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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
   FORM 10-Q (Mark One) þ
    
    Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended March 31, 2004.
 or o
    
    Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From  to .
 Commission File Number 1-13676 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 
  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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x As of May 11, 2004, there were 2,557,816 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
    
    
    7-10Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10-21Item 3.
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    21-22Item 4.
    
    Controls and Procedures
    
    
    23Part II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24-25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    25SIGNATURES
    
    
    26Certification 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 STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)  March 31
    
    December 312004
    
    2003(dollars in thousands)AssetsCash and due from banks
    
    $
    13,183
    
    
    $
    13,558Interest bearing due from banks and other
    
    
    3,418
    
    
    
    14,831Federal funds sold
    
    
    3,018
    
    
    
    17,216Cash and cash equivalents
    
    
    19,619
    
    
    
    45,605Certificates of Deposit
    
    
    348
    
    
    
    50Investment Securities:Available-for-sale, at fair value
    
    
    114,647
    
    
    
    87,712Held-to-maturity, (fair value: $703 and $912)
    
    
    681
    
    
    
    892Loans, net of allowance for loan losses of ($7,728 and $7,471)
    
    
    424,869
    
    
    
    425,840Loans held for sale
    
    
    1,067
    
    
    
    Premises and equipment
    
    
    17,250
    
    
    
    17,113Goodwill
    
    
    12,446
    
    
    
    11,433Life insurance contracts
    
    
    8,852
    
    
    
    8,752Non-marketable equity securities
    
    
    3,746
    
    
    
    3,298Accrued interest receivable
    
    
    2,781
    
    
    
    2,552Intangible assets
    
    
    1,957
    
    
    
    1,229Real estate held for sale
    
    
    634
    
    
    
    319Other assets
    
    
    3,082
    
    
    
    4,413Total Assets
    
    $
    611,979
    
    
    $
    609,208LiabilitiesDeposits:Noninterest bearing
    
    $
    49,530
    
    
    $
    42,400Interest bearing
    
    
    457,971
    
    
    
    451,952Total Deposits
    
    
    507,501
    
    
    
    494,352Borrowings
    
    
    41,908
    
    
    
    54,396Junior subordinated debt owed to unconsolidated trusts
    
    
    10,000
    
    
    
    10,000Other liabilities
    
    
    5,920
    
    
    
    4,817Total Liabilities
    
    
    565,329
    
    
    
    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
    
    
    28,952
    
    
    
    28,929Retained income, partially restricted
    
    
    39,881
    
    
    
    39,231Accumulated other comprehensive income
    
    
    1,342
    
    
    
    1,088Unearned restricted stock (26,400 and 27,800 shares)
    
    
    (722
    )
    
    
    (820
    )Treasury stock, (1,592,484 and 1,594,278 shares), at cost
    
    
    (22,845
    )
    
    
    (22,827
    )Total Stockholders Equity
    
    
    46,650
    
    
    
    45,643Total
Liabilities and Stockholders Equity
    
    $
    611,979
    
    
    $
    609,208
 See the accompanying notes to consolidated financial statements. 3




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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)  Three Months EndedMarch 312004
    
    2003(dollars in thousands)Interest income:Loans
    
    $
    6,293
    
    
    $
    6,211Investments
    
    
    940
    
    
    
    975Deposits with banks and other
    
    
    75
    
    
    
    103FHLB stock dividends
    
    
    57
    
    
    
    44Total interest income
    
    
    7,365
    
    
    
    7,333Interest expense:Deposits
    
    
    2,099
    
    
    
    2,614Borrowings
    
    
    580
    
    
    
    588Junior subordinated debt owed to unconsolidated trusts
    
    
    113
    
    
    
    140Total interest expense
    
    
    2,792
    
    
    
    3,342Net interest income
    
    
    4,573
    
    
    
    3,991Provision for loan losses
    
    
    300
    
    
    
    66Net interest income after provision for loan losses
    
    
    4,273
    
    
    
    3,925Noninterest income:Fee income
    
    
    892
    
    
    
    633Net gain on sale of securities
    
    
    89
    
    
    
    Net gain (loss) on sale of real estate held for sale
    
    
    (7
    )
    
    
    26Net gain on sale of loans
    
    
    106
    
    
    
    382Gain on sale of branch
    
    
    
    
    
    
    478Increase in cash surrender value of life insurance
    
    
    100
    
    
    
    112Other
    
    
    69
    
    
    
    110Total noninterest income
    
    
    1,249
    
    
    
    1,741Noninterest expense:Compensation and benefits
    
    
    2,263
    
    
    
    1,908Occupancy, net
    
    
    394
    
    
    
    339Furniture and equipment
    
    
    335
    
    
    
    176Advertising
    
    
    64
    
    
    
    106Data processing
    
    
    163
    
    
    
    132Telephone and postage
    
    
    129
    
    
    
    138Amortization of intangibles
    
    
    46
    
    
    
    38Legal and professional fees
    
    
    236
    
    
    
    220Other
    
    
    679
    
    
    
    612Total noninterest expense
    
    
    4,309
    
    
    
    3,669Income before income taxes
    
    
    1,213
    
    
    
    1,997Income tax expense
    
    
    368
    
    
    
    627Net income
    
    $
    845
    
    
    $
    1,370Other comprehensive income (loss):Change in unrealized gains on available for sale securities, net
of related income taxes
    
    
    313
    
    
    
    (169
    )Less: reclassification adjustment for gains included in net income
net of related income taxes
    
    
    59
    
    
    
    Other comprehensive income (loss)
    
    
    254
    
    
    
    (169
    )Comprehensive income
    
    $
    1,099
    
    
    $
    1,201Basic earnings per share
    
    $
    .33
    
    
    $
    .64Diluted earnings per share
    
    $
    .33
    
    
    $
    .64Dividends per share
    
    $
    .075
    
    
    $
    .075
 See notes to the accompanying consolidated financial statements 4




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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  Three Months EndedMarch 312004
    
    2003(dollars in thousands)Operating activitiesNet income
    
    $
    845
    
    
    $
    1,370Adjustments to reconcile net income to net cash provided
by operating activities:Provision for loan losses
    
    
    300
    
    
    
    66Depreciation and amortization
    
    
    381
    
    
    
    242Net amortization on investments
    
    
    (37
    )
    
    
    32Amortization of intangibles
    
    
    46
    
    
    
    38Deferred income taxes
    
    
    828
    
    
    
    Origination of loans held for sale
    
    
    (5,985
    )
    
    
    (15,065
    )Proceeds from sales of loans held for sale
    
    
    5,024
    
    
    
    14,681Gain on sale of loans
    
    
    (106
    )
    
    
    (382
    )Gain on sale of investments, net
    
    
    (89
    )
    
    
    (Gain) loss on sale of real estate held for sale
    
    
    7
    
    
    
    (26
    )Gain on sale of branch
    
    
    
    
    
    
    (478
    )Compensation expense for restricted stock
    
    
    98
    
    
    
    Increase in cash surrender value of life insurance
    
    
    (100
    )
    
    
    (112
    )Federal Home Loan Bank stock dividends
    
    
    (53
    )
    
    
    (75
    )Changes in:Accrued interest receivable
    
    
    (125
    )
    
    
    103Other assets and other liabilities, net
    
    
    1,104
    
    
    
    616Net cash provided by operating activities
    
    
    2,138
    
    
    
    1,010Investing activitiesPurchases of available for sale securities
    
    
    (28,289
    )
    
    
    (6,905
    )Proceeds from sales of available for sale securities
    
    
    3,948
    
    
    
    Proceeds from maturities of available for sale securities
    
    
    6,580
    
    
    
    12,637Proceeds from maturities of held-to-maturity securities
    
    
    210
    
    
    
    177Proceeds from sales of real estate held for sale
    
    
    197
    
    
    
    157Cash paid for branch sale
    
    
    
    
    
    
    (12,315
    )Purchase of Parish Bank and Trust Company
    
    
    38Net decrease in loans
    
    
    7,494
    
    
    
    17,166Purchases of bank premises and equipment
    
    
    (249
    )
    
    
    (1,441
    )Net cash used in investing activities
    
    
    (10,071
    )
    
    
    9,476Financing activitiesNet increase (decrease) in deposits
    
    
    (5,375
    )
    
    
    7,161Proceeds of borrowings
    
    
    
    
    
    
    800Repayments of borrowings
    
    
    (12,488
    )
    
    
    (11,500
    )Proceeds from exercise of stock options
    
    
    94
    
    
    
    Dividends paid
    
    
    (195
    )
    
    
    (174
    )Purchase of treasury stock
    
    
    (89
    )
    
    
    (9,308
    )Net cash provided by financing activities
    
    
    (18,053
    )
    
    
    (13,021
    )Net decrease in cash and cash equivalents
    
    
    (25,986
    )
    
    
    (2,535
    )Cash and cash equivalents  beginning of year
    
    
    45,605
    
    
    
    47,426Cash and cash equivalents  end of period
    
    $
    19,619
    
    
    $
    44,891
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Supplemental disclosure of cash flow informationInterest paid
    
    $
    2,602
    
    
    $
    3,201Income taxes paid
    
    
    
    
    
    
    150Real estate acquired in settlement of loans
    
    
    519
    
    
    
    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) March 31, 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-month period ended March 31, 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, goodwill, and real estate acquired in connection
with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of real estate
acquired by foreclosure, management obtains independent appraisals for
significant properties. Certain 2003 amounts have been reclassified where appropriate to conform
to the consolidated financial statement presentation used in 2004. 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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value recognition provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation: Three Months EndedMarch 312004
    
    2003(dollars in thousands)Net income, as reported
    
    $
    845
    
    
    $
    1,370Less: Total stock-based employee
compensation cost determined under the fair
value based method, net of income taxes
    
    
    39
    
    
    
    Pro forma net income
    
    $
    806
    
    
    $
    1,370Earnings per share:Basic  as reported
    
    $
    .33
    
    
    $
    .64Basic  pro forma
    
    
    .31
    
    
    
    .64Diluted  as reported
    
    
    .33
    
    
    
    .64Diluted  pro forma
    
    
    .31
    
    
    
    .64
 Note 2  Common Stock Split On October 30, 2003, the Company issued 1,282,761 additional shares to
effect 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 EndedMarch 312004
    
    2003(Dollars in thousands)BasicNet Income
    
    $
    845
    
    
    $
    1,370Average common shares outstanding
    
    
    2,580,331
    
    
    
    2,134,328Net income per common share  basic
    
    $
    .33
    
    
    $
    .64DilutedNet Income
    
    $
    845
    
    
    $
    1,370Average common shares outstanding
    
    
    2,580,331
    
    
    
    2,134,328Dilutive potential due to stock options
    
    
    9,678
    
    
    
    2,206Average common shares outstanding
    
    
    2,590,009
    
    
    
    2,136,534Net income per common share  diluted
    
    $
    .33
    
    
    $
    .64
 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. The acquisition has been 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 $773,000 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 has 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 ended March 31, 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 9




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its investment in Kankakee Capital Trust I as of
March 31, 2004, because the Company is not
the primary beneficiary. The Companys prior financial statements have been
reclassified to de-consolidate the Companys investment in the Trust. There
has been no impact on shareholders equity or net income upon adoption of the
standard. Note 6  Junior Subordinated Debt Owed to Unconsolidated Trusts In April 2002, the Company issued $10.0 million in cumulative trust
preferred securities through a newly formed special-purpose trust, Kankakee
Capital Trust I, L.P. The proceeds of the offering were invested by Capital
Trust I in junior subordinated deferrable interest debentures of the Company.
Capital Trust I is a wholly-owned unconsolidated subsidiary of the Company, and
its sole assets are the junior subordinated deferrable interest debentures.
Distributions are cumulative and are payable quarterly at a variable rate of
3.70% over the LIBOR rate (an effective rate of 4.92% at March 31, 2004) per
annum of the stated liquidation amount of $1,000 per preferred security.
Interest expense on the trust preferred securities was $113,000 and $140,000
for the three months ended March 31, 2004 and 2003, respectively. The
obligations of the trust are fully and unconditionally guaranteed, on a
subordinated basis, by the Company. The trust preferred securities 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. 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 entire amount of the capital securities is allowed in
the calculation of Tier 1 capital. Note 7  Subsequent Events On April 22, 2004, the Company issued $10.0 million in trust preferred
securities as part of a large pool of such securities. These securities carry a
variable rate of interest, and are currently includable, within specified
limits, in regulatory capital. The proceeds from the issuance of these
securities could be used for a number of corporate purposes, including the
repurchase of stock, funding of an acquisition or the purchasing of securities
as part of a leveraging strategy. Interest payments on these securities are
deductible for income tax purposes. 
 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 nineteen branch offices. The Companys market
areas include western Indiana, central and southern Illinois, 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 loans 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




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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. The Company has
approximately 178 full time equivalent employees. FINANCIAL CONDITION The Companys total assets were $612.0 million at March 31, 2004, an
increase of $2.8 million or 0.5%, from $609.2 million at December 31, 2003.
The increase in total assets was primarily due to the acquisition of Parish
Bank, partially offset by repayments on higher rate borrowings and reductions
of higher rate certificates of deposit. Fluctuations in asset accounts were
represented by an increase in investment securities of $26.7 million, goodwill
of $1.0 million, and intangible assets of $728,000. These increases were
partially offset by a decrease in cash and cash equivalents of $26.0 million
and a decrease in other assets of $1.3 million. Cash and cash equivalents decreased $26.0 million or 57.0% to $19.6
million from $45.6 million. Investment securities increased $26.7 million or
30.2% to $115.3 million from $88.6 million. The increase in investment
securities and decrease in cash and cash equivalents was primarily a result of
the Company repositioning lower yielding liquid investments such as federal
funds sold to higher yielding investment securities. This repositioning has
already had a positive impact on the Companys net interest margin. Goodwill increased $1.0 million or 8.9% to $12.4 million from $11.4
million. Intangible assets increased $728,000 or 59.2% to $2.0 million from
$1.2 million. The increase in goodwill and intangible assets was a result of
the acquisition of Parish Bank. Other assets decreased $1.3 million or 30.2% to $3.1 million from $4.4
million. The decrease in other assets was primarily due to a decrease in
deferred taxes. The decrease in deferred taxes is primarily due to changes in
the Companys tax position as a result of acquisitions and other tax related
items through March 31, 2004. Deposits increased $13.1 million or 2.7% to $507.5 million from $494.4
million. The increase in deposits was also primarily attributable to the
acquisition of Parish Bank. Due to the increase in deposits from Parish Bank,
the Company was able to repay higher rate borrowings and reduce high rate
certificates of deposit. Borrowings decreased $12.5 million or 23.0% to $41.9
million from $54.4 million. The decrease in borrowings was due to higher rate
(4.0%) borrowings that matured late in March, 2004. Stockholders equity increased $1.0 million or 2.2% to $46.7 million from
$45.6 million at December 31, 2003. Equity per share of common stock increased
by $0.38 to $17.89 at March 31, 2004 from $17.51 at December 31, 2003. 11




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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 determine the adequacy of the allowance for loan losses. The Companys loan
analysis process proactively identifies, monitors and works 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. During the first quarter, total nonperforming loans increased $3.8 million
due to an increase of loans delinquent 90 days or more and still accruing. The
increase was primarily due to one large commercial borrower. This
nonperforming loan 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. The Company has downgraded this
relationship to substandard as it appears headed for legal collection action.
As of March 31, 2004, the Company does not anticipate a material loss on this
nonperforming loan. Management is in various stages of workout or liquidation
with the remaining nonperforming loans. March 31
    
    December 312004
    
    2003
    
    Change(dollars in thousands)Non-accruing loans
    
    $
    3,062
    
    
    $
    3,248
    
    
    $
    (186
    )Accruing loans delinquent 90
days or more
    
    
    6,265
    
    
    
    2,232
    
    
    
    4,033Total nonperforming loans
    
    
    9,327
    
    
    
    5,480
    
    
    
    3,847Foreclosed assets
    
    
    634
    
    
    
    319
    
    
    
    315Troubled debt restructuring
    
    
    47
    
    
    
    281
    
    
    
    (234
    )Total nonperforming assets
    
    $
    10,008
    
    
    $
    6,080
    
    
    $
    3,928Allowance for loan losses to
nonperforming loans
    
    
    82.86
    %
    
    
    136.34
    %Nonperforming loans to total loans
    
    
    2.15
    %
    
    
    1.26
    %Nonperforming assets to total loans
and foreclosed property
    
    
    2.30
    %
    
    
    1.40
    %Nonperforming assets to total assets
    
    
    1.64
    %
    
    
    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 1.78% and 1.72% at March 31, 2004 and
December 31, 2003, respectively. The ratio of the allowance for loan losses to
non-performing loans decreased to 82.9% as of March 31, 2004 compared to 136.3%
at December 31, 2003. The decrease in this ratio, which excludes foreclosed
assets and restructured troubled debt, was the result of the increase of $3.8
million of nonperforming loans. Total classified loans at March 31, 2004 decreased to $24.7 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 two other seasoned 12




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##### Table of Contents



commercial lenders. These initiatives have already 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 $199,000 during the
first quarter of 2004 and had no chargeoffs during the first quarter of 2003.
No recoveries were recorded for either period. The provision for loan losses
totaled $300,000 and $66,000 during the first quarters of 2004 and 2003. In
addition, the Company acquired $156,000 of allowance for loan losses with the
Parish acquisition. 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
March 31, 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. 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. Credit card loans are charged off at the earliest of notice of
bankruptcy, when at least 120 days past due, or when otherwise deemed to be
uncollectible. All other 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 13




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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 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 prepayments
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. 14




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##### Table of Contents



RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 For the three months ended March 31, 2004, net income decreased $525,000
to $845,000 from $1.4 million for the three months ended March 31, 2003. The
decrease in net income was primarily due to the $478,000 gain on sale of the
Companys Hoopeston branch that was recorded during the first quarter of 2003.
Also affecting net income were increases in the provision for loan losses of
$234,000 and in noninterest expenses of $640,000, which were partially offset
by an increase in net interest income of $582,000 and a decrease in income tax
expense of $259,000. Net interest income for the quarter increased $582,000 or 14.6% to $4.6
million, from $4.0 million in 2003. Interest income increased by $32,000 or
0.4% and interest expense decreased by $550,000 or 16.5%. Net interest margin
increased to 3.32% compared to 3.28% for 2003. The increase in the net
interest margin was primarily a result of the Companys effort to replace lower
earning assets, such as federal funds sold, with higher yielding loans and
tax-advantaged investments. In addition, the Company decreased rates on
deposit accounts to be more in line with local competition and repaid certain
high rate borrowings. With the decrease in interest rates during the quarter,
the Company has lowered the cost of funds for deposits and borrowings. 15




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##### Table of Contents



TABLE INET INTEREST INCOME ANALYSIS (UNAUDITED)CENTRUE FINANCIAL CORPORATION AND SUBSIDIARYThree Months Ended March 31,2004
    
    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)
    
    $
    430,213
    
    
    
    
    
    
    $
    6,315
    
    
    
    5.93
    %
    
    $
    371,992
    
    
    $
    6,211
    
    
    
    6.77
    %Investments securities (2) (3)
    
    
    94,588
    
    
    
    
    
    
    
    976
    
    
    
    4.13
    %
    
    
    81,038
    
    
    
    975
    
    
    
    4.88
    %Other interest-earning assets
    
    
    33,658
    
    
    
    
    
    
    
    75
    
    
    
    0.90
    %
    
    
    37,017
    
    
    
    103
    
    
    
    1.13
    %FHLB stock
    
    
    3,323
    
    
    
    
    
    
    
    57
    
    
    
    6.81
    %
    
    
    2,789
    
    
    
    44
    
    
    
    6.40
    %Total interest-earning assets
    
    
    561,782
    
    
    
    
    
    
    
    7,423
    
    
    
    5.33
    %
    
    
    492,836
    
    
    
    7,333
    
    
    
    6.03
    %Other assets
    
    
    49,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,861Total assets
    
    $
    610,820
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    534,697Interest-bearing liabilities:Certificate accounts
    
    $
    272,039
    
    
    
    
    
    
    
    1,759
    
    
    
    2.60
    %
    
    $
    245,966
    
    
    
    2,074
    
    
    
    3.42
    %Savings deposits
    
    
    87,635
    
    
    
    
    
    
    
    147
    
    
    
    0.68
    %
    
    
    73,709
    
    
    
    231
    
    
    
    1.27
    %Demand and NOW deposits
    
    
    87,441
    
    
    
    
    
    
    
    193
    
    
    
    0.89
    %
    
    
    79,646
    
    
    
    309
    
    
    
    1.57
    %Borrowings
    
    
    62,586
    
    
    
    
    
    
    
    693
    
    
    
    4.51
    %
    
    
    65,950
    
    
    
    728
    
    
    
    4.48
    %Total interest-bearing liabilities
    
    
    509,701
    
    
    
    
    
    
    
    2,792
    
    
    
    2.21
    %
    
    
    465,271
    
    
    
    3,342
    
    
    
    2.91
    %Non-interest bearing demand deposits
    
    
    50,368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,683Other liabilities
    
    
    4,662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,387Total liabilities
    
    
    564,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    497,341Stockholders equity
    
    
    46,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,356Total liabilities and stockholders equity
    
    $
    610,820
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    534,697Net interest income
    
    
    
    
    
    
    
    
    
    $
    4,631
    
    
    
    
    
    
    
    
    
    
    $
    3,991Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    3.12
    %Net earning assets
    
    $
    52,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,565Net yield on average interest-earning
assets (net interest margin)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.32
    %
    
    
    
    
    
    
    
    
    
    
    3.28
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    110.22
    %
    
    
    
    
    
    
    
    
    
    
    99.98
    %
  (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
certificates of deposit.(3)
    
    Presented on a fully tax-equivalent basis, assuming a tax rate of 34%. Interest income increased $32,000, 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 $68.9
million to $561.7 million from $492.8 million in 2003. The average tax
equivalent rate earned on earning assets decreased 70 basis points to 5.33%
from 6.03%. The increase in the average balance of interest-earning assets was
primarily due 16




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##### Table of Contents



to earning assets acquired in the Aviston Financial and Parish
Bank acquisitions, partially offset
by the first quarter of 2003 sale of the Hoopeston branch. The decrease in the
yield earned on interest-earning assets was the result of the gradual repricing
of loans and investments to lower interest rates throughout 2003 and the first
quarter of 2004. Interest expense decreased $550,000 to $2.8 million from $3.3 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 $44.4 million to $509.7 million from $465.3 million. The
rate paid on interest bearing liabilities decreased 71 basis points to 2.21%
from 2.91% 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, partially offset by the sale of the
Hoopeston branch as well as the repayment of borrowed funds. 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
lower ratio of certificate of deposit accounts. The provision for loan losses increased $234,000 to $300,000 from $66,000
in 2003. The increase in the provision for loan losses was primarily due to
the Companys efforts to properly identify potential loan losses when they
occur. 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. Noninterest income decreased $492,000 to $1.2 million from $1.7 million in
2003. The decrease was primarily attributable to a decrease in the gain on the
sale of the Hoopeston branch of $478,000 and a decrease in gain on sale of
loans of $276,000, partially offset by an increase in fee income of $259,000.
The decrease in gain on sale of loans was primarily due to a high volume of
refinancings that occurred during the first quarter of 2003. Due to the rate
structure in early 2004 and the large amount of loans that refinanced during
2002 and 2003, the amount of refinancings has greatly decreased and the
majority of the gain on loans sold in the first quarter of 2004 was primarily
attributable to new loans. It would appear that the gain on sale of loans
during the remainder of 2004 will be significantly less than 2003 or 2002. The
increase in fee income was partially due to an increase in fees assessed on
customer accounts and transactions to better reflect the competitive
environment. Noninterest expenses increased $640,000 to $4.3 million from $3.7 million
in 2003. The increase was primarily due to an increase in compensation and
benefits of $355,000 and furniture and equipment of $159,000. Compensation and
benefits and furniture and equipment increased 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, the opening of three new offices, Parish Bank
personnel added in the beginning of March 2004, as well as the amortization of
restricted stock awards that were awarded in late 2003. Income tax expense decreased $259,000 to $368,000 from $627,000 in 2003.
The effective income tax rate decreased to 30.3% from 31.4%. The decrease in
the effective rate was primarily due to an increase in tax-exempt income from
municipal securities. 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 17




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##### Table of Contents



summarizes significant contractual
obligations and other commitments at March 31, 2004 (in thousands): Junior (1)Subordinated DebtOwed toTime
    
    
    
    
    
    UnconsolidatedYears Ended December 31,
    
    Deposits
    
    Borrowings (1)
    
    Trusts
    
    Total2004
    
    $
    122,595
    
    
    $
    17,488
    
    
    
    
    
    
    $
    140,0832005
    
    
    116,733
    
    
    
    14,723
    
    
    
    
    
    
    
    131,4562006
    
    
    10,284
    
    
    
    8,342
    
    
    
    
    
    
    
    18,6262007
    
    
    9,158
    
    
    
    450
    
    
    $
    10,000
    
    
    
    19,6082008 and thereafter
    
    
    10,594
    
    
    
    905
    
    
    
    
    
    
    
    11,499Total
    
    $
    269,364
    
    
    $
    41,908
    
    
    $
    10,000
    
    
    $
    321,272Financial instruments whose
contract amounts represent credit
risk:Commitment to originate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,454Commitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,135Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,210Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    62,799
   (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 $4.0 million maturing in 2011. Junior subordinated debt owed
to unconsolidated trusts mature in 2032 but are callable in 2007. 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 March 31, 2004 and December 31, 2003, these liquid assets
totaled $19.6 million and $45.6 million, respectively. 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 March
31, 2004, the Company had outstanding borrowings totaling $41.9 million, of
which $29.9 were advances from the FHLB, $9.2 were funds from securities sold
under agreement to repurchase, and $2.8 million were funds from notes payable. At March 31, 2004, the Company had outstanding commitments to originate
mortgage loans of $14.5 million, of which 88% 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 $122.6 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 also had
unused lines of credit provided to customers of $46.1 million at March 31,
2004. 18




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##### Table of Contents



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 March 31, 2004,
that the Company and the Bank meet all capital adequacy requirements to which
it is subject. As of March 31, 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 March 31, 2004Tier 1 Capital to Average AssetsCentrue Financial
    
    
    40,905
    
    
    
    6.86
    %
    
    
    23,855
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    42,948
    
    
    
    7.22
    %
    
    
    23,807
    
    
    
    4.00
    %
    
    
    29,759
    
    
    
    5.00
    %Tier I Capital to Risk Weighted AssetsCentrue Financial
    
    
    40,905
    
    
    
    10.36
    %
    
    
    15,788
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    42,948
    
    
    
    10.91
    %
    
    
    15,740
    
    
    
    4.00
    %
    
    
    23,610
    
    
    
    6.00
    %Total Capital to Risk Weighted AssetsCentrue Financial
    
    
    45,839
    
    
    
    11.61
    %
    
    
    31,576
    
    
    
    8.00
    %
    
    
    N/ACentrue Bank
    
    
    47,911
    
    
    
    12.18
    %
    
    
    31,480
    
    
    
    8.00
    %
    
    
    39,350
    
    
    
    10.00
    %As of December 31, 2003Tier 1 Capital to Average AssetsCentrue Financial
    
    
    41,893
    
    
    
    7.26
    %
    
    
    23,090
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    43,944
    
    
    
    7.63
    %
    
    
    23,038
    
    
    
    4.00
    %
    
    
    28,797
    
    
    
    5.00
    %Tier I Capital to Risk Weighted AssetsCentrue Financial
    
    
    41,893
    
    
    
    9.90
    %
    
    
    16,925
    
    
    
    4.00
    %
    
    
    N/ACentrue Bank
    
    
    43,944
    
    
    
    10.46
    %
    
    
    16,802
    
    
    
    4.00
    %
    
    
    25,203
    
    
    
    6.00
    %Total Capital to Risk Weighted AssetsCentrue Financial
    
    
    47,173
    
    
    
    11.14
    %
    
    
    33,850
    
    
    
    8.00
    %
    
    
    N/ACentrue Bank
    
    
    49,201
    
    
    
    11.71
    %
    
    
    33,604
    
    
    
    8.00
    %
    
    
    42,006
    
    
    
    10.00
    %
 19




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##### Table of Contents



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 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. 20




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##### Table of Contents




    
    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. 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. 21




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##### Table of Contents



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 March 31, 2004 and December 31, 2003: EVE RatiosMarch 31,
    
    December 31,Changes in Interest Rates
    
    2004
    
    2003300 basis point rise
    
    
    7.51
    %
    
    
    7.87
    %200 basis point rise
    
    
    7.51
    %
    
    
    7.94
    %100 basis point rise
    
    
    7.62
    %
    
    
    8.13
    %Base rate scenario
    
    
    7.01
    %
    
    
    7.45
    %100 basis point decline
    
    
    5.57
    %
    
    
    6.08
    %
 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 and that 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 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. 22




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##### Table of Contents



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 March 31, 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. 23




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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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders An Annual Meeting of Stockholders of the Company was held on April 23,
2004. At the meeting, stockholders voted to approve the election of
Michael A. Griffith as a director of the Company. Michael J. Hejna will
continue to serve as a director until 2005 and Thomas A. Daiber, Mark L.
Smith and Wesley E. Walker will continue to serve as directors until
2006. An amendment to increase the number of shares in the Companys
2003 Stock Incentive Plan was approved. Stockholders also voted to
approve the appointment of McGladrey & Pullen LLP as the Companys
auditors for the year ending December 31, 2004. The matters approved by stockholders at the meeting and the number of
votes cast for, against or withheld (as well as the number of
abstentions) as to each matter are set forth below:  1.
    
    For the election of one (1) director of the Company: NOMINEE: Michael A. Griffith FOR
    
    WITHHELD2,105,906
    
    
    246,137
  2.
    
    To approve an amendment to Centrue Financial Corporations 2003 Stock Incentive Plan. FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER NON-VOTES1,302,230
    
    
    231,925
    
    
    
    118,288
    
    
    
    699,600
 24




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##### Table of Contents



3.
    
    To approve the appointment of McGladrey & Pullen LLP as the
Companys auditors for the year ending December 31, 2004. FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER NON-VOTES2,224,858
    
    
    26,240
    
    
    
    100,945
    
    
    
    0
 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K a. 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 2002.32.2
    
    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.
 b. Reports on Form 8-K On February 23, 2004, the Company filed a report on Form 8-K pursuant
to Item 11 announcing a blackout period for executive officers and
directors from March 22, 2004 to April 22, 2004 as a result of the
merger of the assets of the Centrue Employee Stock Ownership Plan and
the Centrue Bank 401(k) Savings Plan. On March 12, 2004, the Company filed a report on Form 8-K pursuant to
Item 5 announcing that the Company completed the merger with Parish
Bank and Trust Company and pursuant to Item 12 disclosing its
financial results for the quarter and year ended December 31, 2003. On April 28, 2004, the Company filed a report on Form 8-K pursuant to
Item 12 disclosing its financial results for the quarter ended March
31, 2004. 25




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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 CORPORATION
RegistrantDate: May 12, 2004
    
    /s/ THOMAS A. DAIBERPresident and Chief Executive OfficerDate: May 12, 2004
    
    /s/ JAMES M. LINDSTROMChief Financial Officer andSenior Vice PresidentDate: May 12, 2004
    
    /s/ JOHN A. BETTSVice President andCorporate Controller
 26