UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2006.

or

o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From                      to                     .

CENTRUE FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware		36-3846489
(State or Other Jurisdiction of Incorporation		(I.R.S. Employer Identification Number)
or Organization)
303 Fountains Parkway, Fairview Heights, Illinois		62208
(Address of Principal Executive Offices)		(Zip Code)

Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

As of August 11, 2006, there were 2,232,889 issued and outstanding shares of the Issuer’s common stock.

 

 

CENTRUE FINANCIAL CORPORATION

INDEX

		Page
		Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Income and Comprehensive Income			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			7 - 12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25 - 27
Item 4. Controls and Procedures			27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1a. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Submission of Matters to a Vote of Security Holders			28 - 29
Item 5. Other Information			29
Item 6. Exhibits			29
SIGNATURES			30
Section 302 Certification
Section 1350 Certification

PART I. — FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

		June 30,				December 31,
		2006				2005
		(dollars in thousands)
Assets
Cash and due from banks		$	11,534			$	13,566
Interest bearing due from banks and other			3,322				4,692
Cash and cash equivalents			14,856				18,258
Certificates of Deposit			50				50
Investment Securities available-for-sale, at fair value			121,175				125,190
Loans, net of allowance for loan losses of $4,294 and $4,486			435,183				428,468
Loans held for sale			3,132				8,373
Premises and equipment			22,678				22,579
Goodwill			14,362				14,362
Life insurance contracts			9,647				9,465
Non-marketable equity securities			5,065				5,059
Accrued interest receivable			3,376				3,248
Intangible assets			1,779				1,922
Real estate held for sale			38				1,709
Other assets			3,162				2,840
Total Assets		$	634,503			$	641,523
Liabilities
Deposits:
Noninterest bearing		$	65,526			$	67,982
Interest bearing			396,752				439,934
Total Deposits			462,278				507,916
Short-term borrowings			65,112				27,014
Long-term borrowings			60,053				58,723
Other liabilities			3,790				4,767
Total Liabilities			591,233				598,420
Stockholders’ Equity
Preferred stock, $.01 par value – 500,000 shares authorized and unissued			—				—
Common stock, $.01 par value – 5,500,000 authorized; 4,200,300 shares issued and outstanding			42				42
Additional paid-in capital			30,895				30,460
Retained income, partially restricted			49,023				47,403
Accumulated other comprehensive (loss)			(2,586	)			(1,657	)
Treasury stock, (1,967,411 and 1,937,361 shares), at cost			(34,104	)			(33,145	)
Total Stockholders’ Equity			43,270				43,103
Total Liabilities and Stockholders’ Equity		$	634,503			$	641,523

See the accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
		(dollars in thousands, except per share data)
Interest and dividend income:
Loans		$	7,206			$	6,687			$	14,286			$	12,872
Investments			1,281				1,229				2,573				2,396
Deposits with banks and other			8				15				15				23
FHLB stock dividends			37				56				76				105
Total interest and dividend income			8,532				7,987				16,950				15,396
Interest expense:
Deposits			2,771				2,155				5,543				4,100
Long-term borrowings			979				866				1,699				1,589
Short-term borrowings			438				69				670				125
Total interest expense			4,188				3,090				7,912				5,814
Net interest income			4,344				4,897				9,038				9,582
Provision for loan losses			75				251				150				501
Net interest income after provision for loan losses			4,269				4,646				8,888				9,081
Noninterest income:
Fee income			1,632				1,330				2,799				2,429
Net gain on sale of securities			—				—				4				183
Net gain (loss) on sale of real estate held for sale			181				(8	)			157				(6	)
Net gain on sale of loans			324				158				431				289
Increase in cash surrender value of life Insurance contracts			90				87				182				178
Other			100				140				397				198
Total noninterest income			2,327				1,707				3,970				3,271
Noninterest expense:
Compensation and benefits			2,736				2,688				5,868				5,024
Occupancy, net			483				391				946				778
Furniture and equipment			262				803				544				1,133
Advertising			110				80				200				160
Data processing			462				160				806				318
Telephone and postage			220				153				372				324
Amortization of intangibles			71				72				143				133
Legal and professional fees			191				319				353				461
Other			773				791				1,436				1,450
Total noninterest expense			5,308				5,457				10,668				9,781
Income before income taxes			1,288				896				2,190				2,571
Income tax expense			350				176				570				664
Net income		$	938			$	720			$	1,620			$	1,907
Other comprehensive income:
Change in unrealized gains or losses on available for sale securities, net of related income taxes		$	(688	)		$	577			$	(927	)		$	(323	)
Less: reclassification adjustment for gains included in net income net of related income taxes			—				—				2				131
Other comprehensive income (loss)			(688	)			577				(929	)			(454	)
Comprehensive income		$	250			$	1,297			$	691			$	1,453
Basic earnings per share		$	0.42			$	0.30			$	0.73			$	0.80
Diluted earnings per share			0.42				0.30				0.72				0.80
Dividends per share			—				—				—				—

See the accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES
Page 1 of 2

		Six Months Ended
		June 30
		2006				2005
		(dollars in thousands)
Operating activities:
Net income		$	1,620			$	1,907
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			150				501
Depreciation and amortization			374				1,145
Net amortization on investments			80				111
Amortization of intangibles			143				133
Deferred income taxes			(160	)			2,159
Origination of loans held for sale			(18,428	)			(14,017	)
Proceeds from sales of loans held for sale			19,308				14,015
Gain on sale of loans			(431	)			(289	)
(Gain) on sale of securities			(4	)			(183	)
(Gain) loss on sale of real estate held for sale			(157	)			6
Compensation expense for restricted stock			386				103
Increase in cash surrender value of life insurance Contracts			(182	)			(178	)
Federal Home Loan Bank stock dividends			(6	)			(120	)
Changes in:
Accrued interest receivable			(128	)			(197	)
Other assets and other liabilities, net			(659	)			456
Net cash provided by operating activities			1,906				5,552
Investing activities:
Proceeds from maturities of certificates of deposit			—				99
Purchases of available for sale securities			(2,012	)			(9,786	)
Proceeds from sales of available for sale securities			2,475				9,015
Proceeds from maturities of available for sale securities			2,067				7,383
Proceeds from sales of real estate held for sale			1,828				1,612
Acquisitions, net			—				357
Net (increase) decrease in loans			(2,073	)			5,776
Purchases of bank premises and equipment			(473	)			(2,200	)
Net cash provided by investing activities			1,812				12,256
Financing activities:
Net (decrease) in deposits			(45,638	)			(9,612	)
Net change in short-term borrowings			38,098				(1,610	)
Proceeds from long-term borrowings			5,000				21,405
Repayments of long-term borrowings			(3,670	)			(13,742	)
Proceeds from exercise of stock options			357				62
Dividends paid			—				—
Purchase of treasury stock			(1,267	)			(2,003	)
Net cash used in financing activities			(7,120	)			(5,500	)
Net increase (decrease) in cash and cash equivalents			(3,402	)			12,308
Cash and cash equivalents – beginning of period			18,258				13,286
Cash and cash equivalents – end of period		$	14,856			$	25,594

See the accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES
Page 2 of 2

		Six Months Ended
		June 30
		2006				2005
Supplemental disclosure of cash flow information
Interest paid		$	8,734			$	4,787
Income taxes paid			290				525
Real estate acquired in settlement of loans			—				195
Loans held for sale, transferred to loan portfolio at fair market value			4,792				—
Acquisitions, net:
Assets acquired:
Investments						$	(6,561	)
Loans, net							(12,608	)
Loans held for sale							(5,047	)
Interest receivable							(109	)
Premises and equipment							(2,428	)
Goodwill							(1,034	)
Intangibles							(424	)
Real Estate held for sale							(155	)
Non-marketable securities							(639	)
Other assets							(108	)
Liabilities assumed:
Deposits							27,757
Other liabilities							56
Treasury Stock issued							1,657
Cash received, net of cash paid						$	357

See the accompanying notes to consolidated financial statements.

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2006

Note 1 – Basis of Presentation

     The consolidated financial statements of Centrue Financial Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The December 31, 2005 balance sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Operating results for the three and six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report for the Company on Form 10-K for the year ended December 31, 2005.

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Centrue Bank, an Illinois chartered commercial bank (the ”Bank”). All material intercompany transactions and balances are eliminated. The Company is a financial holding company that engages in its business through its subsidiaries, in a single significant business segment.

     In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of mortgage servicing rights, goodwill, and real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of real estate acquired by foreclosure, management obtains independent appraisals for significant properties.

     Certain 2005 amounts have been reclassified where appropriate to conform to the consolidated financial statement presentation used in 2006.

     Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123 (revised 2004), “Share-Based Payment” “SFAS 123R” which amends SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company adopted SFAS 123R using the modified retrospective method. The modified retrospective method requires that compensation cost be recognized beginning with the effective date based on the requirements of SFAS 123R for all share-based payments granted after the effective date and based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R. The modified retrospective method also allows companies to adjust prior year financials based on the amounts previously reported under the SFAS 123 pro forma disclosures for all prior periods for which SFAS 123 was effective. See Note 6 for a more detailed description of the Company’s adoption of SFAS 123R.

Note 2 – Earnings Per Share

     Basic earnings per share of common stock have been determined by dividing net income for the period by the average number of shares of common stock outstanding. Diluted earnings per share of common stock have been determined by dividing net income for the period by the average number of shares of common stock and common stock equivalents outstanding. Average unearned restricted stock shares have been excluded from common shares outstanding for both basic and diluted earnings per share. Common stock equivalents assume exercise of stock options, and the purchase of treasury stock with the option proceeds at the average market price for the period (when dilutive). The Company has an incentive stock option plan for the benefit of directors, officers and employees. Diluted earnings per share have been determined considering the stock options granted, net of stock options which have been exercised.

		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
		(dollars in thousands, except share and per share data)
Basic:
Net income		$	938			$	720			$	1,620			$	1,907
Average common shares outstanding			2,222,405				2,379,121				2,227,133				2,369,233
Net income per common share – basic		$	.42			$	0.30			$	0.73			$	0.80
Diluted:
Net income		$	938			$	720			$	1,620			$	1,907
Average common shares outstanding			2,222,405				2,379,121				2,227,133				2,369,233
Dilutive potential due to stock options			7,297				5,784				8,407				7,414
Average common shares outstanding			2,229,702				2,384,905				2,235,540				2,376,647
Net income per common share – Diluted		$	0.42			$	0.30			$	0.72			$	0.80

Note 3 – Liquidity and Capital Resources

     The Company maintains a certain level of cash and other liquid assets to fund normal volumes of loan commitments, deposit withdrawals and other obligations. The following table summarizes significant contractual obligations and other commitments at June 30, 2006 (in thousands):

		Certificates of				Long-term
Years Ending June 30,		Deposit				Borrowings (1)				Total
2007		$	146,588			$	28,041			$	174,629
2008			48,496				21,149				69,645
2009			7,292				10,156				17,448
2010			5,341				165				5,506
2011			4,563				174				4,737
thereafter			—				368				368
Total		$	212,280			$	60,053			$	272,333
Financial instruments whose contract amounts represent credit risk:
Commitment to extend credit										$	56,528
Standby letters of credit											1,372
Total										$	330,233

Note 4 – Investments

     Continuous gross unrealized losses of investments in debt and equity securities as of June 30, 2006 (in thousands) which are classified as temporary were as follows:

		Continuous unrealized								Continuous unrealized
		losses existing for less than								losses existing greater
		12 months								than 12 months								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				losses				Fair Value				losses				Fair Value				losses
Description of Securities U.S. government agencies		$	16,415			$	471			$	57,748			$	2,079			$	74,163			$	2,550
Municipals			2,857				63				19,017				772				21,874				835
Mortgage backed securities			7,741				164				6,766				355				14,508				518
Corporate			—				—				1,920				132				1,920				132
Total temporarily impaired securities		$	27,013			$	698			$	85,451			$	3,338			$	112,464			$	4,037

     The unrealized losses at June 30, 2006, relate principally to declines in interest rates since the investments were purchased. Based on management’s review of the investment portfolio, investment securities that have been in a continuous loss position for more than 12 consecutive months are due to changes in interest rates and as such, and since management has the ability to hold investment securities until maturity, all declines are deemed to be temporary.

Note 5 – Junior Subordinated Debt Owed to Unconsolidated Trusts

     The Company issued $10.0 million in each of April 2002 and April 2004 in cumulative trust preferred securities through newly formed special-purpose trusts, Kankakee Capital Trust I (Trust I) and Centrue Statutory Trust II (Trust II). The proceeds of the offerings were invested by the trusts in junior subordinated deferrable interest debentures of Trust I and Trust II. Trust I and Trust II are wholly-owned unconsolidated subsidiaries of the Company, and their sole assets are the junior subordinated deferrable interest debentures. Distributions are cumulative and are payable quarterly at a variable rate of 3.70% and 2.65% over the LIBOR rate, respectively, (at a rate of 9.10% and 8.05% at June 30, 2006) per annum of the stated liquidation amount of $1,000 per preferred security. Interest expense on the trust preferred securities was $442,000 and $334,000 for the three months ended June 30, 2006 and 2005, and $839,000 and $633,000 for the six months ended June 30, 2006 and 2005, respectively. The obligations of the trusts are fully and unconditionally guaranteed, on a subordinated basis, by the Company. The trust preferred securities for Trust I are mandatorily redeemable upon the maturity of the debentures on April 7, 2032, or to the extent of any earlier redemption of any debentures by the Company, and are callable beginning April 7, 2007. The trust preferred securities for Trust II are mandatorily redeemable upon the maturity of the debentures on April 22, 2034, or to the extent of any earlier redemption of any debentures by the Company, and are callable beginning April 22, 2009. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s capital stock. For regulatory purposes, the trust preferred securities qualify as Tier I capital subject to certain provisions.

Note 6 – Stock Plans

     Effective January 1, 2006, the Company adopted SFAS 123R using the modified retrospective method to account for share-based payments to employees and the Company’s Board of Directors. In accordance with the modified retrospective method, the Company has adjusted previously reported results to reflect the effect of expensing stock options granted during those periods.

     The cumulative adjustment associated with the adoption of SFAS 123R increased the Company’s deferred tax asset $182,000, surplus $1.1 million and decreased retained earnings $901,000 as of December 31, 2005. The results for the second quarter and first 6 months of 2005 were also restated to include additional compensation expense of $185,000 and $234,000, respectively. Net income after tax for the second quarter and first six months of 2005 was decreased by $133,000 and $182,000, respectively, as a result of the restatement.

     The primary type of share-based payment utilized by the Company is stock options. Stock options are awards which allow the employee to purchase shares of the Company’s stock at a fixed price. Stock options are granted at an exercise price equal to the Company stock price at the date of grant. Stock options issued by the Company generally have a contractual term of seven to ten years and vest over five years for non-director options and immediately at the time of issuance for director options. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined by the Plan).

     A summary of option activity under the Plan as of June 30, 2006, and changes during the six months then ended is presented below:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
		Shares				Exercise Price				Term				Intrinsic Value
Outstanding at January 1, 2006			223,800			$	25.41
Granted			20,000				25.05
Exercised			(15,000	)			23.19
Forfeited			(24,000	)			27.29
Outstanding at June 30, 2006			204,800			$	25.28				6.99			$	1,607,239
Exercisable at June 30, 2006			116,900			$	24.21				5.69			$	853.201

     The Company estimates the fair value of stock option grants using the Black-Scholes valuation model and the key input assumptions are described fully in the disclosure of its critical accounting policies in Item 2 of this report on Form 10-Q. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are consistent with SFAS 123R and appropriately estimates the fair value of Centrue’s stock option grants. Estimates of fair value are not intended to predict actual future events of the value ultimately realized by employees who receive share-based awards, and subsequent events are not indicative of the reasonableness of original estimates of fair value made by the Company under SFAS 123R. Key assumptions for the grants are shown below:

		Six Months Ended
		June 30
		2006		2005
Expected volatility		10% - 25%		10% - 25%
Weighted-average volatility		17.5%		16%
Expected dividend rate		0%		0%
Expected term		5 years		5 years
Risk-free rate		4.92%		4.27%

     A summary of the Company’s nonvested option shares as of June 30, 2006, and changes during the six month period ended June 30, 2006, is presented below:

						Weighted-Average
						Grant Date
		Shares				Fair Value
Nonvested at January 1, 2006			120,000			$	26.58
Granted			20,000				25.05
Vested			(30,900	)			24.65
Forfeited			(21,200	)			27.26
Nonvested at June 30, 2006			87,900			$	26.69

     As of June 30, 2006 there was $386,000 of unrecognized compensation cost related to nonvested option-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 3.6 years.

Note 7 – Recent Accounting Pronouncements

     In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (FAS 155). FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of FAS 155 to have a material effect on the results of operations or the statement of condition.

     In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140 (FAS 140 and FAS 156). FAS 140 establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends FAS 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006. Upon adoption, the Company will apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions. The Company will adopt FAS 156 for the fiscal year beginning January 1, 2007 and currently has not determined if it will adopt FAS 156 using the fair value election.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company is currently evaluating the impact of FIN 48 and is required to adopt this Interpretation in the first quarter of 2007.

Note 8. – Merger with UnionBancorp, Inc.

     On June 30, 2006, the Company signed a definitive agreement to join forces in a merger of equals transaction with UnionBancorp, Inc., (UBCD) in a stock transaction where shareholders will receive shares of UnionBancorp common stock in a fixed exchange ratio of 1.2 shares of UnionBancorp for each share of the Company. The combined company will adopt the Centrue Financial Corporation name and stock market symbol of TRUE.

     The merger is subject to the approval by UnionBancorp’s and Company stockholders, by banking regulators and to other customary conditions. It is anticipated that the merger will be completed in the fourth quarter of 2006.

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

GENERAL

     The Company serves the financial needs of families and local businesses in its primary market areas through the Bank. As a community-oriented financial institution, the Bank operates twenty retail banking offices and provides comprehensive financial services primarily to individuals and local businesses residing in Kankakee, Champaign, Clinton, Effingham, Grundy, Iroquois, Livingston, St. Clair and Will counties in Illinois. The Company’s business involves attracting deposits from the general public and using such deposits to originate commercial business, commercial real estate, consumer, multi-family, construction loans and residential mortgage loans in its market areas. The Company also invests in investment securities and various types of short term liquid assets. The Company had approximately 187 full time equivalent (FTE) employees at June 30, 2006.

     On June 30, 2006, the Company and UnionBancorp, Inc. announced the signing of a definitive agreement to join forces in a merger of equals transaction. UnionBancorp is the holding company for UnionBank, based in Streator, Illinois. Under the terms of the agreement, the Company will merge with UnionBancorp, and the Company’s stockholders will receive shares of UnionBancorp common Stock using a fixed exchange ratio of 1.2 shares of UnionBancorp common stock for each share of the Company’s common stock outstanding. The combined company will adopt the name “Centrue Financial Corporation,” and will adopt the Nasdaq symbol “TRUE”. The merger is subject to approval by a majority of the shareholders of each company as well as the approval of banking regulators and to other customary conditions. The transaction is expected to be completed during the fourth quarter of 2006. For more information regarding this transaction, please refer to our Form 8-K filings with the SEC filed on June 30, 2006 and July 7, 2006.

     On April 8, 2005, the Company acquired for cash all of the outstanding shares of Illinois Community Bancorp, Inc. (“ICB”) for a total cost of $3.3 million. The acquisition was accounted for using the purchase method of accounting. As such, the results of operations of the acquired entity are excluded from the consolidated financial statements of income for the periods prior to the acquisition date. At closing, ICB had assets of $29.9 million, including $17.9 million of loans, deposits of $27.7 million and stockholders’ equity of $1.4 million.

FINANCIAL CONDITION

     The Company’s total assets were $634.5 million at June 30, 2006, a decrease of $7.0 million or 1.1%, from $641.5 million at December 31, 2005. Fluctuations in asset accounts were represented by an increase in net loans of $6.7 million and decreases in cash and cash equivalents of $3.4 million, investment securities of $4.0 million, loans held for sale of $5.2 million and real estate held for sale of $1.7 million.

     Net loans increased $6.7 million or 1.6% to $435.2 million from $428.5 million. Loan growth was partially offset by the payoff of a $4.0 million commercial credit which the Company decided not to renew under the previous terms of the note due to changes in the borrower’s financial condition and strategic plans and a $2.6 million payoff of a purchased loan participation.

     Cash and cash equivalents decreased $3.4 million and investment securities decreased $4.0 million, both of which were a result of meeting short-term liquidity needs. Loans held for sale declined $5.2 million as $4.8 million of loans were transferred to the regular mortgage loan portfolio. The decrease in real estate held for sale of $1.7 million was primarily due to the sale the Company’s largest real estate owned property.

     Deposits decreased $45.6 million to $462.3 million from $507.9 million at December 31, 2005. The net decrease in deposits was primarily attributable to a $43.6 million reduction in certificates of deposit over $100,000 as a result of a strategy of not being as aggressive in bidding on the renewal of these deposits in light of the availability of lower wholesale funding rates from other funding sources.

     Partially compensating for the deposit decline were increases in total borrowings of $39.4 million. This increase included gains in customer repurchase agreements, a deposit alternative, which increased $10.7 million and increases in total borrowings from the Federal Home Loan Bank of Chicago (FHLB) of $26.2 million.

     Stockholders’ equity increased slightly from $43.1 million to $43.3 million. There were 2,232,889 shares of common stock outstanding at June 30, 2006, compared to 2,262,939 shares at December 31, 2005. Equity per share of common stock increased by $0.33 to $19.38 at June 30, 2006 from $19.05 at December 31, 2005.

ASSET QUALITY

     The Company’s asset quality management program, particularly with regard to loans, is designed to analyze potential risk elements and to support the growth of a high quality loan portfolio. The existing loan portfolio is monitored via the Company’s loan rating system. The loan rating system is used to assist in determining the adequacy of the allowance for loan losses. The Company’s loan analysis process allows us to proactively identify, monitor and work with borrowers for whom there are indications of future repayment difficulties. The Company’s lending philosophy is to invest in the communities served by its banking centers so that it can effectively monitor and control credit risk.

Table 1

		June 30				December 31
		2006				2005				Change
		(dollars in thousands)
Non-accruing loans		$	3,048			$	3,823			$	(775	)
Accruing loans delinquent 90 days or more			—				—				—
Total nonperforming loans			3,048				3,823				(775	)
Foreclosed assets			38				1,709				(1,671	)
Troubled debt restructuring			44				35				(2	)
Total nonperforming assets		$	3,130			$	5,567			$	(2,448	)
Allowance for loan losses to total loans			.97	%			1.02	%
Allowance for loan losses to nonperforming loans			140.88	%			117.33	%
Nonperforming loans to total loans			.69	%			0.88	%
Nonperforming assets to total loans and foreclosed property			.71	%			1.28	%
Nonperforming assets to total assets			.49	%			0.87	%

     Nonperforming loans decreased $775,000 from the end of 2005, while foreclosed assets decreased $1.7 million. The decline in the total nonperforming loans marks the 8^th consecutive quarterly decline and it is attributable to the Company’s implementation of an ongoing comprehensive loan review as well as the adoption and implementation of a new loan policy that identifies problem loans in a timelier manner. Management is in various stages of workout or liquidation with the remaining nonperforming loans. The drop in foreclosed assets came primarily from the sale of the Company’s largest real estate owned property.

     One measure of the adequacy of the allowance for loan losses is the ratio of the allowance for loan losses to total loans. The ratio of the allowance for loan losses to total loans was .97% and 1.02% at June 30, 2006 and December 31, 2005, respectively. The ratio of the allowance for loan losses to non-performing loans increased to 140.88% at June 30, 2006 compared to 117.33% at December 31, 2005. The increase in this ratio, which excludes foreclosed assets and restructured troubled debt, was the result of the $775,000 decrease in nonperforming loans.

     The Company’s Chief Credit Officer joined the Company in 2004 to strengthen the monitoring of credit quality and improve the credit quality of the overall loan portfolio. His duties include responsibility for all credit administration activities and to oversee an independent review of new and existing loans in the portfolio. Company management performs a quarterly analysis of the adequacy of the allowance for loan losses. Problem loans are classified into one of four categories: Special Mention, Substandard, Doubtful, and Loss. The Company’s implementation of an ongoing comprehensive loan review, as well as the adoption and implementation of a new comprehensive loan policy has assisted management in identifying problem loans in a timely manner. The new program was designed to facilitate the focus of collection efforts in problem areas which should result in lower charge-offs. Classified loans began decreasing in 2004 and decreased dramatically during 2005 and the first half of 2006. The Company will continue to work to reduce the volume of classified loans through the remainder of 2006.

     The Company recognized charge offs in the amount of $298,000 and $626,000 during the second quarter and first six-months of 2006 and $797,000 and $874,000 for the second quarter and first six-months of 2005. The Company had recoveries of $84,000 and $284,000 for the second quarter and first six-months of 2006 and $187,000 and $379,000 for the second quarter and first six-months of 2005. The provision for loan losses was $75,000 and $150,000 for the second quarter and first six months of 2006, compared to $251,000 and $501,000 for the second quarter and first six months of 2005.

     The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management’s methodology to determine the adequacy of the allowance for loan losses considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth and composition of the loan portfolio. Based upon the Company’s quarterly analysis of the adequacy of the allowance for loan losses, considering remaining collateral of loans with more than a normal degree of risk, historical loan loss percentages and economic conditions, it is management’s belief that the allowance for loan losses at June 30, 2006 was adequate. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

     Each credit on the Company’s internal loan “watch list” is evaluated periodically to estimate potential losses. In addition, minimum loss estimates for each category of watch list credits are provided for based on management’s judgment which considers past loan loss experience and other factors. For installment and real estate mortgage loans, specific allocations are based on past loss experience adjusted for recent portfolio growth and economic trends. The total of the estimated loss exposure resulting from the analysis is considered the allocated portion of the allowance for loan losses. The amounts specifically provided for individual loans and pools of loans are supplemented by an unallocated portion of the allowance for loan losses. This

unallocated amount is determined based on management’s judgment which considers, among other things, the risk of error in the specific allocations, other potential exposure in the loan portfolio, economic conditions and trends, and other factors.

     The allowance for loan losses is charged when management determines that the prospects of recovery of the principal of a loan have significantly diminished. Subsequent recoveries, if any, are credited to the allowance for loan losses. All installment loans that are 90 to 120 days past due are charged off monthly unless the loans are insured for credit loss or where scheduled payments are being received. Real estate mortgage loans are written down to fair value upon foreclosure. Commercial and other loan charge-offs are made based on management’s on-going evaluation of non-performing loans.

CRITICAL ACCOUNTING POLICIES

     In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion, including the allowance for loan losses, goodwill, and mortgage servicing rights, addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

     Allowance for Loan Losses - The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, which collateralize loans. Management believes it uses the best information available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the Company believes it has established its existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Bank’s loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.

     Goodwill – Costs in excess of the estimated fair value of identified net assets acquired through purchase transactions are recorded as an asset by the Company. The Company performs an annual impairment assessment as of September 30. No impairment of goodwill has been identified as a result of these tests. In making these impairment assessments, management must make subjective assumptions regarding the fair value of the Company’s assets and liabilities. It is possible that these judgments may change over time as market conditions or Company strategies change, and these changes may cause the Company to record impairment charges to adjust the goodwill to its estimated fair value.

     Real Estate Held for Sale – Real estate held for sale is recorded at the property’s fair value at the date of foreclosure (cost). Initial valuation adjustments, if any, are charged against the allowance for loan losses. Property is evaluated to ensure the recorded amount is supported by its current fair value. Subsequent declines in estimated fair value are charged to expense when incurred.

     Mortgage Servicing Rights – The Company recognizes as a separate asset the rights to service mortgage loans for others. The value of mortgage servicing rights is amortized in relation to the servicing revenue expected to be earned. Mortgage servicing rights are periodically evaluated for impairment based upon the fair value of those rights. Estimating the fair value of the mortgage servicing rights involves judgment, particularly of estimated prepayment speeds of the underlying mortgages serviced. Net income could be affected if management’s assumptions and estimates differ from actual prepayments.

     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. Valuation allowances are established when necessary to reduce deferred tax assets to an amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

     Stock Compensation Plans. - In January 2006, the Company adopted Financial Accounting Standards Board Statement No. 123R (revised 2004), “Share-Based Payment” (SFAS 123R) which amends SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires new, modified and unvested share-based payment transactions with employees to be measured at fair value and recognized as compensation expense over the vesting period. The fair value of each option award is estimated using a Black-Scholes option valuation model that requires the Company to develop estimates for assumptions used in the model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected term of option, risk-free interest rate and dividend yield. Expected volatility estimates are developed by the Company based on historical volatility of the Company’s stock. The Company uses historical data to estimate the expected term of the options. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. The dividend yield represents the expected dividends on the Company stock.

     The above listing is not intended to be a comprehensive list of all the Company’s accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

RESULTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

     For the second quarter ended June 30, 2006, net income increased to $938,000 from $720,000 for the same period in 2005. Net income for the six months ended June 30, 2006 decreased to $1.6 million from $1.9 million for the same period in 2005. Return on average assets for the second quarter and first six months of 2006 was 0.60% and 0.51% compared to 0.45% and 0.60% for 2005. Return on average equity for the second quarter and first six months of 2006 was 8.73% and 7.55%, compared to 6.72% and 8.90% for 2005.

     With the adoption of Statement of Financial Accounting Standards No. 123R beginning in 2006, the Company elected to use the modified retrospective method of application which requires the restatement of earnings for prior periods. Accordingly, the results for the second quarter and first six months of 2005 were restated to include additional compensation expense of $185,000 and $234,000, respectively. Net income for the second quarter and first six months of 2005 was decreased by $133,000 and $182,000, respectively as a result of this restatement.

     The second quarter of 2005 operating results included non-recurring expenses of $666,000 ($0.22 per share, after tax). The non-recurring expenses included $464,000 of fixed asset and prepaid expense write downs and other conversion costs that were incurred from the Company’s core processing system conversion. Management converted its systems to Jack Henry & Associates’ Silverlake data processing system which allowed the Company to expand it’s products and improve delivery of services to it’s customer base. The non-recurring expenses also included $202,000 of professional fees due to a terminated transaction associated with the Company’s merger and acquisition activity.

     Net interest income for the three month and six month periods decreased $553,000 and $544,000 from 2005. Interest income increased by $545,000 and $1.6 million for the three month and six month periods. The net interest margin for the second quarter of 2006 decreased to 3.15% compared to 3.49% on a tax equivalent basis for 2005. For the six month periods, the net interest margin decreased to 3.29% compared to 3.52% on a tax equivalent basis for 2005.

     For the second quarter of 2006, tax equivalent interest income increased $557,000, to $8.6 million (see Table 2). The increase was primarily attributable to an increase in interest rates that was partially offset by a decrease in average earning assets. Average earning assets decreased $8.6 million to $564.4 million from $573.1 million in 2005. The average tax equivalent rate earned on earning assets increased 48 basis points to 6.13% from 5.65%. The decrease in the average balance of interest-earning assets was primarily due to a decline in average loans of $6.0 million. Influencing this decline was the payoff of a $4.0 million commercial credit which the Company decided not to renew under the previous terms of the note due to changes in the borrower’s financial condition and strategic plans and a $2.6 million payoff of a purchased loan participation. The increase in the yield earned on interest-earning assets was due to the rising interest rate environment which has seen multiple increases in the federal funds rate and prime lending rates over the past several months.

     Interest expense in the second quarter increased $1.1 million to $4.2 million from $3.1 million in 2005. The increase was primarily attributable to a rising interest rate environment as the rates paid on deposits increased during the period. This increase was partially offset by a decline in average interest bearing liabilities of $10.1 million to $513.6 million from $523.7 for the second quarter of 2005. The rise in rates also led to a shift in deposits away from the Savings category to the Demand and NOW account categories as customers migrated their deposits to higher rate NOW accounts. As illustrated in Table 2, the rate paid on interest bearing liabilities increased 90 basis points to 3.27% from 2.37% in 2005.

     The second quarter net interest margin dropped from 3.49% in 2005 to 3.15% in 2006. This compression occurred as the rates paid on interest bearing liabilities increased faster than the yield on loans and investments. The Company’s loan and investment rate increases tend to lag deposit and borrowing rates in an increasing rate environment. A flat yield curve has also contributed to this margin decline.

Table 2

		NET INTEREST INCOME ANALYSIS (UNAUDITED)
		CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES
		Three Months Ended June 30,
		2006												2005
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
(Dollars in Thousands)		Balance				Paid				Rate				Balance				Paid				Rate
		(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (3)		$	435,355			$	7,239				6.67	%		$	441,340			$	6,703				6.09	%
Investments securities (2) (3)			121,969				1,344				4.42	%			123,754				1,297				4.20	%
Other interest-earning assets			2,677				8				1.10	%			3,641				15				1.65	%
FHLB stock			4,445				37				3.37	%			4,322				56				5.20	%
Total interest-earning assets			564,446				8,628				6.13	%			573,057				8,071				5.65	%
Other assets			62,890												64,184
Total assets		$	627,336											$	637,241
Interest-bearing liabilities:
Certificate accounts		$	225,987				2,007				3.56	%		$	246,650				1,728				2.81	%
Savings deposits			81,738				136				0.67	%			101,424				182				0.72	%
Demand and NOW deposits			103,467				628				2.43	%			89,597				263				1.18	%
Borrowings			102,374				1,417				5.53	%			86,009				917				4.28	%
Total interest-bearing liabilities			513,566				4,188				3.27	%			523,680				3,090				2.37	%
Non-interest bearing demand deposits			66,777												65,453
Other liabilities			4,000												5,258
Total liabilities			584,343												594,391
Stockholders’ equity			42,993												42,850
Total liabilities and stockholders’ equity		$	627,336											$	637,241
Net interest income (3)						$	4,440											$	4,981
Net interest rate spread											2.86	%											3.28	%
Net earning assets		$	50,880											$	49,377
Net yield on average interest-earning assets (net interest margin)											3.15	%											3.49	%
Average interest-earning assets to average interest-bearing liabilities							109.91	%											109.43	%

Table 3

		NET INTEREST INCOME ANALYSIS (UNAUDITED)
		CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES
		Six Months Ended June 30,
		2006												2005
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
(Dollars in Thousands)		Balance				Paid				Rate				Balance				Paid				Rate
Interest-earning assets:
Loans receivable (1) (3)		$	436,646			$	14,353				6.63	%		$	430,025			$	12,908				6.05	%
Investments securities (2) (3)			122,806				2,700				4.43	%			121,271				2,534				4.21	%
Other interest-earning assets			2,540				15				1.19	%			3,009				23				1.54	%
FHLB stock			4,442				76				3.45	%			3,969				105				5.34	%
Total interest-earning assets			566,434				17,144				6.10	%			558,274				15,570				5.62	%
Other assets			63,534												60,995
Total assets		$	629,968											$	619,269
Interest-bearing liabilities:
Certificate accounts		$	236,917				4,105				3.49	%		$	245,209				3,304				2.72	%
Savings deposits			83,334				276				0.67	%			95,107				315				0.67	%
Demand and NOW deposits			101,947				1,162				2.30	%			89,040				481				1.09	%
Borrowings			93,821				2,369				5.09	%			81,013				1,714				4.27	%
Total interest-bearing liabilities			516,019				7,912				3.09	%			510,369				5,814				2.30	%
Non-interest bearing demand deposits			66,788												61,756
Other liabilities			4,246												3,856
Total liabilities			587,053												575,981
Stockholders’ equity			42,915												43,288
Total liabilities and stockholders’ equity		$	629,968											$	619,269
Net interest income (3)						$	9,232											$	9,756
Net interest rate spread											3.01	%											3.32	%
Net earning assets		$	50,415											$	47,905
Net yield on average interest-earning assets (net interest margin)											3.29	%											3.52	%
Average interest-earning assets to average interest-bearing liabilities							109.77	%											109.39	%