash basis interest income recognized from impaired loans		3,109		9,322

In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things, current economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan; and in the case of a collateralized loan, the quality of the collateral for such loan. The allowance for loan losses represents the Company’s estimate of the allowance necessary to provide for probable incurred losses in the loan portfolio. In making this determination, the Company analyzes the ultimate collectability of the loans in its portfolio; incorporating feedback provided by internal loan staff; the independent loan review function; and information provided by regulatory agencies. Included in the impaired loans above is $16.9 million of troubled debt restructurings representing 8 loans categorized as 1 to 4 family and commercial real estate.

Nonaccrual loans were $78.2 million and $80.1 million as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, there were no loans that were past 90 days and still accruing. The Company has loans held for sale of $2.1 million and $1.5 million as of September 30, 2010 and December 31, 2009, respectively. In addition, there were $16.9 million of troubled debt restructurings as of September 30, 2010 of which $16.3 million is on nonaccrual. At December 31, 2009, troubled debt restructurings were $0.7 million.

11.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 4. Loans (Continued)

Management evaluates the allowance for loan losses based on the combined total of specific allocations, historical loss and qualitative components and believes that the allowance for loan losses represented probable incurred credit losses inherent in the loan portfolio at September 30, 2010. Activity in the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 are summarized below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Beginning balance	$	42,378		$	26,894		$	40,909		$	15,018
Charge-offs		(6,303	)		(13,493	)		(21,898	)		(17,291	)
Recoveries		65			64			229			439
Provision for loan losses		7,250			14,500			24,150			29,799

Ending balance	$	43,390		$	27,965		$	43,390		$	27,965

Period end total loans	$	764,585		$	921,340		$	764,585		$	921,340

Average loans	$	780,383		$	938,905		$	822,379		$	971,836

Ratio of net charge-offs to average loans		0.80	%		1.43	%		2.63	%		1.73	%
Ratio of provision for loan losses to average loans		0.93			1.54			2.94			3.07
Ratio of allowance for loan losses to period end total loans		5.67			3.04			5.67			3.04
Ratio of allowance for loan losses to total nonperforming loans		45.63			36.48			45.63			36.48
Ratio of allowance for loan losses to average loans		5.56			2.98			5.28			2.88

Note 5. Share Based Compensation

In 1999, the Company adopted the 1999 Option Plan. Under the 1999 Option Plan, nonqualified options may be granted to employees and eligible directors of the Company and its subsidiaries to purchase the Company's common stock at 100% of the fair market value on the date the option is granted. The Company has authorized 50,000 shares for issuance under the 1999 Option Plan. During 1999, 40,750 of these shares were granted and are 100% fully vested. The options had an exercise period of ten years from the date of grant, and all options have expired. The plan terminated on November 18, 2009 leaving no shares available for grant under this plan.

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 subsidiary 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, 570,000 shares of the Company's unissued common stock have been reserved and are available for issuance upon the exercise of options and rights granted under the 2003 Option Plan. The options have an exercise period of seven to ten years from the date of grant. There are 66,000 shares available to grant under this plan.

The Company awarded 5,000 shares of restricted stock in November, 2006 that were available under the restricted stock portion of the plan. The restricted shares were issued out of treasury stock with an aggregate grant date fair value of $0.09 million. The awards were granted using the fair value as the last sale price as quoted on the NASDAQ Stock Market on the date of grant of $18.03. The awarded shares vested at a rate of 20% of the initially awarded amount per year, beginning on the date of the award and were contingent upon continuous service by the recipient through the vesting date. As of April 3, 2009, the contingency was not fulfilled and the remaining 2,000 shares of unvested restricted stock were forfeited and returned to treasury stock.

12.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 5. Share Based Compensation (Continued)

A summary of the status of the option plans as of September 30, 2010, and changes during the period ended on those dates are presented below:

	September 30, 2010
						Weighted-
				Weighted-		Average
				Average		Remaining	Aggregate
				Exercise		Contractual	Intrinsic
	Shares			Price		Life	Value
Outstanding at January 1, 2010		690,769		$	16.68
Granted		—			—
Exercised		—			—
Forfeited		(129,700	)		16.89

Outstanding at end of period		561,069		$	16.63	3.5 years	$	—
Vested or expected to vest		555,471		$	16.67	3.4 years	$	—
Options exercisable at period end		436,669		$	17.46	3.1 years	$	—

Options outstanding at September 30, 2010 and December 31, 2009 were as follows:

					Outstanding			Exercisable
							Weighted-
							Average			Weighted-
							Remaining			Average
							Contractual			Exercise
Range of Exercise Prices					Number		Life	Number		Price
September 30, 2010:

$	5.24	-	$	13.00		146,881	4.1 years		83,281	$	8.59
	13.88	-		18.63		176,588	3.2 years		133,388		16.58
	19.03	-		23.31		237,600	3.4 years		220,000		21.35

						561,069	3.5 years		436,669	$	17.46

December 31, 2009:

$	5.24	-	$	13.00		170,381	4.9 years		77,381		7.96
	13.88	-		18.63		233,588	3.9 years		167,188		16.60
	19.03	-		23.31		286,800	3.9 years		259,600		21.41

						690,769	4.1 years		504,169	$	17.75

There were no options exercised for the periods ended September 30, 2009 and 2010.

The compensation cost that has been charged against income for the stock options portion of the Option Plans was $0.03 million and $0.05 million for the three months ended September 30, 2010 and 2009, respectively.

The compensation cost that has been charged against income for the stock options portion of the Option Plans was $0.08 million and $0.27 million for the nine months ended September 30, 2010 and 2009, respectively.

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. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Employee and director options are tracked separately.

13.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 5. Share Based Compensation (Continued)

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 in the first, second or third quarter 2010. Year to date data for September 30, 2010, December 31, 2009 and December 31, 2008, is as follows:

	September 30, 2010		December 31, 2009			December 31, 2008
Fair value	$	—	$	1.79 – 3.70		$	3.36 – 3.69
Risk-free interest rate		—		1.53 – 2.01	%		2.75 – 2.95	%
Expected option life (years)		—		6			6
Expected stock price volatility		—		68.84 – 116.39	%		23.91 – 24.07	%
Dividend yield		—		5.71 – 7.31	%		2.79 – 2.95	%

Unrecognized stock option compensation expense related to unvested awards (net of estimated forfeitures) for the remainder of 2010 and beyond is estimated as follows:

	Amount
October, 2010 – December, 2010	$	30
2011		113
2012		79
2013		33
2014		—

Total	$	255

Note 6. Contingent Liabilities and Other Matters

Neither the Company nor its subsidiary is involved in any pending legal proceedings other than routine legal proceedings occurring in the normal course of business, which, in the opinion of management, in the aggregate, are not material to the Company’s consolidated financial condition.

Note 7. Segment Information

The Company utilizes an internal reporting and planning process that focuses on lines of business (“LOB”). The reportable segments are determined by the products and services offered, primarily distinguished between retail, commercial, treasury, and other operations. Loans and deposits generate the revenues in the commercial segments; deposits, loans, secondary mortgage sales and servicing generates the revenue in the retail segment; investment income generates the revenue in the treasury segment; and holding company services generate revenue in the other operations segment. The “net allocations” line represents the allocation of the costs that are overhead being spread to the specific segments.

The accounting policies used with respect to segment reporting are the same as those described in the summary of significant accounting policies as forth in Note 1. Segment performance is evaluated using net income.

14.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 7. Segment Information (Continued)

Information reported internally for performance assessment follows:

	Three Months Ended
	September 30, 2010
	Retail			Commercial			Treasury			Other			Total
	Segment			Segment			Segment			Operations			Company
Net interest income (loss)	$	1,197		$	5,929		$	497		$	(484	)	$	7,139
Other revenue		2,292			431			401			303			3,427
Other expense		2,555			1,061			52			4,510			8,178
Noncash items
Depreciation		541			2			—			251			794
Provision for loan losses		—			7,250			—			—			7,250
Other intangibles		307			—			—			—			307
Net allocations		1,483			3,020			439			(4,942	)		—
Income tax benefit		648			10,026			(234	)		—			10,440
Segment profit (loss)	$	(2,045	)	$	(14,999	)	$	641		$	—		$	(16,403	)

Goodwill	$	7,784		$	8,096		$	—		$	—		$	15,880
Segment assets	$	200,119		$	597,230		$	282,056		$	100,279		$	1,179,684

	Three Months Ended
	September 30, 2009
	Retail			Commercial			Treasury			Other			Total
	Segment			Segment			Segment			Operations			Company
Net interest income (loss)	$	2,128		$	6,830		$	1,220		$	(770	)	$	9,408
Other revenue		2,560			329			(3,131	)		308			66
Other expense		2,824			741			68			4,349			7,982
Noncash items
Depreciation		324			1			—			309			634
Provision for loan losses		—			14,500			—			—			14,500
Other intangibles		375			—			—			—			375
Net allocations		2,095			2,879			146			(5,120	)		—
Income tax benefit		(509	)		(4,461	)		(635	)		—			(5,605	)
Segment profit (loss)	$	(421	)	$	(6,501	)	$	(1,490	)	$	—		$	(8,412	)

Goodwill	$	7,784		$	8,096		$	—		$	—		$	15,880
Segment assets	$	243,805		$	778,291		$	257,302		$	59,076		$	1,338,474

	Nine Months Ended
	September 30, 2010
	Retail			Commercial			Treasury			Other			Total
	Segment			Segment			Segment			Operations			Company
Net interest income (loss)	$	3,420		$	18,844		$	2,252		$	(1,720	)	$	22,796
Other revenue		7,781			1,013			(2,109	)		870			7,555
Other expense		8,263			4,419			158			13,641			26,481
Noncash items
Depreciation		1,162			6			—			759			1,927
Provision for loan losses		—			24,150			—			—			24,150
Other intangibles		967			—			—			—			967
Net allocations		5,170			8,732			1,348			(15,250	)		—
Income tax benefit		(615	)		4,835			(806	)		—			3,414
Segment profit (loss)	$	(3,746	)	$	(22,285	)	$	(557	)	$	—		$	(26,588	)

Goodwill	$	7,784		$	8,096		$	—		$	—		$	15,880
Segment assets	$	200,119		$	597,230		$	282,056		$	100,279		$	1,179,684

15.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 7. Segment Information (Continued)

	Nine Months Ended
	September 30, 2009
	Retail			Commercial			Treasury			Other			Total
	Segment			Segment			Segment			Operations			Company
Net interest income (loss)	$	7,085		$	20,815		$	3,968		$	(2,366	)	$	29,502
Other revenue		7,996			865			(8,803	)		1,110			1,168
Other expense		9,004			1,919			174			21,857			32,954
Noncash items
Depreciation		1,162			5			—			830			1,997
Provision for loan losses		425			29,374			—			—			29,799
Other intangibles		1,182			—			—			—			1,182
Net allocations		9,747			11,719			2,477			(23,943	)		—
Income tax expense		(1,886	)		(7,854	)		(1,960	)		—			(11,700	)
Segment profit (loss)	$	(4,553	)	$	(13,483	)	$	(5,526	)	$	—		$	(23,562	)

Goodwill	$	7,784		$	8,096		$	—		$	—		$	15,880
Segment assets	$	243,805		$	778,291		$	257,302		$	59,076		$	1,338,474

Note 8. Borrowed Funds and Debt Obligations

As of September 30, 2010, the Company has $10.3 million outstanding per a loan agreement dated March 31, 2008. This original agreement was entered into with Bank of America and consisted of three credit facilities: a secured revolving line of credit, a secured term facility, and a subordinated debt. In February 2009, the loan agreement on the revolving line of credit was amended resulting in an aggregate principal amount of $20.3 million. The first credit facility consisted of a $10.0 million secured revolving line of credit which matured on June 30, 2009 and was not renewed by Bank of America. The second credit facility consists of a $0.3 million secured term facility, which will mature in March 31, 2015. The third credit facility consists of $10.0 million in subordinated debt, which also matures in March 31, 2015. On December 14, 2009, the Bank of America transferred to Cole Taylor Bank all rights, title, interest in to and under the loan agreements dated March 31, 2008. Repayment of each of the remaining two credit facilities is interest only on a quarterly basis, with the principal amount of the loan due at maturity. The term credit facility is secured by a pledge of the stock of the Bank. The subordinated debt credit facility is unsecured and is intended to qualify as Tier II capital for regulatory purposes.

The loan agreement contains customary covenants, including but not limited to, the Bank's maintenance of its status as well-capitalized, the Bank’s maximum nonperforming assets to primary capital below 90%, and the Bank’s minimum loan loss reserves to total loans of 2.00%. The Company is using these credit facilities for general working capital purposes. The loan agreement contains no penalty for early repayment of the subordinated debt credit facility. Except for the Tier I leverage ratio covenant which requires the Company to have a ratio of 6%, in which the Company currently has a ratio of 5.75%, the Company is in compliance with the remaining covenants as of September 30, 2010. The Company has received a waiver of this covenant as of September 30, 2010.

Additionally, the Company has a note outstanding to an individual with an imputed interest rate of 5.25% maturing October 24, 2012 from a prior acquisition. The balance as of September 30, 2010 and December 31, 2009 was $0.4 million and $0.5 million, respectively.

Note 9. Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

16.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs to reflect a reporting entity’s own assumptions about the assumptions that market participants would use to price and asset or liability.

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

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.

Pooled Trust Preferred CDOs

The assets included in Level 3 are pooled trust preferred collateralized debt obligations (“CDO”). These securities were historically priced using Level 2 inputs. However, in 2008, the decline in the level of observable inputs and market activity for trust preferred CDOs by the measurement date was significant and resulted in unreliable external pricing. As such, the Company uses an internal other-than-temporary impairment (“OTTI”) evaluation model to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments.

We assume no recoveries on defaults and treat all interest payment deferrals as defaults. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Company’s note class.

Each bank in the tranche was analyzed using the Fitch ratings for the quarter and key financial data so that the banks in each tranche can be divided between a pool of “performing” banks and “under-performing” banks. A factor is applied to the under-performing banks for each quarter to project additional defaults and deferrals to be factored into the cash flow model. Three internal scenarios were developed that had different assumptions regarding the impact of the economic environment on additional defaults and deferrals for the upcoming quarters. On average, the additional deferrals for a specific CDO that were factored in to our calculation were approximately 5% of the performing balance of the instrument across the three scenarios. All of the additional deferrals for the three scenarios are factored in to the cash flow for each tranche. A discount factor to be applied to LIBOR was developed for each specific tranche and incorporated to arrive at the discount rate for the CDO. The factor applied ranged from 200 basis points to 600 basis points based on the rating of the CDO and its gross-up factor for risk based capital. These rates were applied to calculate the net present value of the cash flows. The results of the three net present value calculations were weighted based on their likelihood of occurring. The scenarios were weighted 35%, 47% and 18%.

17.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

Finally, an independent valuation of our portfolio was obtained. This was weighted as the final overall step to arrive at our valuation for September 30, 2010 using 55% for the internal weighting and 45% for the external one. Due to market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

At September 30, 2010, the Company held seven pooled trust preferred CDOs with an amortized cost of $9.4 million (after third quarter 2010 credit impairment). These securities were rated high quality (A3 and above) at inception, but at September 30, 2010 rating agencies rated these securities as Ba2/B, which are defined as highly speculative, and C, which is defined as default, with some recovery. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. Specific ratings of our pooled trust preferred CDO’s that have incurred OTTI are listed below as of September 30, 2010:

Issue	Tranche	Gross Amortized Cost		Fair Value		Gross Unrealized Gains/(Losses)			Ratings as of September 30, 2010 Moody’s/Fitch	Ratings as of June 30, 2010 Moody’s/Fitch
PreTSL VII	B	$	1,283	$	1,201	$	(82	)	Ca / C)	Ca / C)
PreTSL VIII	B-1		638		401		(237	)	Ca / C)	Ca / C)
PreTSL XII	B-1		3,255		1,785		(1,470	)	Ca / C)	Ca / C)
PreTSL XIII	B-3		577		296		(281	)	Ca / C)	Ca / C)
PreTSL XVI	B		547		186		(361	)	Ca / C)	Ca / C)
PreTSL XXIV	C-2		107		132		25		Ca / C)	Ca / C)
		$	6,407	$	4,001	$	(2,406	)

The Company performed an analysis including evaluation for OTTI for each of the seven CDOs. Upon completion of the September 30, 2010 analysis, our model indicated OTTI on two of these CDOs, with an aggregate cost basis of $4.3 million. Total impairment for these two CDOs totaled $0.6 million. Of this, $0.1 million is carried in other comprehensive income. The impairment of $0.5 million was related to credit loss based on the Company’s analysis of future cash flows. Management has determined that the remaining CDOs are deemed to be only temporarily impaired at quarter-end due to the projected cash flows adjusted for the possible further deterioration is sufficient to return the outstanding principal balance with interest at the stated rate.

Private Label CMOs

Private label CMOs were also evaluated using management’s internal analysis process. These securities were rated high quality (A3 and above) at inception. They are all supported primarily by conforming 1-4 family real estate collateral. The RAST series has a limited amount of alt-a real estate as underlying collateral. Specific ratings of our CMOs that have incurred OTTI are listed below as of September 30, 2010:

18.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

Issue	Tranche	Gross Amortized Cost		Fair Value		Gross Unrealized Gains/(Losses)			Ratings as of September 30, 2010 Moody’s/Fitch	Ratings as of June 30, 2010 Moody’s/Fitch
RAST Series	A3	$	1,124	$	1,117	$	(7	)	- / CCC	- / CCC
BOAMS	A10		3,726		3,691		(35	)	- / AAA	- / AAA
WFMBS Series	2A6		1,402		1,439		37		Baa3 / BBB	Baa3 / BBB
		$	6,252	$	6,247	$	(5	)

Based on the Company’s third quarter 2010 evaluation of its CMO security portfolio, none of the securities in the portfolio were deemed to be impaired.

Single Issue Trust Preferred

During the third quarter of 2010, the Company purchased $3.9 million of 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. Since these items were purchased in mid-September, the Company determined that all of the securities were performing. Additionally, they have unrealized gains of $0.01 million as of September 30, 2010.

The Company’s unrealized losses on other securities relate primarily to its investment in CDO securities. The decline in fair value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. Due to the illiquidity in the market, it is unlikely that the Company would be able to recover its investment in these securities if the Company sold the securities at this time. The Company does not intend to sell these securities or more likely than not will be required to sell these securities before its anticipated recovery.

Impaired Loans. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with authoritative guidance for impairments. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

Other Real Estate Owned. Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Mortgage Servicing Rights. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.

Loans Held For Sale. Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors.

19.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value measurements at September 30, 2010 Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government agencies	$	12,864	$	—	$	12,864	$	—
State and political subdivisions		31,014		—		31,014		—
U.S. government agency residential mortgage-backed securities		185,980		—		185,980		—
Collateralized residential mortgage obligations
Agency		22,182		—		22,182		—
Private Label		6,712		—		—		6,712
Equities		2,264		—		2,264		—
Collateralized debt obligations:
Single Issue		3,859		3,859		—		—
Pooled		6,426		—		—		6,426

Available-for-sale securities	$	271,301	$	3,859	$	254,304	$	13,138

			Fair Value measurements at December 31, 2009 Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government agencies	$	3,966	$	—	$	3,966	$	—
State and political subdivisions		36,541		—		36,541		—
U.S. government agency residential mortgage-backed securities		198,183		—		198,183		—
Collateralized residential mortgage obligations
Agency		3,261		—		3,261		—
Private Label		11,165		—		1,376		9,789
Equities		1,898		—		1,898		—
Collateralized debt obligations:
Single Issue		—		—		—		—
Pooled		9,758		—		—		9,758

Available-for-sale securities	$	264,772	$	—	$	245,225	$	19,547

20.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2010:

	CDOs			CMOs			Total Available for Sale Securities
Beginning balance, July 1, 2010	$	7,128		$	7,999		$	15,127

Transfers into Level 3		—			—			—
Interest income on securities		—			—			—
Security impairment		(498	)		—			(498	)
Other changes in fair value		30			(1,392	)		(1,362	)
Gains (losses) on sales of securities		—			—			—
Included in other comprehensive income		(234	)		105			(129	)

Ending balance, September 30, 2010	$	6,426		$	6,712		$	13,138

	CDOs			CMOs		Total Available for Sale Securities
Beginning balance, July 1, 2009	$	9,747		$	1,352	$	11,099

Transfers into Level 3		—			—		—
Interest income on securities		—			—		—
Security impairment		(3,132	)		—		(3,132	)
Other changes in fair value		—			—		—
Gains (losses) on sales of securities		—			—		—
Included in other comprehensive income		5,894			218		6,112

Ending balance, September 30, 2009	$	12,509		$	1,570	$	14,079

	CDOs			CMOs			Total Available for Sale Securities
Beginning balance, January 1, 2010	$	9,758		$	9,789		$	19,547

Transfers into Level 3		—			788			788
Interest income on securities		—			—			—
Security impairment		(3,883	)		(139	)		(4,022	)
Other changes in fair value		101			(3,859	)		(3,758	)
Gains (losses) on sales of securities		—			—			—
Included in other comprehensive income		450			133			583

Ending balance, September 30, 2010	$	6,426		$	6,712		$	13,138

21.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

	CDOs			CMOs			Total Available for Sale Securities
Beginning balance, January 1, 2009	$	19,848		$	—		$	19,848

Transfers into Level 3		—			1,330			1,330
Interest income on securities		—			—			—
Security impairment		(8,878	)		(171	)		(9,049	)
Other changes in fair value		—			—			—
Gains (losses) on sales of securities		—			—			—
Included in other comprehensive income		1,539			411			1,950

Ending balance, September 30, 2009	$	12,509		$	1,570		$	14,079

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value measurements at September 30, 2010 Using
			Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
							Significant Unobservable Inputs (Level 3)

	September 30, 2010
	September 30, 2010
Assets:
Impaired loans	$	76,727	$	—	$	—	$	76,727
Oreo property	$	12,322	$	—	$	—	$	12,322

			Fair Value measurements at December 31, 2009 Using
			Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
							Significant Unobservable Inputs (Level 3)

	December 31,
	2009
Assets:
Impaired loans	$	102,938	$	—	$	—	$	102,938
Oreo property	$	11,107	$	—	$	—	$	11,107

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $104.7 million with a valuation allowance of $28.0 million resulting in an additional provision for loan losses of $2.2 million for the period.

The majority of our impaired loans are collateralized by real estate. The carrying value for these real estate secured impaired loans was based upon information in independent appraisals obtained on the underlying collateral. For troubled debt restructurings, impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measure and accordingly, such loans are excluded from the fair value disclosures above.

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $12.3 million. This is made up of the outstanding balance of $15.7 million, net of the valuation allowance of $3.4 million, at September 30, 2010. Per management’s fair value analysis a valuation allowance of $0.4 million was required for the quarter ending September 30, 2010 bringing the year to date valuation allowance to $2.4 million. The net carrying amount at December 31, 2009, was $11.1 million, which is made up of the outstanding balance of $12.2 million, net of valuation allowance of $1.1 million.

22.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 9. Fair Value (Continued)

Fair Value of Financial Instruments

The methods and assumptions used to estimate fair value are described as follows:

The carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on the methods described above.

The carrying value and fair value of the subordinated debentures issued to capital trusts are estimated using market data for similarly risk weighted items to value them. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. The fair value of loans held for sale is based on market quotes. The fair value of debt and redeemable stock is based on current rates for similar financing.

It was not practicable to determine the fair value of the restricted securities due to restrictions placed on transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.

The estimated fair values of the Company's financial instruments were as follows:

	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	43,927	$	43,927	$	56,452	$	56,452
Securities		271,301		271,301		264,772		264,772
Restricted securities		10,925		N/A		10,711		N/A
Net loans		721,195		676,251		844,186		808,446
Accrued interest receivable		4,195		4,195		4,709		4,709
Financial liabilities
Deposits		958,032		961,829		1,054,689		1,059,766
Federal funds purchased and securities sold under agreements to repurchase		11,725		11,725		16,225		16,225
Federal Home Loan Bank advances		81,060		83,458		86,261		87,727
Notes payable		10,711		8,800		10,796		9,092
Subordinated debentures		20,620		11,750		20,620		11,383
Series B mandatory redeemable preferred stock		268		268		268		268
Accrued interest payable		4,276		4,276		4,051		4,051

In addition, 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. Also, 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 earnings power of core deposit accounts, the earnings potential of the trained work force, customer goodwill, and similar items.

23.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 10. Participation in the Treasury Capital Purchase Program

On January 9, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“U.S. Treasury”), pursuant to which the Company sold 32,668 shares of newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share and liquidation value $1,000 per share (the “Series C Preferred Stock”) and also issued warrants (the “Warrants”) to the U.S. Treasury to acquire an additional 508,320 shares of the Company’s common stock at an exercise price of $9.64 per share.

The Series C Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series C Preferred Stock may be redeemed by the Company at any time subject to consultation with the Federal Reserve. The Series C Preferred Stock is not subject to any contractual restrictions on transfer.

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Common Stock will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.14) declared on the Common Stock prior to October 28, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock and (b) the date on which the Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of the Preferred Stock to third parties.

On August 10, 2009, the Company announced that it would defer scheduled interest payments on the principal outstanding Series C, fixed rate cumulative, perpetual preferred stock. The Company is accruing the expense in accordance with GAAP and the terms of the program. The Company may, at its option, redeem the deferred securities at their liquidation preference plus accrued and unpaid dividends at any time subject to consultation with the Federal Reserve.

Note 11. Goodwill and Intangible Assets

Goodwill

Goodwill initially recorded is subject to the completion of the valuation of assets acquired and liabilities assumed. Purchase accounting adjustments are the adjustments to the initial goodwill recorded at the time an acquisition is completed. Such adjustments generally consist of adjustments to the assigned fair value of assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations and adjustments to initial estimates recorded for transaction costs or exit liabilities. Goodwill is not amortized but is subject to impairment tests on at least an annual basis.

At December 31, 2009, the Company performed its annual goodwill impairment analysis by using a third party to perform its step one analysis per accounting standards (i.e. ASC 350 “Goodwill and Other Intangible Assets”). The results of this analysis showed that the Company identified potential impairment. The step two results obtained from the third party were applied to our December 31 balance sheet which resulted in no additional impairment as the fair value of the balances supported the level of goodwill carried as of December 31. However, if the economy remains stressed and bank stocks remain out of favor, no assurance can be given that future impairment tests will not result in a charge to earnings.

24.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 11. Goodwill and Intangible Assets (Continued)

The change in balance of goodwill during the year is as follows:

	September 30,		December 31,
	2010		2009

Beginning of period	$	15,880	$	24,494
Goodwill allocated to sale of Trust		—		(163	)
Impairment recorded June 30, 2009		—		(8,451	)

End of period	$	15,880	$	15,880

In the first quarter of 2009, the Company sold its Trust product line which resulted in a goodwill charge to earnings.

Acquired Intangible Assets

Acquired intangible assets were as follows as of the quarter ending:

	September 30, 2010				December 31, 2009
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization

Amortized intangible assets:
Core deposit intangibles	$	14,124	$	8,121	$	14,124	$	7,154
Missouri charter		581		—		581		—

Total	$	14,705	$	8,121	$	14,705	$	7,154

The core deposit intangible asset recorded in the 2006 merger with former Centrue Financial Corporation was $13.0 million. Aggregate amortization expense was $1.0 million and $1.2 million for the nine months ended September 30, 2010 and 2009.

Estimated amortization expense for subsequent periods is as follows:

Remaining quarters in 2010	$	291
2011		1,029
2012		951
2013		951
2014		951
Thereafter		1,830

Note 12. Business Acquisitions and Divestures

On June 30, 2010, the Company completed the sale of its Effingham branch to Washington Savings Bank headquartered in Effingham, Illinois. Washington Savings Bank assumed approximately $19.5 million in deposits and acquired $5.9 million in loans. The net gain on the sale was $1.2 million.

The sale of the Effingham branch in 2010 is not expected to have a material impact on the future operations and results of the Company.

25.

Centrue Financial Corporation

Notes to Unaudited Consolidated Financial Statements

(Table Amounts In Thousands, Except Share Data)

Note 13. Income Taxes

Per accounting guidance, the Company reviewed its deferred tax assets at September 30, 2010 and determined that a valuation allowance of $12.8 million was necessary. The Company did not record a valuation allowance in previous quarters due to the weight of all positive evidence overcoming the negative evidence. However, during the third quarter of 2010 changes have occurred which have triggered the need for a valuation allowance. First, the Company has now generated enough net operating losses on a YTD basis to use up the available tax carryback refunds, and an additional NOL carryforward has now been generated and is included in the deferred balance. Second, the revised earnings forecast generated this quarter has declined from previous forecasts largely due to increased provision for loan loss levels and has moved profitability further into the future. Finally, the level of nonperforming assets has not declined as previously planned.

Below is a summary of items included in the deferred tax inventory as of December 31, 2009 and September 30, 2010:

	Balance at 09/30/10			Balance at 12/31/09			Change
Allowance for loan loss	$	16,759		$	15,801		$	958
Impairment on securities portfolio		7,479			5,926			1,553
Net operating loss carryforwards		3,985			1,773			2,212
Valuation adjustments on OREO property		1,321			408			913
Basis adjustments from merger		(1,630	)		(1,695	)		65
Mortgage servicing rights		(958	)		(1,114	)		156
All other		(347	)		(1,515	)		1,168

Net deferred tax	$	26,609		$	19,584		$	7,025
Valuation allowance on NOL carry forwards		(12,816	)		(370	)		(12,446	)
Net deferred tax assets	$	13,793		$	19,214		$	(5,421	)

Note 14. Recent Accounting Developments

In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The adoption of this guidance did not have a material effect on the Company’s results of operations or financial position.

In July 2010, FASB issued guidance requiring companies to provide more information about the credit risks inherent in its loan and lease portfolios and how management considers those credit risks in determining the allowance for credit losses. A company would be required to disclose its accounting policies, the methods it uses to determine components of the allowance for credit losses and qualitative and quantitative information about the credit quality of its loan portfolio, such as aging information and credit quality indicators. Both new and existing disclosures would be required either by portfolio segment or class, based on how a company develops its allowance for credit losses and how it manages its credit exposure. The guidance is effective for all financing receivables, including loans and trade accounts receivables. However, short-term trade account receivables, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure requirements. For public companies, any period-end disclosures are effective for periods ending on or after December 15, 2010. Any disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. As this guidance affects only disclosures, the adoption of this guidance on December 31, 2010 for period-end disclosures and January 1, 2011 for intra-period activity is not expected to have a significant impact to the Company’s financial statements.

26.

Centrue Financial Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Table Amounts In Thousands, Except Share Data)

The following management discussion and analysis (“MD&A”) is intended to address the significant factors affecting the Company’s results of operations and financial condition for the three and nine months ended September 30, 2010 as compared to the same period in 2009. 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 subsidiary. 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. 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. 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 2009 Annual Report on Form 10-K.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan balance is confirmed.

Securities: Available-for-sale securities are those that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available-for-sale are carried at fair value with unrealized gains or losses, net of the related income tax effect, reported in other comprehensive income. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses when the Company is unable to retain their position in the instrument allowing it to recover. If the Company is able to retain the instrument and allow it to recover its value, only the credit component of any identified impairment is recognized through the income statement. The fair values 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.

27.

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 assets included in Level 3 are trust preferred CDOs and five CMOs. These securities were historically priced using Level 2 inputs. In 2008, the decline in the level of observable inputs and market activity for trust preferred CDOs by the measurement date was significant and resulted in unreliable external pricing. As such, these investments are now considered Level 3 inputs and are priced using an internal model. The following information is incorporated into the pricing model utilized in determining individual security valuations:

	●	historical and current performance of the underlying collateral
	●	deferral/default rates
	●	collateral coverage ratios
	●	break in yield calculations
	●	cash flow projections
	●	required liquidity and credit premiums
	●	financial trend analysis with respect to the individual issuing financial institutions and insurance companies

Due to market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such valuation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. For additional discussion on securities, see Notes 3 and 9 of “Notes to Consolidated Financial Statements” of this Form 10-Q.

Deferred Income Taxes: Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Accounting guidance requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.

An allowance of $0.4 million was previously established upon the merger of UnionBancorp, Inc. with Centrue Financial Corporation for the portion of federal net operating loss carryforward that will expire unused under Section 382 of the Internal Revenue Code. The tax loss carryforward generated during the current year can be used over a twenty year carry forward period according to both Internal Revenue Service and State of Illinois guidelines. The State of Missouri does not allow carryforwards and therefore no tax benefits are currently being recorded related to Missouri losses. The deferred tax balance also includes an Alternative Minimum Tax credit carryforward which does not expire as well as a donation carryforward which has a five year expiration.

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 deferred tax asset will be analyzed quarterly to determine if any additional valuation allowance is warranted. In making such judgments, significant weight is given to evidence that can be objectively verified. In making decisions regarding any valuation allowance, the Company considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and if conditions warrant it more frequently. Any such impairment will be recognized in the period identified. Management evaluated goodwill as of September 30, 2010 and concluded there is no additional impairment at this time. Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, and branch company acquisitions. They are initially measured at fair value and then are amortized over their estimated useful lives, which is ten years.

General

Third Quarter Highlights:

	●	Earnings: Third quarter 2010 net loss of $16.4 million compared to second quarter 2010 net loss of $3.9 million and third quarter 2009 net loss of $8.4 million. The results for the third quarter 2010 were primarily due to a $12.8 million valuation allowance for our deferred tax asset and a $7.3 million provision for loan losses.
	●	Risk-Based Capital Ratios: All regulatory capital ratios at the Company and unit Centrue Bank exceeded regulatory “well-capitalized” levels as of September 30, 2010. Total Company risk-based capital ratio and tier 1 leverage ratio were 10.20% and 5.75%, respectively. Total Centrue Bank risk-based capital ratio and tier 1 leverage ratio was 10.42% and 6.52%, respectively.
	●	Credit Quality: The allowance for loan losses was increased to 5.67% of total loans; nonperforming assets increased $10.5 million from second quarter 2010 to 10.15% of total assets; the coverage ratio (allowance for loan losses to nonperforming loans) remained relatively unchanged from second quarter 2010; quarterly provision levels exceeded net loan charge-offs by $1.0 million.
	●	Balance Sheet: Total assets equaled $1.180 billion, representing decreases of $47.1 million, or 3.8%, from June 30, 2010 and $133.0 million, or 10.1%, from year-end 2009. Total loans equaled $764.6 million, representing decreases of $27.7 million, or 3.5%, from June 30, 2010 and $120.5 million, or 13.6%, from year-end 2009. Total deposits equaled $958.0 million, representing decreases of $35.3 million, or 3.6%, from June 30, 2010 and $96.7 million, or 9.2%, from year-end 2009.
	●	Net Interest Margin: The net interest margin was 2.69% for the third quarter 2010, representing decreases of 10 basis points from 2.79% recorded in the second quarter 2010 and 52 basis points from 3.21% reported in the third quarter 2009.
	●	Liquidity: The Bank’s liquidity improved as securities grew, while loans and wholesale funding (brokered deposits and FHLB advances) decreased since year-end 2009.
	●	Income Taxes: The Company established a $12.8 million valuation allowance against the deferred tax asset in the third quarter 2010 in part due to management’s determination that the third quarter asset quality results impacted the short-term ability to realize the asset.

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)

Results of Operations

Net Income (Loss)

The Company reported a third quarter net loss of $16.4 million. This compares with a net loss of $3.9 million in the second quarter of 2010 and a net loss of $8.4 million in the third quarter of 2009. The net loss per common diluted share in the third quarter 2010 was $2.79, compared to $0.73 in the second quarter of 2010 and $1.47 in the third quarter 2009. For the first nine months of 2010, the Company reported a net loss of $26.6 million, or $4.64 per common diluted share, compared to a net loss of $23.6 million, or $4.13 per common diluted share, for the same period in 2009.

Third quarter 2010 results include a $12.8 million valuation allowance for our deferred tax asset. Excluding the $12.8 million valuation for the deferred tax asset, the third quarter 2010 net loss equaled $3.6 million, or $(0.68) per common diluted share. Credit costs continued to weigh heavily on earnings in the third quarter 2010, as we recorded $7.3 million in provision for loan losses largely related to asset quality deterioration in the Company’s land development, construction and commercial real estate portfolio. Also contributing to the loss was a $0.5 million non-cash credit impairment charge to CDO securities, $0.4 million non-cash valuation adjustment to OREO and increased loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate. Positively contributing to earnings were gains on sale of securities and increase in mortgage banking revenue.

Net Interest Income/ Margin

The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds referred to as "rate change." The following table details each category of average amounts outstanding for interest-earning assets and interest-bearing liabilities, average rate earned on all interest-earning assets, average rate paid on all interest-bearing liabilities and the net yield on average interest-earning assets. In addition, the table reflects the changes in net interest income stemming from changes in interest rates and from asset and liability volume, including mix. The change in interest attributable to both rate and volume has been allocated to the changes in the rate and the volume on a pro rata basis.

Fully tax equivalent net interest income for the third quarter 2010 decreased 24.0% to $7.3 million as compared to $9.6 million for the same period in 2009. As compared to the second quarter 2010, it declined $0.5 million or 6.4%. The net interest margin, on a tax equivalent basis, was 2.69% for the third quarter, representing decreases of 10 basis points from 2.79% recorded in the second quarter of 2010 and 52 basis points from 3.21% recorded in the third quarter of 2009.

The decrease in net interest income and the net interest margin from 2009 was primarily due to the cost of increasing liquidity, average loan volume decline, the cost of carrying higher balances of nonaccrual loans and the impact of nonaccrual loan interest reversals. Additionally, the loan portfolio purchase accounting adjustments that were accreted into interest income related to the Company’s 2006 merger expired in the first quarter 2010. Positively impacting the margin was increased utilization of interest rate floors on a majority of variable rate loans and a reduction in the Company’s cost of interest-bearing liabilities due to maturity of higher rate time deposits and decline in market interest rates. Due largely to the protracted economic downturn, the carrying cost of nonaccrual loans, and the Company's interest rate sensitivity the margin will likely remain under pressure through the remainder of 2010.

Fully tax equivalent net interest income for the nine months ended September 30, 2010 totaled $23.3 million, representing a decrease of $6.8 million or 22.6% compared to the $30.1 million earned during the same period in 2009. The net interest margin, on a tax equivalent basis, was 2.79% for the nine months ended September 30, 2010, representing a decrease of 51 basis points from 3.30% recorded in the same period of 2009. The decrease of net interest income and the net interest margin was driven by the same factors impacting the third quarter.

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)

AVERAGE BALANCE SHEET
AND ANALYIS OF NET INTEREST INCOME

	For the Three Months Ended September 30,
	2010								2009
				Interest								Interest
	Average			Income/		Average			Average			Income/		Average			Change Due To:
	Balance			Expense		Rate			Balance			Expense		Rate			Volume			Rate			Net
ASSETS

Interest-earning assets
Interest-earning deposits	$	5,209		$	18		1.39	%	$	2,783		$	17		2.44	%	$	12		$	(11	)	$	1
Securities
Taxable		261,093			1,367		2.08			209,980			2,026		3.83			571			(1,230	)		(659	)
Non-taxable		29,270			384		5.20			35,683			487		5.42			(81	)		(22	)		(103	)

Total securities (tax equivalent)		290,363			1,751		2.39			245,663			2,513		4.06			490			(1,252	)		(762	)

Federal funds sold & other		620			8		5.18			620			8		4.94			—			—			—

Loans
Commercial		128,435			1,854		5.73			142,326			2,143		5.97			(187	)		(102	)		(289	)
Real estate		647,874			7,935		4.86			790,466			10,726		5.38			(1,647	)		(1,144	)		(2,791	)
Installment and other		4,074			92		8.98			5,530			130		9.31			(30	)		(8	)		(38	)

Gross loans (tax equivalent)		780,383			9,881		5.02			938,322			12,999		5.50			(1,864	)		(1,254	)		(3,118	)

Total interest-earnings assets		1,076,575			11,658		4.30			1,187,388			15,537		5.19			(1,362	)		(2,517	)		(3,879	)

Noninterest-earning assets
Cash and cash equivalents		44,545								54,262
Premises and equipment, net		26,688								30,908
Other assets		66,723								56,948

Total nonearning assets		137,956								142,118

Total assets	$	1,214,531							$	1,329,506

LIABILITIES & STOCKHOLDERS’ EQUITY

Interest-bearing liabilities
NOW accounts		99,931			60		0.24			108,794			148		0.54			(15	)		(73	)		(88	)
Money market accounts		133,091			255		0.76			146,862			434		1.17			(46	)		(133	)		(179	)
Savings deposits		91,736			34		0.15			89,478			61		0.27			—			(27	)		(27	)
Time deposits		541,171			3,068		2.25			589,945			4,287		2.88			(374	)		(845	)		(1,219	)
Federal funds purchased and repurchase
Agreements		11,697			7		0.25			31,344			39		0.50			(19	)		(13	)		(32	)
Advances from FHLB		75,516			572		3.01			76,266			595		3.10			(7	)		(16	)		(23	)
Notes payable and subordinated debt		31,926			373		4.63			31,742			363		4.53			(3	)		13			10

Total interest-bearing liabilities		985,068			4,369		1.76			1,074,431			5,927		2.19			(464	)		(1,094	)		(1,558	)

Noninterest-bearing liabilities
Noninterest-bearing deposits		115,550								112,778
Other liabilities		13,172								11,244
Total noninterest-bearing liabilities		128,722								124,022

Stockholders’ equity		100,741								131,053

Total liabilities and stockholders’ equity	$	1,214,531							$	1,329,506

Net interest income (tax equivalent)				$	7,289							$	9,610				$	(898	)	$	(1,423	)	$	(2,321	)

Net interest income (tax equivalent) to total earning assets							2.69	%							3.21	%
Interest-bearing liabilities to earning assets		91.50	%							90.49	%

(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 non-taxable securities are reflected on a tax equivalent basis based upon a statutory federal income tax rate of 34%.

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

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

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 ANALYIS OF NET INTEREST INCOME

	For the Nine Months Ended September 30,
	2010								2009
				Interest								Interest
	Average			Income/		Average			Average			Income/		Average			Change Due To:
	Balance			Expense		Rate			Balance			Expense		Rate			Volume			Rate			Net
ASSETS

Interest-earning assets
Interest-earning deposits	$	4,219		$	62		1.96	%	$	2,738		$	27		1.32	%	$	22		$	13		$	35
Securities
Taxable		257,034			4,690		2.44			209,171			6,652		4.25			1,737			(3,699	)		(1,962	)
Non-taxable		30,884			1,219		5.28			35,547			1,464		5.51			(176	)		(69	)		(245	)

Total securities (tax equivalent)		287,918			5,909		2.74			244,718			8,116		4.44			1,561			(3,768	)		(2,207	)

Federal funds sold & other		2,525			30		1.61			620			25		5.29			34			(29	)		5

Loans
Commercial		136,084			5,726		5.63			155,655			6,720		5.77			(800	)		(194	)		(994	)
Real estate		682,244			25,962		5.09			810,025			33,742		5.57			(4,612	)		(3,168	)		(7,780	)
Installment and other		4,051			268		8.85			5,615			387		9.20			(96	)		(23	)		(119	)

Gross loans (tax equivalent)		822,379			31,956		5.20			971,295			40,849		5.62			(5,508	)		(3,385	)		(8,893	)

Total interest-earnings assets		1,117,041			37,957		4.54			1,219,371			49,017		5.38			(3,891	)		(7,169	)		(11,060	)

Noninterest-earning assets
Cash and cash equivalents		55,288								40,902
Premises and equipment, net		28,540								31,452
Other assets		65,532								64,003

Total nonearning assets		149,360								136,357

Total assets	$	1,266,401							$	1,355,728

LIABILITIES & STOCKHOLDERS’ EQUITY

Interest-bearing liabilities
NOW accounts		99,646			253		0.34			104,571			481		0.62			(31	)		(197	)		(228	)
Money market accounts		133,892			979		0.98			147,975			1,708		1.54			(181	)		(548	)		(729	)
Savings deposits		93,577			144		0.21			89,391			180		0.27			5			(41	)		(36	)
Time deposits		582,660			10,460		2.40			595,548			13,500		3.03			(371	)		(2,669	)		(3,040	)
Federal funds purchased and repurchase Agreements		13,492			37		0.37			28,180			111		0.53			(51	)		(23	)		(74	)
Advances from FHLB		77,823			1,733		2.98			91,277			1,708		2.50			(278	)		303			25
Notes payable & subordinated debt		32,029			1,074		4.48			33,291			1,215		4.88			(44	)		(97	)		(141	)

Total interest-bearing liabilities		1,033,119			14,680		1.90			1,090,233			18,903		2.32			(951	)		(3,272	)		(4,223	)

Noninterest-bearing liabilities
Noninterest-bearing deposits		115,302								113,965
Other liabilities		12,761								10,781
Total noninterest-bearing liabilities		128,063								124,746

Stockholders’ equity		105,219								140,749

Total liabilities and stockholders’ equity	$	1,266,401							$	1,355,728

Net interest income (tax equivalent)				$	23,277							$	30,114				$	(2,940	)	$	(3,897	)	$	(6,837	)

Net interest income (tax equivalent) to total earning assets							2.79	%							3.30	%
Interest-bearing liabilities to earning assets		92.49	%							89.41	%

(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 non-taxable securities are reflected on a tax equivalent basis based upon a statutory federal income tax rate of 34%.

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

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

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)

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.

The provision for loan losses for third quarter 2010 was $7.3 million, compared to $7.6 million and $14.5 million for second quarter 2010 and third quarter 2009, respectively. The third quarter 2010 provision was driven by an increase in nonperforming loans; elevated levels of charge-offs which impacts historical loss levels; deteriorating collateral values, reflecting the impact of the adverse economic climate on the Company’s borrowers; guarantor positions collapsing due to economic conditions; and an increase in the level of past due loans.

Management continues to diligently monitor the loan portfolio, paying particular attention to borrowers with residential and commercial real estate exposure. The prolonged period of high economic uncertainty that began in 2008 continued into the third quarter of 2010. Should the economic climate deteriorate from current levels, more borrowers may experience repayment difficulty. In turn, the level of nonperforming loans, charge-offs and delinquencies will rise, requiring further increases in the provision for loan losses.

Noninterest Income

Noninterest income consists of a wide variety of fee-based revenues from bank-related service charges on deposits and mortgage revenues. Also included in this category are revenues generated by the Company’s increases in cash surrender value on bank-owned life insurance.

The following table summarizes the Company’s noninterest income:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Service charges	$	1,215		$	1,756		$	3,934		$	4,812
Mortgage banking income		628			351			1,114			1,860
Electronic banking income		516			513			1,528			1,447
Bank owned life insurance		261			248			773			763
Other income		204			191			858			806
Subtotal recurring noninterest income		2,824			3,059			8,207			9,688
Securities gains		899			—			1,913			246
Net impairment on securities		(498	)		(3,132	)		(4,022	)		(9,049	)
Valuation adjustment mortgage servicing rights		—			—			(225	)		—
Gain on sale of OREO		24			130			34			166
Gain on sale of other assets		178			9			1,648			117

Total noninterest income	$	3,427		$	66		$	7,555		$	1,168

Total noninterest income for the third quarter of 2010 was $3.4 million, an increase of $3.3 million, compared to $0.1 million reported in the same period in 2009, which included impairment charges on CDO securities of $3.1 million. Included in noninterest income for the third quarter of 2010 was a $0.9 million gain on sale of securities, $0.5 million of credit impairment charges on CDO securities and a $0.2 million gain related to the sale of other assets. Excluding nonrecurring items from 2010 and 2009, noninterest income decreased $0.3 million or 9.7%. This net decrease largely stems from reduced consumer spending and the impact on overdraft fees partially offset by higher revenue generated from the mortgage banking business as volume has increased due to the rate environment.

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)

For the nine months ended September 30, 2010, total noninterest income was $7.6 million compared to $1.2 million. This was a $6.4 million or 533.3% increase. Recurring noninterest income decreased $1.5 million or 15.5%. The decline for the nine months was due to reduced consumer spending and the impact on overdraft fees and lower revenue generated from the mortgage banking business as volume has decreased compared to 2009.

Noninterest Expense

Noninterest expense is comprised primarily of compensation and employee benefits, deposit account expense, occupancy and other operating expense. The following table summarizes the Company’s noninterest expense:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Salaries and employee benefits	$	3,547	$	3,931	$	11,019	$	12,379
Occupancy, net		647		777		2,378		2,547
Furniture and equipment		642		602		1,685		1,726
Marketing		91		191		280		579
Supplies and printing		106		108		302		344
Telephone		194		164		567		654
Data processing		388		374		1,167		1,136
FDIC insurance		842		538		2,549		1,877
Loan processing and collection costs		675		483		1,789		946
Amortization of intangible assets		307		375		967		1,182
Other expenses		1,462		1,448		4,307		4,312
Subtotal recurring noninterest expenses		8,901		8,991		27,010		27,682
Goodwill impairment		—		—		—		8,451
OREO valuation adjustment		378		—		2,365		—

Total noninterest expense	$	9,279	$	8,991	$	29,375	$	36,133

Total noninterest expense for the third quarter of 2010 was $9.3 million, an increase of $0.3 million, compared to $9.0 million recorded during the same period in 2009. Included in noninterest expense for the third quarter of 2010 was a $0.4 million valuation adjustment to OREO. Excluding the OREO valuation adjustment, noninterest expense levels decreased by $0.1 million, or 1.1%. The lower expense levels were attributed to reductions in various noninterest expense categories, including salaries and employee benefits and reduced discretionary spending in areas such as marketing, contributions, dues and subscriptions and travel. These lower expense levels were offset by higher FDIC premiums and loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate.

Noninterest expense totaled $29.4 million for the nine months ended September 30, 2010 decreasing by $6.7 million or 18.6% from the same period in 2009. Excluding nonrecurring charges of $2.4 million for 2010 and $8.5 million for 2009, noninterest expense levels decreased $0.6 million or 2.2% for the first nine months of 2010 as compared to 2009. The decrease was due mainly to the same reasons as expressed for third quarter.

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)

Applicable Income Taxes

Income tax expense for the periods included benefits for tax-exempt income, tax-advantaged investments and general business tax credits offset by the effect of nondeductible expenses. The following table shows the Company’s income before income taxes, as well as applicable income taxes and the effective tax rate for the three and nine months ended September 2010 and 2009.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Income (loss) before income taxes	$	(5,963	)	$	(14,017	)	$	(23,174	)	$	(35,262	)
Applicable income taxes		10,440			(5,605	)		3,414			(11,700	)
Effective tax rates		(175.08	%)		39.99	%		(14.73	%)		33.18	%

The Company recorded income tax expense of $10.4 million and benefit of $5.6 million for the three months ended September 30, 2010 and 2009, respectively. Effective tax rates equaled (175.08%) and 39.99% respectively, for such periods. The Company recorded income tax expense of $3.4 million and benefit of $11.7 million for the nine months ended September 30, 2010 and 2009, respectively. Effective tax rates equaled (14.73%) and 33.18% respectively, for such periods.

The Company recorded a deferred tax valuation allowance of $12.8 million in September 2010, which is included in the income tax expense for the three and nine months ended September 30, 2010. Excluding this item, the income tax benefit for the three and nine months ended September, 2010 would have been $2.4 million and $9.4 million, respectively, and the effective tax rates would have been 39.85% and 40.57%, respectively. For the nine months ended September 30, 2010, the Company’s effective tax rate was lower than statutory rates due to the non-deductible portion of the goodwill impairment charge taken in the second quarter of 2009. Excluding this item, the effective tax rate for the nine months ended September 30, 2010 would have been approximately 40.92%. Excluding the valuation adjustment, the income tax benefits for all periods were generated by the non-cash impairment charges related to trust preferred securities, writedowns on other real estate owned properties, higher than historical provision for loan losses, and the goodwill impairment charge.

The Company’s tax rates are also impacted by several tax-exempt items. First, the Company derives interest income from municipal securities and loans, which are exempt from federal tax and certain U.S. government agency securities, which are exempt from state tax. Second, the Company derives income from bank owned life insurance policies, which is exempt from federal and state tax. Finally, state income taxes are recorded net of the federal tax benefit, which lowers the combined effective tax rate. Excluding the valuation adjustment and goodwill impairment charge, the higher than statutory effective tax rates for the three and nine months ended September 30, 2010 and 2009 were due to the taxable losses generating tax benefits at the combined statutory rate of 38.62% and further increased by the tax-exempt items.

Earnings Review by Business Segment

The Company’s internal reporting and planning process focuses on three primary lines of business: Retail, Commercial and Treasury. See Note 7 of the Notes to Unaudited Consolidated Financial Statements for the presentation of the condensed income statement and total assets for each Segment.

The financial information presented was derived from the Company’s internal profitability reporting system that is used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies which have been developed to reflect the underlying economics of the Segments and, to the extent practicable, to portray the Segment as if it operated on a stand alone basis. Thus, each Segment, in addition to its direct revenues and expenses, assets and liabilities, includes an allocation of shared support function expenses. The Retail, Commercial and Treasury Segments also include funds transfer pricing adjustments to appropriately reflect the cost of funds on loans made and funding credits on deposits generated. Apart from these adjustments, the accounting policies used are similar to those described in Note 1 of the Notes to Consolidated Financial Statements.

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)

Since there are no comprehensive authorities for management accounting equivalent to GAAP, the information presented is not necessarily comparable with similar information from other financial institutions. In addition, methodologies used to measure, assign and allocate certain items may change from time-to-time to reflect, among other things, accounting estimate refinements, changes in risk profiles, changes in customers or product lines and changes in management structure.

Retail Segment. The Retail Segment (“Retail”) provides retail banking services to individual customers through the Company’s branch locations in Illinois and Missouri. The services provided by this Segment include direct lending, checking, savings, money market, CD accounts, safe deposit rental, ATMs and other traditional and electronic banking services.

Retail generated a third quarter 2010 loss of $2.0 million, or 12.2% of total Segment loss, as compared to a loss of $0.4 million, or 4.8% of total Segment loss, during the same period in 2009. Year to date Retail Segment net loss was $3.7 million, or 13.9% of total Segment loss, as compared to net loss of $4.6 million, or 19.5%, for the same period in 2009. Retail assets were $200.1 million at September 30, 2010, $223.4 million at December 31, 2009 and $243.8 million as of September 30, 2009. This represented 17.0%, 17.0% and 18.2% of total consolidated assets, respectively.

The major factors impacting results for the third quarter 2010 were primarily related to the $0.6 million tax expense attributed to the $12.8 million deferred tax asset valuation adjustment, lower net interest income due to pressure on loan yields, reduced earning asset levels and reduced loan fee income. Segment loss increased from third quarter 2009 primarily due to a $0.5 million decrease in service charges, negative net servicing fees and higher allocations. This decrease in income was slightly offset by higher revenue from the mortgage product line and lower non-interest expenses. For the year to date results, the improvement is primarily due to a reduction in net allocations offset partially by similar items as experienced in the current quarter.

Commercial Segment. The Commercial Segment (“Commercial”) provides commercial banking services to business customers served through the Company’s full service branch channels located in Illinois and Missouri. The services provided by this Segment include lending, business checking and deposits, cash management, and other traditional as well as electronic commercial banking services.

Commercial generated a third quarter 2010 loss of $15.0 million, or 91.5% of total Segment loss, as compared to a loss of $6.5 million, or 77.4% of total Segment loss, during the same period in 2009. Year to date Commercial Segment net loss was $22.3 million, or 83.8% of total Segment loss, as compared to net loss of $13.5 million, or 57.2%, for the same period in 2009. Commercial assets were $597.2 million at September 30, 2010, $693.1 million at December 31, 2009 and $778.3 million as of September 30, 2009. This represented 50.6%, 52.8% and 58.1% of total consolidated assets, respectively.

Results for the third quarter 2010 declined due primarily to the $10.0 million tax expense attributable to the $12.8 million deferred tax asset valuation adjustment. Additionally, net interest income was adversely impacted by the lower yields on loan portfolio, average loan volume decline, the cost of carrying higher nonaccrual loans and the impact of nonaccrual loan interest reversals. The loan portfolio purchase accounting adjustments that were accreted into interest income related to the Company’s 2006 merger expired in the first quarter 2010. Finally, noninterest expense was higher due to higher loan remediation costs, including collection expenses on nonperforming loans and expenses associated with maintaining foreclosed real estate and OREO valuation adjustments. Offsetting these negative impacts slightly were lower levels of provision for loan losses related to land development, construction and commercial real estate credits as compared to third quarter 2009 levels and net allocations were lower in 2010 as compared to 2009. On a year to date basis, results are worse in 2010 than in 2009 due to items described for the quarter except allocations are lower on year to date basis.

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)

Treasury Segment. The Treasury Segment (“Treasury”) is responsible for managing the investment portfolio, acquiring wholesale funding for loan activity and assisting in the management of the Company’s liquidity and interest rate risk.

Treasury generated a third quarter 2010 gain of $0.6 million, as compared to a net loss of $1.5 million, or 17.9% of total Segment net loss, during the same period in 2009. Year to date Treasury Segment net loss was $0.6 million, or 2.3% of total Segment loss, as compared to net loss of $5.5 million, or 23.3%, for the same period in 2009. Treasury assets were $282.1 million at September 30, 2010, $277.4 million at December 31, 2009 and $257.3 million at September 30, 2009. This represented 23.9%, 21.1% and 19.2% of total consolidated assets, respectively.

Results for Treasury were impacted positively by the $0.9 million of security gains during the third quarter 2010 and lower non-cash CDO impairment charges which were $3.1 million in the same period of 2009. Those positives were offset by lower net interest income due to decreased yields in the security portfolio, lower tax benefit and higher allocations. The year to date results for Treasury were impacted by similar items.

Financial Condition

General

Following are highlights of the September 30, 2010 balance sheet when compared to June 30, 2010 and December 31, 2009:

Securities. Total securities equaled $282.2 million, representing a decrease of $25.6 million, or 8.3%, from June 30, 2010 and an increase of $6.7 million, or 2.4%, from year-end 2009. The decrease from June was related to initiatives to increase the margin by reducing high cost funding alternatives. The increase from year end was related to the earlier surplus liquidity initiatives. The primary strategic objective of the Company’s securities portfolio is to assist with liquidity and interest rate risk management. In managing the securities portfolio, the Company seeks to minimize any credit risk and avoid investments in sophisticated and complex investment products. The Company does not hold any securities containing sub-prime mortgages or any Fannie Mae or Freddie Mac equities.

At quarter-end, the Company held seven pooled trust preferred collateralized debt obligations (“CDOs”) involving approximately three hundred original issuers with a total book value (after third quarter 2010 impairment) of $9.4 million and fair value of $6.4 million. The investments in trust-preferred securities receive principal and interest payments from several pools of subordinated capital debentures with each pool containing issuances by a minimum of twenty-three banks or, in a few instances, capital notes from insurance companies. The Company also has single issuer trust preferred instruments with an amortized cost of $3.8 million and fair value of $3.9 million.

Per guidance issued by the Financial Accounting Standards Board ("FASB") regarding the recognition and presentation of Other-Than-Temporary Impairments, codified as ASC 320-10, the Company recorded for the third quarter 2010 a $0.5 million pre-tax non-cash impairment charge based upon management’s determination that two trust preferred securities with an aggregate cost before impairment of $4.3 million were other than temporarily impaired. This determination was based on the Company’s analysis which follows accounting pronouncements. The analysis showed an adverse change in estimated cash flows from these securities due to a significant number of deferrals. These values continued to decline as rating agencies downgraded the ratings of the securities. Per the accounting pronouncements, the Company calculated the difference between the present value of the cash flows expected to be collected and the cost basis, otherwise referred to as the credit loss.

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)

Should the economic climate deteriorate from current levels, the underlying credits may experience repayment difficulty, and the level of deferrals and defaults could increase requiring additional impairment charges in future quarters.

Loans. Total loans equaled $764.6 million, representing decreases of $27.7 million, or 3.5%, from June 30, 2010 and $120.5 million, or 13.6%, from year-end 2009. This decline was related to a combination of normal attrition, pay-downs, loan charge-offs and strategic initiatives to reduce balance sheet risk. Due to economic conditions, we have also experienced a decrease in loan demand as many borrowers continue to reduce their debt.

The Company does not have any material direct sub-prime exposure as we have focused our residential real estate lending activities on providing traditional loan products to relationship borrowers in locally known markets.

Deposit. Total deposits equaled $958.0 million, representing decreases of $35.3 million, or 3.6%, from June 30, 2010 and $96.7 million, or 9.2%, from year-end 2009. Excluding $19.5 million in deposits related to the Effingham branch sale in the second quarter of 2010, deposits decreased $77.2 million, or 7.3%, from year-end 2009. The net decrease from year-end 2009 was primarily related to declines in NOW accounts and time deposits on strategic initiatives to reduce higher costing in-market time deposits, brokered deposits and collateralized local public agency deposits.

Goodwill. Goodwill was $15.9 million as of September 30, 2010 which represented no change from the level at June 30, 2010 and December 31, 2009. GAAP requires companies to perform an annual test for goodwill impairment. The Company performed its last annual goodwill impairment test as of December 31, 2009. Results of the analysis determined no goodwill impairment since the fair value of the balances supported the level of goodwill carried. Based on the deferred tax valuation allowance recorded in the current quarter, management performed an internal review and determined that this had no adverse impact on goodwill. However, if the economy remains stressed, the Bank’s operating losses continue and bank stocks remain out of favor, no assurance can be given that future impairment tests will not result in a charge to earnings. Management will perform its’ annual analysis at year-end using an independent third party.

Other Assets. Other assets equaled $26.4 million at September 30, 2010 compared to $36.1 million recorded at June 30, 2010 and $34.4 million recorded at December 31, 2009. The majority of this decrease was related to the $12.8 million deferred tax asset valuation allowance taken in the third quarter of 2010.

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 Company 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.

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)

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 has an independent loan review function which is separate from the lending function and is responsible for the review of new and existing loans.

The following table summarizes nonperforming assets and loans past due 90 days or more for the previous five quarters:

	2010									2009
	Sep 30,			June 30,			Mar 31,			Dec 31,			Sep 30,
Nonaccrual loans	$	78,197		$	78,260		$	78,958		$	80,121		$	75,973
Troubled debt restructurings		16,899			14,898			11,226			743			684
Loans 90 days past due and still accruing interest		—			—			—			—			—
Total nonperforming loans		95,096			93,158			90,184			80,864			76,657

Other real estate owned		24,695			16,182			15,230			16,223			13,961
Total nonperforming assets	$	119,791		$	109,340		$	105,414		$	97,087		$	90,618

End of period loans	$	764,585		$	792,289		$	838,700		$	885,095		$	921,340

Nonperforming loans to total end of period loans		12.44	%		11.76	%		10.75	%		9.14	%		8.32	%
Nonperforming assets to total end of period loans		15.67	%		13.80	%		12.57	%		10.97	%		9.84	%
Nonperforming assets to total end of period assets		10.15	%		8.91	%		8.19	%		7.40	%		6.77	%

Nonperforming loans (nonaccrual, 90 days past due and troubled debt restructures) increased to $95.1 million at September 30, 2010, from $93.2 million at June 30, 2010 and $80.9 million at December 31, 2009. The level of nonperforming loans to end of period loans was 12.44% as of September 30, 2010 as compared to 11.76% as of June 30, 2010 and 9.14% as of December 31, 2009. The nonperforming loan ratio (nonperforming loans to end of period loans) was negatively impacted to a greater degree by the decrease in total loans outstanding than the increase in nonperforming loans.

Approximately 48.0% of total nonaccrual loans at September 30, 2010 were concentrated in land development and construction credits. The ratio of construction and land development loans to total loans decreased to 11.67% at September 30, 2010 from 13.32% at June 30, 2010 and 14.50% at December 31, 2009.

The coverage ratio (allowance for loan losses to nonperforming loans) was 45.63% at September 30, 2010, representing an increase from 45.49% at June 30, 2010 and a decrease from 50.59% at December 31, 2009. Our coverage ratio has declined since year-end as many of the previously identified workout loans were placed into nonaccrual status and marked to fair value of the collateral.

Other real estate owned (“OREO”) increased to $24.7 million at September 30, 2010, from $16.2 million at June 30, 2010 and December 31, 2009. During the third quarter 2010, the Company recorded valuation adjustments on OREO properties by $0.4 million reflective of existing market conditions and more aggressive disposition strategies.

Nonperforming assets (nonaccrual, 90 days past due, troubled debt restructures and OREO) increased to $119.8 million at September 30, 2010, from $109.3 million at June 30, 2010 and $97.1 million at December 31, 2009. This included $78.2 million of nonaccrual loans, $16.9 million in troubled debt restructures and $24.7 million of foreclosed assets and repossessed real estate. The ratio of nonperforming assets to total assets increased to 10.15% at September 30, 2010 from 8.91% at June 30, 2010 and 7.40% as of December 31, 2009.

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)

	●	increase in nonperforming
	●	elevated levels of action list loans;
	●	elevated levels of charge-offs and losses which impacts historical loss levels;
	●	deteriorating collateral values, reflecting the impact of the adverse economic climate on the Company’s borrowers;
	●	guarantor positions collapsing due to economic conditions; and
	●	increase in the level of past due loans.

	Payments Due by Period
	Within 1						After
	Year		1 – 3 Years		4 – 5 Years		5 Years		Total
Contractual Obligations

Short-term debt	$	—	$	—	$	250	$	—	$	250
Long-term debt		178		283		10,000		—		10,461
Certificates of deposit		393,342		114,986		22,077		93		530,498
Operating leases		314		647		653		326		1,940
Severance payments		80		—		—		—		80
Series B mandatory redeemable preferred stock		—		268		—		—		268
Subordinated debentures		—		—		—		20,620		20,620
FHLB advances		33,000		28,000		15,060		5,000		81,060

Total contractual cash obligations	$	426,914	$	144,184	$	48,040	$	26,039	$	645,177

	Amount of Commitment Expiration Per Period
	Within 1						After
	Year		1 – 3 Years		4 – 5 Years		5 Years		Total
Off-Balance Sheet Financial Instruments

Lines of credit	$	74,615	$	976	$	2,481	$	25,149	$	103,221
Standby letters of credit		5,641		—		40		—		5,681

Total contractual cash obligations	$	80,256	$	976	$	2,521	$	25,149	$	108,902

	Company						Bank						Well- Capitalized Thresholds			Minimum Thresholds
	Sep 30, 2010			Dec 31, 2009			Sep 30, 2010			Dec 31, 2009			Well- Capitalized Thresholds			Minimum Thresholds
Carrying amounts ($millions):
Total risk-based capital	$	86,800		$	114,900		$	87,400		$	111,200
Tier 1 risk-based capital	$	67,700		$	91,900		$	76,500		$	98,300
Tangible common equity	$	29,400		$	56,000		$	91,800		$	112,600

Capital ratios:
Total risk-based capital		10.20	%		11.34	%		10.42	%		11.13	%		10.0	%		8.0	%
Tier 1 risk-based capital		7.96	%		9.07	%		9.12	%		9.85	%		6.0	%		4.0	%
Tier 1 leverage ratio		5.75	%		7.10	%		6.52	%		7.60	%		5.0	%		4.0	%
Tangible common equity		2.54	%		4.35	%		7.96	%		8.78	%	NA			NA

	●	management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of the Company’s net interest income;
	●	fluctuations in the value of the Company’s investment securities;
	●	the Company’s ability to ultimately collect on any downgraded loan relationships;
	●	the Company’s ability to respond and adapt to economic conditions in our geographic market;

	●	the Company’s ability to adapt successfully to technological changes to compete effectively in the marketplace;
	●	credit risks and risks from concentrations (by geographic area and by industry) within the Company’s loan portfolio and individual large loans;
	●	volatility of rate sensitive deposits;
	●	operational risks, including data processing system failures 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 Congress, 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;
	●	fluctuation in the valuation of the Company and its impact on goodwill;
	●	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 in a market that is very volatile;
	●	the Company might not be able to realize the benefit of its deferred tax assets.

		Change in Net Interest Income Over One Year Horizon
		September 30, 2010					December 31, 2009
		Change					Change
		$			%		$			%
+300	bp	$	(766	)	(2.27	)%	$	224		0.61	%
+200	bp		(1,833	)	(5.43	)		(1,261	)	(3.42	)
+100	bp		(1,306	)	(3.87	)		(962	)	(2.61	)
+ 50	bp		(633	)	(1.87	)		(462	)	(1.25	)

Base			—		—			—		—

- 50	bp		415		1.23			1,338		3.63

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 effect 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 Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	None.

Item 3.	Defaults Upon Senior Securities

	None.

Item 4.	[Reserved]

Item 5.	Other Information

	None.

Item 6.	Exhibits

	Exhibits:

	31.1	Certification of Thomas A. Daiber, President and Principal Executive Officer, required by Rule 13a – 14(a).

	31.2	Certification of Kurt R. Stevenson, Senior Executive Vice President and Principal Financial and Accounting Officer required by Rule 13a – 14(a).

	32.1(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 Principal Executive Officer.

	32.2(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 Senior Executive Vice President and Principal Financial and Accounting Officer.


	(1)	This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

	CENTRUE FINANCIAL CORPORATION

Date: November 15, 2010	By:	/s/ Thomas A. Daiber
		Thomas A. Daiber
		President and Principal Executive Officer

Date: November 15, 2010	By:	/s/ Kurt R. Stevenson
		Kurt R. Stevenson
		Senior Executive Vice President and Principal Financial and Accounting Officer