##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION   FORM 10-Q (Mark One) [X]
    
    Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended September 30, 2004.
 or [ ]
    
    Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From  to .
 Commission File Number 1-15025 CENTRUE FINANCIAL CORPORATION 
 Delaware
    
    36-3846489(State or Other Jurisdiction of Incorporation
or Organization)
    
    (I.R.S. Employer Identification Number)310 South Schuyler Avenue, Kankakee, Illinois
    
    60901(Address of Principal Executive Offices)
    
    (Zip Code)
 (815) 937-4440
(Registrants telephone number, including area 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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of November 10, 2004, there were 2,423,316 issued and outstanding shares of
the Issuers common stock.




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CENTRUE FINANCIAL CORPORATION INDEX  
 PageNumberPart I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets
    
    
    3Consolidated Statements of Income and Comprehensive Income
    
    
    4Consolidated Statements of Cash Flows
    
    
    5-6Notes to Consolidated Financial Statements
    
    
    7-12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26-28Item 4. Controls and Procedures
    
    
    28Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31Certification of Principal Executive OfficerCertification of Chief Financial OfficerCertification of Corporate ControllerCertification of Principal Executive OfficerCertification of Chief Financial OfficerCertification of Corporate Controller
  2




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PART I.  FINANCIAL INFORMATION 
 ITEM 1. Consolidated Financial Statements (Unaudited) 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY September 30
    
    December 312004
    
    2003(dollars in thousands)AssetsCash and due from banks
    
    $
    13,043
    
    
    $
    13,558Interest bearing due from banks and other
    
    
    2,101
    
    
    
    14,831Federal funds sold
    
    
    
    
    
    
    17,216Cash and cash equivalents
    
    
    15,144
    
    
    
    45,605Certificates of deposit
    
    
    149
    
    
    
    50Investment securities:Available-for-sale, at fair value
    
    
    108,798
    
    
    
    87,712Held-to-maturity, (fair value: $0 and $912)
    
    
    
    
    
    
    892Loans, net of allowance for loan losses of $6,687 and $7,471
    
    
    427,678
    
    
    
    425,840Loans held for sale
    
    
    407
    
    
    
    Premises and equipment
    
    
    17,492
    
    
    
    17,113Goodwill
    
    
    12,446
    
    
    
    11,433Life insurance contracts
    
    
    9,022
    
    
    
    8,752Non-marketable equity securities
    
    
    4,159
    
    
    
    3,298Accrued interest receivable
    
    
    2,726
    
    
    
    2,552Intangible assets
    
    
    1,835
    
    
    
    1,229Real estate held for sale
    
    
    596
    
    
    
    319Other assets
    
    
    3,440
    
    
    
    4,413Total Assets
    
    $
    603,892
    
    
    $
    609,208LiabilitiesDeposits:Noninterest bearing
    
    $
    54,157
    
    
    $
    44,102Interest bearing
    
    
    441,865
    
    
    
    451,952Total Deposits
    
    
    496,022
    
    
    
    496,054Borrowings
    
    
    41,551
    
    
    
    54,396Junior subordinated debt owed to unconsolidated trusts
    
    
    20,000
    
    
    
    10,000Other liabilities
    
    
    3,350
    
    
    
    3,115Total Liabilities
    
    
    560,923
    
    
    
    563,565Stockholders EquityPreferred stock, $.01 par value - 500,000 shares authorized
and unissued
    
    
    
    
    
    
    Common stock, $.01 par value - 5,500,000 authorized;
4,200,300 shares issued
    
    
    42
    
    
    
    42Additional paid-in capital
    
    
    28,970
    
    
    
    28,929Retained income, partially restricted
    
    
    42,297
    
    
    
    39,231Accumulated other comprehensive income
    
    
    350
    
    
    
    1,088Unearned restricted stock (26,400 and 27,800 shares)
    
    
    (622
    )
    
    
    (820
    )Treasury stock, (1,776,984 and 1,594,278 shares), at cost
    
    
    (28,068
    )
    
    
    (22,827
    )Total Stockholders Equity
    
    
    42,969
    
    
    
    45,643Total Liabilities and Stockholders Equity
    
    $
    603,892
    
    
    $
    609,208
 See the accompanying notes to consolidated financial statements. 3




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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(dollars in thousands, except per share data)Interest and dividend income:Loans
    
    $
    6,246
    
    
    $
    5,476
    
    
    $
    18,684
    
    
    $
    17,308Investments
    
    
    1,050
    
    
    
    713
    
    
    
    3,049
    
    
    
    2,494Deposits with banks and other
    
    
    10
    
    
    
    104
    
    
    
    104
    
    
    
    344FHLB stock dividends
    
    
    52
    
    
    
    46
    
    
    
    160
    
    
    
    167Total interest and dividend income
    
    
    7,358
    
    
    
    6,339
    
    
    
    21,997
    
    
    
    20,313Interest expense:Deposits
    
    
    1,896
    
    
    
    2,040
    
    
    
    5,913
    
    
    
    6,975Borrowings
    
    
    468
    
    
    
    521
    
    
    
    1,516
    
    
    
    1,631Junior subordinated debt owed to
unconsolidated trusts
    
    
    238
    
    
    
    135
    
    
    
    569
    
    
    
    411Total interest expense
    
    
    2,602
    
    
    
    2,696
    
    
    
    7,998
    
    
    
    9,017Net interest income
    
    
    4,756
    
    
    
    3,643
    
    
    
    13,999
    
    
    
    11,296Provision for loan losses
    
    
    300
    
    
    
    272
    
    
    
    900
    
    
    
    4,022Net interest income after provision
for loan losses
    
    
    4,456
    
    
    
    3,371
    
    
    
    13,099
    
    
    
    7,274Noninterest income:Fee income
    
    
    1,245
    
    
    
    1,068
    
    
    
    3,126
    
    
    
    2,092Net gain (loss) on sale of securities
    
    
    (5
    )
    
    
    8
    
    
    
    85
    
    
    
    8Net gain on sale of real estate held for sale
    
    
    
    
    
    
    5
    
    
    
    39
    
    
    
    37Net gain on sale of loans
    
    
    238
    
    
    
    254
    
    
    
    661
    
    
    
    1,117Gain on sale of branch
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    478Increase in cash surrender value of life
Insurance contracts
    
    
    71
    
    
    
    116
    
    
    
    270
    
    
    
    344Other
    
    
    40
    
    
    
    83
    
    
    
    161
    
    
    
    316Total noninterest income
    
    
    1,589
    
    
    
    1,534
    
    
    
    4,342
    
    
    
    4,392Noninterest expense:Compensation and benefits
    
    
    2,227
    
    
    
    1,794
    
    
    
    6,624
    
    
    
    5,597Occupancy, net
    
    
    367
    
    
    
    372
    
    
    
    1,087
    
    
    
    1,023Furniture and equipment
    
    
    330
    
    
    
    235
    
    
    
    1,019
    
    
    
    619Advertising
    
    
    83
    
    
    
    77
    
    
    
    204
    
    
    
    272Data processing
    
    
    158
    
    
    
    134
    
    
    
    458
    
    
    
    372Telephone and postage
    
    
    157
    
    
    
    131
    
    
    
    437
    
    
    
    402Amortization of intangibles
    
    
    61
    
    
    
    34
    
    
    
    168
    
    
    
    106Legal and professional fees
    
    
    124
    
    
    
    128
    
    
    
    526
    
    
    
    548Other
    
    
    803
    
    
    
    603
    
    
    
    2,243
    
    
    
    1,840Total noninterest expense
    
    
    4,310
    
    
    
    3,508
    
    
    
    12,766
    
    
    
    10,779Income before income taxes
    
    
    1,735
    
    
    
    1,397
    
    
    
    4,675
    
    
    
    887Income tax expense
    
    
    502
    
    
    
    574
    
    
    
    1,414
    
    
    
    196Net income
    
    $
    1,233
    
    
    $
    823
    
    
    $
    3,261
    
    
    $
    691Other comprehensive income (loss):Change in unrealized gains or losses on
available for sale securities, net of
related income taxes
    
    
    849
    
    
    
    (347
    )
    
    
    (706
    )
    
    
    (617
    )Less: reclassification adjustment for gains
(losses) included in net income net of
related
income taxes
    
    
    (2
    )
    
    
    3
    
    
    
    32
    
    
    
    3Other comprehensive income (loss)
    
    
    851
    
    
    
    (355
    )
    
    
    (738
    )
    
    
    (620
    )Comprehensive income
    
    $
    2,084
    
    
    $
    468
    
    
    $
    2,523
    
    
    $
    71Basic earnings per share
    
    $
    0.50
    
    
    $
    0.44
    
    
    $
    1.29
    
    
    $
    0.35Diluted earnings per share
    
    $
    0.50
    
    
    $
    0.44
    
    
    $
    1.29
    
    
    $
    0.35Dividends per share
    
    
    
    
    
    $
    .075
    
    
    $
    .075
    
    
    $
    .225
 See the accompanying notes to consolidated financial statements. 4




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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY Nine Months EndedSeptember 302004
    
    2003(dollars in thousands)Operating activitiesNet income
    
    $
    3,261
    
    
    $
    691Adjustments to reconcile net income to net cash provided
by operating activities:Provision for loan losses
    
    
    900
    
    
    
    4,022Depreciation and amortization
    
    
    1,276
    
    
    
    885Net amortization on investments
    
    
    (247
    )
    
    
    123Amortization of intangibles
    
    
    168
    
    
    
    105Deferred income taxes
    
    
    2,547
    
    
    
    Origination of loans held for sale
    
    
    (24,426
    )
    
    
    (48,957
    )Proceeds from sales of loans
    
    
    40,263
    
    
    
    49,896Gain on sale of loans
    
    
    (661
    )
    
    
    (1,117
    )Gain on sale of securities
    
    
    (85
    )
    
    
    (8
    )Gain on sale of real estate held for sale
    
    
    (39
    )
    
    
    (29
    )Gain on sale of branch
    
    
    
    
    
    
    (478
    )Compensation expense for restricted stock
    
    
    198
    
    
    
    Increase in cash surrender value of life insurance
Contracts
    
    
    (270
    )
    
    
    (344
    )Federal Home Loan Bank stock dividends
    
    
    (161
    )
    
    
    (167
    )Changes in:Accrued interest receivable
    
    
    (70
    )
    
    
    681Other assets and other liabilities, net
    
    
    (1,646
    )
    
    
    (999
    )Net cash provided by operating activities
    
    
    21,008
    
    
    
    4,304Investing activitiesProceeds from maturities of certificates of deposit
    
    
    199
    
    
    
    Purchases of available for sale securities
    
    
    (51,794
    )
    
    
    (20,838
    )Proceeds from sales of available for sale securities
    
    
    5,943
    
    
    
    96Proceeds from maturities of available for sale securities
    
    
    33,354
    
    
    
    36,351Proceeds from maturities of held-to-maturity securities
    
    
    210
    
    
    
    177Proceeds from sales of real estate held for sale
    
    
    261
    
    
    
    385Cash paid for branch sale
    
    
    
    
    
    
    (12,315
    )Purchase of Parish Bank and Trust Company, net
    
    
    38
    
    
    
    Net (increase) decrease in loans
    
    
    (11,498
    )
    
    
    33,692Purchases of bank premises and equipment
    
    
    (1,386
    )
    
    
    (6,288
    )Net cash (used in) provided by investing activities
    
    
    (24,673
    )
    
    
    31,260Financing activitiesNet increase (decrease) in deposits
    
    
    (18,556
    )
    
    
    4,919Proceeds from borrowings
    
    
    6,100
    
    
    
    800Repayments of borrowings
    
    
    (18,945
    )
    
    
    (12,100
    )Proceeds from issuance of junior subordinated debt owed to
unconsolidated trusts
    
    
    10,000
    
    
    
    Proceeds from exercise of stock options
    
    
    189
    
    
    
    Dividends paid
    
    
    (195
    )
    
    
    (455
    )Purchase of treasury stock
    
    
    (5,389
    )
    
    
    (9,308
    )Net cash used in financing activities
    
    
    (26,796
    )
    
    
    (16,144
    )Net increase (decrease) in cash and cash equivalents
    
    
    (30,461
    )
    
    
    19,420Cash and cash equivalents  beginning of year
    
    
    45,605
    
    
    
    47,426Cash and cash equivalents  end of period
    
    $
    15,144
    
    
    $
    66,846
 5




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Nine Months EndedSeptember 302004
    
    2003(dollars in thousands)Supplemental disclosure of cash flow informationInterest paid
    
    $
    7,886
    
    
    $
    9,054Income taxes paid
    
    
    1,290
    
    
    
    1,254Real estate acquired in settlement of loans
    
    
    519
    
    
    
    428Transfer of securities from held to maturity to available for
sale
    
    
    651
    
    
    
    Sale of branch:Assets disposed:Loans
    
    
    
    
    
    $
    (6,370
    )Interest receivable
    
    
    
    
    
    
    (24
    )Premises and equipment
    
    
    
    
    
    
    (165
    )Other assets
    
    
    
    
    
    
    (197
    )Liabilities assumed by buyer:Demand deposits
    
    
    
    
    
    
    2,162Certificates of deposit
    
    
    
    
    
    
    17,243Other liabilities
    
    
    
    
    
    
    144Gain on sale of branch
    
    
    
    
    
    
    (478
    )Cash paid
    
    
    
    
    
    $
    12,315Acquisition of Parish Bank and Trust Company:Assets acquired:Certificates of deposit
    
    $
    (298
    )Investments
    
    
    (8,616
    )Loans, net
    
    
    (7,342
    )Interest receivable
    
    
    (104
    )Premises and equipment
    
    
    (269
    )Goodwill
    
    
    (1,013
    )Intangibles
    
    
    (774
    )Other assets
    
    
    (157
    )Liabilities assumed:Non-interest bearing deposits
    
    
    5,462Interest-bearing deposits
    
    
    13,062Other liabilities
    
    
    87Cash received, net of cash paid
    
    $
    38
 See the accompanying notes to consolidated financial statements. 6




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CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2004 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, 2003 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 nine-month periods ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. 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, 2003. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary Centrue Bank (the Bank), an Illinois
chartered commercial bank. All material intercompany transactions and balances
are eliminated. The Company is a financial holding company that engages in its
business through its sole subsidiary, 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 and goodwill. 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 2003 amounts have been reclassified where appropriate to conform
to the consolidated financial statement presentation used in 2004 with no
effect on previously reported net income or stockholders equity. The Company has a stock-based employee compensation plan, which is
described more fully in the Companys annual report on Form 10-K for the year
ended December 31, 2003. The Company accounts for this plan under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the grant date. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair 7




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##### Table of Contents



value recognition provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(dollars in thousands, except per share data)Net income, as reported
    
    $
    1,233
    
    
    $
    823
    
    
    $
    3,261
    
    
    $
    691Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes
    
    
    39
    
    
    
    3
    
    
    
    253
    
    
    
    160Pro forma net income
    
    $
    1,194
    
    
    $
    820
    
    
    $
    3,008
    
    
    $
    531Earnings per share:Basic  as reported
    
    $
    0.50
    
    
    $
    0.44
    
    
    
    1.29
    
    
    $
    0.35Basic  pro forma
    
    
    0.49
    
    
    
    0.44
    
    
    
    1.19
    
    
    
    0.27Diluted  as reported
    
    
    0.50
    
    
    
    0.44
    
    
    
    1.29
    
    
    
    0.35Diluted  pro forma
    
    
    0.48
    
    
    
    0.44
    
    
    
    1.19
    
    
    
    0.27
 Note 2  Common Stock Split On October 30, 2003, the Company issued 1,282,761 additional shares to
affect a 2-for-1 common stock split. All share and per share amounts have been
retroactively adjusted for this split as if it occurred on January 1, 2003. Note 3  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. 8




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Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(dollars in thousands, except share and per share data)BasicNet Income
    
    $
    1,233
    
    
    $
    823
    
    
    $
    3,261
    
    
    $
    691Average common shares outstanding
    
    
    2,458,005
    
    
    
    1,865,222
    
    
    
    2,525,183
    
    
    
    1,953,938Net income per common share -basic
    
    $
    0.50
    
    
    $
    0.44
    
    
    $
    1.29
    
    
    $
    0.35DilutedNet Income
    
    $
    1,233
    
    
    $
    823
    
    
    $
    3,261
    
    
    $
    691Average common shares outstanding
    
    
    2,458,005
    
    
    
    1,865,222
    
    
    
    2,525,183
    
    
    
    1,953,938Dilutive potential due to stock options
    
    
    9,955
    
    
    
    17,922
    
    
    
    9,893
    
    
    
    7,876Average common shares outstanding
    
    
    2,467,960
    
    
    
    1,883,144
    
    
    
    2,535,076
    
    
    
    1,961,814Net income per common share -Diluted
    
    $
    0.50
    
    
    $
    0.44
    
    
    $
    1.29
    
    
    $
    0.35
 Note 4  Acquisition of Parish Bank and Trust Company On March 5, 2004, the Company acquired for cash all of the outstanding
shares of Parish Bank and Trust Company (Parish Bank) for a total cost of
$4.5 million, including related expenses of $123,000. 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. The
purchase price has been allocated based on the fair values at the date of
acquisition. This allocation resulted in intangible assets of $774,000 and
goodwill of $1.0 million. The intangible assets are being amortized over ten
years. At closing, Parish Bank had assets of $21.5 million, including $7.3
million of loans, deposits of $18.5 million and stockholders equity of $2.9
million. This acquisition was not considered material to the Company as a
whole and therefore, proforma information is not included. Note 5  Adoption of FASB Interpretation No. 46 The Company adopted FASB Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 (Revised December 2003)in connection with its consolidated financial
statements for the quarter and nine-months ended September 30, 2004. FIN 46
establishes accounting guidance for consolidation of variable interest entities
(VIE) that function to support the activities of the primary beneficiary. The
primary beneficiary of a VIE entity is the entity that absorbs a majority of
the VIEs expected losses, receives a majority of the VIEs expected residual
returns, or both, as a result of ownership, controlling interest, contractual
relationship or other business relationship with a VIE. Prior to the
implementation of FIN 46, VIEs were generally consolidated by an enterprise
when the enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The implementation of FIN 46, as
revised, required the Company to de-consolidate its investment in Kankakee
Capital Trust I as of January 1, 2004, because the 9




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##### Table of Contents



Company is not the primary
beneficiary. The Companys prior financial statements were not
reclassified to de-consolidate the Companys investment in the Trust. There
was no impact on shareholders equity or net income upon adoption of the
standard. Note 6  Recent Accounting Pronouncements In December 2003, the American Institute of Certified Public Accountants
released Statement of Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer(SOP 03-3). SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable to credit quality.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. The adoption of SOP 03-3 is not expected to have a material
impact on the Companys financial statements. In March 2004, the FASB released EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). The EITF 03-1 provides guidance for determining when an
investment is impaired and whether the impairment is other than temporary as
well as guidance for quantifying the impairment. In September 2004, the FASB approved for issuance a FASB Staff Position
(FSP). FSP EITF Issue 03-1-1, Effective Date of paragraphs 10-20 of EIT Issue
No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. FSP EITF Issue 03-1-1 delays the effective date,
originally set for periods beginning after June 15, 2004, for measurement and
recognition guidance contained in paragraphs 10-20 of Issue 03-1. However, it
does not suspend the requirement to recognize other-than-temporary impairments
as required by existing authoritative literature. The adoption of EITF 03-1-1-
is not expected to have a material impact on the Companys financial
statements. In March 2004, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 105, Application of Accounting Principles to Loan
Commitments(SAB 105). SAB 105 provides general guidance that must be applied
when an entity determines the fair value of a loan commitment accounted for as
a derivative. SAB 105 is effective for commitments to originate mortgage loans
to be held for sale that are entered into after March 31, 2004 The adoption of
SAB 105 did not have a material impact on the Companys financial statements. 10




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Note 7  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 5.07% and 4.54% at September 30, 2004) per annum of the stated liquidation
amount of $1,000 per preferred security. Interest expense on the trust
preferred securities was $238,000 and $135,000 for the three months ended
September 30, 2004 and 2003, and $569,000 and $411,000 for the nine months
ended September 30, 2004 and 2003, 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. On May 6, 2004, the Board of Governors of the Federal Reserve System issued a
Notice of Proposed Rulemaking in which it proposed to allow the continued
inclusion of trust preferred securities in the Tier 1 capital of bank holding
companies, subject to stricter standards. The Federal Reserve is proposing to
limit the aggregate amount of a bank holding companys cumulative perpetual
preferred stock, trust preferred securities and other minority interests to 25%
of a companys core capital elements, net of goodwill. Current regulations do
not require the deduction of goodwill. The proposal also provides that amounts
of qualifying trust preferred securities and certain minority interests in
excess of the 25% limit may be included in Tier 2 capital but would be limited,
together with subordinated debt and limited-life preferred stock, to 50% of
Tier 1 capital. The proposal provides a three-year transition period for bank
holding companies to meet these quantitative limitations. At this time, it is
not possible to predict the impact that this proposal would have on the
Company. Note 8  Investments With Other Than Temporary Impairment Continuous gross unrealized losses of investments in debt and equity securities
as of September 30, 2004 (in thousands) which are classified as temporary were
as follows: 11




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##### Table of Contents



Continuous unrealized
    
    Continuous unrealizedlosses existing for less
    
    losses existing greaterthan 12 months
    
    than 12 months
    
    TotalDescription of
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedSecurities
    
    Value
    
    losses
    
    Value
    
    losses
    
    Value
    
    lossesU.S. government
agencies
    
    
    8,462
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    8,462
    
    
    
    4Municipals
    
    
    16,545
    
    
    
    215
    
    
    
    529
    
    
    
    1
    
    
    
    17,074
    
    
    
    216Mortgage backed
securities
    
    
    6,187
    
    
    
    79
    
    
    
    4,663
    
    
    
    39
    
    
    
    10,870
    
    
    
    118Corporate
    
    
    2,017
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    2,017
    
    
    
    62Total temporarily
impaired securities
    
    
    33,211
    
    
    
    360
    
    
    
    5,212
    
    
    
    40
    
    
    
    38,423
    
    
    
    400
 The unrealized losses on investment securities that have been in a continuous
loss position for more than 12 consecutive months consist of three municipal
securities with a fair market value of $529,000 and two mortgage backed
securities with a fair market value of $4.7 million. The unrealized losses are
generally due to changes in interest rates and, as such, are considered to be
temporary, by the Company. 
 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 its main banking office at 310 South Schuyler
Avenue, Kankakee, Illinois and eighteen branch offices. The Companys market
areas include central and southern Illinois, western Indiana and the
metropolitan St. Louis, Missouri markets. 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 and residential mortgage loans in its market areas. The Company
also invests in investment securities and various types of short term liquid
assets. On October 9, 2003, the Company merged with Aviston Financial Corporation.
At the time of the merger, Aviston Financial had approximately $98.0 million
in total assets and operated three locations in southwestern Illinois,
including its newest office in Fairview Heights, which is 10 miles from
downtown St. Louis. Subsequent to the merger, the remaining corporation
changed its name to Centrue Financial Corporation. On October 17, 2003, the
subsidiary banks were merged to form Centrue Bank, a state-chartered commercial
bank. On March 5, 2004, the Company acquired Parish Bank and Trust Company in
Momence, Illinois, which was merged into Centrue Bank. At the time of the
acquisition, Parish Bank had approximately $21.5 million in total assets. At
September 30, 2004, the Company has approximately 171 full time equivalent
employees. FINANCIAL CONDITION The Companys total assets were $603.9 million at September 30, 2004, a
decrease of $5.3 million or 0.9%, from $609.2 million at December 31, 2003.
Changes in asset accounts were represented by an increase in investment
securities of $20.2 million, net loans and loans held for sale of $2.3 million,
goodwill of $1.0 million, nonmarketable equity securities of $861,000 and 12




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##### Table of Contents



intangible assets of $606,000. These increases were offset by a decrease in
cash and cash equivalents of $30.5 million and other assets of $1 million. Cash and cash equivalents decreased $30.5 million or 66.9% to $15.1
million from $45.6 million. Investment securities increased $20.2 million or
22.8% to $108.8 million from $88.6 million. The increase in investment
securities and decrease in cash and cash equivalents was primarily as a result
of the Company repositioning lower yielding liquid investments such as federal
funds sold to higher yielding investment securities and commercial loans. This
repositioning has had a positive impact on the Companys net interest margin. Net loans, including loans held for sale, increased $2.3 million or 0.5%
to $428.1 million from $425.8 million. The increase in net loans was offset by
the sale of $15.6 million of long-term fixed rate mortgage loans that had
previously been held in the Companys loan portfolio. Management decided to
improve its interest rate risk position through the reduction of 25-30 year
fixed rate mortgages held in the Companys portfolio. The Company has retained
servicing
on all of the loans sold and recognized a minimal gain on the transactions.
The increase in loans was primarily due to the Company adding several
experienced commercial loan officers in the latter part of 2003 and first part
of 2004. The addition of these officers and the Companys concentration of
efforts on growing the commercial loan portfolio have contributed to our
increase in loans. Goodwill increased $1.0 million or 8.9% to $12.4 million from $11.4
million. Intangible assets increased $606,000 or 49.3% to $1.8 million from
$1.2 million. The increase in goodwill and intangible assets was a result of
the acquisition of Parish Bank. Nonmarketable equity securities increased $861,000 or 26.1% to $4.2
million from $3.3 million. The increase in nonmarketable equity securities was
primarily due to the deconsolidation of the Companys trust preferred
securities which resulted in an increase of $620,000. Other assets decreased $1 million or 22.1% to $3.4 million from $4.4
million. The decrease in other assets was primarily due to a decrease in
deferred tax assets. Borrowings decreased $12.8 million or 23.6% to $41.6 million from $54.4
million. The decrease in borrowings was due to borrowings (which had a rate of
4%) that matured late in March, 2004 and September, 2004. Junior subordinated debt owed to unconsolidated trusts (trust preferred
securities) increased $10.0 million or 100.0% to $20.0 million from $10.0
million. In April, 2004, the Company issued an additional$10.0 million in
trust preferred securities which have been used for repurchases of common stock
and other corporate purposes. Stockholders equity decreased $2.6 million or 5.7% to $43.0 million from
$45.6 million at December 31, 2003. Equity per share of common stock increased
by $0.22 to $17.73 at September 30, 2004 from $17.51 at December 31, 2003. The
decrease in stockholders equity and increase in equity per share was due to
the Company repurchasing 189,500 shares of common stock in 2004, at a total
cost of $5.4 million, partially offset by net income of $3.3 million. 13




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##### Table of Contents



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. Total nonperforming loans increased $4.4 million due to an increase of
non-accrual loans. The increase was primarily due to two large commercial
borrowers. The loans to one of these borrowers totaling $2.9 million matured
at year end 2003. During the first quarter of 2004, the Company had ongoing
negotiations to resolve and extend the maturity but was unable to achieve a
satisfactory agreement. During the second quarter of 2004, when negotiations
indicated that full collection of principal and interest was questionable, the
Company decided to place the loans on nonaccrual status until final resolution.
The Company expects a resolution in 2004 and does not anticipate a material
loss. The second borrower has a $2.0 million commercial loan that was
previously on the Companys watch list, although the borrower continued to make
payments as agreed. This borrower filed bankruptcy and ceased making loan
payments during the second quarter of 2004. During the third quarter, the
Company charged-off $1.2 million relating to a third commercial borrower. The
loan was fully reserved for prior to the charge-off. As such, the charge-off
had no effect on the Companys determination of the adequacy of the allowance
for loan losses during the third quarter. Management is in various stages of
workout or liquidation with the remaining nonperforming loans. TABLE 1  Nonperforming Loans September 30
    
    December 312004
    
    2003
    
    Change(dollars in thousands)Non-accruing loans
    
    $
    9,529
    
    
    $
    3,248
    
    
    $
    6,281Accruing loans delinquent 90
days or more
    
    
    328
    
    
    
    2,232
    
    
    
    (1,904
    )Total nonperforming loans
    
    
    9,857
    
    
    
    5,480
    
    
    
    4,377Foreclosed assets
    
    
    596
    
    
    
    319
    
    
    
    277Troubled debt restructuring
    
    
    44
    
    
    
    281
    
    
    
    (237
    )Total nonperforming assets
    
    $
    10,497
    
    
    $
    6,080
    
    
    $
    4,417Allowance for loan losses to total loans
    
    
    1.54
    %
    
    
    1.72
    %Allowance for loan losses to
nonperforming loans
    
    
    67.96
    %
    
    
    136.34
    %Nonperforming loans to total loans
    
    
    2.27
    %
    
    
    1.26
    %Nonperforming assets to total loans
and foreclosed property
    
    
    2.41
    %
    
    
    1.40
    %Nonperforming assets to total assets
    
    
    1.74
    %
    
    
    1.00
    %
 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 1.54% at September 30, 2004 compared to
1.72% at December 31, 2003. The decrease in this ratio was primarily the
result of the $1.2 million charge-off for one commercial loan. The loan had 14




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##### Table of Contents



been previously classified and reserved preceding the charge-off, which was
recorded during
the third quarter. The ratio of the allowance for loan losses to
non-performing loans decreased to 67.96% as of September 30, 2004 compared to
136.34% at December 31, 2003. The decrease in this ratio, which excludes
foreclosed assets and restructured troubled debt, was the result of the
increase of $4.4 million of nonperforming loans. Total loans which management has classified on the Companys internal
watch list at September 30, 2004 decreased to $20.2 million compared to $25.1
million at December 31, 2003. During 2003, the Company adopted a new loan
policy and implemented new loan approval, documentation and monitoring
processes. The Company also recruited and employed an experienced commercial
lending team including three new regional presidents, each of whom is an
experienced commercial lender, as well as other seasoned commercial lenders.
These initiatives have had a positive impact on the monitoring of the loan
portfolio. The Company will continue to attempt to improve the loan monitoring
processes. The Company recognized charge offs in the amount of $1.3 million and $2.0
million during the third quarter and first nine months of 2004 and $261,000 and
$3.4 million for the third quarter and first nine-months of 2003. The Company
had recoveries of $20,000 and $126,000 for the third quarter and first
nine-months of 2004 and $8,000 for the third quarter and first nine-months of
2003. The provision for loan losses was $300,000 and $900,000 for the third
quarter and first nine months of 2004, compared to $272,000 and $4.0 million
for the third quarter and first nine months of 2003. The provision for loan
losses represents managements judgment of the cost associated with credit risk
inherent in the loan portfolio. Factors which influence managements
determination of the provision for loan losses include, among other things,
size and quality of the loan portfolio measured against prevailing economic
conditions, regulatory guidelines, a review of individual loans and historical
loan loss experience. The decrease in the provision for loan losses for the
nine-month period ending September 30, 2004 compared to the same period of 2003
was primarily reflective of lower net charge-offs and improvements in asset
quality. In addition, the Company acquired $156,000 of allowance for loan
losses with the Parish acquisition in the first quarter of 2004. 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
September 30, 2004 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. 15




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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. 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 16




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##### Table of Contents



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. 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
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 For the third quarter ended September 30, 2004, net income increased
$410,000 to $1.2 million from $823,000 for the same period in 2003. Net income
for the nine-months ended September 30, 2004 increased $2.6 million to $3.3
million from $691,000 for the same period in 2003. Return on average assets
for the third quarter and first nine months of 2004 was 0.81% and 0.71%,
compared to 0.64% and 0.18% for 2003. Return on average equity for the third
quarter and first nine months of 2004 was 11.86% and 9.87%, compared to 10.54%
and 2.72% for 2003. The Companys results for the quarter and nine-months ended September 30,
2003, included loan loss provisions of $272,000 and $4.0 million compared to
provisions of $300,000 and $900,000 for the three and nine-month periods in
2004. The three months ended September 30, 2003 also included additional fee
income of $373,000, which reflected a revaluation in the value of mortgage
servicing rights. Net interest income for the three month and nine month periods increased
$1.1 million and $2.7 million or 30.6% and 23.9% from 2003. Interest income
increased by $1.0 million and $1.7 million for the three month and nine-month
periods. The net interest margin for the third quarter increased to 3.47%
compared to 3.08% for 2003. For the nine-month periods, the net interest
margin increased to 3.41% compared to 3.14% for 2003. The increase in the net
interest margin was primarily a result of the Companys sensitivity to
increased interest rates and initiatives that were implemented over the last
twelve months to reposition the balance sheet. Lower earning assets, such as
federal funds sold, were replaced with higher yielding loans and tax-advantaged
investments. In addition, the Companys cost of funds decreased due to an
increase in non-interest bearing demand deposit accounts as a percentage of
total deposits and a reduction in the percentage of certificates of deposit to
total deposits from 55.5% at December 31, 2003 to 51.5% at September 30, 2004. 17




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TABLE 2
NET INTEREST INCOME ANALYSIS
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY Three Months Ended September 30,2004
    
    2003Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate
    
    Balance
    
    Paid
    
    Rate(Dollars in Thousands)Interest-earning assets:Loans receivable (1) (3)
    
    $
    436,371
    
    
    $
    6,263
    
    
    
    5.71
    %
    
    $
    345,217
    
    
    $
    5,476
    
    
    
    6.29
    %Investments securities (2) (3)
    
    
    111,254
    
    
    
    1,121
    
    
    
    4.01
    %
    
    
    69,124
    
    
    
    703
    
    
    
    4.03
    %Other interest-earning assets
    
    
    4,239
    
    
    
    10
    
    
    
    0.94
    %
    
    
    51,661
    
    
    
    116
    
    
    
    0.89
    %FHLB stock
    
    
    3,505
    
    
    
    52
    
    
    
    5.90
    %
    
    
    2,884
    
    
    
    44
    
    
    
    6.05
    %Total interest-earning assets
    
    
    555,369
    
    
    
    7,446
    
    
    
    5.33
    %
    
    
    468,886
    
    
    
    6,339
    
    
    
    5.36
    %Other assets
    
    
    53,535
    
    
    
    
    
    
    
    
    
    
    
    43,817Total assets
    
    $
    608,904
    
    
    
    
    
    
    
    
    
    
    $
    512,703Interest-bearing liabilities:Certificate accounts
    
    $
    255,663
    
    
    
    1,546
    
    
    
    2.41
    %
    
    $
    229,213
    
    
    
    1,628
    
    
    
    2.82
    %Savings deposits
    
    
    92,241
    
    
    
    142
    
    
    
    0.61
    %
    
    
    77,975
    
    
    
    197
    
    
    
    1.00
    %Demand and NOW deposits
    
    
    96,983
    
    
    
    208
    
    
    
    0.85
    %
    
    
    81,998
    
    
    
    215
    
    
    
    1.04
    %Borrowings
    
    
    62,616
    
    
    
    706
    
    
    
    4.48
    %
    
    
    58,550
    
    
    
    656
    
    
    
    4.45
    %Total interest-bearing liabilities
    
    
    507,503
    
    
    
    2,602
    
    
    
    2.04
    %
    
    
    447,736
    
    
    
    2,696
    
    
    
    2.39
    %Non-interest bearing demand deposits
    
    
    53,576
    
    
    
    
    
    
    
    
    
    
    
    32,854Other liabilities
    
    
    6,471
    
    
    
    
    
    
    
    
    
    
    
    1,144Total liabilities
    
    
    567,550
    
    
    
    
    
    
    
    
    
    
    
    481,734Stockholders equity
    
    
    41,354
    
    
    
    
    
    
    
    
    
    
    
    30,969Total liabilities and stockholders equity
    
    $
    608,904
    
    
    
    
    
    
    
    
    
    
    $
    512,703Net interest income
    
    
    
    
    
    $
    4,844
    
    
    
    
    
    
    
    
    
    
    $
    3,643Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.29
    %
    
    
    
    
    
    
    
    
    
    
    2.97
    %Net earning assets
    
    $
    47,866
    
    
    
    
    
    
    
    
    
    
    $
    21,150Net yield on average interest-earning
assets (net interest margin)
    
    
    
    
    
    
    
    
    
    
    3.47
    %
    
    
    
    
    
    
    
    
    
    
    3.08
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    109.43
    %
    
    
    
    
    
    
    
    
    
    
    104.72
    %
  (1)
    
    Calculated including loans held for sale, and net of deferred loan fees,
loan discounts,
loans in process and the allowance for losses on loans.(2)
    
    Calculated including investment securities available-for-sale and held to
maturity and certificates of deposit.(3)
    
    Presented on a fully tax-equivalent basis, assuming a tax rate of 34%. For the third quarter ended September 30, 2004, tax equivalent interest
income increased $1.1 million, to $7.4 million. The increase was primarily
attributable to an increase in average earning assets, partially offset by a
decrease in interest rates. Average earning assets increased $86.5 million to
$555.4 million from $468.9 million in 2003. The average tax equivalent rate
earned on earning assets decreased 3 basis points to 5.33% from 5.36%. The 18




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increase in the average balance of interest-earning assets was primarily due to
earning assets
acquired in the Aviston Financial and Parish Bank acquisitions. The decrease
in the yield earned on interest-earning assets was the result of the sale of
$15.6 million of mortgage loans to reduce interest rate risk and the gradual
repricing of loans and investments to lower interest rates throughout 2003 and
the first two quarters of 2004. These decreases were partially offset by
higher loan rates during the third quarter of 2004. The prime rate has
increased 75 basis points since June 29, 2004, which has had a positive impact
on loan rates. Interest expense in the third quarter decreased $94,000 to $2.6 million
from $2.7 million in 2003. The decrease was primarily attributable to a
decrease in the rate paid on average interest bearing liabilities, partially
offset by an increase in the average balance of interest bearing liabilities.
Average interest-bearing liabilities increased $59.8 million to $507.5 million
from $447.7 million. The rate paid on interest bearing liabilities decreased
35 basis points to 2.04% from 2.39% in 2003. The increase in average
interest-bearing liabilities was primarily attributable to interest-bearing
liabilities assumed in the Aviston Financial and Parish Bank acquisitions. The
decrease in the average yield on interest-bearing liabilities resulted from
decreasing market interest rates and continuing improvement in the deposit mix,
with a significant growth of noninterest bearing deposits and a lower
percentage of certificates of deposit to deposits. 19




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TABLE 3
NET INTEREST INCOME ANALYSIS
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY Nine Months Ended September 30,2004
    
    2003Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate
    
    Balance
    
    Paid
    
    Rate(Dollars in Thousands)Interest-earning assets:Loans receivable (1) (3)
    
    $
    434,912
    
    
    $
    18,782
    
    
    
    5.77
    %
    
    $
    358,037
    
    
    $
    17,308
    
    
    
    6.46
    %Investments securities (2) (3)
    
    
    106,450
    
    
    
    3,222
    
    
    
    4.04
    %
    
    
    74,371
    
    
    
    2,508
    
    
    
    4.51
    %Other interest-earning assets
    
    
    14,756
    
    
    
    104
    
    
    
    0.94
    %
    
    
    45,103
    
    
    
    360
    
    
    
    1.07
    %FHLB stock
    
    
    3,428
    
    
    
    160
    
    
    
    6.24
    %
    
    
    2,837
    
    
    
    137
    
    
    
    6.46
    %Total interest-earning assets
    
    
    559,546
    
    
    
    22,268
    
    
    
    5.32
    %
    
    
    480,348
    
    
    
    20,313
    
    
    
    5.65
    %Other assets
    
    
    51,821
    
    
    
    
    
    
    
    
    
    
    
    42,494Total assets
    
    $
    611,367
    
    
    
    
    
    
    
    
    
    
    $
    522,842Interest-bearing liabilities:Certificate accounts
    
    $
    263,520
    
    
    
    4,904
    
    
    
    2.49
    %
    
    $
    236,788
    
    
    
    5,472
    
    
    
    3.09
    %Savings deposits
    
    
    91,204
    
    
    
    425
    
    
    
    0.62
    %
    
    
    76,079
    
    
    
    673
    
    
    
    1.18
    %Demand and NOW deposits
    
    
    93,276
    
    
    
    584
    
    
    
    0.84
    %
    
    
    78,404
    
    
    
    830
    
    
    
    1.42
    %Borrowings
    
    
    61,516
    
    
    
    2,085
    
    
    
    4.53
    %
    
    
    61,570
    
    
    
    2,042
    
    
    
    4.43
    %Total interest-bearing liabilities
    
    
    509,516
    
    
    
    7,998
    
    
    
    2.10
    %
    
    
    452,841
    
    
    
    9,017
    
    
    
    2.66
    %Non-interest bearing demand deposits
    
    
    52,237
    
    
    
    
    
    
    
    
    
    
    
    32,906Other liabilities
    
    
    5,499
    
    
    
    
    
    
    
    
    
    
    
    3,141Total liabilities
    
    
    567,252
    
    
    
    
    
    
    
    
    
    
    
    488,888Stockholders equity
    
    
    44,115
    
    
    
    
    
    
    
    
    
    
    
    33,954Total liabilities and stockholders equity
    
    $
    611,367
    
    
    
    
    
    
    
    
    
    
    $
    522,842Net interest income
    
    
    
    
    
    $
    14,270
    
    
    
    
    
    
    
    
    
    
    $
    11,296Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.22
    %
    
    
    
    
    
    
    
    
    
    
    2.99
    %Net earning assets
    
    $
    50,030
    
    
    
    
    
    
    
    
    
    
    $
    27,507Net yield on average interest-earning
assets (net interest margin)
    
    
    
    
    
    
    
    
    
    
    3.41
    %
    
    
    
    
    
    
    
    
    
    
    3.14
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    109.82
    %
    
    
    
    
    
    
    
    
    
    
    106.07
    %
  (1)
    
    Calculated including loans held for sale, and net of deferred loan fees,
loan discounts,
loans in process and the allowance for losses on loans.(2)
    
    Calculated including investment securities available-for-sale and held to
maturity and certificates of deposit.(3)
    
    Presented on a fully tax-equivalent basis, assuming a tax rate of 34%. For the nine months ended September 30, 2004, tax equivalent interest
income increased $2.0 million, to $22.3 million. The increase was primarily
attributable to an increase in average earning assets, partially offset by a
decrease in interest rates. Average earning assets increased $79.2 million to
$559.5 million from $480.3 million in 2003. The average tax 20




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##### Table of Contents



equivalent rate
earned on earning assets decreased 33 basis points to 5.32% from 5.65%. The
increase in the average balance of interest-earning assets was primarily due to
earning assets acquired in the Aviston Financial and Parish Bank acquisitions.
The decrease in the yield earned on interest-earning assets was the result of
the sale of $15.6 million of mortgage loans to reduce interest rate risk and
the gradual repricing of loans and investments to lower interest rates
throughout 2003 and the first nine months of 2004. Interest expense during the first three quarters of the year decreased
$1.0 to $8.0 million from $9.0 million in 2003. The decrease was primarily
attributable to a decrease in the rate paid on average interest bearing
liabilities, partially offset by an increase in the average balance of interest
bearing liabilities. Average interest-bearing liabilities increased $56.7
million to $509.5 million from $452.8 million. The rate paid on interest
bearing liabilities decreased 56 basis points to 2.10% from 2.66% in 2003. The
increase in average interest-bearing liabilities was primarily attributable to
interest-bearing liabilities assumed in the Aviston Financial and Parish Bank
acquisitions. The decrease in the average yield on interest-bearing
liabilities resulted from decreasing market interest rates and continuing
improvement in the deposit mix, with a significant growth of noninterest
deposits and a lower percentage of certificates of deposit to deposits. The provision for loan losses was $300,000 and $900,000 for the third
quarter and first nine months of 2004, compared to $272,000 and $4.0 million
for the third quarter and first nine months of 2003. The decrease in the
provision for loan losses for the nine month period was primarily due to a
decrease in net charge-offs. Several initiatives to more effectively monitor
the risk involved in the loan portfolio were put in place during the latter
part of 2003 and have continued in 2004. The amount of the provision for
losses on loans is determined through regular review of the various elements of
the loan portfolio, and by a review of overall adequacy, based on circumstances
and factors known at the time of the review. TABLE 4  Noninterest Income and Expense Three Months EndedSeptember 30
    
    Change2004
    
    2003
    
    Amount
    
    Percent(dollars in thousands)Noninterest income:Fee income
    
    
    1,245
    
    
    
    1,068
    
    
    
    177
    
    
    
    16.6
    %Net gain (loss) on sale of securities
    
    
    (5
    )
    
    
    8
    
    
    
    (13
    )
    
    
    (162.5
    )Net gain on sale of real estate held for sale
    
    
    
    
    
    
    5
    
    
    
    (5
    )
    
    
    (100.0
    )Net gain on sale of loans
    
    
    238
    
    
    
    254
    
    
    
    (16
    )
    
    
    (6.3
    )Increase in cash surrender value of life insurance
    
    
    71
    
    
    
    116
    
    
    
    (45
    )
    
    
    (38.8
    )Other
    
    
    40
    
    
    
    83
    
    
    
    (43
    )
    
    
    (51.8
    )Total
    
    
    1,589
    
    
    
    1,534
    
    
    
    55
    
    
    
    3.6Noninterest expense:Compensation and benefits
    
    
    2,227
    
    
    
    1,794
    
    
    
    433
    
    
    
    24.1Occupancy, net
    
    
    367
    
    
    
    372
    
    
    
    (5
    )
    
    
    (1.3
    )Furniture and equipment
    
    
    330
    
    
    
    235
    
    
    
    95
    
    
    
    40.4Advertising
    
    
    83
    
    
    
    77
    
    
    
    6
    
    
    
    7.8Data processing
    
    
    158
    
    
    
    134
    
    
    
    24
    
    
    
    17.9Telephone and postage
    
    
    157
    
    
    
    131
    
    
    
    26
    
    
    
    19.8Amortization of Intangibles
    
    
    61
    
    
    
    34
    
    
    
    27
    
    
    
    79.4Legal and professional fees
    
    
    124
    
    
    
    128
    
    
    
    (4
    )
    
    
    (3.1
    )Other
    
    
    803
    
    
    
    603
    
    
    
    200
    
    
    
    33.2Total
    
    
    4,310
    
    
    
    3,508
    
    
    
    802
    
    
    
    22.8
 21




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For the third quarter of 2004, noninterest income increased $55,000 to
$1.6 million from $1.5 million in 2003. The increase in noninterest income was
primarily due to an increase in fee
income, partially offset by decreases in all other categories of noninterest
income. Fee income increased $177,000 to $1.2 million from $1.1 million in
2003. The increase in fee income was primarily due to a new overdraft
protection program that began in June of 2004. Additionally, noninterest
income for 2003 included fee income of $373,000 related to the revaluation of
mortgage servicing rights. Noninterest expense increased $802,000 to $4.3 million compared to $3.5
million for 2003. The increase in noninterest expense was primarily due to
increases in compensation and benefits of $433,000, furniture and equipment of
$95,000, and other noninterest expense of $200,000. Each of these increases
was primarily due to the addition of personnel and branches that were added due
to the merger with Aviston Financial in the fourth quarter of 2003, Parish Bank
in March 2004 and the opening of two new offices within the last year. Income tax expense for the third quarter of 2004 decreased $72,000 to
$502,000 from $574,000 in 2003. The effective income tax rate for 2004 was
28.9% compared to 41.1% for 2003. The decrease in the effective rate was due
to several initiatives implemented during 2004 to minimize the Companys income
tax expenses, including the purchase of tax exempt investment securities. TABLE 5  Noninterest Income and Expense Nine Months EndedSeptember 30
    
    Change2004
    
    2003
    
    Amount
    
    Percent(dollars in thousands)Noninterest income:Fee income
    
    
    3,126
    
    
    
    2,092
    
    
    
    1,034
    
    
    
    49.4
    %Net gain (loss) on sale of securities
    
    
    85
    
    
    
    8
    
    
    
    77
    
    
    
    962.5Net gain on sale of real estate held for sale
    
    
    39
    
    
    
    37
    
    
    
    2
    
    
    
    5.4Net gain on sale of loans
    
    
    661
    
    
    
    1,117
    
    
    
    (456
    )
    
    
    (40.8
    )Gain on sale of branch
    
    
    
    
    
    
    478
    
    
    
    (478
    )
    
    
    (100.0
    )Increase in cash surrender value of life insurance
    
    
    270
    
    
    
    344
    
    
    
    (74
    )
    
    
    (21.5
    )Other
    
    
    161
    
    
    
    316
    
    
    
    (155
    )
    
    
    (49.1
    )Total
    
    
    4,342
    
    
    
    4,392
    
    
    
    (50
    )
    
    
    (1.1
    )Noninterest expense:Compensation and benefits
    
    
    6,624
    
    
    
    5,597
    
    
    
    1,027
    
    
    
    18.3Occupancy, net
    
    
    1,087
    
    
    
    1,023
    
    
    
    64
    
    
    
    6.3Furniture and equipment
    
    
    1,019
    
    
    
    619
    
    
    
    400
    
    
    
    64.6Advertising
    
    
    204
    
    
    
    272
    
    
    
    (68
    )
    
    
    (25.0
    )Data processing
    
    
    458
    
    
    
    372
    
    
    
    86
    
    
    
    23.1Telephone and postage
    
    
    437
    
    
    
    402
    
    
    
    35
    
    
    
    8.7Amortization of Intangibles
    
    
    168
    
    
    
    106
    
    
    
    62
    
    
    
    58.5Legal and professional fees
    
    
    526
    
    
    
    548
    
    
    
    (22
    )
    
    
    (4.0
    )Other
    
    
    2,243
    
    
    
    1,840
    
    
    
    403
    
    
    
    21.9Total
    
    
    12,766
    
    
    
    10,779
    
    
    
    1,987
    
    
    
    18.4
 For the nine month period ended September 30, 2004, noninterest income
decreased $50,000 compared to the same period in 2003. The decrease in
noninterest income was primarily due to a decrease in gain on sale of loans of
$456,000, a decrease in gain on sale of branch of $478,000, and a decrease in
other noninterest income of $155,000. These decreases were partially offset by
an increase in fee income of $1.0 million. The decrease in gain on sale 22




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of
loans in 2004 was primarily due to the higher volume of refinancing that
occurred during 2003. Due to the rate structure moving higher in 2004 and the
large amount of loans that refinanced during 2002 and 2003, the amount of
refinancing greatly decreased and the majority of the gain on loans in 2004 was
primarily attributable to new loans. Additionally, during the second quarter
of 2004, the Company sold its credit card portfolio and recorded a gain in the
amount of $127,000. The decision to sell the credit card portfolio was made
due to the cost related to processing the credit card transactions, loan loss
exposure to these unsecured loans and the marginal profitability of carrying
and servicing the portfolio. The Company has continued to offer credit card
services through an affiliation with a third party. This arrangement has
allowed the Company to continue to offer credit card services without the risk
and cost associated with the credit card loans while sharing in future revenue.
The gain on sale of branch in 2003 was a result of the sale of the Hoopeston
branch in February of 2003. The increase in fee income was primarily due to an
increase in fees assessed on customer accounts and transactions to better
reflect the competitive environment as well as a new overdraft protection
program that began in June of 2004. The decrease in other noninterest income
was the result of various immaterial items. Noninterest expense increased $2.0 million compared to the same period in
2003. The increase in noninterest expense was primarily due to increases in
compensation and benefits of $1.0 million, furniture and equipment of $400,000,
and other noninterest expense of $403,000. Each of these increases was
primarily due to the addition of personnel and branches that were added due to
the merger with Aviston Financial in the fourth quarter of 2003, Parish Bank in
March 2004 and the opening of two new offices within the last year. Income tax expense for the nine months ended September 30, 2004 increased
$1.2 million to $1.4 million from $196,000 for the same period in 2003. The
Companys effective tax rate was 30.3% and 22.1% for 2004 and 2003,
respectively. The 2004 effective tax rate reflects the level of tax expense
anticipated by the Company while the 2003 effective tax rate reflects the tax
impact of significant net losses incurred in the second quarter of 2003. 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 September 30, 2004 (in thousands): Junior (1)SubordinatedDebt Owed toTime
    
    
    
    
    
    UnconsolidatedYears Ended December 31,
    
    Deposits
    
    Borrowings (1)
    
    Trusts
    
    Total2004
    
    $
    51,087
    
    
    $
    13,118
    
    
    
    
    
    
    $
    64,2052005
    
    
    160,749
    
    
    
    16,736
    
    
    
    
    
    
    
    177,4852006
    
    
    20,726
    
    
    
    9,342
    
    
    
    
    
    
    
    30,0682007
    
    
    10,151
    
    
    
    1,450
    
    
    $
    10,000
    
    
    
    21,6012008 and thereafter
    
    
    12,882
    
    
    
    905
    
    
    
    10,000
    
    
    
    23,787Total
    
    $
    255,595
    
    
    $
    41,551
    
    
    $
    20,000
    
    
    $
    317,146Financial instruments
whose contract amounts
represent credit risk:Commitment to originate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,894Commitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,497Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,541Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    377,078
 23




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##### Table of Contents



(1)
    
    Fixed rate callable borrowings are included in the period of their
modified duration rather than in the period in which they are due.
Borrowings include fixed rate callable advances of $5.0 million maturing
in 2008 and $2.0 million maturing in 2011. Junior subordinated debt owed
to unconsolidated trusts matures in 2032 and 2034 but is callable in 2007
and 2009. The Companys most liquid assets are cash, cash in banks and highly
liquid, short-term investments. The levels of these assets are dependent on the
Companys operating, financing, lending and investing activities during any
given period. At September 30, 2004 and December 31, 2003, these liquid assets
totaled $15.1 million and $45.6 million. Securities available-for-sale may also
be utilized to meet liquidity needs. The level of liquid assets at December 31,
2003 was higher than usual due to a number of factors, including sales of loans
and higher than expected prepayments on loans and investment securities. Liquidity management for the Company is both a daily and long-term
function of the Companys management strategy. Excess funds are generally
invested in short-term investments such as federal funds. In the event that the
Company should require funds beyond its ability to generate them internally,
additional sources of funds are available, including FHLB advances. At
September 30, 2004, the Company had outstanding borrowings totaling $41.6
million, of which $29.7 were advances from the FHLB, $9.2 were funds from
securities sold under agreement to repurchase, and $2.7 million were funds from
notes payable. At September 30, 2004, the Company had outstanding commitments to
originate mortgage loans of $13.9 million, of which 83.8% were at fixed
interest rates. These commitments provided that the loans would be secured by
properties located, for the most part, in the Companys primary market areas.
The Company anticipates that it will have sufficient funds available to meet
its current loan commitments. Certificates of deposit that were scheduled to
mature by December 31, 2004, totaled $51.1 million. Based upon the historically
stable nature of the Companys deposit base, management believes that a
significant portion of such deposits will remain with the Company. The Company
had unused lines of credit provided to customers of $44.5 million at September
30, 2004. The Company also had a signed contract to construct a facility in
Fairview Heights, Illinois for a total cost of approximately $4.3 million. The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory  and
possibly additional discretionary  actions by regulators that, if undertaken,
could have a direct material effect on the Company and the Banks financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company and the Banks capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined by the regulations) to
average assets (as defined) and Total and Tier I capital (as defined) to
risk-weighted assets (as defined). Management believes, as of September 30,
2004, that the Company and the Bank meet all capital adequacy requirements to
which it is subject. 24




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##### Table of Contents



As of September 30, 2004, the most recent notification from the Banks
primary regulators, categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Banks category. To be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)As of September 30, 2004Tier 1 Capital to Average AssetsCentrue Financial
    
    $
    42,543
    
    
    
    7.15
    %
    
    $
    23,785
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    44,543
    
    
    
    7.59
    %
    
    
    23,460
    
    
    
    4.00
    %
    
    $
    29,325
    
    
    
    5.00
    %Tier I Capital to Risk Weighted AssetsCentrue Financial
    
    
    42,543
    
    
    
    9.63
    %
    
    
    17,675
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    44,543
    
    
    
    10.18
    %
    
    
    17,497
    
    
    
    4.00
    %
    
    
    26,246
    
    
    
    6.00
    %Total Capital to Risk Weighted AssetsCentrue Financial
    
    
    53,861
    
    
    
    12.19
    %
    
    
    35,350
    
    
    
    8.00
    %
    
    
    N/ACentrue Bank
    
    
    50,025
    
    
    
    11.44
    %
    
    
    34,994
    
    
    
    8.00
    %
    
    
    43,743
    
    
    
    10.00
    %As of December 31, 2003Tier 1 Capital to Average AssetsCentrue Financial
    
    $
    41,893
    
    
    
    7.05
    %
    
    $
    23,090
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    43,944
    
    
    
    7.49
    %
    
    
    23,038
    
    
    
    4.00
    %
    
    $
    28,798
    
    
    
    5.00
    %Tier I Capital to Risk Weighted AssetsCentrue Financial
    
    
    41,893
    
    
    
    9.48
    %
    
    
    16,925
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    43,944
    
    
    
    10.05
    %
    
    
    16,802
    
    
    
    4.00
    %
    
    
    25,203
    
    
    
    6.00
    %Total Capital to Risk Weighted AssetsCentrue Financial
    
    
    47,173
    
    
    
    10.68
    %
    
    
    33,850
    
    
    
    8.00
    %
    
    
    N/ACentrue Bank
    
    
    49,201
    
    
    
    11.25
    %
    
    
    33,604
    
    
    
    8.00
    %
    
    
    42,005
    
    
    
    10.00
    %
 SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS This document contains, and future oral and written statements of the
Company and its management may contain, forward-looking statements, within the
meaning of such term in the Private Securities Litigation Reform Act of 1995,
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company. Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of
the Companys management and on information currently available to management,
are generally identifiable by the use of words such as believe, expect,
anticipate, plan, intend estimate, may, will, would, could,
should or other similar expressions. Additionally, all statements in this
document, including forward-looking statements, speak only as of the date they
are made, and the Company undertakes no obligation to update any statement in
light of new information or future events. The Companys ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations and future prospects of the Company
and its subsidiaries include, but are not limited to, the following:  
    
    The strength of the United States economy in general and the
strength of the local economies in which the Company conducts its
operations which may be less 25




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##### Table of Contents



favorable than expected and may result
in, among other things, a deterioration in the credit quality and
value of the Companys assets.
    
    The economic impact of past and any future terrorist threats
and attacks, acts of war or threats thereof, and the response of the
United States to any such threats and attacks.
    
    The effects of, and changes in, federal, state and local
laws, regulations and policies affecting banking, securities,
insurance and monetary and financial matters.
    
    The effects of changes in interest rates (including the
effects of changes in the rate of prepayments of the Companys
assets) and the policies of the Board of Governors of the Federal
Reserve System.
    
    The ability of the Company to compete with other financial
institutions as effectively as the Company currently intends due to
increases in competitive pressures in the financial services sector.
    
    The inability of the Company to obtain new customers and to
retain existing customers.
    
    The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
    
    Technological changes implemented by the Company and by other
parties, including third party vendors, which may be more difficult
or more expensive than anticipated or which may have unforeseen
consequences to the Company and its customers.
    
    The ability of the Company to develop and maintain secure and
reliable electronic systems.
    
    The ability of the Company to retain key executives and
employees and the difficulty that the Company may experience in
replacing key executives and employees in an effective manner.
    
    Consumer spending and saving habits which may change in a
manner that affects the Companys business adversely.
    
    Business combinations and the integration of acquired
businesses which may be more difficult or expensive than expected.
    
    The costs, effects and outcomes of existing or future
litigation.
    
    Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies and the Financial
Accounting Standards Board. The ability of the Company to manage the risks associated with the foregoing
as well as anticipated. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be
placed on such statements. Additional information concerning the Company
and its business, including other factors that could materially affect the
Companys financial results, is included in the Companys filings with the
Securities and Exchange Commission. 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ASSET/LIABILITY MANAGEMENT In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Companys interest rate risk. The Bank has a
funds management committee, which meets monthly and reviews the Banks interest
rate risk position and evaluates its current asset/liability pricing and
strategies. This committee adjusts pricing and strategies as needed and makes
recommendations to the Banks board of directors regarding significant changes
in strategy. In addition, on a quarterly basis the board reviews the Banks
asset/liability position, including simulations of the effect on the Banks
capital of various interest rate scenarios. 26




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##### Table of Contents



In managing its asset/liability mix, the Company, at times, depending on
the relationship between long-term and short-term interest rates, market
conditions and consumer preferences, may place somewhat greater emphasis on
maximizing its net interest margin than on better matching the interest rate
sensitivity of its assets and liabilities in an effort to improve its net
income. While the Company does have some exposure to changing interest rates,
management believes that the Company is positioned to protect earnings
throughout changing interest rate environments. The Company currently does not enter into derivative financial
instruments, including futures, forwards, interest rate risk swaps, option
contracts, or other financial instruments with similar characteristics.
However, the Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers such as commitments to extend credit and letters of credit.
Commitments to extend credit and letters of credit are not recorded as an asset
by the Company until the commitment is accepted and funded or the letter of
credit is exercised. The Companys net income and economic value of equity (EVE), in the
normal course of business, are exposed to interest rate risk, and can vary
based on changes in the general level of interest rates. All financial
products carry some amount of interest rate risk, and substantial portions of
both the Companys assets and liabilities are financial products. These
include investment securities, loans, deposits and borrowed money. Off-balance
sheet items, such as loan commitments, letters of credit, commitments to buy or
sell loans or securities, and derivative financial instruments, also carry some
amount of interest rate risk. The Funds Management Committee generally uses three types of analysis in
measuring and reviewing the Companys interest rate sensitivity. These are
Static GAP analysis, Dynamic Gap Analysis and Economic Value of Equity. The
Static GAP analysis measures assets and liabilities as they reprice in various
time periods and is discussed under the heading of Asset/Liability Management
on page 17 of the 2003 Annual Report to Shareholders. The economic value of equity calculation uses information about the
Companys assets, liabilities and off-balance sheet items, market interest rate
levels and assumptions about the behavior of the assets and liabilities, to
calculate the Companys equity value. The economic value of equity is the
market value of assets minus the market value of liabilities, adjusted for
off-balance sheet items divided by the market value of assets. The economic
value of equity is then subjected to immediate and permanent upward changes of
300 basis points in market interest rate levels, in 100 basis point increments,
and a downward change of 100 basis points. The resulting changes in equity
value and net interest income at each increment are measured against
pre-determined, minimum EVE ratios for each incremental rate change, as
approved by the board in the interest rate risk policy. The following table presents the Banks EVE ratios for the various rate
change levels at September 30, 2004 and December 31, 2003: EVE RatiosSeptember 30,
    
    December 31,Changes in Interest Rates
    
    2004
    
    2003300 basis point rise
    
    
    7.54
    %
    
    
    7.87
    %200 basis point rise
    
    
    7.83
    %
    
    
    7.94
    %100 basis point rise
    
    
    7.92
    %
    
    
    8.13
    %Base rate scenario
    
    
    7.56
    %
    
    
    7.45
    %100 basis point decline
    
    
    6.27
    %
    
    
    6.08
    %
 27




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##### Table of Contents



The preceding table indicates that in the event of an immediate and
permanent increase in prevailing market interest rates, the Banks EVE ratio,
would be expected to increase in all scenarios other than a 300 basis point
rise. In the event of an immediate and permanent decrease in prevailing market
interest rates, the Banks EVE ratio would be expected to decrease. The EVE increases in a rising rate scenario because the Company is asset
sensitive and would have more interest earning assets repricing than
interest-bearing liabilities. This effect is
increased by periodic and lifetime limits on changes in rate on most
adjustable-rate, interest-earning assets. The EVE decreases in the 300 basis
point rise scenario due to the extension of the duration on the various loan
products which increase the price volatility. The EVE decreases in a falling
rate scenario because of the limits on the Companys ability to decrease rates
on some of its deposit sources, such as money market accounts and NOW accounts,
and by the ability of borrowers to repay loans ahead of schedule and refinance
at lower rates. The EVE ratio is calculated by the Companys fixed income investment
advisor, and reviewed by management, on a quarterly basis utilizing information
about the Companys assets, liabilities and off-balance sheet items, which is
provided by the Company. The calculation is designed to estimate the effects
of hypothetical rate changes on the EVE, utilizing projected cash flows, and is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayment speeds and deposit decay rates. Actual changes in the
EVE, in the event of market interest rate changes of the type and magnitude
used in the calculation, could differ significantly. Additionally, the
calculation does not account for possible actions taken by Funds Management to
mitigate the adverse effects of changes in market interest rates. 
 ITEM 4. Controls and Procedures An evaluation was performed under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer, Chief Financial Officer and Corporate Controller, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures
(as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act
of 1934, as amended) as of September 30, 2004. Based on that evaluation, the
Companys management, including the Chief Executive Officer, Chief Financial
Officer and Corporate Controller, concluded that the Companys disclosure
controls and procedures were effective. There have been no significant changes
in the Companys internal controls or in other factors that could significantly
affect internal controls. 28




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##### Table of Contents



CENTRUE FINANCIAL CORPORATION 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings There are no material pending legal proceedings to which the
Company or the Bank is a party other than ordinary routine
litigation incidental to their respective businesses. 
 Item 2. Unregistered sales of Equity Securities and Use of Proceeds The following table sets forth information about our stock
repurchases for the three months ended September 30, 2004: Total Number
    
    Maximumof Shares
    
    Number ofPurchased as
    
    Shares that MayPart of Publicly
    
    Yet BeTotal Number of
    
    
    
    
    
    Announced
    
    Purchased UnderShares
    
    Average Price
    
    Plans or
    
    the Plans orPeriod
    
    Purchased
    
    Paid per Share
    
    Programs
    
    ProgramsJuly 1 - July 31, 2004
    
    
    30,000
    
    
    $
    28.15
    
    
    
    110,000
    
    
    
    403,104August 1 - August 31, 2004
    
    
    33,500
    
    
    
    28.10
    
    
    
    143,500
    
    
    
    369,604September 1 - September 30, 2004
    
    
    46,000
    
    
    
    27.95
    
    
    
    189,500
    
    
    
    323,604Total
    
    
    109,500
    
    
    $
    28.05
    
    
    
    189,500
    
    
    
    323,604
 (1) The Company originally announced its current stock repurchase
program on October 9, 2003, and on April 28, 2004, announced that the
Company intended to begin initiating the repurchase of shares under the
program. Under this program, which expired on October 9, 2004, the board
authorized the purchase of up to 20% of the shares outstanding, or
513,104 shares. The Company purchased all of the shares listed above on
the open market and under the repurchase program. The Company has
announced a new share repurchase plan which authorizes the Company to
purchase up to 20% of the shares outstanding, or 484,663. The plan will
expire on December 31, 2005. 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 29




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##### Table of Contents



Item 6. Exhibits Exhibits  31.1
    
    Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)/15d-14(a)31.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)31.3
    
    Certification of Corporate Controller Pursuant to Rule 13a-14(a)/15d-14(a)32.1
    
    Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.3
    
    Certification of Corporate Controller Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 30




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##### Table of Contents



CENTRUE FINANCIAL CORPORATION 
 SIGNATURES In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CENTRUE FINANCIAL CORPORATIONRegistrantDate: November 12, 2004
    
    /s/ THOMAS A. DAIBERPresident and Chief Executive OfficerDate: November 12, 2004
    
    /s/ JAMES M. LINDSTROMChief Financial Officer andSenior Vice PresidentDate: November 12, 2004
    
    /s/ JOHN A. BETTSVice President andCorporate Controller
 31