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CENTRUE FINANCIAL CORPORATION



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2003 ANNUAL REPORT



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CORPORATE


PROFILE &


TABLE OF CONTENTS







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CORPORATE PROFILE

Centrue Financial Corporation (the
Company) is the holding company for Centrue Bank
(the Bank). As a community-oriented financial
institution, the Bank operates eighteen retail banking offices
and provides comprehensive financial services to families and
local businesses residing in Kankakee, Champaign, Clinton,
Grundy, Iroquois, Livingston and St. Clair counties, and
portions of Will County in Illinois.


The common stock of the Company is publicly
traded on the American Stock Exchange under the symbol
CFF.

TABLE OF CONTENTS

|                                                                                          |  |  |    | 
|----------------------------------------------------------------------------------------- |  |  | -- | 
|Letter to Stockholders                                                                    |  |  | 2  | 
|Financial Highlights                                                                      |  |  | 4  | 
|Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 5  | 
|Independent Auditors Report                                                              |  |  | 23 | 
|Consolidated Financial Statements                                                         |  |  | 24 | 
|Notes to Consolidated Financial Statements                                                |  |  | 29 | 
|Corporate Information                                                                     |  |  | 52 | 
|Directors and Officers                                                                    |  |  | 54 | 
|Office Locations/ Map                                                                     |  |  | 55 | 

Factors That May Affect Future Results This publication contains statements concerning
earnings, revenues, operating margins, growth and other
financial measurements; new business and business opportunities;
acquisitions; and other aspects of future operating or financial
performance. These statements are based on assumptions currently
believed to be valid and may be forward-looking
statements under the securities laws, as further detailed
on pages 21 and 22 of this Annual Report. Various factors
could materially affect actual results. These include, among
other things, changes in general economic or market conditions,
government regulation and competition. For additional
information about these factors, see our report on
Form 10-K for 2003 and reports on Forms 10-Q and 8-K
filed with the Securities and Exchange Commission.


1




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##### 





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LETTER TO


STOCKHOLDERS









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The mission of Centrue Financial
Corporation is to be the premier bank serving central Illinois,
southern Illinois, western Indiana and metropolitan St. Louis,
Missouri with a return on equity within the upper quartile of
our peer group. Our regional banking philosophy is to support
and empower our employees to provide superior customer
service.


Dear Stockholder,

We are pleased to provide this report on the
accomplishments and vision of Centrue Financial Corporation. As
you are aware, we became Centrue Financial in October 2003
through the merger of Kankakee Bancorp, Inc., and Aviston
Financial Corporation. We are proud of our banking history and
community service that encompasses the last 120 years. We
have taken the initiatives summarized in this letter to build on
this tradition while improving the return on our
shareholders investment.

The merger allowed us to combine the management
talent of two long-standing and respected financial
institutions. It also allowed us to recruit other experienced
bankers to supplement and enhance our management team. Most of
our senior officer positions have been filled with new
executives during the last twelve months, including the Chief
Executive Officer, the Chief Financial Officer, the Chief
Lending Officer, new Regional Presidents for three of our four
Banking regions (each of these Presidents is also a commercial
lender with more than 15 years of experience), a new
Corporate Controller and two other seasoned commercial lenders.
We now have a results-oriented team of bankers with the
experience and track record to help us fulfill our mission to be
the premier bank in the communities we serve and to improve the
operating performance of our company.

We believe that our regional banking philosophy
provides us a competitive advantage and allows us to support and
empower our employees to provide superior customer service. Each
of our four community-focused regions now has its own budget and
profit and loss statement. The regional presidents and managers
have the authority to make loans, price deposits, and make
personnel and administrative decisions that affect their
branches and customers. Each of our managers now runs their own
business, which we believe provides better service to our
communities and customers and makes Centrue Financial a
challenging and rewarding place to work.

While sharpening our focus to improve the
delivery of our banking services, we have also significantly
improved our operating efficiency. In the latter part of 2003,
we completed a reduction in our operational and administrative
work force and restructured our employee benefit programs. We
have also reorganized and consolidated our finance, operations,
and information technology functions. We have reassigned many
duties that involve customer service, moving them from our
centralized operations group to the branch level. The remaining
support functions have been consolidated to maximize efficiency
and improve responsiveness. We have implemented a cost
accounting based budgeting system throughout our organization.
We have also significantly strengthened our asset and liability
management system in order to help us manage our net interest
margin while minimizing our exposure to changes in interest
rates.

As of December 31, 2003, we reported assets
of $609 million, an increase of 12% from 2002. During 2003,
loans increased 11% to $433 million and deposits increased
15% to $494 million. Our net income for 2003 was
$1.4 million compared to $2.2 million in 2002. The
Company recognized large loan loss provisions of approximately
1% of total loans in both 2003 and 2002 on a group of commercial
real estate and real estate development loans that were made in
previous years. We are working hard to clean up these inherited
asset quality issues. During 2003, we adopted a new loan policy
and implemented new loan approval, documentation, and monitoring
procedures. We have recruited and employed an experienced
commercial lending team that will allow us to improve our asset
quality and has given us the capacity to prudently expand our
commercial loan portfolio.

2




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LETTER TO


STOCKHOLDERS







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During the first quarter of 2004, we completed
the acquisition of Parish Bank, an institution with
$20 million in assets located in Momence, Illinois. The all
cash acquisition allowed us to expand our banking presence in
that community where we now have the #1 market share. We have
consolidated our banking operations into Parish Banks
facilities and have retained several talented employees who have
joined the Centrue Financial team.

We will continue to look for acquisition
opportunities and merger partners within our geographic
footprint that allow us to strategically expand our banking
presence. We will also supplement our growth strategy by opening
new branches in adjacent communities when we can demonstrate
that the performance of the new branch is expected to exceed our
weighted average cost of capital. Consistent with this strategy,
we opened a new permanent branch in Bradley and a temporary
facility in Fairview Heights during 2003, and have opened a new
branch in Dwight and a loan production office in Channahon in
the first quarter of 2004. We are building a permanent branch in
Fairview Heights, a fast growing area approximately 12 miles
outside of St. Louis, which will be completed this year.

Our current marketing is focused on brand
awareness for our new name. Our campaign promotes the idea that
Centrue is... Service... Centered on You,
but our people know that this is more than just marketing. At
Centrue, highly qualified people are empowered to meet our
customers banking needs at the local level.

We are proud of how much Centrue Financial has
accomplished during 2003, and are committed to take the steps
necessary to accomplish the goals outlined in our mission
statement. We appreciate your confidence and we expect to reward
your support with positive results in the coming year.

Sincerely,

|                                              |  |                                       
|--------------------------------------------- |  | --------------------------------------
|LOGO                                          |  | LOGO                                  
|Michael A. Griffith
    Chairman of the Board |  | Thomas A. Daiber
    President and CEO

3




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FINANCIAL


HIGHLIGHTS







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FINANCIAL HIGHLIGHTS




|                                           |                                                         |                                              |           |        |  |      |           |        |  |      |           |        |  |   |           |        |  |   |           |        | 
|------------------------------------------ | ------------------------------------------------------- | -------------------------------------------- | --------- | ------ |  | ---- | --------- | ------ |  | ---- | --------- | ------ |  | - | --------- | ------ |  | - | --------- | ------ | 
|                                           |                                                         |                                             
|                                           |                                                         | Years Ended December 31,                    
|                                           |                                                         |                                             
|                                           |                                                         | 2003                                         |           | 2002   |  | 2001 |           | 2000   |  | 1999
|                                           |                                                         |                                              |           |        |  |      |           |        |  |     
|                                           |                                                         |                                             
|                                           |                                                         | (Dollar in Thousands, except per share data)
|Selected Financial Condition Data:         |                                                         |                                              |           |        |  |      |           |        |  |      |           |        |  |   |           |        |  |   |           |       
|Total assets                               |                                                         | $                                            | 609,208   |        |  | $    | 546,404   |        |  | $    | 490,280   |        |  | $ | 459,894   |        |  | $ | 404,718   |       
|Loans, net, including loans held for sale  |                                                         |                                              | 425,840   |        |  |      | 384,367   |        |  |      | 394,618   |        |  |   | 338,956   |        |  |   | 270,360   |       
|Investment securities held-to-maturity (1) |                                                         |                                              | 942       |        |  |      | 1,143     |        |  |      | 1,554     |        |  |   | 2,066     |        |  |   | 966       |       
|Investment securities available-for-sale   |                                                         |                                              | 87,712    |        |  |      | 82,638    |        |  |      | 46,391    |        |  |   | 73,221    |        |  |   | 82,623    |       
|Deposits                                   |                                                         |                                              | 494,352   |        |  |      | 431,814   |        |  |      | 415,153   |        |  |   | 387,637   |        |  |   | 354,624   |       
|Total borrowings                           |                                                         |                                              | 64,396    |        |  |      | 69,700    |        |  |      | 30,000    |        |  |   | 29,000    |        |  |   | 11,200    |       
|Stockholders equity                       |                                                         |                                              | 45,643    |        |  |      | 41,107    |        |  |      | 41,191    |        |  |   | 39,289    |        |  |   | 36,248    |       
|Shares outstanding (3)                     |                                                         |                                              | 2,606,022 |        |  |      | 2,331,762 |        |  |      | 2,432,716 |        |  |   | 2,526,216 |        |  |   | 2,486,766 |       
|For the period:                            |                                                         |                                              |           |        |  |      |           |        |  |      |           |        |  |   |           |        |  |   |           |       
|                                           | Net interest income after provision for loan
    losses |                                              | $         | 11,358 |  |      | $         | 12,037 |  |      | $         | 13,528 |  |   | $         | 12,852 |  |   | $         | 11,557 | 
|                                           | Net income                                              |                                              |           | 1,363  |  |      |           | 2,233  |  |      |           | 3,261  |  |   |           | 2,584  |  |   |           | 1,759  | 
|Per common share:                          |                                                         |                                              |           |        |  |      |           |        |  |      |           |        |  |   |           |        |  |   |           |       
|                                           | Book value per share outstanding (3)                    |                                              | $         | 17.51  |  |      | $         | 17.63  |  |      | $         | 16.93  |  |   | $         | 15.56  |  |   | $         | 14.58  | 
|                                           | Tangible book value per share
    outstanding (2)(3)    |                                              |           | 12.66  |  |      |           | 15.81  |  |      |           | 15.11  |  |   |           | 13.65  |  |   |           | 12.49  | 
|                                           | Basic earnings per share (3)                            |                                              |           | 0.65   |  |      |           | 0.94   |  |      |           | 1.34   |  |   |           | 1.03   |  |   |           | 0.68   | 
|                                           | Diluted earnings per share (3)                          |                                              |           | 0.65   |  |      |           | 0.93   |  |      |           | 1.31   |  |   |           | 1.00   |  |   |           | 0.64   | 
|Financial ratios:                          |                                                         |                                              |           |        |  |      |           |        |  |      |           |        |  |   |           |        |  |   |           |       
|                                           | Stockholders equity to total assets                    |                                              |           | 7.49%  |  |      |           | 7.52%  |  |      |           | 8.40%  |  |   |           | 8.54%  |  |   |           | 8.96%  | 
|                                           | Non-performing assets to total assets                   |                                              |           | 1.00%  |  |      |           | 2.03%  |  |      |           | 0.45%  |  |   |           | 0.76%  |  |   |           | 0.69%  | 
|                                           | Net charge-offs to average loans                        |                                              |           | 1.53%  |  |      |           | 0.01%  |  |      |           | 0.02%  |  |   |           | 0.02%  |  |   |           | 0.08%  | 
|                                           | Net interest margin                                     |                                              |           | 3.16%  |  |      |           | 3.22%  |  |      |           | 3.16%  |  |   |           | 3.25%  |  |   |           | 3.08%  | 
|                                           | Operating expenses to average assets                    |                                              |           | 2.86%  |  |      |           | 2.52%  |  |      |           | 2.58%  |  |   |           | 2.68%  |  |   |           | 2.92%  | 
|                                           | Return on average assets                                |                                              |           | 0.25%  |  |      |           | 0.42%  |  |      |           | 0.69%  |  |   |           | 0.60%  |  |   |           | 0.43%  | 
|                                           | Return on average stockholders equity                  |                                              |           | 4.00%  |  |      |           | 5.42%  |  |      |           | 8.20%  |  |   |           | 6.95%  |  |   |           | 4.61%  | 
|                                           | Average equity to average assets                        |                                              |           | 6.33%  |  |      |           | 7.70%  |  |      |           | 8.41%  |  |   |           | 8.70%  |  |   |           | 9.38%  | 
|                                           | Dividend payout ratio                                   |                                              |           | 46.15% |  |      |           | 30.32% |  |      |           | 18.32% |  |   |           | 24.12% |  |   |           | 37.50% | 



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|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(1) | Includes certificates of deposit.                                                            
|   
|(2) | Calculated by subtracting goodwill and other
    intangible assets from stockholders equity.
|   
|(3) | Restated for 2 for 1 stock split in October 2003.                                            

4




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MANAGEMENTS


DISCUSSION AND


ANALYSIS







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MANAGEMENTS DISCUSSION AND ANALYSIS OF








Centrue Financial Corporation (the
Company) is the holding company for Centrue Bank,
(the Bank). All references to the Company in the
following discussion include the Bank and the Banks
wholly-owned service corporation, Centrue Service Corporation
(CSC), unless indicated otherwise. On
October 9, 2003, Kankakee Bancorp, Inc. merged with Aviston
Financial Corporation (Aviston Financial). At the
time of the merger, Aviston Financial had approximately
$98 million in total assets. 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.
During February 2003, the Company sold its Hoopeston, Illinois
branch with assets of approximately $19 million.


The Company also assembled a new experienced
management team during 2003. Headed by Thomas A. Daiber, who
joined the Company as CEO most of the senior officer positions
have been filled with new executives during the last twelve
months, including the Chief Financial Officer, the Chief Lending
Officer, new Regional Presidents for three of our four Banking
regions (each of these Presidents is also a commercial lender
with more than 15 years of experience), a new Corporate
Controller and two other seasoned commercial lenders. Management
has reorganized the Company into four operating regions and is
working to improve operations and profitability throughout the
branch system, while it continues to clean up the asset quality
issues it inherited. The Company incurred severance and
termination expenses as well as non-recurring merger related
expenses during this year of transition.

Net income declined 32% in 2002, and declined an
additional 39% in 2003 due to asset quality issues which
resulted in almost $4.0 million in provision for loan
losses during 2002 and $4.1 million for 2003. Assets grew
from $546.4 million at the end of 2002 to $609.2 million,
or 11%, at the end of 2003. Without the merger with Aviston
Financial or the sale of the Hoopeston branch, total assets
would have decreased by $16 million or 3%. The decrease was
due to the Company positioning itself for profitable growth by
reducing higher rate interest bearing liabilities, as well as
low rate assets, in an effort to improve the net interest margin.

The Company has had an aggressive capital
management plan over the last two years. As part of this
strategy, the Company made open market purchases of its own
stock, repurchasing 167,224 common shares at a total cost of
$3.2 million ($19.15 per share) in 2002 and 466,540
additional shares of stock at a total cost of $9.3 million
($19.95 per share) in early 2003. The Company executed a 2 for 1
stock split during October of 2003. All references in this
discussion to the prices and number of shares have been adjusted
for this split. In addition, the Company is continuously
evaluating balance sheet opportunities to augment and leverage
its strong capital base to maximize stockholders return on
equity. The Company will continue to evaluate opportunities in
2004 in an effort to resume a positive earnings trend.

The Companys results of operations are
dependent primarily on net interest income, which is the
difference, or spread, between the interest income
earned on its loans, investments and its cost of funds,
consisting of interest paid on its deposits and on borrowed
funds. The Companys operating expenses principally consist
of employee compensation and benefits, occupancy, marketing and
other general and administrative expenses. The Companys
results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of
regulatory authorities.

5




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MANAGEMENTS


DISCUSSION AND


ANALYSIS







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Mission and Goals

The Companys mission is to provide, safely
and profitably, financial services to families and businesses in
the communities served by its offices. The recently adopted
mission statement of the Bank is:




| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To be the premier bank serving central Illinois,
    southern Illinois, western Indiana and metropolitan St. Louis,
    Missouri with a return on equity within the upper quartile of
    our peer group. Our regional banking philosophy is to support
    and empower our employees to provide superior customer service.

In seeking to accomplish this mission, management
has adopted a business strategy designed to accomplish a number
of goals, including:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | increase return on equity and increase
    stockholders value;                                                                  
|
| |  | maintain the Banks capital at a level that
    exceeds regulatory requirements;                                                 
|
| |  | maintain a high level of asset quality;                                                                                          
|
| |  | manage the Companys exposure to changes in
    market interest rates;                                                           
|
| |  | increase the Companys net interest margin;
    and                                                                              
|
| |  | to the extent available, take advantage of loan
    and deposit growth opportunities in the Companys principal
    market areas.

The Company has attempted to achieve these goals
by focusing on a number of areas, including:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | management of the Companys capital to
    enhance stockholders value;                                                                                                                   
|
| |  | establishment of regional banking centers with a
    local regional president;                                                                                                            
|
| |  | the origination of commercial real estate,
    consumer, commercial business, and, multi-family and
    construction loans;                                                               
|
| |  | providing high quality service to enhance
    customer loyalty; and                                                                                                                       
|
| |  | offering a variety of financial products and
    services to serve as comprehensively as practicable the
    financial needs of families and community businesses in its
    market areas.

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,

6




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MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



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 loses 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. This
amount was originally amortized into expense on a straight-line
basis assuming a life of twenty years. Effective January 1,
2002, the Company ceased amortization in accordance with newly
adopted accounting standards generally accepted in the United
States of America. The Company performed an initial impairment
assessment as of January 1, 2002 and annual impairment
assessment as of September 30, 2002 and 2003. No impairment
of goodwill was 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.

Economic Climate

During 2002, the Federal Open Market Committee
(the FOMC) kept the federal funds target at 1.75%
and the Federal Reserve discount rate at 1.25%. The federal
funds rate is the rate at which financial institutions borrow
from each other, while the discount rate is the rate at which
member banks borrow from the Federal Reserve. In November 2002,
the FOMC reduced its target short-term interest rates by an
additional fifty basis points. This action lowered the federal
funds target to 1.25% and the Federal Reserve discount rate to
0.75%. During 2003, the rates were reduced an additional 25
basis points. While lower short-term interest rates would tend
to stimulate economic activity by reducing the financing costs
on borrowed funds for both businesses and individuals, they also
reduce the interest income for institutions that rely on short
term investments for interest income. Centrue had an average
balance of $30.2 million in short term investments including
federal funds sold and other interest-earning investments at
other financial institutions. Because deposits were already at a
level that could not be repriced downward, this level of
short-term investments decreased the net interest margin of the
Company and as a result the net income.


Results of Operations

The Companys results of operations depend
primarily on the level of its net interest and non-interest
income and its control of operating expenses. Net interest
income depends upon the


7




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##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned from
or paid on them.

Net Interest Income Analysis

The following table presents for the periods
indicated the total dollar amount of interest income from
average interest-earning assets and resultant yields, as well as
the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. All amounts are tax
equivalent assuming a 34% tax rate. All average balances are
monthly average balances. Non-accruing loans have been included
in the table as loans carrying a zero yield.


|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |      |  
|--------------------------------------------------------------------------- | -------------------------------- | ---------------------------- | ------- | ---------------------------- |  | ---------------------------- | ------ | ---------------------- |  | -------- | ---- | ------ | - | ----------- | ------- | -------- |  | ------ | ------ | ------ |  |  | ---- | ---- | - | - | ------- | ------- |  | - | ------ | ------ |  |  | ---- | ---- | -
|                                                                            |                                  |                              |         |                              |  |                             
|                                                                            |                                  | Year Ended December 31, 2003 |         | Year Ended December 31, 2002 |  | Year Ended December 31, 2001
|                                                                            |                                  |                              |         |                              |  |                             
|                                                                            |                                  | Average                      |         | Interest                     |  |                              |        | Average                |  | Interest |      |        |   | Average     |         | Interest |  |       
|                                                                            |                                  | Outstanding                  |         | Earned/                      |  | Yield/                       |        | Outstanding            |  | Earned/  |      | Yield/ |   | Outstanding |         | Earned/  |  | Yield/
|                                                                            |                                  | Balance                      |         | Paid                         |  | Rate                         |        | Balance                |  | Paid     |      | Rate   |   | Balance     |         | Paid     |  | Rate  
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |       
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |         
|                                                                            |                                  |                              |         |                              |  |                              |        | (Dollars in Thousands) |  |          |      |        |   |             |         |         
|Interest-earning assets:                                                    |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|                                                                            | Loans receivable (1)             |                              | $       | 366,305                      |  |                              | $      | 23,523                 |  |          |      | 6.42   | % |             | $       | 394,523  |  |        | $      | 27,615 |  |  |      | 7.00 | % |   | $       | 368,955 |  |   | $      | 28,403 |  |  |      | 7.70 | %
|                                                                            | Investments securities (2)       |                              |         | 75,088                       |  |                              |        | 3,554                  |  |          |      | 4.73   | % |             |         | 72,869   |  |        |        | 3,842  |  |  |      | 5.27 | % |   |         | 57,537  |  |   |        | 3,499  |  |  |      | 6.08 | %
|                                                                            | Other interest-earning assets    |                              |         | 49,296                       |  |                              |        | 313                    |  |          |      | 0.63   | % |             |         | 28,082   |  |        |        | 518    |  |  |      | 1.84 | % |   |         | 14,980  |  |   |        | 709    |  |  |      | 4.73 | %
|                                                                            | FHLB stock                       |                              |         | 2,929                        |  |                              |        | 195                    |  |          |      | 6.66   | % |             |         | 2,634    |  |        |        | 139    |  |  |      | 5.28 | % |   |         | 2,325   |  |   |        | 148    |  |  |      | 6.37 | %
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Total interest-earning assets                                               |                                  |                              | 493,618 |                              |  |                              | 27,585 |                        |  |          | 5.59 | %      |   |             | 498,108 |          |  |        | 32,114 |        |  |  | 6.45 | %    |   |   | 443,797 |         |  |   | 32,759 |        |  |  | 7.38 | %   
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Other assets                                                                |                                  |                              | 45,080  |                              |  |                              |        |                        |  |          |      |        |   |             | 37,185  |          |  |        |        |        |  |  |      |      |   |   | 29,551  |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Total assets                                                                |                                  | $                            | 538,698 |                              |  |                              |        |                        |  |          |      |        |   | $           | 535,293 |          |  |        |        |        |  |  |      |      |   | $ | 473,348 |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Interest-bearing liabilities:                                               |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|                                                                            | Time deposits                    |                              | $       | 243,629                      |  |                              |        | 7,564                  |  |          |      | 3.10   | % |             | $       | 254,239  |  |        |        | 10,412 |  |  |      | 4.10 | % |   | $       | 251,367 |  |   |        | 13,952 |  |  |      | 5.55 | %
|                                                                            | Savings deposits                 |                              |         | 78,450                       |  |                              |        | 860                    |  |          |      | 1.10   | % |             |         | 72,196   |  |        |        | 1,397  |  |  |      | 1.94 | % |   |         | 62,035  |  |   |        | 1,573  |  |  |      | 2.54 | %
|                                                                            | Interest Bearing Demand deposits |                              |         | 83,001                       |  |                              |        | 792                    |  |          |      | 0.95   | % |             |         | 73,312   |  |        |        | 1,485  |  |  |      | 2.03 | % |   |         | 65,478  |  |   |        | 1,861  |  |  |      | 2.84 | %
|                                                                            | Borrowings                       |                              |         | 62,115                       |  |                              |        | 2,780                  |  |          |      | 4.48   | % |             |         | 63,038   |  |        |        | 2,793  |  |  |      | 4.43 | % |   |         | 27,692  |  |   |        | 1,343  |  |  |      | 4.85 | %
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Total interest-bearing liabilities                                          |                                  |                              | 467,194 |                              |  |                              | 11,996 |                        |  |          | 2.57 | %      |   |             | 462,785 |          |  |        | 16,087 |        |  |  | 3.48 | %    |   |   | 406,572 |         |  |   | 18,729 |        |  |  | 4.61 | %   
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Non-Interest Bearing Demand Deposits                                        |                                  |                              | 33,719  |                              |  |                              |        |                        |  |          |      |        |   |             | 27,133  |          |  |        |        |        |  |  |      |      |   |   | 23,237  |         |  |   |        |        |  |  |      |     
|Other liabilities                                                           |                                  |                              | 3,700   |                              |  |                              |        |                        |  |          |      |        |   |             | 4,170   |          |  |        |        |        |  |  |      |      |   |   | 3,751   |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Total liabilities                                                           |                                  |                              | 504,614 |                              |  |                              |        |                        |  |          |      |        |   |             | 494,088 |          |  |        |        |        |  |  |      |      |   |   | 433,560 |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Stockholders equity                                                        |                                  |                              | 34,084  |                              |  |                              |        |                        |  |          |      |        |   |             | 41,205  |          |  |        |        |        |  |  |      |      |   |   | 39,788  |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Total liabilities and stockholders equity                                  |                                  | $                            | 538,698 |                              |  |                              |        |                        |  |          |      |        |   | $           | 535,293 |          |  |        |        |        |  |  |      |      |   | $ | 473,348 |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net interest income                                                         |                                  |                              |         |                              |  | $                            | 15,589 |                        |  |          |      |        |   |             |         |          |  | $      | 16,027 |        |  |  |      |      |   |   |         |         |  | $ | 14,030 |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net interest rate spread                                                    |                                  |                              |         |                              |  |                              |        |                        |  |          | 3.02 | %      |   |             |         |          |  |        |        |        |  |  | 2.97 | %    |   |   |         |         |  |   |        |        |  |  | 2.77 | %   
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net earning assets                                                          |                                  | $                            | 26,424  |                              |  |                              |        |                        |  |          |      |        |   | $           | 35,323  |          |  |        |        |        |  |  |      |      |   | $ | 37,225  |         |  |   |        |        |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net yield on average interest-earning assets (net
    interest margin)      |                                  |                              |         |                              |  |                              |        |                        |  |          | 3.16 | %      |   |             |         |          |  |        |        |        |  |  | 3.22 | %    |   |   |         |         |  |   |        |        |  |  | 3.16 | %   
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Average interest-earning assets to average
    interest-bearing liabilities |                                  |                              |         |                              |  |                              | 105.66 | %                      |  |          |      |        |   |             |         |          |  |        | 107.63 | %      |  |  |      |      |   |   |         |         |  |   | 109.16 | %      |  |  |      |     
|                                                                            |                                  |                              |         |                              |  |                              |        |                        |  |          |      |        |   |             |         |          |  |        |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     



---



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Calculated on a tax-equivalent basis, including
    loans held for sale, and net of deferred loan fees, loan
    discounts, loans in process and the allowance for loan losses.
    Includes net loan fees of $142, $45, and $(15) for 2003, 2002,
    and 2001, respectively.
|   
|(2) | Calculated on a tax-equivalent basis, including
    investment securities available-for-sale and certificates of
    deposit.                                                                                                                                                 

8




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##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



The following schedule presents the dollar amount
of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing
liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to: (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate
(i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume,
which cannot be segregated have been allocated proportionately
to the change due to volume and the change due to rate.

|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |         |         |  
|----------------------------- | ----------------------------- | ---------------------------------- | -- | ----------------------- | ----- | ---------------------- | -- | -------- | ----- | ---- | --- | ---------- | ----- | - | - | ----- | ----- |  | -- | ----- | ----- | - | ------ | ------- | ------- | -
|                              |                               |                                    |    |                        
|                              |                               | Year Ended December 31,            |    | Year Ended December 31,
|                              |                               | 2003 vs. 2002                      |    | 2002 vs. 2001          
|                              |                               |                                    |    |                        
|                              |                               |                                    |    |                         |       |                        |    |         
|                              |                               | Increase (Decrease)                |    |                         |       | Increase (Decrease)    |    |         
|                              |                               | Due to                             |    | Total                   |       | Due to                 |    | Total   
|                              |                               |                                    |    | Increase                |       |                        |    | Increase
|                              |                               | Volume                             |    | Rate                    |       | (Decrease)             |    | Volume   |       | Rate |     | (Decrease)
|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |           
|                              |                               |                                    |    |                         |       |                        |    |          |       |     
|                              |                               |                                    |    |                         |       | (Dollars in thousands) |    |          |       |     
|Interest earning assets:      |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        
|                              | Loans receivable              |                                    | ($ | 1,899                   | )     |                        | ($ | 2,193    | )     |      | ($  | 4,092      | )     |   | $ | 1,891 |       |  | ($ | 2,679 | )     |   |        | ($788   | )      
|                              | Investment securities         |                                    |    | 114                     |       |                        |    | (402     | )     |      |     | (288       | )     |   |   | 850   |       |  |    | (507  | )     |   |        | 343     |        
|                              | Other interest-earning assets |                                    |    | 254                     |       |                        |    | (459     | )     |      |     | (205       | )     |   |   | 397   |       |  |    | (588  | )     |   |        | (191    | )      
|                              | Federal Home Loan Bank stock  |                                    |    | 17                      |       |                        |    | 39       |       |      |     | 56         |       |   |   | 18    |       |  |    | (27   | )     |   |        | (9      | )      
|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        
|                              |                               | Total interest-earning assets      |    | ($                      | 1,514 | )                      |    | ($       | 3,015 | )    |     | ($         | 4,529 | ) |   | $     | 3,156 |  |    | ($    | 3,801 | ) |        |         | ($645   | )
|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        
|Interest bearing liabilities: |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        
|                              | Certificate accounts          |                                    | ($ | 422                     | )     |                        | ($ | 2,426    | )     |      | ($  | 2,848      | )     |   | $ | 158   |       |  | ($ | 3,698 | )     |   |        | ($3,540 | )      
|                              | Savings deposits              |                                    |    | 112                     |       |                        |    | (649     | )     |      |     | (537       | )     |   |   | 233   |       |  |    | (409  | )     |   |        | (176    | )      
|                              | Interest Bearing Deposits     |                                    |    | 176                     |       |                        |    | (869     | )     |      |     | (693       | )     |   |   | 204   |       |  |    | (580  | )     |   |        | (376    | )      
|                              | Borrowings                    |                                    |    | (41                     | )     |                        |    | 28       |       |      |     | (13        | )     |   |   | 1,587 |       |  |    | (137  | )     |   |        | 1,450   |        
|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        
|                              |                               | Total interest-bearing liabilities |    | ($                      | 175   | )                      |    | ($       | 3,916 | )    |     | ($         | 4,091 | ) |   | $     | 2,182 |  |    | ($    | 4,824 | ) |        |         | ($2,642 | )
|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        
|Net interest income           |                               |                                    |    |                         |       |                        |    |          |       | ($   | 438 | )          |       |   |   |       |       |  |    |       |       |   | $1,997 |        
|                              |                               |                                    |    |                         |       |                        |    |          |       |      |     |            |       |   |   |       |       |  |    |       |       |   |        |        

Comparison of Operating Results for 2003 to 2002

General

Consolidated net income was $1.4 million, or
$.65 per share (diluted), for the year ended December 31,
2003 compared to $2.2 million, or $.93 per share (diluted),
for the year ended December 31, 2002. The 39% decrease in
net income occurred primarily due to a decrease in net interest
income of $547,000, an increase of $132,000 in provision for
loan losses, and an increase in noninterest expenses of
$2.0 million offset by an increase in noninterest income of
$1.2 million as well as a decrease in income taxes of
$593,000.


Net Interest Income

Net interest income was $15.5 million for
the year ended December 31, 2003, a decrease of $547,000,
or 3.4%, during 2003 compared to 2002. Net interest income
decreased primarily due to a decrease in interest income of
$4.6 million or 14.4% partially offset by a decrease in
interest expense of $4.1 million or 25.4%. The decrease in
interest income resulted from the decrease of 86 basis
points in the average rate of interest on interest earning
assets, as well as a decrease in the average balance of
interest-earning assets of $4.5 million. The decrease in
interest expense resulted primarily from the decrease in the
average rate of interest on interest-bearing liabilities of 91
basis points, which was partially offset by an increase in the
average balance of interest-


9




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##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



bearing liabilities of $4.4 million. As discussed
previously, during 2003, the interest rate environment shifted
slightly lower during the beginning of the year and remained low
throughout the end of 2003. This decrease reduced all interest
rates and had a negative effect on net interest income during
2003.

Interest Income

Tax equivalent interest income totaled
$27.6 million for the year ended December 31, 2003, a
decrease of $4.5 million or 14.1%, as compared to $32.1
million for 2002. This resulted from a decrease in the yield
earned on assets from 6.45% during 2002 to 5.59% during 2003, as
well as a $4.5 million decrease in average interest-earning
assets from $498.1 million during 2002 to $493.6 million
during 2003.


Tax equivalent interest on loans was
$23.5 million for 2003, a decrease of $4.1 million, or
14.8%, as compared to 2002. This was primarily attributable to
the effect of a decrease in the yield on loans from 7.00% during
2002 to 6.42% during 2003, as well as a decrease of
$28.2 million in average outstanding loans. The decrease in
interest earned on loans resulted from loans repricing to lower
interest rates during 2003 as well as a decrease in average
balances.

Tax equivalent interest earned on investment
securities and other interest-earning assets and dividends on
Federal Home Loan Bank of Chicago (FHLB) stock
totaled $4.1 million for 2003, compared to
$4.5 million for 2002. This represented a decrease of 9.7%
during 2003. This was primarily due to a decrease in average
yield on these assets from 4.34% in 2002 to 3.19% in 2003, which
was partially offset by an increase in the average balance of
these assets from $103.6 million in 2002 to
$127.3 million in 2003. The increase in these assets was
funded primarily by an increase in total deposits.

Interest Expense

Interest expense was $12.0 million for 2003
or $4.1 million (25.4%) less than in 2002. This was due to
a decrease in average rates to 2.57% for 2003 from 3.48% for
2002, which was partially offset by an increase of
$4.4 million in the average balance of interest-bearing
liabilities to $467.2 million for 2003 compared to
$462.8 million for 2002.


During 2003, average interest bearing deposits
increased by $5.3 million, to $405.1 million for 2003,
compared to $399.7 million for 2002. The rate paid on
interest bearing deposits decreased 105 basis points to 2.28%
from 3.33%. The decrease in the average cost of deposits was due
to the lower interest rate environment as well as a continued
focus by the Company to shift to lower yielding deposits. The
increase in average balances was primarily due to the Aviston
Financial merger, partially offset by the sale of the Hoopeston
branch.

During 2003 and 2002, $2.8 million of the
Companys interest expense related to advances from the
FHLB and other borrowed money. While interest expense on
borrowed funds remained constant, the average balance of
borrowed funds decreased $923,000 from $63.0 million in
2002 to $62.1 million in 2003. The decrease in average
balance was offset against an increase of five basis points in
the average interest rate on borrowed funds to 4.48% in 2003
from 4.43% in 2002. The increase in rates was due to the
maturity of lower rate borrowings.

Provision for Loan Losses

The Company recorded a $4.1 million
provision for loan losses during 2003 compared to a $4.0
provision during 2002. Charge-offs during 2003 increased to
$6.2 million from $81,000 during 2002. Recoveries during
2003 increased to $632,000 from $33,000 in 2002. The ratio of
net charge-offs to average outstanding loans was 1.53% in 2003
and 0.01% in 2002. A substantial portion of the 2002 provision
for loan losses related to commercial real estate and real
estate development loans. Real estate development loans relate
to land acquisition, development planning, land improvements,
such as streets and utilities, and either building construction
or sales of developed parcels. Two principal sets of problem
loans were made, in one case, to a group of


10




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##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



related borrowers and, in the other case, to an
individual borrower. The lead borrower of the group filed a
petition for bankruptcy protection under Chapter 11 on
October 18, 2002. The majority of the problem loans that
were provided for in 2002 were charged-off in 2003. The
provision for loan losses for 2003 was increased as part of the
Companys asset quality program in an effort to ensure that
the Company is adequately reserved for loan losses.

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 $7.5 million allowance
for loan losses at December 31, 2003 is 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.

The following is a summary of loan loss
experience and nonperforming assets for the years ended
December 31, 2003 and 2002:

|                                                          |  |                        |         |      |  |   |         |  
|--------------------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                                          |  | 2003                   |         | 2002
|                                                          |  |                        |         |     
|                                                          |  |                       
|                                                          |  | (Dollars in thousands)
|Total loans                                               |  | $                      | 433,311 |      |  | $ | 390,763 |  
|Total assets                                              |  |                        | 609,208 |      |  |   | 546,404 |  
|Allowance for loan losses                                 |  |                        | 7,471   |      |  |   | 6,524   |  
|Net loan charge-offs                                      |  |                        | 5,610   |      |  |   | 48      |  
|Nonperforming loans                                       |  |                        | 5,480   |      |  |   | 10,273  |  
|Nonperforming assets                                      |  |                        | 6,080   |      |  |   | 11,069  |  
|Net loan charge-offs as a percentage of average
    loans |  |                        | 1.53    | %    |  |   | 0.01    | %
|Nonperforming assets to total assets                      |  |                        | 1.00    | %    |  |   | 2.03    | %
|Allowance for loan losses to gross loans                  |  |                        | 1.72    | %    |  |   | 1.67    | %
|Allowance for loan losses to nonperforming loans          |  |                        | 136.34  | %    |  |   | 63.51   | %

11




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---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



The Company will continue to improve the
reporting and monitoring of the adequacy of the allowance for
loan losses based on managements analysis of its loan
portfolio and general economic conditions.

Other Income

Other income increased $1.2 million for 2003
to $5.7 million, compared to $4.6 million for 2002. The
26.5% increase in other income was the result of increases of
$201,000 in gain on sale of real estate, $155,000 in gain on
sales of loans, $478,000 in gain on sale of branch, and a
$339,000 increase in fee income. The increase in the gain on the
sale of real estate was due to deferred gains from previous
sales being recognized during 2003. The increase in gains on
sales of loans was the result of a continued increase in
refinancings during the first nine months of 2003. Due to the
rate structure in early 2004 and the large amount of loans that
refinanced during 2002 and 2003, current estimates indicate that
the gain on sale of loans during 2004 will be significantly less
than 2003 or 2002. The gain on sale of branch was due to the
Company selling a branch in Hoopeston, Illinois during 2003. The
increase in fee income was primarily the result of an overall
restructuring of fees to be more competitive with other local
banks.


Other Expenses

Other expenses were $15.4 million for 2003,
as compared to $13.4 million for 2002. This represented an
increase of $2.0 million or 14.7%. The increase in other
expenses primarily resulted from increases in compensation and
benefits of $635,000, occupancy expenses of $149,000, furniture
and equipment of $333,000, advertising of $115,000, and other of
$513,000. The increase in compensation and benefits was
partially the result of $297,000 of severance payments
associated with the departure of three executive officers and
severance payments associated with reorganizational reductions
of workforce, as well as normal merit and inflationary increases
to both salaries and benefits. Additional personnel resulting
from the Aviston Financial merger also contributed to the
increase in compensation and benefits. The increase in occupancy
costs was primarily the result of an increase in repair and
maintenance work during the year. The increase in furniture and
equipment expenses was primarily due to increased maintenance
costs associated with new equipment. The increase in other
expenses was primarily due non-recurring expenses relating to
the merger of Aviston Financial and the Companys name
change as well as other miscellaneous non-recurring expenses of
$169,000.


Income Taxes

Income tax expense was $290,000 for 2003, as
compared to $883,000 for 2002. This decrease was the result of
the decrease in pre-tax income and to an increase in non-taxable
income resulting from an increase in the cash surrender value of
life insurance. The Companys effective tax rate was 17.5%
for 2003 and 28.4% for 2002. A summary of the significant tax
components is provided in Note 13 of the Notes to Consolidated
Financial Statements included later in this report.


Comparison of Operating Results for 2002 to 2001

General

Consolidated net income was $2.2 million, or
$.93 per share (diluted), for the year ended December 31,
2002 compared to $3.3 million, or $1.31 per share
(diluted), for the year ended December 31, 2001. The 32%
decrease in net income occurred primarily due to an increase in
problem loans which led to the recording of $4.0 million in
provision for loan losses during 2002.


Net Interest Income

Net interest income was $16.0 million for
the year ended December 31, 2002, an increase of
$2.0 million, or 14.2%, during 2002 compared to 2001. Net
interest income increased primarily due to the decrease in
interest expense exceeding the decrease in interest income. The
decrease in


12




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---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



interest income resulted from the decrease in the
average rate of interest on interest earning assets, which was
partially offset by an increase in the average balance of
interest-earning assets. The decrease in interest expense
resulted from the decrease in the average rate of interest on
interest-bearing liabilities, which was partially offset by an
increase in the average balance of interest-bearing liabilities.

Interest Income

Interest income totaled $32.1 million for
the year ended December 31, 2002, a decrease of $645,000 or
2.0%, as compared to $32.8 million for 2001. This resulted
from a decrease in the yield earned on assets from 7.38% during
2001 to 6.45% during 2002, which was partially offset by a
$54.3 million increase in average interest-earning assets
from $443.8 million during 2001 to $498.1 million during
2002.


Interest on loans was $27.6 million for
2002, a decrease of $788,000, or 2.8%, as compared to 2001. This
was primarily attributable to the effect of a decrease in the
yield on loans from 7.70% during 2001 to 7.00% during 2002,
which was partially offset by an increase of $25.6 million
in average outstanding loans. The decrease in interest earned on
loans resulted in part from the Companys sale during 2002
of a substantial portion of its long-term, fixed-rate,
one-to-four family loan originations.

Interest earned on investment securities and
other interest-earning assets and dividends on FHLB stock
totaled $4.5 million for 2002, compared to
$4.4 million for 2001. This represented an increase of
$143,000 during 2002. This was primarily due to a decrease in
average yield on these assets from 5.82% in 2001 to 4.34% in
2002, which was partially offset by an increase in the average
balance of these assets from $74.8 million in 2001 to
$103.6 million in 2002. The increase in these assets was
primarily due to a leveraging strategy implemented by the bank
and was funded by borrowings.

Interest Expense

Interest expense was $16.1 million for 2002,
or $2.6 million 14.1% less than in 2001. This was due to a
decrease in average rates to 3.48% for 2002 from 4.61% for 2001,
which was partially offset by an increase of $56.2 million
in the average balance of interest-bearing liabilities to
$462.8 million for 2002 from $406.6 million for 2001.
Interest expense on deposits decreased $4.1 million or
23.5% from 2001 to 2002. During 2002, average deposits increased
by $20.8 million or 5.5%. The rate paid on interest bearing
liabilities decreased 126 basis points from 4.59% in 2001 to
3.33% in 2002. The decrease in the average cost of funds was the
result of market interest rates trending lower throughout 2001
and well into 2002.


During 2002, $2.8 million of the
Companys interest expense, compared to $1.3 million during
2001, related to advances from the FHLB and other borrowed
money. The increase in interest expense on borrowed funds was
the result of a $35.3 million increase in average balance
of borrowed funds from $27.7 million in 2001 to
$63.0 million in 2002, which was partially offset by a
decrease in the average interest rate on borrowed funds to 4.43%
in 2002 from 4.85% in 2001.

Provision for Loan losses

The Company recorded a $4.0 million
provision for loan losses during 2002 compared to a $502,000
provision during 2001. Charge-offs during 2002 decreased to
$81,000 from $103,000 during 2001. Recoveries during 2002
increased to $33,000 from $26,000 in 2001. The ratio of net
charge-offs to average outstanding loans was 0.01% in 2002 and
0.02% in 2001. A substantial portion of the increase in the
provision for loan losses during 2002 took place during the
third quarter of the year, when the Company recorded additions
of $3.1 million. As discussed previously, these reserves
related to commercial real estate and real estate development
loans.


13




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---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



Other Income

Other income increased $907,000 for 2002 to
$4.5 million, compared to $3.6 million for 2001. The 25.2%
increase in other income was the result of increases of $787,000
in gain on the sale of loans, $349,000 in increase in cash
surrender value of life insurance, and $182,000 in fee income.
These increases were partially offset by a $401,000 net gain on
the sale of securities during 2001, which did not recur during
2002. The increase in the gain on the sale of loans was the
result of an increase of $35.5 million (147.7%) in loan
sales in 2002 to $59.6 million from $24.1 million in
2001. The increase in fee income was primarily the result of an
increase in checking related fees due to an increase in the
number of checking accounts and to an increase in discount fees
related to debit cards. The increase in cash surrender value of
life insurance was the result of income from the Banks
$8.0 million investment in life insurance.


Other Expenses

Other expenses were $13.4 million for 2002,
as compared to $12.2 million for 2001. This represented an
increase of $1.2 million or 9.8% during 2002. There were
increases in other expenses of $729,000, compensation and
benefits of $751,000. These increases were partially offset by
decreases in amortization of intangibles of $191,000. The
increase in compensation and benefits was the result of three
primary factors, including a general increase in compensation
levels, an increase in insurance costs and an employee incentive
compensation plan. The major reason for the increase in other
expenses, and a significant factor in the overall increase in
other expenses, was costs related to a proxy contest in
connection with the annual meeting in April, 2002. The decrease
in amortization expense was a result of the implementation of
Statement of Financial Accounting Standards
(SFAS) No. 142. SFAS 142 stopped the amortization of
all previously acquired goodwill as of January 1, 2002. The
effect of the change in accounting principle is more fully
described in Note 1 of the Notes to Consolidated Financial
Statements included later in this report.


Income Taxes

Income tax expense was $883,000 for 2002, as
compared to $1.6 million for 2001. This decrease was the
result of the decrease in pre-tax income and to an increase in
non-taxable income resulting from an increase in the cash
surrender value of life insurance. The Companys effective
tax rate was 34% for 2001 and 28.4% for 2002. A summary of the
significant tax components is provided in Note 13 of the Notes
to Consolidated Financial Statements included later in this
report.


Financial Condition

Total assets increased by $62.8 million or
11.5% to $609.2 million at December 31, 2003, from
$546.4 million at December 31, 2002. The increase in
total assets during 2003 was primarily attributed to the Aviston
Financial merger, partially offset by the sale of the Hoopeston
branch and also included increases in investment securities, net
loans, office properties and equipment, goodwill and other
assets, which were partially offset by a decrease in cash and
cash equivalents.


Cash and cash equivalents decreased by
$1.8 million to $45.6 million at December 31,
2003, from $47.4 million at December 31, 2002. Cash
and cash equivalents decreased $12.3 million from the sale
of the Hoopeston branch as well as $9.3 million from
purchases of treasury stock. These decreases were partially
offset by an increase in deposits and borrowings as well as cash
and cash equivalents acquired in the Aviston Financial merger.

Investment securities available-for-sale
increased $5.1 million to $87.7 million at
December 31, 2003 compared to $82.6 million at
December 31, 2002. Investment securities acquired in the
merger with Aviston Financial totaled $15.4 million. This
increase was partially offset by paydowns on mortgage backed
securities. The Company further expects to realign short-term
investments such as Federal funds sold into higher yielding
investment securities during 2004 in an effort to increase the
overall net interest margin.

14




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MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



Net loans increased by $41.6 million or
10.8% to $425.8 million at December 31, 2003 from
$384.2 million at December 31, 2002. The increase was
the result of the merger with Aviston Financial which had net
loans of approximately $72.0 million. Additionally, the Company
sold approximately $6.4 million in loans as part of the
sale of the Hoopeston branch. Without the Aviston Financial
merger and before the sale of the Hoopeston branch, the net
loans would have decreased by $24.0 million. During the
course of the year in 2003, market rates decreased marginally
following a significant decrease in the preceding two years. The
Company experienced a high volume of mortgage loan origination
for the second consecutive year. The majority of these loans
were sold into the secondary market with servicing retained. As
such, the increase in mortgage lending is not reflected in the
net loan balance. The volume in mortgage loans resulted from a
competitive price structure and a high volume of refinancing of
both the Companys mortgage loans and those of other
lenders. While interest rates remain very low going into 2004,
the volume of loan originations is expected to decrease because
of current economic conditions and level of refinancing that has
already taken place. The Company has focused on increasing the
commercial lending portfolio for 2004 and beyond while
continuing to maintain a strong focus on mortgage lending.

Office properties and equipment increased
$6.7 million to $17.1 million at December 31,
2003 compared to $10.4 million at December 31, 2002.
The increase was primarily attributable to the additional fixed
assets acquired in the Aviston Financial merger the construction
of a new branch office in Bradley, Illinois, as well as various
equipment upgrades.

Goodwill increased $8.4 million to
$11.4 million at December 31, 2003 compared to
$3.1 million at December 31, 2002. The increase in
goodwill was a result of the merger with Aviston Financial and
represented the full amount of goodwill created in the
transaction. Accounting for goodwill and the measurement of
impairment is discussed in more detail in Note 1 of the Notes to
Consolidated Financial Statements included later in this report.

Other assets increased $2.4 million to
$4.5 million at December 31, 2003 compared to
$2.0 million at December 31, 2002. The increase in
other assets was primarily attributable to an increase in
deferred tax assets as well as various other miscellaneous
increases.

Deposits increased by $62.5 million or 14.5%
to $494.4 million at December 31, 2003, from
$431.8 million at December 31, 2002. The merger with
Aviston Financial increased deposits $80.6 million and the
sale of the Hoopeston branch decreased deposits by
$19.4 million. Without these two events, deposits would
have increased $1.3 million. During 2003, the Company
attempted to reduce higher rate interest-bearing liabilities in
the face of intense competition in the various markets in which
the Company operates. In 2004, the Company will continue to look
for ways to reduce the overall cost of funds including pursuing
lower rate deposits.

Borrowed money decreased by $5.3 million or
8.9% to $54.4 million at December 31, 2003, from
$59.7 million at December 31, 2002. Borrowed money
consists of advances from the FHLB, notes payable, and funds
from securities sold under agreements to repurchase. The Aviston
Financial merger added an additional $4.2 million in
borrowings, bringing the actual decrease of borrowings to
$9.5 million during 2003. The majority of the decrease was
primarily due to a maturity of $9.2 million of securities
sold under agreements to repurchase.

Stockholders equity on a per share basis
decreased by .7% from $17.63 at December 31, 2002, to
$17.51 at December 31, 2003. Total stockholders
equity increased by $4.5 million or 11.0% to
$45.6 million at December 31, 2003. The increase in
stockholders equity was primarily due to the issuance of
stock in connection with the Aviston Financial merger of
$13.5 million and net income of $1.4 million,
partially offset by the repurchase of 466,540 shares of treasury
stock for a total cost of $9.3 million.

15




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---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



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
profitable and high quality loan portfolio. The existing loan
portfolio is monitored in a number of ways, including through
the Companys loan rating system. The loan rating system is
also 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 loans in the communities served by its banking centers
so it can effectively monitor and control risk. The majority of
the loan portfolio is comprised of retail loans and loans to
small-to-midsize businesses. The loan portfolio does not include
any loans to foreign countries.

Non-performing assets include foreclosed assets,
loans that have been placed on non-accrual status, loans
90 days or more past due that continue to accrue interest
and restructured troubled debt. During the year ended
December 31, 2003, total non-performing assets decreased by
$5.0 million, or 45.0%, to $6.1 million from
$11.1 million at December 31, 2002. The decrease in
nonperforming assets was primarily due to $6.2 million of
charge-offs taken by the Company during 2003. Changes in the
individual loan categories are detailed in the following table:

|                                          |  |                        |       |      |  |        |        |  |  |   |        |  
|----------------------------------------- |  | ---------------------- | ----- | ---- |  | ------ | ------ |  |  | - | ------ | -
|                                          |  |                        |       |     
|                                          |  | December 31,           |       |     
|                                          |  |                        |       |     
|                                          |  | 2003                   |       | 2002 |  | Change
|                                          |  |                        |       |      |  |       
|                                          |  |                       
|                                          |  | (Dollars in thousands)
|Non-accruing loans                        |  | $                      | 3,248 |      |  | $      | 6,834  |  |  | $ | (3,586 | )
|Accruing loans delinquent 90 days or more |  |                        | 2,232 |      |  |        | 3,439  |  |  |   | (1,207 | )
|                                          |  |                        |       |      |  |        |        |  |  |   |        |  
|Total non-performing loans                |  |                        | 5,480 |      |  |        | 10,273 |  |  |   | (4,793 | )
|                                          |  |                        |       |      |  |        |        |  |  |   |        |  
|Foreclosed assets                         |  |                        | 319   |      |  |        | 316    |  |  |   | 3      |  
|Troubled debt restructuring               |  |                        | 281   |      |  |        | 480    |  |  |   | (199   | )
|                                          |  |                        |       |      |  |        |        |  |  |   |        |  
|Total non-performing assets               |  | $                      | 6,080 |      |  | $      | 11,069 |  |  | $ | (4,989 | )
|                                          |  |                        |       |      |  |        |        |  |  |   |        |  

Company management performs a quarterly analysis
of the adequacy of the allowance for loan losses. Management
classifies problem assets into one of four categories: Special
Mention Substandard, Doubtful, and Loss. During the year ended
December 31, 2003, total classified assets increased by
$9.1 million to $25.1 million from $16.0 million
at December 31, 2002. This increase was due in part to the
companys implementation of a six month comprehensive loan
review as well as the adoption of a new comprehensive loan
policy that has identified problem loans in a more timely
manner. The new program is designed to assist management in
focusing collection efforts in problem areas and should result
in a lower charge-off ratio.

Certain loans may require frequent management
attention and are reviewed on a monthly or more frequent basis.
Although payments on these loans may be current or less than
90 days past due, the borrowers presently have or have had
a history of financial difficulties and management has a concern
as to the borrowers ability to comply with the present
loan payment terms. Management believes such loans present more
than the normal risk of collectibility. As such, these loans may
result in classification at some future point in time as
nonperforming. At December 31, 2003, such loans amounted to
approximately $14.3 million, as compared to
$5.7 million at December 31, 2002.

For additional information with respect to asset
quality, please refer to the sections on Provision for Loan
Losses, which are part of the analysis of the Companys
results of operations.

16




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MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



Asset/ Liability Management

The matching of assets and liabilities may be
analyzed by examining the extent to which such assets and
liabilities are interest rate sensitive and by
monitoring an institutions interest rate sensitivity gap.
An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning
assets anticipated, based upon certain assumptions, to mature or
reprice within a specific time period and the amount of
interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that same time period.
A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of
interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a positive gap would tend to
result in an increase in net interest income while a negative
gap would tend to adversely affect net interest income. During a
period of falling interest rates, a positive gap would tend to
adversely affect net interest income while a negative gap would
tend to result in an increase in net interest income.


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. This is accomplished
using a simulation model. Modeling techniques encompass
contractual maturity, prepayment assumptions covering interest
rate increases and decreases and index-driven repricing
characteristics. The model projects changes in net interest
income over a one-year period should interest rates rise, fall
or remain constant. These effects are analyzed assuming interest
rate increases or decreases of 100, 200 and 300 basis points.
The model also incorporates key assumptions involving the
Companys ability to control and direct deposit rates,
particularly on non-maturity categories. As of December 31,
2003, the simulation model indicates that over a twelve month
horizon if interest rates were to increase 100 basis points, net
income would increase $214,000. If interest rates were to
decrease 100 basis points, net income would decrease $387,000.

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 exposure to market risk is
reviewed on a regular basis by the funds management committee.
Interest rate risk is the potential of economic losses due to
future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss
of current fair market values. Tools used by management include
the standard GAP report and a

17




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MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



quarterly interest rate risk report measuring
interest rate sensitivity. The report provides the Company the
economic value of each type of asset, liability, and off-balance
sheet contract under the assumption that the Treasury yield
curve shifts instantaneously and parallel up and down by 100 to
300 basis points in 100 basis point increments. The Company has
no market risk sensitive instruments held for trading purposes.
It appears that the Companys market risk is reasonable at
this time. The following condensed GAP report summarizing the
Companys interest rate sensitivity sets forth the interest
rate sensitivity of the Banks assets and liabilities at
December 31, 2003. Except as stated below, the amounts of
assets and liabilities shown which reprice or mature during a
particular period are determined in accordance with the earlier
of the term to repricing or maturity of the asset or liability.
Based on the Companys historical trends, interest bearing
demand deposits, money market deposits, and savings deposits
have been proven to be a very stable source of funds, even
through interest rate fluctuations. Accordingly, Company
management believes these deposits are not 100% rate sensitive
within the three months or less time frame. As a result,
interest bearing demand and savings deposits have been allocated
between the four repricing categories as follows: three months
or less 20%, after three through twelve months 20%,
after one through five years 40%, and after five
years 20%. Money market deposits have been allocated
between the categories as follows: after three through twelve
months 50% and after one through five years 50%.
Certificate accounts are assumed to reprice at the date of
contractual maturity.

|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |         | 
|-------------------------------------------------------------------------------------------------------- | ---------------------------------- | --------------------- | ------ | -------- |  | -------- | ------- | -------- |  | ------ | ------- | ------- |  | -- | ------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                         |                                    |                      
|                                                                                                         |                                    | Maturing or Repricing
|                                                                                                         |                                    |                      
|                                                                                                         |                                    |                       |        | 4 Months |  |         
|                                                                                                         |                                    | 1-3                   |        | to One   |  | Over 1-3 |         | Over 3-5 |  | Over 5 |         |        
|                                                                                                         |                                    | Months                |        | Year     |  | Years    |         | Years    |  | Years  |         | Total  
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |        
|                                                                                                         |                                    | Amount                |        | Amount   |  | Amount   |         | Amount   |  | Amount |         | Amount 
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |        
|Fixed rate one-to-four family (including
    commercial real estate and construction loans)              |                                    | $                     | 6,673  |          |  | $        | 9,170   |          |  | $      | 12,345  |         |  | $  | 10,676  |        |  | $ | 154,277 |         |  | $ | 193,141 |        
|Adjustable rate one-to-four family (including
    commercial real estate and construction loans)         |                                    |                       | 6,136  |          |  |          | 33,464  |          |  |        | 27,786  |         |  |    | 33,673  |        |  |   | 11,981  |         |  |   | 113,040 |        
|Construction & Development                                                                               |                                    |                       | 5,290  |          |  |          | 4,313   |          |  |        | 14,334  |         |  |    | 3,528   |        |  |   | 1,175   |         |  |   | 28,640  |        
|Commercial business loans                                                                                |                                    |                       | 20,403 |          |  |          | 14,482  |          |  |        | 10,836  |         |  |    | 10,506  |        |  |   | 2,008   |         |  |   | 58,235  |        
|Consumer loans                                                                                           |                                    |                       | 22,851 |          |  |          | 1,785   |          |  |        | 8,037   |         |  |    | 7,628   |        |  |   | 2,986   |         |  |   | 43,287  |        
|Investment securities and other                                                                          |                                    |                       | 471    |          |  |          | 4,280   |          |  |        | 24,025  |         |  |    | 32,716  |        |  |   | 27,112  |         |  |   | 88,604  |        
|Federal Funds Sold, interest bearing due from
    banks, money market funds, and certificates of deposit |                                    |                       | 32,097 |          |  |          |        |          |  |        |        |         |  |    |        |        |  |   |        |         |  |   | 32,097  |        
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        
|                                                                                                         | Total interest-earning assets      |                       |        | 93,921   |  |          |         | 67,494   |  |        |         | 97,363  |  |    |         | 98,727 |  |   |         | 199,539 |  |   |         | 557,044 | 
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        
|Savings deposits                                                                                         |                                    |                       | 5,734  |          |  |          | 19,558  |          |  |        | 29,762  |         |  |    | 15,306  |        |  |   | 14,456  |         |  |   | 84,816  |        
|Checking and money market                                                                                |                                    |                       | 6,505  |          |  |          | 23,231  |          |  |        | 34,186  |         |  |    | 14,868  |        |  |   | 13,008  |         |  |   | 91,798  |        
|Certificates                                                                                             |                                    |                       | 52,814 |          |  |          | 103,097 |          |  |        | 101,980 |         |  |    | 17,447  |        |  |   |        |         |  |   | 275,338 |        
|FHLB advances                                                                                            |                                    |                       | 2,000  |          |  |          | 6,000   |          |  |        | 12,188  |         |  |    | 8,900   |        |  |   | 4,068   |         |  |   | 33,156  |        
|Other borrowings                                                                                         |                                    |                       | 9,200  |          |  |          | 1,448   |          |  |        | 9,200   |         |  |    | 10,000  |        |  |   | 1,392   |         |  |   | 31,240  |        
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        
|                                                                                                         | Total interest-bearing liabilities |                       |        | 76,253   |  |          |         | 153,334  |  |        |         | 187,316 |  |    |         | 66,521 |  |   |         | 32,924  |  |   |         | 516,348 | 
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        
|Interest-earning assets less interest-bearing
    liabilities                                            |                                    | $                     | 17,668 |          |  | ($       | 85,840  | )        |  | ($     | 89,953  | )       |  | $  | 32,206  |        |  | $ | 166,615 |         |  | $ | 40,696  |        
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        
|Cumulative interest-rate sensitivity gap                                                                 |                                    | $                     | 17,668 |          |  | ($       | 68,172  | )        |  | ($     | 158,125 | )       |  | ($ | 125,919 | )      |  | $ | 40,696  |         |  |   |         |        
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        
|Cumulative interest-rate gap as a percentage of
    assets                                               |                                    |                       | 2.90   | %        |  |          | (11.19  | )%       |  |        | (25.96  | )%      |  |    | (20.67  | )%     |  |   | 6.68    | %       |  |   |         |        
|                                                                                                         |                                    |                       |        |          |  |          |         |          |  |        |         |         |  |    |         |        |  |   |         |         |  |   |         |        

Certain shortcomings are inherent in the method
of analysis presented in the foregoing table. For example,
although certain assets and liabilities may have similar
maturities or periods to repricing,

18




---



##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may
lag behind changes in market rates. Additionally, certain
assets, such as ARMs, have features which restrict changes in
interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest
rate increase.

Liquidity and Capital Resources

The Companys primary sources of funds are
deposits, proceeds from principal and interest payments on loans
and on investment securities. While maturities and scheduled
amortization of loans and investment securities are a
predictable source of funds, deposit flows and mortgage loan
prepayments are greatly influenced by general interest rates,
economic conditions and competition. In a period of declining
interest rates, mortgage loan prepayments generally increase. As
a result, the proceeds from mortgage loan prepayments are
invested in lower yielding loans or other investments which have
the effect of reducing interest income. In a period of rising
interest rates, mortgage loan prepayments generally decrease and
the proceeds from such prepayments are invested in higher
yielding loans or investments which would have the effect of
increasing interest income.


The Companys liquidity, represented by cash
and cash equivalents, is a result of its operating, investing
and financing activities. The primary investing activities of
the Company are the origination of loans, the purchase of
investment securities, and, to a lesser extent, the purchase of
loans and loan participations. The Company manages the investing
activities primarily by investing in or selling loans and
investment securities. During 2003, the Company sold a branch,
and acquired Aviston Financial. Both of these transactions
involved investing activities that are not part of the day to
day operations of the Company. All other transactions from the
purchase of fixed assets to the reinvestment of investment
security maturities are common activities of the Company.

The Companys investing activities have a
direct correlation to the financing activities. Factors that
influence the Companys financing activities involve the
collection of deposits and advances and repayments of
borrowings. The Company has the ability to borrow funds from the
FHLB. Additionally, the Company has approximately
$8.6 million available on a line of credit from a third
party financial institution. The issuance or purchase of stock
also has a direct effect on the Companys financing
activities. Additional financing activities that the Company
engages in on a regular basis include the purchase and issuance
of common stock, as well as, the payment of dividends on common
stock. During 2003, the Company repurchased 466,540 shares of
stock and issued 700,300 shares in the acquisition of Aviston
Financial.

19




---



##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



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 December 31, 2003 (in thousands):

|                                                                        |  |          |         |                |  |            |        |       |  |   |        |  |  |   |         | 
|----------------------------------------------------------------------- |  | -------- | ------- | -------------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                                                        |  |          |         |                |  | Trust (1)  |        |      
|                                                                        |  | Time     |         |                |  | Preferred  |        |      
|Years Ended December 31,                                                |  | Deposits |         | Borrowings (1) |  | Debentures |        | Total
|                                                                        |  |          |         |                |  |            |        |      
|2004                                                                    |  | $        | 155,748 |                |  | $          | 27,648 |       |  |   |       |  |  | $ | 183,396 | 
|2005                                                                    |  |          | 93,130  |                |  |            | 14,388 |       |  |   |       |  |  |   | 107,518 | 
|2006                                                                    |  |          | 9,013   |                |  |            | 7,000  |       |  |   |       |  |  |   | 16,013  | 
|2007                                                                    |  |          | 8,090   |                |  |            | 3,900  |       |  | $ | 10,000 |  |  |   | 21,990  | 
|2008 and thereafter                                                     |  |          | 9,357   |                |  |            | 1,460  |       |  |   |       |  |  |   | 10,817  | 
|                                                                        |  |          |         |                |  |            |        |       |  |   |        |  |  |   |         | 
|Total                                                                   |  | $        | 275,338 |                |  | $          | 54,396 |       |  | $ | 10,000 |  |  | $ | 339,734 | 
|                                                                        |  |          |         |                |  |            |        |       |  |   |        |  |  |   |         | 
|Financial instruments whose contract amounts
    represent credit risk: |  |          |         |                |  |            |        |       |  |   |        |  |  |   |         | 
|Commitment to originate loans                                           |  | $        | 13,803  |               
|Commitments to extend credit                                            |  |          | 46,451  |               
|Standby letters of credit                                               |  |          | 2,506   |               
|                                                                        |  |          |         |               
|Total                                                                   |  | $        | 62,760  |               
|                                                                        |  |          |         |               



---



|    |                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 million maturing in fiscal year 2008 and
    $4 million maturing in fiscal year 2011. Trust preferred
    debentures 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. Securities available-for-sale may also be
utilized to meet liquidity needs. At December 31, 2003 and
2002 these liquid assets totaled $45.6 million and
$47.4 million, respectively. The level of liquid assets at
December 31, 2003 and 2002 was higher than usual due to a
number of factors, including sales of loans and higher than
expected prepayments on loans and investment securities. In
addition, the current interest rate environment has not
presented many opportunities for prudent investing.

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 December 31, 2003, the Company had
outstanding borrowings totaling $54.4 million, of which
$33.2 were advances from the FHLB, $18.4 were funds from
securities sold under agreement to repurchase, and
$2.8 million were funds from notes payable.

At December 31, 2003, the Company had
outstanding commitments to originate mortgage loans of
$13.8 million, of which 95% 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 in one
year or less from December 31, 2003, totaled
$155.7 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 $46.5 million at December 31, 2003.

20




---



##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---



At December 31, 2003, the Company and Bank
were categorized as well capitalized under prompt
corrective action as set by federal and state regulatory
agencies. See Note 14 of the Notes to Consolidated
Financial Statements and the discussion of the Companys
financial condition above.

Dividends

The Federal Reserve Boards policy is that a
bank holding company should pay cash dividends only to the
extent that its net income for the past year is sufficient to
cover both the cash dividends and a rate of earnings retention
that is consistent with the holding companys capital
needs, asset quality an overall financial condition, an that it
is inappropriate for a bank holding company experiencing serious
financial problems to borrow funds to pay dividends.
Furthermore, under certain circumstances, the Federal Reserve
Board may prohibit a bank holding company from paying any
dividends if a bank subsidiary of the holding company is
classified under prompt corrective action as
undercapitalized.


The Companys primary source for cash
dividends is the dividends received from our subsidiary bank.
The Bank is subject to various regulatory policies and
requirements relating to the payment of dividends, including
requirements to maintain capital above regulatory minimums. The
Bank, in general, may not pay dividends in excess of its net
profits. The Bank declared and paid dividends totaling
$1.9 million, $1.9 million and $1.7 million to
the Company, its sole stockholder, during 2003, 2002 and 2001,
respectively.

Cash dividends in the total amount of $.30, $.29,
and $.24 per share were paid by the Company during 2003, 2002
and 2001, respectively. The Board of Directors of the Company
declared a quarterly cash dividend of $.075 per share payable on
March 1, 2004, to stockholders of record as of
February 16, 2004. Future dividends will depend primarily
upon the Companys earnings, financial condition and need
for funds, as well as restrictions imposed by regulatory
authorities regarding dividend payments and net worth
requirements.

Special Note Concerning Forward-Looking Statements

This document (including information incorporated
by reference) 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.                                                                                                                                       

21




---



##### 





---



MANAGEMENTS


DISCUSSION AND


ANALYSIS







---





| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

22




---



##### 





---



INDEPENDENT


AUDITORS


REPORT







---



INDEPENDENT AUDITORS REPORT




To the Stockholders and Board of Directors

Centrue Financial Corporation


Kankakee, Illinois


We have audited the accompanying consolidated
balance sheets of Centrue Financial Corporation and Subsidiary
as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the years in the three year period
ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Centrue
Financial Corporation and Subsidiary as of December 31,
2003 and 2002, and the results of their operations and their
cash flows for each of the years in the three year period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.



| |     
| | ----
| | LOGO

Champaign, Illinois


February 24, 2004




23




---



##### 



CONSOLIDATED BALANCE SHEETS








|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |         |         |         | 
|-------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                 |                                                                                                                                                          | 2003                |                                            | 2002   
|                                                                                 |                                                                                                                                                          |                     |                                            |        
|                                                                                 |                                                                                                                                                          |                    
|                                                                                 |                                                                                                                                                          | (in thousands,     
|                                                                                 |                                                                                                                                                          | except share and   
|                                                                                 |                                                                                                                                                          | per share data)    
|Assets                                                                           |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|Cash and due from banks                                                          |                                                                                                                                                          | $                   | 13,558                                     |         |         | $       | 11,714  |        
|Interest bearing deposits with banks                                             |                                                                                                                                                          |                     | 14,373                                     |         |         |         | 4,863   |        
|Federal funds sold                                                               |                                                                                                                                                          |                     | 17,216                                     |         |         |         | 19,178  |        
|Money market funds                                                               |                                                                                                                                                          |                     | 458                                        |         |         |         | 11,671  |        
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 |                                                                                                                                                          |                     | Cash and cash equivalents                  |         |         | 45,605  |         |         |         | 47,426  | 
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|Certificates of deposit                                                          |                                                                                                                                                          |                     | 50                                         |         |         |         | 50      |        
|Investment securities:                                                           |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 | Available-for-sale, at fair value                                                                                                                        |                     |                                            | 87,712  |         |         |         | 82,638  |        
|                                                                                 | Held-to-maturity, at cost (fair value: 2003 $912;
    2002 $1,103)                                                                                       |                     |                                            | 892     |         |         |         | 1,093   |        
|Loans, net of allowance for loan losses of $7,471
    in 2003 and $6,524 in 2002 |                                                                                                                                                          |                     | 425,840                                    |         |         |         | 384,239 |        
|Loans held for sale                                                              |                                                                                                                                                          |                     |                                           |         |         |         | 128     |        
|Office properties and equipment                                                  |                                                                                                                                                          |                     | 17,113                                     |         |         |         | 10,378  |        
|Goodwill                                                                         |                                                                                                                                                          |                     | 11,433                                     |         |         |         | 3,066   |        
|Life insurance contracts                                                         |                                                                                                                                                          |                     | 8,752                                      |         |         |         | 8,349   |        
|Federal Home Loan Bank stock, at cost                                            |                                                                                                                                                          |                     | 3,298                                      |         |         |         | 2,740   |        
|Accrued interest receivable                                                      |                                                                                                                                                          |                     | 2,552                                      |         |         |         | 2,796   |        
|Intangible assets                                                                |                                                                                                                                                          |                     | 1,229                                      |         |         |         | 1,181   |        
|Real estate held for sale                                                        |                                                                                                                                                          |                     | 319                                        |         |         |         | 316     |        
|Other assets                                                                     |                                                                                                                                                          |                     | 4,413                                      |         |         |         | 2,004   |        
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 |                                                                                                                                                          |                     | Total assets                               |         | $       | 609,208 |         |         | $       | 546,404 | 
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|Liabilities and Stockholders Equity                                             |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|Liabilities                                                                      |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 | Deposits                                                                                                                                                 |                     |                                            |         |         |         |         |         |        
|                                                                                 |                                                                                                                                                          | Noninterest bearing |                                            | $       | 42,400  |         |         | $       | 28,416  |        
|                                                                                 |                                                                                                                                                          | Interest bearing    |                                            |         | 451,952 |         |         |         | 403,398 |        
|                                                                                 | Borrowings                                                                                                                                               |                     |                                            | 54,396  |         |         |         | 59,700  |        
|                                                                                 | Trust preferred debentures                                                                                                                               |                     |                                            | 10,000  |         |         |         | 10,000  |        
|                                                                                 | Other liabilities                                                                                                                                        |                     |                                            | 4,817   |         |         |         | 3,783   |        
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 |                                                                                                                                                          |                     | Total liabilities                          |         |         | 563,565 |         |         |         | 505,297 | 
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|Commitments and Contingencies (Notes 16 and
    17)                              |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|Stockholders Equity                                                             |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 | Preferred stock, $.01 par value; authorized and
    unissued, 500,000 shares                                                                             |                     |                                            |        |         |         |         |        |        
|                                                                                 | Common stock, $.01 par value; authorized
    5,500,000 and 3,500,000 shares in 2003 and 2002; shares issued
    4,200,300 and 3,500,000 in 2003 and 2002 |                     |                                            | 42      |         |         |         | 36      |        
|                                                                                 | Additional paid-in capital                                                                                                                               |                     |                                            | 28,929  |         |         |         | 15,022  |        
|                                                                                 | Retained income, partially restricted                                                                                                                    |                     |                                            | 39,231  |         |         |         | 38,517  |        
|                                                                                 | Accumulated other comprehensive income                                                                                                                   |                     |                                            | 1,088   |         |         |         | 1,631   |        
|                                                                                 | Unearned restricted stock                                                                                                                                |                     |                                            | (820    | )       |         |         |        |        
|                                                                                 | Treasury stock (1,594,278 and 1,168,238 shares in
    2003 and 2002, respectively), at cost                                                              |                     |                                            | (22,827 | )       |         |         | (14,099 | )      
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 |                                                                                                                                                          |                     | Total stockholders equity                 |         |         | 45,643  |         |         |         | 41,107  | 
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        
|                                                                                 |                                                                                                                                                          |                     | Total liabilities and stockholders equity |         | $       | 609,208 |         |         | $       | 546,404 | 
|                                                                                 |                                                                                                                                                          |                     |                                            |         |         |         |         |        

See Accompanying Notes to Consolidated Financial
Statements.

24




---



##### 



CONSOLIDATED STATEMENTS OF INCOME








|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |        |        | 
|-------------------------- | -------------------------------------------------- | ------------------------------------------------------- | ----- | ------ | ------ | ---- | ----- | ------ | ------ | - | ----- | ------ | ------ | 
|                           |                                                    | 2003                                                    |       | 2002   |        | 2001
|                           |                                                    |                                                         |       |        |        |     
|                           |                                                    |                                                        
|                           |                                                    | (in thousands,                                         
|                           |                                                    | except per share data)                                 
|Interest income:           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           | Loans                                              |                                                         | $     | 23,442 |        |      | $     | 27,615 |        |   | $     | 28,403 |       
|                           | Investment securities and certificates of deposit  |                                                         |       | 3,526  |        |      |       | 3,842  |        |   |       | 3,499  |       
|                           | Other                                              |                                                         |       | 508    |        |      |       | 657    |        |   |       | 857    |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Total interest income                                   |       |        | 27,476 |      |       |        | 32,114 |   |       |        | 32,759 | 
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|Interest expense:          |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           | Deposits                                           |                                                         |       | 9,216  |        |      |       | 13,294 |        |   |       | 17,386 |       
|                           | Borrowings                                         |                                                         |       | 2,780  |        |      |       | 2,793  |        |   |       | 1,343  |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Total interest expense                                  |       |        | 11,996 |      |       |        | 16,087 |   |       |        | 18,729 | 
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Net interest income                                     |       |        | 15,480 |      |       |        | 16,027 |   |       |        | 14,030 | 
|Provision for loan losses  |                                                    |                                                         | 4,122 |        |        |      | 3,990 |        |        |   | 502   |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Net interest income after provision for loan
    losses |       |        | 11,358 |      |       |        | 12,037 |   |       |        | 13,528 | 
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|Other income:              |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           | Fee income                                         |                                                         |       | 2,874  |        |      |       | 2,535  |        |   |       | 2,353  |       
|                           | Net gain on sales of securities                    |                                                         |       | 8      |        |      |       |       |        |   |       | 401    |       
|                           | Net gain on sales of real estate held for sale     |                                                         |       | 253    |        |      |       | 52     |        |   |       | 27     |       
|                           | Net gain on sales of loans held for sale           |                                                         |       | 1,271  |        |      |       | 1,116  |        |   |       | 329    |       
|                           | Gain on sale of branch                             |                                                         |       | 478    |        |      |       |       |        |   |       |       |       
|                           | Increase in cash surrender value of life insurance |                                                         |       | 403    |        |      |       | 349    |        |   |       |       |       
|                           | Other                                              |                                                         |       | 419    |        |      |       | 459    |        |   |       | 494    |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Total other income                                      |       |        | 5,706  |      |       |        | 4,511  |   |       |        | 3,604  | 
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|Other expenses:            |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           | Compensation and benefits                          |                                                         |       | 7,786  |        |      |       | 7,151  |        |   |       | 6,400  |       
|                           | Occupancy                                          |                                                         |       | 1,398  |        |      |       | 1,249  |        |   |       | 1,241  |       
|                           | Furniture and equipment                            |                                                         |       | 945    |        |      |       | 612    |        |   |       | 647    |       
|                           | Advertising                                        |                                                         |       | 440    |        |      |       | 325    |        |   |       | 387    |       
|                           | Data processing services                           |                                                         |       | 514    |        |      |       | 417    |        |   |       | 404    |       
|                           | Telephone and postage                              |                                                         |       | 534    |        |      |       | 453    |        |   |       | 431    |       
|                           | Amortization                                       |                                                         |       | 147    |        |      |       | 184    |        |   |       | 375    |       
|                           | Legal fees                                         |                                                         |       | 540    |        |      |       | 447    |        |   |       | 72     |       
|                           | Other                                              |                                                         |       | 3,107  |        |      |       | 2,594  |        |   |       | 2,274  |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Total other expenses                                    |       |        | 15,411 |      |       |        | 13,432 |   |       |        | 12,231 | 
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Income before income taxes                              |       |        | 1,653  |      |       |        | 3,116  |   |       |        | 4,901  | 
|Income taxes               |                                                    |                                                         | 290   |        |        |      | 883   |        |        |   | 1,640 |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|                           |                                                    | Net income                                              |       | $      | 1,363  |      |       | $      | 2,233  |   |       | $      | 3,261  | 
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|Basic Earnings Per Share   |                                                    | $                                                       | 0.65  |        |        | $    | 0.94  |        |        | $ | 1.34  |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|Diluted Earnings Per Share |                                                    | $                                                       | 0.65  |        |        | $    | 0.93  |        |        | $ | 1.31  |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       
|Dividends Per Share        |                                                    | $                                                       | 0.30  |        |        | $    | 0.29  |        |        | $ | 0.24  |       
|                           |                                                    |                                                         |       |        |        |      |       |        |        |   |       |       

See Accompanying Notes to Consolidated Financial
Statements.

25




---



##### 



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY








|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |       |       | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | -- | ---------- |  | -------- | ------ | ------------- |  | ---------- | ------ | -------- |  | ------------- | ----- | ----- | - | - | ---- | - |  | - | ------- | - |  | - | ------ | ----- | ----- | 
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        | Accumulated   |  |            |        |          |  |              
|                                                     |                                                                                                                 |                                                 |    | Additional |  |          |        | Other         |  | Unearned   |        |          |  | Total        
|                                                     |                                                                                                                 | Common                                          |    | Paid-In    |  | Retained |        | Comprehensive |  | Restricted |        | Treasury |  | Stockholders
|                                                     |                                                                                                                 | Stock                                           |    | Capital    |  | Income   |        | Income        |  | Stock      |        | Stock    |  | Equity       
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |              
|                                                     |                                                                                                                 |                                                
|                                                     |                                                                                                                 | (in thousands, except share and per share data)
|Balance, December 31, 2000, as originally
    stated |                                                                                                                 | $                                               | 18 |            |  | $        | 15,328 |               |  | $          | 34,286 |          |  | $             | 116   |       |   | $ |     |   |  | $ | (10,459 | ) |  | $ | 39,289 |      
|Stock split, 2 for 1                                 |                                                                                                                 |                                                 | 18 |            |  |          | (18    | )             |  |            |       |          |  |               |      |       |   |   |     |   |  |   |        |   |  |   |       |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|Balance, December 31, 2000, as restated              |                                                                                                                 |                                                 | 36 |            |  |          | 15,310 |               |  |            | 34,286 |          |  |               | 116   |       |   |   |     |   |  |   | (10,459 | ) |  |   | 39,289 |      
|Comprehensive income:                                |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     | Net income                                                                                                      |                                                 |    |           |  |          |        |              |  |            |        | 3,261    |  |               |       |      |   |   |      |  |  |   |         |  |  |   |        | 3,261 |      
|                                                     | Unrealized gain on securities available-for-sale
    arising during the period, net of tax of $402              |                                                 |    |           |  |          |        |              |  |            |        |         |  |               |       | 780   |   |   |      |  |  |   |         |  |  |   |        | 780   |      
|                                                     | Less: Reclassifications adjustment for gains
    included in net income, net of tax of $(150)                   |                                                 |    |           |  |          |        |              |  |            |        |         |  |               |       | (291  | ) |   |      |  |  |   |         |  |  |   |        | (291  | )    
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   | 489    |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     |                                                                                                                 | Comprehensive income                            |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |       | 3,750 | 
|Purchase of 128,400 shares of treasury stock         |                                                                                                                 |                                                 |   |            |  |          |       |               |  |            |       |          |  |               |      |       |   |   |     |   |  |   | (1,543  | ) |  |   | (1,543 | )    
|Exercise of stock options                            |                                                                                                                 |                                                 |   |            |  |          | (101   | )             |  |            |       |          |  |               |      |       |   |   |     |   |  |   | 379     |   |  |   | 278    |      
|Dividends paid on common stock $.24 per
    share   |                                                                                                                 |                                                 |   |            |  |          |       |               |  |            | (583   | )        |  |               |      |       |   |   |     |   |  |   |        |   |  |   | (583   | )    
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|Balance, December 31, 2001                           |                                                                                                                 |                                                 | 36 |            |  |          | 15,209 |               |  |            | 36,964 |          |  |               | 605   |       |   |   |     |   |  |   | (11,623 | ) |  |   | 41,191 |      
|Comprehensive income:                                |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     | Net income                                                                                                      |                                                 |    |           |  |          |        |              |  |            |        | 2,233    |  |               |       |      |   |   |      |  |  |   |         |  |  |   |        | 2,233 |      
|                                                     | Unrealized gain on securities available-for-sale
    arising during the period, net of tax of $529              |                                                 |    |           |  |          |        |              |  |            |        |         |  |               |       | 1,026 |   |   |      |  |  |   |         |  |  |   |        | 1,026 |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   | 1,026  |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     |                                                                                                                 | Comprehensive income                            |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |       | 3,259 | 
|Purchase of 167,224 shares of treasury stock         |                                                                                                                 |                                                 |   |            |  |          |       |               |  |            |       |          |  |               |      |       |   |   |     |   |  |   | (3,202  | ) |  |   | (3,202 | )    
|Exercise of stock options                            |                                                                                                                 |                                                 |   |            |  |          | (187   | )             |  |            |       |          |  |               |      |       |   |   |     |   |  |   | 726     |   |  |   | 539    |      
|Dividends paid on common stock  $.29
    per share  |                                                                                                                 |                                                 |   |            |  |          |       |               |  |            | (680   | )        |  |               |      |       |   |   |     |   |  |   |        |   |  |   | (680   | )    
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|Balance, December 31, 2002                           |                                                                                                                 |                                                 | 36 |            |  |          | 15,022 |               |  |            | 38,517 |          |  |               | 1,631 |       |   |   |     |   |  |   | (14,099 | ) |  |   | 41,107 |      
|Comprehensive income:                                |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     | Net income                                                                                                      |                                                 |    |           |  |          |        |              |  |            |        | 1,363    |  |               |       |      |   |   |      |  |  |   |         |  |  |   |        | 1,363 |      
|                                                     | Unrealized gain (loss) on securities
    available-for-sale arising during the period, net of tax of
    $(326) |                                                 |    |           |  |          |        |              |  |            |        |         |  |               |       | (538  | ) |   |      |  |  |   |         |  |  |   |        | (538  | )    
|                                                     | Less: Reclassifications adjustment for gains
    included in net income, net of tax of $(3)                     |                                                 |    |           |  |          |        |              |  |            |        |         |  |               |       | (5    | ) |   |      |  |  |   |         |  |  |   |        | (5    | )    
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   | (543   | )    
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|                                                     |                                                                                                                 | Comprehensive income                            |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |       | 820   | 
|Purchase of 466,540 shares of treasury stock         |                                                                                                                 |                                                 |   |            |  |          |       |               |  |            |       |          |  |               |      |       |   |   |     |   |  |   | (9,308  | ) |  |   | (9,308 | )    
|Exercise of stock options                            |                                                                                                                 |                                                 |   |            |  |          | 20     |               |  |            |       |          |  |               |      |       |   |   |     |   |  |   | 182     |   |  |   | 202    |      
|Restricted stock awards                              |                                                                                                                 |                                                 |   |            |  |          | 422    |               |  |            |       |          |  |               |      |       |   |   | (820 | ) |  |   | 398     |   |  |   |       |      
|Stock issued in acquisition (700,300 shares)         |                                                                                                                 |                                                 | 6  |            |  |          | 13,465 |               |  |            |       |          |  |               |      |       |   |   |     |   |  |   |        |   |  |   | 13,471 |      
|Dividends paid on common stock $.30 per
    share   |                                                                                                                 |                                                 |   |            |  |          |       |               |  |            | (649   | )        |  |               |      |       |   |   |     |   |  |   |        |   |  |   | (649   | )    
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      
|Balance, December 31, 2003                           |                                                                                                                 | $                                               | 42 |            |  | $        | 28,929 |               |  | $          | 39,231 |          |  | $             | 1,088 |       |   | $ | (820 | ) |  | $ | (22,827 | ) |  | $ | 45,643 |      
|                                                     |                                                                                                                 |                                                 |    |            |  |          |        |               |  |            |        |          |  |               |       |       |   |   |      |   |  |   |         |   |  |   |        |      

See Accompanying Notes to Consolidated Financial
Statements.

26




---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS








|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |         |         |         |  
|------------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------- | ---------------------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                                  |                                                                                | 2003                                               |                                                      | 2002    |         | 2001   
|                                                  |                                                                                |                                                    |                                                      |         |         |        
|                                                  |                                                                                |                                                   
|                                                  |                                                                                | (in thousands)                                    
|Cash Flows from Operating Activities              |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  | Net income                                                                     |                                                    | $                                                    | 1,363   |         |         | $      | 2,233   |         |         | $      | 3,261   |        
|                                                  | Adjustments to reconcile net income to net cash
    from operating activities: |                                                    |                                                      |         |         |         |        |         |         |         |        |         |        
|                                                  |                                                                                | Provision for loan losses                          |                                                      |         | 4,122   |         |        |         | 3,990   |         |        |         | 502     |        
|                                                  |                                                                                | Depreciation                                       |                                                      |         | 1,293   |         |        |         | 894     |         |        |         | 901     |        
|                                                  |                                                                                | Amortization (accretion) of investments, net       |                                                      |         | 179     |         |        |         | 69      |         |        |         | (18     | )      
|                                                  |                                                                                | Amortization of intangibles                        |                                                      |         | 147     |         |        |         | 184     |         |        |         | 375     |        
|                                                  |                                                                                | Deferred income taxes                              |                                                      |         | 551     |         |        |         | (1,400  | )       |        |         | 24      |        
|                                                  |                                                                                | Decrease in interest receivable                    |                                                      |         | 559     |         |        |         | 27      |         |        |         | 459     |        
|                                                  |                                                                                | Origination of loans held for sale                 |                                                      |         | (56,224 | )       |        |         | (58,865 | )       |        |         | (24,885 | )      
|                                                  |                                                                                | Proceeds from sales of loans held for sale         |                                                      |         | 57,623  |         |        |         | 60,698  |         |        |         | 24,385  |        
|                                                  |                                                                                | Net gain on sales of loans held for sale           |                                                      |         | (1,271  | )       |        |         | (1,116  | )       |        |         | (329    | )      
|                                                  |                                                                                | Net gain on sales of securities                    |                                                      |         | (8      | )       |        |         |        |         |        |         | (401    | )      
|                                                  |                                                                                | Net gain on sales of real estate held for sale     |                                                      |         | (253    | )       |        |         | (52     | )       |        |         | (27     | )      
|                                                  |                                                                                | Gain on sale of branch                             |                                                      |         | (478    | )       |        |         |        |         |        |         |        |        
|                                                  |                                                                                | Increase in cash surrender value of life insurance |                                                      |         | (403    | )       |        |         | (349    | )       |        |         |        |        
|                                                  |                                                                                | Federal Home Loan Bank stock dividend              |                                                      |         | (229    | )       |        |         | (133    | )       |        |         | (154    | )      
|                                                  |                                                                                | Other, net                                         |                                                      |         | (2,760  | )       |        |         | 1,159   |         |        |         | (1,612  | )      
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  |                                                                                |                                                    | Net cash provided by operations                      |         |         | 4,211   |        |         |         | 7,339   |        |         |         | 2,481   |  
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|Cash Flow from Investing Activities               |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  | Purchases of available for sale securities                                     |                                                    |                                                      | (37,784 | )       |         |        | (52,040 | )       |         |        | (22,414 | )      
|                                                  | Proceeds from sales of available for sale
    securities                       |                                                    |                                                      | 96      |         |         |        | -       |         |         |        | 5,437   |        
|                                                  | Proceeds from maturities of available for sale
    securities                  |                                                    |                                                      | 47,226  |         |         |        | 17,279  |         |         |        | 45,007  |        
|                                                  | Purchases of held-to-maturity securities                                       |                                                    |                                                      |        |         |         |        | (195    | )       |         |        | (660    | )      
|                                                  | Proceeds from maturities of held-to-maturity
    securities                    |                                                    |                                                      | 201     |         |         |        | 604     |         |         |        | 672     |        
|                                                  | Proceeds from sale of non-marketable equity
    securities                     |                                                    |                                                      |        |         |         |        |        |         |         |        | 460     |        
|                                                  | Proceeds from sales of real estate held for sale                               |                                                    |                                                      | 678     |         |         |        | 601     |         |         |        | 361     |        
|                                                  | Cash paid for branch sale                                                      |                                                    |                                                      | (12,315 | )       |         |        |        |         |         |        |        |        
|                                                  | Purchase of Aviston Financial Corporation, net
    cash acquired               |                                                    |                                                      | 2,984   |         |         |        |        |         |         |        |        |        
|                                                  | (Increase) decrease in loans                                                   |                                                    |                                                      | 19,547  |         |         |        | 5,033   |         |         |        | (55,793 | )      
|                                                  | Purchases of office properties and equipment, net                              |                                                    |                                                      | (6,767  | )       |         |        | (2,874  | )       |         |        | (704    | )      
|                                                  | Purchases of bank owned life insurance                                         |                                                    |                                                      |        |         |         |        | (8,000  | )       |         |        |        |        
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  |                                                                                |                                                    | Net cash from investing activities                   |         |         | 13,866  |        |         |         | (39,592 | )      |         |         | (27,634 | )
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|Cash Flows from Financing Activities              |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|Net increase in deposit accounts                  |                                                                                |                                                    | 1,355                                                |         |         |         | 16,660 |         |         |         | 27,516 |        
|                                                  | Proceeds from other borrowings                                                 |                                                    |                                                      | 902     |         |         |        | 42,600  |         |         |        | 40,000  |        
|                                                  | Repayments of other borrowings                                                 |                                                    |                                                      | (12,400 | )       |         |        | (12,900 | )       |         |        | (39,000 | )      
|                                                  | Proceeds from issuance of trust preferred
    debentures                       |                                                    |                                                      |        |         |         |        | 10,000  |         |         |        |        |        
|                                                  | Proceeds from exercise of stock options                                        |                                                    |                                                      | 202     |         |         |        | 539     |         |         |        | 278     |        
|                                                  | Dividends paid                                                                 |                                                    |                                                      | (649    | )       |         |        | (680    | )       |         |        | (583    | )      
|                                                  | Purchase of treasury stock                                                     |                                                    |                                                      | (9,308  | )       |         |        | (3,202  | )       |         |        | (1,543  | )      
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  |                                                                                |                                                    | Net cash from financing activities                   |         |         | (19,898 | )      |         |         | 53,017  |        |         |         | 26,668  |  
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  |                                                                                |                                                    | Increase (decrease) in cash and cash
    equivalents |         |         | (1,821  | )      |         |         | 20,764  |        |         |         | 1,515   |  
|Cash and cash equivalents:                        |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  | Beginning of year                                                              |                                                    |                                                      | 47,426  |         |         |        | 26,662  |         |         |        | 25,147  |        
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  | End of year                                                                    |                                                    | $                                                    | 45,605  |         |         | $      | 47,426  |         |         | $      | 26,662  |        
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|Supplemental Disclosures of Cash Flow Information |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  | Cash paid during the year for:                                                 |                                                    |                                                      |         |         |         |        |         |         |         |        |         |        
|                                                  |                                                                                | Interest                                           |                                                      | $       | 12,017  |         |        | $       | 16,044  |         |        | $       | 18,846  |        
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        
|                                                  |                                                                                | Income taxes                                       |                                                      | $       | 1,104   |         |        | $       | 1,854   |         |        | $       | 1,745   |        
|                                                  |                                                                                |                                                    |                                                      |         |         |         |        |         |         |         |        |        

(Continued)

27




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##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS








|                                                              |                                          |                              |               |         |         |        |   |     |   |   |   |     |   |   | 
|------------------------------------------------------------- | ---------------------------------------- | ---------------------------- | ------------- | ------- | ------- | ------ | - | --- | - | - | - | --- | - | - | 
|                                                              |                                          | 2003                         |               | 2002    |         | 2001  
|                                                              |                                          |                              |               |         |         |       
|                                                              |                                          |                             
|                                                              |                                          | (in thousands)              
|Supplemental Disclosures of Noncash Investing
    Activities: |                                          |                              |               |         |         |        |   |     |   |   |   |    
|                                                              | Real estate acquired through foreclosure |                              | $             | 428     |         |        | $ | 462 |   |   | $ | 386 |  
|                                                              |                                          |                              |               |         |         |        |   |     |   |   |   |    
|Sale of Hoopeston Branch:                                     |                                          |                              |               |         |         |        |   |     |   |   |   |    
|                                                              | Assets disposed:                         |                              |               |         |         |        |   |     |   |   |   |     |  
|                                                              |                                          | Loans                        |               | $       | (6,370  | )      |   | $   |  |   |   | $   |  |  
|                                                              |                                          | Accrued interest receivable  |               |         | (24     | )      |   |     |  |   |   |     |  |  
|                                                              |                                          | Premises and equipment       |               |         | (165    | )      |   |     |  |   |   |     |  |  
|                                                              |                                          | Other assets                 |               |         | (197    | )      |   |     |  |   |   |     |  |  
|                                                              | Liabilities assumed by buyer:            |                              |               |         |         |        |   |     |   |   |   |     |  
|                                                              |                                          | Demand deposits              |               |         | 2,162   |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Certificates of deposit      |               |         | 17,243  |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Other liabilities            |               |         | 144     |        |   |     |  |   |   |     |  |  
|                                                              | Gain on sale of branch                   |                              |               | (478    | )       |        |   |    |   |   |   |    |  
|                                                              |                                          |                              |               |         |         |        |   |     |   |   |   |    
|Cash paid                                                     |                                          | $                            | 12,315        |         |         | $      |  |     |   | $ |  |    
|                                                              |                                          |                              |               |         |         |        |   |     |   |   |   |    
|Acquisition of Aviston Financial:                             |                                          |                              |               |         |         |        |   |     |   |   |   |    
|                                                              | Stock issued                             |                              | $             | (13,471 | )       |        | $ |    |   |   | $ |    |  
|                                                              | Cost incurred                            |                              |               | (601    | )       |        |   |    |   |   |   |    |  
|                                                              | Assets acquired:                         |                              |               |         |         |        |   |     |   |   |   |     |  
|                                                              |                                          | Investments                  |               |         | 15,355  |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Loans                        |               |         | 72,068  |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Accrued interest receivable  |               |         | 339     |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Premises and equipment       |               |         | 1,426   |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Federal Home Loan Bank stock |               |         | 329     |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Goodwill                     |               |         | 8,367   |        |   |     |  |   |   |     |  |  
|                                                              |                                          | Intangible assets            |               |         | 358     |        |   |     |  |   |   |     |  |  
|                                                              | Liabilities assumed:                     |                              |               |         |         |        |   |     |   |   |   |     |  
|                                                              |                                          | Demand deposits              |               |         | (31,568 | )      |   |     |  |   |   |     |  |  
|                                                              |                                          | Certificates of deposit      |               |         | (49,020 | )      |   |     |  |   |   |     |  |  
|                                                              |                                          | Borrowings                   |               |         | (6,194  | )      |   |     |  |   |   |     |  |  
|                                                              |                                          | Other liabilities            |               |         | (372    | )      |   |     |  |   |   |     |  |  
|                                                              |                                          |                              |               |         |         |        |   |     |   |   |   |    
|                                                              |                                          |                              | Cash acquired |         | $       | (2,984 | ) |     | $ |  |   |     | $ |  | 
|                                                              |                                          |                              |               |         |         |        |   |     |   |   |   |    

See Accompanying Notes to Consolidated Financial
Statements.

28




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






Note 1. Significant Accounting Policies

Through Centrue Bank (the Bank),
Centrue Financial Corporation (the Company, which
was formerly known as Kankakee Bancorp, Inc.) provides a full
range of banking services to individual and corporate customers
through its 18 locations throughout Illinois. The Bank is
subject to competition from other financial institutions and
nonfinancial institutions providing financial products.
Additionally, the Company and the Bank are subject to the
regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory agencies.


The significant accounting and reporting policies
of the Company and its subsidiary follow:

Basis of Consolidation and Financial Statement Presentation

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the
Bank and the Banks wholly-owned subsidiary, Centrue
Service Corporation. Kankakee Capital Trust I (Capital
Trust I), a statutory business trust organized under the
Delaware Business Trust Act, was formed in March 2002. Centrue
Financial Corporation owns all of the Common Securities of
Capital Trust I. Centrue Financial Corporation and Capital Trust
I, as part of a pooled trust preferred offering, issued
$10 million variable rate Cumulative Trust Preferred
Securities issued by Wilmington Trust Company and guaranteed by
the Company.


Significant intercompany accounts and
transactions have been eliminated in consolidation. Based on the
Companys approach to decision making, it has decided that
its business is comprised of a single business segment.

The consolidated financial statements of the
Company have been prepared in conformity with accounting
principles generally accepted in the United States of America
and conform to predominate practice within the banking industry.

In preparing the consolidated financial
statements, Company management is required to make estimates and
assumptions which significantly affect the amounts reported in
the consolidated financial statements. Significant estimates
which are particularly susceptible to change in a short period
of time include the determination of the market value of
investment securities, the allowance for loan losses and
valuation of mortgage servicing rights, goodwill and real estate
and other properties acquired in connection with foreclosures or
in satisfaction of amounts due from borrowers on loans. Actual
results could differ from those estimates.

Comprehensive Income

Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in
net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income,
are components of comprehensive income.


Securities

Securities classified as held-to-maturity are
those securities the Company has both the positive intent and
ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by
the interest method over their contractual lives.


Securities classified as available-for-sale are
those securities that the Company intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale
would be based on various factors, including significant
movements

29




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



in interest rates, changes in the maturity mix of
the Companys assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors.
Securities available-for-sale are carried at fair value. The
difference between fair value and cost, adjusted for
amortization of premium and accretion of discounts, results in
an unrealized gain or loss. Unrealized gains or losses are
reported as accumulated other comprehensive income (loss), net
of the related deferred tax effect. Gains or losses on the sale
of securities are determined on the basis of the specific
security sold and are included in earnings. Premiums and
discounts are recognized in interest income using the interest
method over their contractual lives.

The Bank, as a member of the Federal Home Loan
Bank of Chicago (the FHLB), is required to maintain
an investment in capital stock of the FHLB in an amount equal to
1% of its outstanding home loans. No ready market exists for the
FHLB stock, and it has no quoted market value. For disclosure
purposes, such stock is assumed to have a market value which is
equal to cost.

Declines in the fair value of held-to-maturity
and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as
realized losses. In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the
extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.

Loans

Loans originated or purchased are identified as
either held for sale or portfolio at origination or purchase.
Loans held for portfolio are originated or purchased with the
intent to hold them to maturity for the purpose of earning
interest income. Since the Bank has the ability to hold such
loans as intended, they are recorded at cost. Loans held for
sale are recorded at the lower of aggregate cost or market until
they are sold. Any transfers between portfolios, which are rare,
are recorded at the lower of cost or market.


Interest is credited to income as earned using
the simple interest method applied to the daily balances of the
principal outstanding.

A loan is considered impaired when, based on
current information and events, it is probable that the Bank
will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining
impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons
for the delay, the borrowers prior payment record and the
amount of the shortfall in relation to the principal and
interest owed. Impairment is measured on a loan-by-loan basis
for commercial and construction loans by either the present
value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable
market price or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogenous
loans are collectively evaluated for impairment. Accordingly,
the Bank does not separately identify individual consumer and
residential loans for impairment disclosures.

The accrual of interest income on loans is
discontinued when, in the opinion of management, there is
reasonable doubt as to the borrowers ability to meet
payments of interest or principal when they become due. Interest
income on these loans is recognized to the extent interest
payments are received and the principal is considered fully
collectible.

30




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



Loan origination fees and certain direct
origination costs are being amortized as an adjustment of the
yield over the contractual life of the related loan, adjusted
for prepayments, using the interest method.

Allowance for Loan Losses

The allowance for loan losses
(allowance) is established as losses are estimated
to have occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes that the uncollectibility of a loan balance
is confirmed. Subsequent recoveries, if any, are credited to the
allowance.


The allowance is evaluated on a regular basis by
management and is based upon managements periodic review
of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay,
estimated values of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective,
as it requires estimates that are susceptible to significant
revision as more information becomes available.

While management uses the best information
available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in
economic conditions. In addition, various regulatory agencies
periodically review the allowance. These agencies may require
the Bank to make additions to the allowance based on their
judgments of collectibility based on information available to
them at the time of their examination.

Real Estate Held for Sale

Real estate acquired through foreclosure or deed
in lieu of foreclosure represents specific assets to which the
Company has acquired legal title in satisfaction of
indebtedness. Such real estate is recorded at the
propertys fair value at the date of foreclosure (cost).
Initial valuation adjustments, if any, are charged against the
allowance for loan losses. Property is evaluated regularly to
ensure the recorded amount is supported by its current fair
value. Subsequent declines in estimated fair value are charged
to expense when incurred. Revenues and expenses related to
holding and operating these properties are included in
operations.


Office Properties and Equipment

Office properties and equipment are stated at
cost less accumulated depreciation. Depreciation is computed on
the straight-line method over the estimated useful lives of the
assets. Estimated lives are 15 to 39 years for buildings
and leasehold improvements and 3 to 15 years for furniture
and equipment.


Intangible Assets

Intangible assets consist of core deposit
intangibles from the purchase of branch locations. This amount
is amortized into other expense on a straight-line basis using
periods of 8 to 15 years. On a periodic basis, the Company
reviews the intangible assets for events or circumstances that
may indicate a change in recoverability of the underlying basis.


Goodwill

Goodwill resulted from the acquisition of Coal
City National Bank in 1998 and Aviston Financial Corporation in
2003. The Coal City amount was originally amortized into expense
on a straight-line basis assuming a life of twenty years. As
more fully explained in Note 2, the Company adopted Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets, and ceased amortization of the goodwill
on January 1, 2002. The Company performed an initial
impairment assessment as of January 1, 2002 and an annual
impairment assessment as of September 30, 2003 and 2002.


31




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



Loan Servicing

The cost of mortgage-servicing rights acquired is
amortized in proportion to, and over the period of, estimated
net servicing revenues. Impairment of mortgage-servicing rights
is assessed based on the fair value of those rights. Fair values
are estimated using discounted cash flows based on a current
market interest rate. For purposes of measuring impairment, the
rights are stratified based on the predominant risk
characteristics of the underlying loans. The predominant
characteristic currently used for stratification is type of
loan. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceed
their fair value.


Income Taxes

Deferred income tax assets and liabilities are
computed for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Deferred tax assets are also
recognized for operating loss and tax credit carryforwards.
Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets and
liabilities.


Earnings Per Share

Basic earnings per share are computed by dividing
net income for the year by the average number of shares
outstanding. Shares of unearned restricted stock are not
considered outstanding in this calculation.


Diluted earnings per share are determined by
dividing net income for the year by the average number of shares
of common stock and dilutive potential common shares
outstanding. Dilutive potential common shares assume exercise of
stock options and use of proceeds to purchase treasury stock at
the average market price for the period.

The following reflects earnings per share
calculations for basic and diluted methods:

|                                            |                                     |              |           |           |  |          |           |           |  |   |           |           | 
|------------------------------------------- | ----------------------------------- | ------------ | --------- | --------- |  | -------- | --------- | --------- |  | - | --------- | --------- | 
|                                            |                                     |             
|                                            |                                     | December 31,
|                                            |                                     |             
|                                            |                                     | 2003         |           | 2002 (1)  |  | 2001 (1)
|                                            |                                     |              |           |           |  |         
|Net income available to common shareholders |                                     | $            | 1,363,000 |           |  | $        | 2,233,000 |           |  | $ | 3,261,000 |          
|                                            |                                     |              |           |           |  |          |           |           |  |   |           |          
|Basic potential common shares:              |                                     |              |           |           |  |          |           |           |  |   |           |          
|                                            | Weighted average shares outstanding |              |           | 2,098,386 |  |          |           | 2,387,110 |  |   |           | 2,430,138 | 
|                                            |                                     |              |           |           |  |          |           |           |  |   |           |          
|Basic average shares outstanding            |                                     |              | 2,098,386 |           |  |          | 2,387,110 |           |  |   | 2,430,168 |          
|Diluted potential common shares:            |                                     |              |           |           |  |          |           |           |  |   |           |          
|                                            | Stock option equivalents            |              |           | 2,891     |  |          |           | 8,740     |  |   |           | 49,760    | 
|                                            |                                     |              |           |           |  |          |           |           |  |   |           |          
|Diluted average shares outstanding          |                                     |              | 2,101,277 |           |  |          | 2,395,850 |           |  |   | 2,479,928 |          
|                                            |                                     |              |           |           |  |          |           |           |  |   |           |          
|Basic earnings per share                    |                                     | $            | 0.65      |           |  | $        | 0.94      |           |  | $ | 1.34      |          
|                                            |                                     |              |           |           |  |          |           |           |  |   |           |          
|Diluted earnings per share                  |                                     | $            | 0.65      |           |  | $        | 0.93      |           |  | $ | 1.31      |          
|                                            |                                     |              |           |           |  |          |           |           |  |   |           |          






|    |                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The earnings per common share for the year ended
    December 31, 2002 and 2001 have been adjusted to give
    retroactive effect to the two-for-one stock split (discussed in
    Note 2) effected in the form of a stock dividend on
    October 30, 2003 as if the stock split had occurred on
    January 1, 2001.

Cash and Cash Equivalents

For reporting cash flows, cash and cash
equivalents represent highly liquid investments with maturities
of 90 days or less at the time of purchase and includes
cash on hand, due from bank


32




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



accounts (including cash items in process of
clearing), money market funds and federal funds sold. Cash flows
from loans and deposits are reported net.

Trust Assets

Assets of the trust department, other than trust
cash on deposit at the Bank, are not included in these financial
statements because they are not assets of the Company.


Reclassification

Certain amounts in the 2002 and 2001 consolidated
financial statements have been reclassified to conform with the
2003 presentation. Such reclassifications have no effect on
previously reported net income or stockholders equity.


Stock-Based Employee Compensation

The Company has two stock-based employee
compensation plans which have been in existence for all periods
presented, and which is more fully described in Note 15. As
permitted under accounting principles generally accepted in the
United States of America, grants of options under the plan are
accounted for under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Because options
granted under the plan had an exercise price equal to market
value of the underlying common stock on the date of the grant,
no stock-based employee compensation cost is included in
determining net income. The following table illustrates the
effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.


|                                                                                                                                        |          |                        |       |      |      |      |       |   |      |   |       |   |      | 
|--------------------------------------------------------------------------------------------------------------------------------------- | -------- | ---------------------- | ----- | ---- | ---- | ---- | ----- | - | ---- | - | ----- | - | ---- | 
|                                                                                                                                        |          | 2003                   |       | 2002 |      | 2001
|                                                                                                                                        |          |                        |       |      |      |     
|                                                                                                                                        |          |                       
|                                                                                                                                        |          | (in thousands,        
|                                                                                                                                        |          | except per share data)
|Net income, as reported                                                                                                                 |          | $                      | 1,363 |      |      | $    | 2,233 |   |      | $ | 3,261 |  
|Deduct total stock-based compensation expense
    determined under the fair value method for all awards, net of
    related tax effects |          |                        | (328  | )    |      |      | (6    | ) |      |   | (9    | )
|                                                                                                                                        |          |                        |       |      |      |      |       |   |      |   |       |  
|Pro forma net income                                                                                                                    |          | $                      | 1,035 |      |      | $    | 2,227 |   |      | $ | 3,252 |  
|                                                                                                                                        |          |                        |       |      |      |      |       |   |      |   |       |  
|Earnings per share:                                                                                                                     |          |                        |       |      |      |      |       |   |      |   |       |  
|                                                                                                                                        | Basic:   |                        |       |      |      |      |       |   |      |   |       |   |     
|                                                                                                                                        |          | As reported            |       | $    | 0.65 |      |       | $ | 0.94 |   |       | $ | 1.34 | 
|                                                                                                                                        |          | Pro forma              |       |      | 0.49 |      |       |   | 0.94 |   |       |   | 1.34 | 
|                                                                                                                                        | Diluted: |                        |       |      |      |      |       |   |      |   |       |   |     
|                                                                                                                                        |          | As reported            |       | $    | 0.65 |      |       | $ | 0.93 |   |       | $ | 1.31 | 
|                                                                                                                                        |          | Pro forma              |       |      | 0.49 |      |       |   | 0.93 |   |       |   | 1.31 | 

The fair value of the stock options granted in
2003, 2002 and 2001 has been estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options
which have no vesting restrictions. In addition, such models
require the use of subjective assumptions, including expected
stock price volatility. In managements opinion, such
valuation models may not necessarily provide the best single
measure of option value.

33




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



|                                                 |  |      |             |      |  |      |       |  |  |  |       | 
|------------------------------------------------ |  | ---- | ----------- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                 |  | 2003 |             | 2002 |  | 2001
|                                                 |  |      |             |      |  |     
|Number of options granted                        |  |      | 107,000     |      |  |      | 5,000 |  |  |  | 5,000 | 
|Risk-free interest rate                          |  |      | 3.41%-4.27% |      |  |      | 1.44% |  |  |  | 3.09% | 
|Expected life, in years                          |  |      | 5-10        |      |  |      | 1     |  |  |  | 5     | 
|Expected volatility                              |  |      | 22%-25%     |      |  |      | 25%   |  |  |  | 23%   | 
|Expected dividend yield                          |  |      | 1.14%-1.29% |      |  |      | 1.62% |  |  |  | 1.82% | 
|Estimated weighted average fair value per option |  |      | $9.70       |      |  |      | $3.54 |  |  |  | $5.41 | 

Emerging Accounting Standards

FIN No. 46 ,Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51 (Revised December
2003): 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 VIEs 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 provisions of FIN 46 were effective immediately
for all arrangements entered into after January 31, 2003.
However, subsequent revisions to the interpretation deferred the
implementation date of FIN 46 until the first period ending
after March 15, 2004.


The Company will adopt FIN 46, as revised, in
connection with its consolidated financial statements for the
quarter ended March 31, 2004. The implementation of FIN 46
will require the Company to de-consolidate its investment in
Capital Trust I because the Company is not the primary
beneficiary. There will be no impact on shareholders equity or
net income upon adoption of the standard.

The trust preferred securities issued by Capital
Trust I are currently included in the Tier 1 capital of the
Company for regulatory capital purposes. However, because the
financial statements of Capital Trust I will no longer be
included in the Companys consolidated financial
statements, the Federal Reserve Board may in the future disallow
inclusion of the trust preferred securities in Tier 1 capital
for regulatory capital purposes. In July 2003, the Federal
Reserve Board issued a supervisory letter instructing bank
holding companies to continue to include the trust preferred
securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal
Reserve Board intends to review the regulatory implications of
the change in accounting treatment of subsidiary trusts that
issue trust preferred securities and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance
that the Federal Reserve Board will continue to permit
institutions to include trust preferred securities in Tier I
capital for regulatory capital purposes.

The interpretations of FIN 46 and its application
to various transaction types and structures are evolving.
Management continuously monitors emerging issues related to FIN
46, some of which could potentially impact the Companys
financial statements.

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 for the years ended
December 31, 2002 and 2001 have been retroactively adjusted
for this split as if it occurred on January 1, 2001.


Note 3. Acquisition of Aviston Financial Corporation

On October 9, 2003, the Company acquired for
stock all of the outstanding shares of Aviston Financial
Corporation (Aviston Financial) for a total cost of
$14.1 million. The acquisition has been accounted for using
the purchase method of accounting. As such, the results of
operations of


34




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FINANCIAL


STATEMENTS







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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 $358,000 and
goodwill of $8.4 million. The intangible assets are being
amortized over ten years. At closing, Aviston Financial had
assets of $96.5 million, including $4.0 million of
goodwill, deposits of $80.6 million and stockholders
equity of $9.3 million.

The following information presents a summary of
consolidated operations of unaudited pro forma results of
operations for the years ended December 31, 2003 and 2002
as though Aviston Financial had been acquired as of
January 1, 2002:

|                           |  |                       |        |      |  |   |        | 
|-------------------------- |  | --------------------- | ------ | ---- |  | - | ------ | 
|                           |  | 2003                  |        | 2002
|                           |  |                       |        |     
|                           |  |                      
|                           |  | (in thousands, except
|                           |  | per share data)      
|Interest income            |  | $                     | 31,738 |      |  | $ | 38,080 | 
|Interest expense           |  |                       | 13,625 |      |  |   | 18,943 | 
|Net income                 |  |                       | 1,388  |      |  |   | 3,369  | 
|Basic earnings per share   |  |                       | 0.66   |      |  |   | 1.09   | 
|Diluted earnings per share |  |                       | 0.66   |      |  |   | 1.09   | 

These unaudited pro forma results have been
prepared for comparative purposes only and include certain
adjustments, such as additional amortization expense as a result
of intangible assets and additional depreciation expense on the
revaluation of purchased assets. They do not purport to be
indicative of the results of operations that actually would have
resulted had the combination occurred on January 1, 2002 or
of future results of operations of the consolidated entities.

Note 4. Adoption of Statement 142

On January 1, 2002, the Company implemented
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Under the
provisions of SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life, but instead will be
subject to at least annual assessments for impairment by
applying a fair value based test. SFAS 142 also requires that an
acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual
or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirers
intent to do so. The Company determined that no transitional
impairment loss was required at January 1, 2002.


Goodwill and intangible asset disclosures are as
follows:

|                                |                                      |                         |        |              |     |  |   |       |  | 
|------------------------------- | ------------------------------------ | ----------------------- | ------ | ------------ | --- |  | - | ----- |  | 
|                                |                                      |                        
|                                |                                      | As of December 31, 2003
|                                |                                      |                        
|                                |                                      | Gross Carrying          |        | Accumulated 
|                                |                                      | Amount                  |        | Amortization
|                                |                                      |                         |        |             
|                                |                                      |                        
|                                |                                      | (in thousands)         
|Amortized intangible assets:    |                                      |                         |        |              |     |  |   |      
|                                | Core deposit intangible              |                         | $      | 2,320        |     |  | $ | 1,091 | 
|Aggregate amortization expense: |                                      |                         |        |              |     |  |   |      
|                                | For the year ended December 31, 2003 |                         | $      | 147          |     |  |   |       | 
|Estimated amortization expense: |                                      |                         |        |              |     |  |   |      
|                                | For the year ended:                  |                         |        |              |     |  |   |       | 
|                                |                                      | 2004-2005               |        | $            | 340 |  |   |       |  | 
|                                |                                      | 2006-2010               |        | $            | 791 |  |   |       |  | 
|                                |                                      | 2011-2012               |        | $            | 72  |  |   |       |  | 
|                                |                                      | 2013                    |        | $            | 26  |  |   |       |  | 
|Goodwill:                       |                                      | $                       | 11,433 |              |     |  |   |      

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STATEMENTS







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Had the provisions of SFAS 142 been applied in
2001, the Companys net income and earnings per share would
have been as follows:

|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |      | 
|------------------------------------- | --------------------------------- | ---------------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                      |                                   |                       
|                                      |                                   | December 31,          
|                                      |                                   |                       
|                                      |                                   | 2003                   |       | 2002 |  | 2001
|                                      |                                   |                        |       |      |  |     
|                                      |                                   |                       
|                                      |                                   | (in thousands,        
|                                      |                                   | except per share data)
|Reported net income                   |                                   | $                      | 1,363 |      |  | $    | 2,233 |      |  | $ | 3,261 |     
|Add goodwill amortization, net of tax |                                   |                        |      |      |  |      |      |      |  |   | 126   |     
|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |     
|Adjusted net income                   |                                   | $                      | 1,363 |      |  | $    | 2,233 |      |  | $ | 3,387 |     
|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |     
|Basic earnings per share:             |                                   |                        |       |      |  |      |       |      |  |   |       |     
|                                      | Reported net income               |                        | $     | 0.65 |  |      | $     | 0.94 |  |   | $     | 1.34 | 
|                                      | Goodwill amortization, net of tax |                        |       |     |  |      |       |     |  |   |       | 0.06 | 
|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |     
|                                      | Adjusted net income               |                        | $     | 0.65 |  |      | $     | 0.94 |  |   | $     | 1.40 | 
|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |     
|Diluted earnings per share:           |                                   |                        |       |      |  |      |       |      |  |   |       |     
|                                      | Reported net income               |                        | $     | 0.65 |  |      | $     | 0.93 |  |   | $     | 1.31 | 
|                                      | Goodwill amortization, net of tax |                        |       |     |  |      |       |     |  |   |       | 0.06 | 
|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |     
|                                      | Adjusted net income               |                        | $     | 0.65 |  |      | $     | 0.93 |  |   | $     | 1.37 | 
|                                      |                                   |                        |       |      |  |      |       |      |  |   |       |     

Note 5. Investment Securities

Amortized costs and fair values of investment
securities are summarized as follows:


|                                       |       |                |        |            |  |            |       |       |  |   |     |     |  |   |        |        | 
|-------------------------------------- | ----- | -------------- | ------ | ---------- |  | ---------- | ----- | ----- |  | - | --- | --- |  | - | ------ | ------ | 
|                                       |       |                |        | Gross      |  | Gross      |       |      
|                                       |       | Amortized      |        | Unrealized |  | Unrealized |       | Fair 
|Available-for-sale                     |       | Cost           |        | Gains      |  | Losses     |       | Value
|                                       |       |                |        |            |  |            |       |      
|                                       |       |               
|                                       |       | (in thousands)
|December 31, 2003                      |       |                |        |            |  |            |       |       |  |   |     |     |  |   |        |       
|U. S. Treasury securities              |       | $              | 1,208  |            |  | $          |      |       |  | $ |    |     |  | $ | 1,208  |       
|U. S. government and agency securities |       |                | 53,289 |            |  |            | 1,119 |       |  |   | 27  |     |  |   | 54,381 |       
|Municipal bonds                        |       |                | 4,142  |            |  |            | 51    |       |  |   | 11  |     |  |   | 4,182  |       
|Mortgage-backed securities             |       |                | 26,864 |            |  |            | 540   |       |  |   | 116 |     |  |   | 27,288 |       
|Mutual funds                           |       |                | 400    |            |  |            |      |       |  |   | 21  |     |  |   | 379    |       
|Other securities                       |       |                | 250    |            |  |            | 24    |       |  |   |    |     |  |   | 274    |       
|                                       |       |                |        |            |  |            |       |       |  |   |     |     |  |   |        |       
|                                       | Total |                | $      | 86,153     |  |            | $     | 1,734 |  |   | $   | 175 |  |   | $      | 87,712 | 
|                                       |       |                |        |            |  |            |       |       |  |   |     |     |  |   |        |       

|                                       |       |   |        |        |  |   |       |       |  |   |    |    |  |   |        |        | 
|-------------------------------------- | ----- | - | ------ | ------ |  | - | ----- | ----- |  | - | -- | -- |  | - | ------ | ------ | 
|December 31, 2002                      |       |   |        |        |  |   |       |       |  |   |    |    |  |   |        |       
|U. S. government and agency securities |       | $ | 42,499 |        |  | $ | 1,495 |       |  | $ |   |    |  | $ | 43,994 |       
|Mutual fund shares                     |       |   | 479    |        |  |   |      |       |  |   | 14 |    |  |   | 465    |       
|Mortgage-backed securities             |       |   | 37,189 |        |  |   | 995   |       |  |   | 5  |    |  |   | 38,179 |       
|                                       |       |   |        |        |  |   |       |       |  |   |    |    |  |   |        |       
|                                       | Total |   | $      | 80,167 |  |   | $     | 2,490 |  |   | $  | 19 |  |   | $      | 82,638 | 
|                                       |       |   |        |        |  |   |       |       |  |   |    |    |  |   |        |       

36




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CONSOLIDATED


FINANCIAL


STATEMENTS







---



|                           |       |                  |       |            |  |            |    |       |  |   |   |   |  |   |       |       | 
|-------------------------- | ----- | ---------------- | ----- | ---------- |  | ---------- | -- | ----- |  | - | - | - |  | - | ----- | ----- | 
|                           |       |                 
|                           |       | Held-to-maturity
|                           |       |                 
|                           |       |                  |       | Gross      |  | Gross      |    |      
|                           |       | Amortized        |       | Unrealized |  | Unrealized |    | Fair 
|                           |       | Cost             |       | Gains      |  | Losses     |    | Value
|                           |       |                  |       |            |  |            |    |      
|                           |       |                 
|                           |       | (in thousands)  
|December 31, 2003          |       |                  |       |            |  |            |    |       |  |   |   |   |  |   |       |      
|Municipal bonds            |       | $                | 892   |            |  | $          | 20 |       |  | $ |  |   |  | $ | 912   |      
|                           |       |                  |       |            |  |            |    |       |  |   |   |   |  |   |       |      
|December 31, 2002          |       |                  |       |            |  |            |    |       |  |   |   |   |  |   |       |      
|Municipal bonds            |       | $                | 1,067 |            |  | $          | 13 |       |  | $ | 3 |   |  | $ | 1,077 |      
|Mortgage-backed securities |       |                  | 26    |            |  |            |   |       |  |   |  |   |  |   | 26    |      
|                           |       |                  |       |            |  |            |    |       |  |   |   |   |  |   |       |      
|                           | Total |                  | $     | 1,093      |  |            | $  | 13    |  |   | $ | 3 |  |   | $     | 1,103 | 
|                           |       |                  |       |            |  |            |    |       |  |   |   |   |  |   |       |      

Unrealized losses on investment securities have
not been in a continuous loss position for more than 12
consecutive months. The unrealized losses are generally due to
changes in interest rates and, as such, are considered to be
temporary, by the Company.

The amortized cost and fair value of securities
classified as held-to-maturity and available-for-sale at
December 31, 2003, by contractual maturity, are shown
below. Expected maturities may differ from contractual
maturities because borrowers may have the right to prepay
obligations without prepayment penalties, and certain securities
require principal repayments prior to maturity. Therefore, these
securities and mutual fund shares are not included in the
maturity categories in the following maturity summary.

|                                 |       |                  |     |                    |  |           |     |       |  |   |        |        |  |   |        |        | 
|-------------------------------- | ----- | ---------------- | --- | ------------------ |  | --------- | --- | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                 |       |                  |     |                   
|                                 |       | Held-to-Maturity |     | Available-for-Sale
|                                 |       |                  |     |                   
|                                 |       | Amortized        |     | Fair               |  | Amortized |     | Fair 
|                                 |       | Cost             |     | Value              |  | Cost      |     | Value
|                                 |       |                  |     |                    |  |           |     |      
|                                 |       |                 
|                                 |       | (in thousands)  
|Due within 1 year                |       | $                | 210 |                    |  | $         | 210 |       |  | $ | 4,478  |        |  | $ | 4,541  |       
|Due after 1 year through 5 years |       |                  | 672 |                    |  |           | 691 |       |  |   | 50,247 |        |  |   | 51,276 |       
|Due after 5 through 10 years     |       |                  | 10  |                    |  |           | 11  |       |  |   | 3,664  |        |  |   | 3,703  |       
|Due after 10 years               |       |                  |    |                    |  |           |    |       |  |   | 250    |        |  |   | 251    |       
|Mortgage-backed securities       |       |                  |    |                    |  |           |    |       |  |   | 26,864 |        |  |   | 27,288 |       
|Mutual fund shares               |       |                  |    |                    |  |           |    |       |  |   | 400    |        |  |   | 379    |       
|Other securities                 |       |                  |    |                    |  |           |    |       |  |   | 250    |        |  |   | 274    |       
|                                 |       |                  |     |                    |  |           |     |       |  |   |        |        |  |   |        |       
|                                 | Total |                  | $   | 892                |  |           | $   | 912   |  |   | $      | 86,153 |  |   | $      | 87,712 | 
|                                 |       |                  |     |                    |  |           |     |       |  |   |        |        |  |   |        |       

Investment securities available-for-sale with a
carrying value of approximately $34.4 million and
$30.5 million at December 31, 2003 and 2002,
respectively, were pledged in connection with certain deposit
accounts and for other purposes as required or permitted by law.

Realized gains and losses were as follows:

|                |          |                         |   |      |  |      |   |   |  |   |     |     | 
|--------------- | -------- | ----------------------- | - | ---- |  | ---- | - | - |  | - | --- | --- | 
|                |          |                        
|                |          | Year Ended December 31,
|                |          |                        
|                |          | 2003                    |   | 2002 |  | 2001
|                |          |                         |   |      |  |     
|                |          |                        
|                |          | (in thousands)         
|Realized gains  |          | $                       | 8 |      |  | $    |  |   |  | $ | 441 |    
|Realized losses |          |                         |  |      |  |      |  |   |  |   | (40 | )  
|                |          |                         |   |      |  |      |   |   |  |   |     |    
|                | Net gain |                         | $ | 8    |  |      | $ |  |  |   | $   | 401 | 
|                |          |                         |   |      |  |      |   |   |  |   |     |    

The tax expense applicable to these net realized
gains and losses amounted to $3,000, $0, and $136,000,
respectively.

37




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FINANCIAL


STATEMENTS







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Note 6. Loans

Loans consisted of the following:


|                            |                                      |                |         |         |  |   |         |         | 
|--------------------------- | ------------------------------------ | -------------- | ------- | ------- |  | - | ------- | ------- | 
|                            |                                      |               
|                            |                                      | December 31,  
|                            |                                      |               
|                            |                                      | 2003           |         | 2002   
|                            |                                      |                |         |        
|                            |                                      |               
|                            |                                      | (in thousands)
|Real estate mortgage loans: |                                      |                |         |         |  |   |         |        
|                            | One-to-four family                   |                | $       | 212,578 |  |   | $       | 228,495 | 
|                            | Multifamily                          |                |         | 16,461  |  |   |         | 13,672  | 
|                            | Commercial                           |                |         | 77,142  |  |   |         | 56,589  | 
|                            | Construction and development         |                |         | 28,640  |  |   |         | 21,286  | 
|                            |                                      |                |         |         |  |   |         |        
|                            |                                      |                | 334,821 |         |  |   | 320,042 |        
|                            |                                      |                |         |         |  |   |         |        
|Commercial loans            |                                      |                | 58,235  |         |  |   | 33,301  |        
|                            |                                      |                |         |         |  |   |         |        
|Consumer loans:             |                                      |                |         |         |  |   |         |        
|                            | Home equity loans                    |                |         | 24,305  |  |   |         | 22,560  | 
|                            | All other consumer loans             |                |         | 18,982  |  |   |         | 16,408  | 
|                            |                                      |                |         |         |  |   |         |        
|                            |                                      |                | 43,287  |         |  |   | 38,968  |        
|                            |                                      |                |         |         |  |   |         |        
|Gross loans                 |                                      |                | 436,343 |         |  |   | 392,311 |        
|Less:                       |                                      |                |         |         |  |   |         |        
|                            | Deferred loan fees, net              |                |         | 565     |  |   |         | 505     | 
|                            | Undisbursed portion of loan proceeds |                |         | 2,467   |  |   |         | 1,043   | 
|                            | Allowance for loan losses            |                |         | 7,471   |  |   |         | 6,524   | 
|                            |                                      |                |         |         |  |   |         |        
|                            |                                      | $              | 425,840 |         |  | $ | 384,239 |        
|                            |                                      |                |         |         |  |   |         |        

The Companys opinion as to the ultimate
collectibility of these loans is subject to estimates regarding
the future cash flows from operations and the value of property,
real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic
prospects of the borrowers.

Information about impaired loans and non-accrual
loans as of and for the years ended December 31, 2003, 2002
and 2001 is as follows:

|                                                                            |                      |                |       |       |  |      |       |       |  |   |     |   | 
|--------------------------------------------------------------------------- | -------------------- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | --- | - | 
|                                                                            |                      |               
|                                                                            |                      | December 31,  
|                                                                            |                      |               
|                                                                            |                      | 2003           |       | 2002  |  | 2001
|                                                                            |                      |                |       |       |  |     
|                                                                            |                      |               
|                                                                            |                      | (in thousands)
|Impaired loans with a valuation allowance                                   |                      | $              | 4,545 |       |  | $    | 4,820 |       |  | $ |    |  
|Impaired loans without a valuation allowance                                |                      |                |      |       |  |      | 350   |       |  |   |    |  
|                                                                            |                      |                |       |       |  |      |       |       |  |   |     |  
|                                                                            | Total impaired loans |                | $     | 4,545 |  |      | $     | 5,170 |  |   | $   |  | 
|                                                                            |                      |                |       |       |  |      |       |       |  |   |     |  
|Related valuation allowance                                                 |                      | $              | 2,524 |       |  | $    | 3,162 |       |  | $ |    |  
|Non-accrual loans, excluding impaired loans                                 |                      | $              | 1,438 |       |  | $    | 1,664 |       |  | $ | 730 |  
|Loans past due ninety days or more and still
    accruing                   |                      | $              | 2,232 |       |  | $    | 3,439 |       |  | $ | 391 |  
|Average monthly balance of impaired loans (based
    on month-end balances) |                      | $              | 5,097 |       |  | $    | 3,027 |       |  | $ |    |  
|Interest income recognized on impaired loans                                |                      | $              | 199   |       |  | $    | 70    |       |  | $ |    |  
|Interest income recognized on a cash basis on
    impaired loans            |                      | $              | 199   |       |  | $    | 70    |       |  | $ |    |  

At December 31, 2003, one-to-four family
real estate mortgage loans of approximately $157.1 million
were pledged to secure advances from the Federal Home Loan Bank
of Chicago.

38




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Note 7. Loan Servicing

Mortgage loans serviced for others are not
included in the accompanying consolidated balance sheets. The
unpaid principal balances of these loans at December 31 are
summarized as follows:


|                                       |             |                |         |         |  |   |         |        | 
|-------------------------------------- | ----------- | -------------- | ------- | ------- |  | - | ------- | ------ | 
|                                       |             |               
|                                       |             | December 31,  
|                                       |             |               
|                                       |             | 2003           |         | 2002   
|                                       |             |                |         |        
|                                       |             |               
|                                       |             | (in thousands)
|Mortgage loan portfolios serviced for: |             |                |         |         |  |   |         |       
|                                       | Freddie Mac |                | $       | 104,606 |  |   | $       | 96,778 | 
|                                       | Fannie Mae  |                |         | 1,885   |  |   |         | 4,329  | 
|                                       |             |                |         |         |  |   |         |       
|                                       |             | $              | 106,491 |         |  | $ | 101,107 |       
|                                       |             |                |         |         |  |   |         |       

Custodial escrow balances maintained in
connection with the foregoing loan servicing, and included in
deposits, were approximately $809,000 and $768,000 at
December 31, 2003 and 2002, respectively.

A summary of the changes in the balance of
mortgage servicing rights in 2003 and 2002 is as follows:

|                                            |  |                |      |      |  |   |      |  
|------------------------------------------- |  | -------------- | ---- | ---- |  | - | ---- | -
|                                            |  |               
|                                            |  | December 31,  
|                                            |  |               
|                                            |  | 2003           |      | 2002
|                                            |  |                |      |     
|                                            |  |               
|                                            |  | (in thousands)
|Balance, beginning                          |  | $              | 725  |      |  | $ | 427  |  
|Servicing assets recognized during the year |  |                | 485  |      |  |   | 499  |  
|Amortization of servicing assets            |  |                | (388 | )    |  |   | (201 | )
|                                            |  |                |      |      |  |   |      |  
|Balance, ending                             |  | $              | 822  |      |  | $ | 725  |  
|                                            |  |                |      |      |  |   |      |  

The aggregate changes in the valuation allowances
for mortgage servicing rights in 2003 and 2002 were as follows:

|                   |  |                |      |      |  |   |     | 
|------------------ |  | -------------- | ---- | ---- |  | - | --- | 
|                   |  |               
|                   |  | December 31,  
|                   |  |               
|                   |  | 2003           |      | 2002
|                   |  |                |      |     
|                   |  |               
|                   |  | (in thousands)
|Balance, beginning |  | $              | 169  |      |  | $ |    | 
|Additions          |  |                | 506  |      |  |   | 169 | 
|Reductions         |  |                | (469 | )    |  |   |    | 
|                   |  |                |      |      |  |   |     | 
|Balance, ending    |  | $              | 206  |      |  | $ | 169 | 
|                   |  |                |      |      |  |   |     | 

Note 8. Allowance for Loan Losses

Changes in the allowance for loan losses were as
follows:


|                             |  |                         |        |      |  |      |       |   |  |   |       |  
|---------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- | - |  | - | ----- | -
|                             |  |                        
|                             |  | Year Ended December 31,
|                             |  |                        
|                             |  | 2003                    |        | 2002 |  | 2001
|                             |  |                         |        |      |  |     
|                             |  |                        
|                             |  | (in thousands)         
|Balance at beginning of year |  | $                       | 6,524  |      |  | $    | 2,582 |   |  | $ | 2,156 |  
|Provision for loan losses    |  |                         | 4,122  |      |  |      | 3,990 |   |  |   | 502   |  
|Purchased allowance          |  |                         | 2,435  |      |  |      |      |   |  |   |      |  
|Charge-offs                  |  |                         | (6,242 | )    |  |      | (81   | ) |  |   | (102  | )
|Recoveries                   |  |                         | 632    |      |  |      | 33    |   |  |   | 26    |  
|                             |  |                         |        |      |  |      |       |   |  |   |       |  
|Balance at end of year       |  | $                       | 7,471  |      |  | $    | 6,524 |   |  | $ | 2,582 |  
|                             |  |                         |        |      |  |      |       |   |  |   |       |  

39




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



Note 9. Office Properties and Equipment

Office properties and equipment consisted of:


|                                                |  |                |        |      |  |   |        | 
|----------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                                |  |               
|                                                |  | December 31,  
|                                                |  |               
|                                                |  | 2003           |        | 2002
|                                                |  |                |        |     
|                                                |  |               
|                                                |  | (in thousands)
|Land                                            |  | $              | 4,963  |      |  | $ | 2,212  | 
|Buildings and leasehold improvements            |  |                | 11,851 |      |  |   | 8,881  | 
|Land acquired for future use                    |  |                | 1,438  |      |  |   | 1,548  | 
|Furniture and equipment                         |  |                | 9,326  |      |  |   | 7,639  | 
|                                                |  |                |        |      |  |   |        | 
|                                                |  |                | 27,578 |      |  |   | 20,280 | 
|Less: Accumulated depreciation and amortization |  |                | 10,465 |      |  |   | 9,902  | 
|                                                |  |                |        |      |  |   |        | 
|                                                |  | $              | 17,113 |      |  | $ | 10,378 | 
|                                                |  |                |        |      |  |   |        | 

Depreciation and amortization expense amounted to
$1.3 million, $894,000 and $901,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.

Note 10. Deposits

The composition of deposits is as follows:


|                                      |                           |                |         |         |  |   |         |         | 
|------------------------------------- | ------------------------- | -------------- | ------- | ------- |  | - | ------- | ------- | 
|                                      |                           |               
|                                      |                           | December 31,  
|                                      |                           |               
|                                      |                           | 2003           |         | 2002   
|                                      |                           |                |         |        
|                                      |                           |               
|                                      |                           | (in thousands)
|Demand deposits  noninterest bearing |                           | $              | 42,400  |         |  | $ | 28,416  |        
|                                      |                           |                |         |         |  |   |         |        
|Savings                               |                           |                | 84,816  |         |  |   | 72,739  |        
|NOW                                   |                           |                | 48,411  |         |  |   | 40,816  |        
|Money market                          |                           |                | 43,387  |         |  |   | 33,792  |        
|Time deposits, $100,000 or more       |                           |                | 39,649  |         |  |   | 40,907  |        
|Other time deposits                   |                           |                | 235,689 |         |  |   | 215,144 |        
|                                      |                           |                |         |         |  |   |         |        
|                                      | Interest bearing deposits |                |         | 451,952 |  |   |         | 403,398 | 
|                                      |                           |                |         |         |  |   |         |        
|                                      | Total deposits            |                | $       | 494,352 |  |   | $       | 431,814 | 
|                                      |                           |                |         |         |  |   |         |        

As of December 31, 2003, time deposits had
scheduled maturity dates as follows:

|                 |  |                |         | 
|---------------- |  | -------------- | ------- | 
|Year of Maturity |  | Amount        
|                 |  |               
|                 |  | (in thousands)
|2004             |  | $              | 155,748 | 
|2005             |  |                | 93,130  | 
|2006             |  |                | 9,013   | 
|2007             |  |                | 8,090   | 
|2008             |  |                | 9,357   | 
|                 |  |                |         | 
|                 |  | $              | 275,338 | 
|                 |  |                |         | 

40




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



Note 11. Borrowings

Borrowings consisted of:


|                                               |  |                |        |      |  |   |        | 
|---------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2003           |        | 2002
|                                               |  |                |        |     
|                                               |  |               
|                                               |  | (in thousands)
|Securities sold under agreements to repurchase |  | $              | 18,400 |      |  | $ | 27,600 | 
|Other borrowings                               |  |                | 2,840  |      |  |   |       | 
|Federal Home Loan Bank advances                |  |                | 33,156 |      |  |   | 32,100 | 
|                                               |  |                |        |      |  |   |        | 
|Total                                          |  | $              | 54,396 |      |  | $ | 59,700 | 
|                                               |  |                |        |      |  |   |        | 

The Company holds two securities sold under
agreement to repurchase in the amount of $9.2 million each,
due in March 2004 and March 2005, respectively.

Other borrowings of $2.8 million consist of
a note payable of $1.4 million to an individual and a line
of credit with a financial institution in the amount of
$1.4 million. The note payable bears an imputed rate of
interest of 5.25% and matures in 2012 with semi-annual payments
of $100,000. The Company has drawn $1.4 million on a
$10 million line of credit which bears interest at a rate
of Prime minus .5%, an effective rate of 3.5% at
December 31, 2003.

Mortgage-backed securities available-for-sale
with a carrying value of approximately $18.4 million were
pledged to collateralize the repurchase agreements as of
December 31, 2003. The advances from the FHLB are
collateralized by one-to-four family residential mortgages.

The weighted average maturity date was
approximately 26 months and 30 months and the weighted
average interest rates were approximately 4.16% and 4.12%,
respectively, at December 31, 2003 and 2002, respectively.

Future payments at December 31, 2003, for
all borrowings were as follows:

|           |       |                |        |        | 
|---------- | ----- | -------------- | ------ | ------ | 
|Year Ended |       | Amount        
|           |       |               
|           |       | (in thousands)
|2004       |       | $              | 19,976 |       
|2005       |       |                | 15,723 |       
|2006       |       |                | 8,342  |       
|2007       |       |                | 449    |       
|2008       |       |                | 5,157  |       
|Thereafter |       |                | 4,749  |       
|           |       |                |        |       
|           | Total |                | $      | 54,396 | 
|           |       |                |        |       

Note 12. Trust Preferred Debentures

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 consolidated 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 December 31, 2003) per annum of
the stated liquidation amount of $1,000 per preferred security.
Interest expense on the trust preferred securities was $558,000
and $452,000 for the years ended December 31, 2003 and
2002, 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. Issuance costs of $310,000 related to the
trust preferred securities were


41




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##### 





---



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CONSOLIDATED


FINANCIAL


STATEMENTS







---



deferred and are being amortized over the period
until mandatory redemption of the securities in April 2032. See
discussion in Note 1 of Notes to Consolidated Financial
Statements regarding current accounting developments relating to
the inclusion of trust preferred securities in tier I capital
for regulatory purposes. 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. The capital securities are
included in the consolidated balance sheet as a liability with
the cash distributions included in interest expense.

Note 13. Income Taxes

As of December 31, 2003, the Company had
Illinois net operating loss carryforwards of approximately
$3.5 million for income tax purposes. The difference
between book and tax net operating income results from interest
income from certain investments which is exempt from income tax
for state income tax purposes. The net operating loss
carryforwards expire through 2015.

Income taxes consisted of:

|         |  |                         |      |      |  |      |        |   |  |   |       | 
|-------- |  | ----------------------- | ---- | ---- |  | ---- | ------ | - |  | - | ----- | 
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2003                    |      | 2002 |  | 2001
|         |  |                         |      |      |  |     
|         |  |                        
|         |  | (in thousands)         
|Current  |  | $                       | (261 | )    |  | $    | 2,283  |   |  | $ | 1,616 | 
|Deferred |  |                         | 551  |      |  |      | (1,400 | ) |  |   | 24    | 
|         |  |                         |      |      |  |      |        |   |  |   |       | 
|         |  | $                       | 290  |      |  | $    | 883    |   |  | $ | 1,640 | 
|         |  |                         |      |      |  |      |        |   |  |   |       | 

The Companys income tax expense differed
from the maximum statutory federal rate of 35% as follows:

|                      |                                                             |                         |     |      |   |      |       |      |   |   |       |      |  
|--------------------- | ----------------------------------------------------------- | ----------------------- | --- | ---- | - | ---- | ----- | ---- | - | - | ----- | ---- | -
|                      |                                                             |                        
|                      |                                                             | Year Ended December 31,
|                      |                                                             |                        
|                      |                                                             | 2003                    |     | 2002 |   | 2001
|                      |                                                             |                         |     |      |   |     
|                      |                                                             |                        
|                      |                                                             | (in thousands)         
|Expected income taxes |                                                             | $                       | 579 |      |   | $    | 1,091 |      |   | $ | 1,715 |     
|Income tax effect of: |                                                             |                         |     |      |   |      |       |      |   |   |       |     
|                      | State income tax (carryforward), net of federal
    benefit |                         |     |     |   |      |       | (180 | ) |   |       | (149 | )
|                      | Income taxed at lower rate                                  |                         |     | (16  | ) |      |       | (31  | ) |   |       | (49  | )
|                      | Increase in cash surrender value of life insurance          |                         |     | (137 | ) |      |       | (122 | ) |   |       |     |  
|                      | Tax exempt interest, net                                    |                         |     | (80  | ) |      |       | (106 | ) |   |       | (106 | )
|                      | Utilization of state net operating loss
    carryforwards   |                         |     |     |   |      |       | 180  |   |   |       | 149  |  
|                      | Other                                                       |                         |     | (56  | ) |      |       | 51   |   |   |       | 80   |  
|                      |                                                             |                         |     |      |   |      |       |      |   |   |       |     
|                      |                                                             | $                       | 290 |      |   | $    | 883   |      |   | $ | 1,640 |     
|                      |                                                             |                         |     |      |   |      |       |      |   |   |       |     

42




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



Significant components of the deferred tax
liabilities and assets, included in other assets, were as
follows:

|                          |                                                  |                                                           |       |       |        |   |     |       |        |  
|------------------------- | ------------------------------------------------ | --------------------------------------------------------- | ----- | ----- | ------ | - | --- | ----- | ------ | -
|                          |                                                  |                                                          
|                          |                                                  | December 31,                                             
|                          |                                                  |                                                          
|                          |                                                  | 2003                                                      |       | 2002 
|                          |                                                  |                                                           |       |      
|                          |                                                  |                                                          
|                          |                                                  | (in thousands)                                           
|Deferred tax assets:      |                                                  |                                                           |       |       |        |   |     |      
|                          | Allowance for loan losses                        |                                                           | $     | 2,900 |        |   | $   | 2,218 |       
|                          | State net operating loss carryforwards           |                                                           |       | 169   |        |   |     | 130   |       
|                          | Accrued benefits                                 |                                                           |       | 164   |        |   |     | 140   |       
|                          | OREO                                             |                                                           |       | 20    |        |   |     | 107   |       
|                          | Premises and equipment                           |                                                           |       | 581   |        |   |     | 85    |       
|                          | Other                                            |                                                           |       | 35    |        |   |     | 210   |       
|                          |                                                  |                                                           |       |       |        |   |     |      
|                          |                                                  | Total deferred tax assets                                 |       |       | 3,869  |   |     |       | 2,890  |  
|                          | Valuation allowance for deferred tax assets      |                                                           |       | 169   |        |   |     | 130   |       
|                          |                                                  |                                                           |       |       |        |   |     |      
|                          |                                                  | Total deferred tax assets, net of valuation
    allowance |       |       | 3,700  |   |     |       | 2,760  |  
|                          |                                                  |                                                           |       |       |        |   |     |      
|Deferred tax liabilities: |                                                  |                                                           |       |       |        |   |     |      
|                          | Unrealized gain on securities available-for-sale |                                                           |       | (511  | )      |   |     | (840  | )     
|                          | Loan fees deferred for income tax purposes       |                                                           |       | (16   | )      |   |     | (27   | )     
|                          | Stock dividend on FHLB stock                     |                                                           |       | (297  | )      |   |     | (198  | )     
|                          | Loan costs deferred for book purposes            |                                                           |       | (388  | )      |   |     | (350  | )     
|                          | Mortgage servicing rights                        |                                                           |       | (239  | )      |   |     | (189  | )     
|                          | Intangible assets                                |                                                           |       | (278  | )      |   |     | (95   | )     
|                          | Basis in acquired assets                         |                                                           |       | (120  | )      |   |     |      |       
|                          | Other                                            |                                                           |       |      |        |   |     | (90   | )     
|                          |                                                  |                                                           |       |       |        |   |     |      
|                          |                                                  | Total deferred tax liabilities                            |       |       | (1,849 | ) |     |       | (1,789 | )
|                          |                                                  |                                                           |       |       |        |   |     |      
|Net deferred tax assets   |                                                  | $                                                         | 1,851 |       |        | $ | 971 |      
|                          |                                                  |                                                           |       |       |        |   |     |      

Retained earnings at December 31, 2003 and
2002 included approximately $9.0 million of the tax reserve
which accumulated prior to 1988, for which no deferred income
tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than
tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only,
which would be subject to the then-current corporate income tax
rate. The unrecorded deferred income tax liability on the above
amounts was approximately $3.1 million as of
December 31, 2003 and 2002.

Note 14. Stockholders Equity and Regulatory Capital

Prior to the acquisition of Aviston Financial and
merger of KFS Bank, FSB into the State Bank of Aviston on
October 9, 2003, Kankakee Bancorp, Inc was regulated by the
Office of Thrift Supervision. The Company was not subject to
regulatory capital requirements separate from the Bank. KFS
Bank, FSB was well capitalized under the regulatory framework
for prompt corrective action. Subsequent to the acquisition and
merger, the Company and the Bank became subject to the 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-

43




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##### 





---



NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



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 December 31, 2003, that the Company and the
Bank meet all capital adequacy requirements to which it is
subject.

As of December 31, 2003, 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 Well       
|                                       |                   |                        |   |          |  | For Capital       |  | Capitalized Under
|                                       |                   |                        |   | Adequacy |  | Prompt Corrective
|                                       |                   | Actual                 |   | Purposes |  | Action Provisions
|                                       |                   |                        |   |          |  |                  
|                                       |                   | Amount                 |   | Ratio    |  | Amount            |  | Ratio             |   | Amount |   | Ratio 
|                                       |                   |                        |   |          |  |                   |  |                   |   |        |   |       
|                                       |                   |                       
|                                       |                   | (Dollars in thousands)
|As of December 31, 2003                |                   |                        |   |          |  |                   |  |                   |   |        |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|Tier 1 Capital to Average Assets       |                   |                        |   |          |  |                   |  |                   |   |        |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | Centrue Financial |                        | $ | 41,893   |  |                   |  | 7.26              | % |        | $ | 23,090 |  |  |  | 4.00 | % |  |   | N/A    |  |  |  |       |  
|                                       | Centrue Bank      |                        |   | 43,944   |  |                   |  | 7.63              | % |        |   | 23,038 |  |  |  | 4.00 | % |  | $ | 28,797 |  |  |  | 5.00  | %
|Tier I Capital to Risk Weighted Assets |                   |                        |   |          |  |                   |  |                   |   |        |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | Centrue Financial |                        |   | 41,893   |  |                   |  | 9.90              | % |        |   | 16,925 |  |  |  | 4.00 | % |  |   | N/A    |  |  |  |       |  
|                                       | Centrue Bank      |                        |   | 43,944   |  |                   |  | 10.46             | % |        |   | 16,802 |  |  |  | 4.00 | % |  |   | 25,203 |  |  |  | 6.00  | %
|Total Capital to Risk Weighted Assets  |                   |                        |   |          |  |                   |  |                   |   |        |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | Centrue Financial |                        |   | 47,173   |  |                   |  | 11.14             | % |        |   | 33,850 |  |  |  | 8.00 | % |  |   | N/A    |  |  |  |       |  
|                                       | Centrue Bank      |                        |   | 49,201   |  |                   |  | 11.71             | % |        |   | 33,604 |  |  |  | 8.00 | % |  |   | 42,006 |  |  |  | 10.00 | %

|                                       |                  |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      |   |  |   |        |  |  |  |       |  
|-------------------------------------- | ---------------- |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ---- | - |  | - | ------ |  |  |  | ----- | -
|As of December 31, 2002                |                  |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|Tangible Capital to Tangible Assets    |                  |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | KFS Bank, FSB    |  | $ | 35,726 |  |  |  | 6.73  | % |  | $ | 7,961  |  |  |  | 1.50 | % |  |   | N/A    |  |  |  |       |  
|Core Capital to Tangible Assets        |                  |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | KFS Bank, FSB    |  |   | 35,726 |  |  |  | 6.73  | % |  |   | 21,230 |  |  |  | 4.00 | % |  | $ | 26,537 |  |  |  | 5.00  | %
|Tier I Capital to Risk Weighted Assets |                  |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | KFS Bank, FSB    |  |   | 35,726 |  |  |  | 10.57 | % |  |   | N/A    |  |  |  |      |   |  |   | 20,280 |  |  |  | 6.00  | %
|Total Capital to Risk Weighted Assets  |                  |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                       | KFS Bank, F.S.B. |  |   | 38,785 |  |  |  | 11.47 | % |  |   | 27,040 |  |  |  | 8.00 | % |  |   | 33,800 |  |  |  | 10.00 | %

A liquidation account in the amount of
$17.7 million was established for the benefit of eligible
deposit account holders who continue to maintain their deposit
accounts in the Bank after the December 30, 1992 conversion
from a mutual savings and loan association to a stock savings
bank. In the unlikely event of a complete liquidation of the
Bank, each eligible deposit account holder would be entitled to
receive a liquidation distribution from the liquidation account,
in the proportionate amount of the then-current adjusted balance
for deposit accounts held, before any distribution may be made
with respect to the Banks capital stock. The Bank may not
declare or pay a cash dividend to the Company on, or repurchase
any of, its capital stock if the effect thereof would cause the
net worth of the Bank to be reduced below the amount required
for the liquidation account. Due to various natural events, such
as death, relocation and general attrition of accounts, the
balance in the liquidation account has been reduced to
$1.3 million as of December 31, 2003.

44




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STATEMENTS







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Note 15. Officer, Director and Employee Plans



The Bank sponsored a Money Purchase Pension Plan
and Trust (the Money Purchase Plan) for the benefit
of its employees meeting certain age and service requirements.
The Bank contributed to the Money Purchase Plan on behalf of
each Participant an amount equal to 7% of the Participants
compensation, as defined by the Money Purchase Plan. Expense
related to the Money Purchase Plan amounted to approximately
$309,000, for the year ended December 31, 2001. On
January 1, 2002, the Money Purchase Plan was merged into
the 401(k) Savings Plan, where it retained its identity as a
separate part of the 401(k) Plan. The Bank contributed $305,000
and $301,000 for the years ended December 31, 2003 and
2002, respectively, representing 7% of each Participants
compensation as defined by the plan.


401(k) Savings Plan

The Bank sponsors a qualified, tax-exempt pension
plan qualifying under section 401(k) of the Internal
Revenue Code (the 401(k) Plan). Virtually all
employees are eligible to participate after meeting certain age
and service requirements. Eligible employees are permitted to
contribute 1% to 10% of their compensation to the 401(k) Plan.
Expense related to the 401(k) Plan, including plan
administration, amounted to approximately $8,000, $17,000 and
$15,000, for the years ended December 31, 2003, 2002 and
2001, respectively.


Employee Stock Ownership Plan

The Centrue Financial Corporation Employee Stock
Ownership Plan (the ESOP) covers all full time
employees who have completed twelve months of service and have
attained the minimum age of twenty-one. A participant is
100 percent vested after seven years of credited service.


During 2003 and 2002, the Company made a direct
cash contribution totaling $120,000, to the ESOP. The trust used
the contribution to acquire Company stock in the open market,
and the acquired shares were allocated to the participants at
the end of the plan year. As of January 1, 2004, the ESOP
was merged into the Companys 401(k) Plan. All participant
balances were considered 100% vested upon the merger.

Shares allocated to participants totaled 149,973,
198,374 and 199,840 at December 31, 2003, 2002 and 2001.
There were no unallocated shares during this time period.

The Board of Directors of the Company may direct
payment of dividends with respect to shares allocated to the
participants to be paid in cash to the participants. All shares
of stock owned by the ESOP are considered outstanding and
included in the weighted average shares outstanding for
calculating earnings per share.

Stock Option Plan

In 1992, the Company adopted an incentive stock
option plan for the benefit of directors, officers, and
employees of the Company or the Bank (the 1992 Stock
Option Plan). The number of shares of common stock
authorized under the 1992 Stock Option Plan is 350,000. The
option exercise price of an incentive stock option must be at
least equal to the fair market value per share of the common
stock on the date of grant. The 1992 Stock Option Plan also
provides for the issuance of nonqualified stock options,
restricted stock and stock appreciation rights and limited stock
appreciation rights. All options available under the Plan have
been granted.


In 2003, the Company adopted an incentive stock
option plan for the benefit of directors, officers, and
employees of the Company or the Bank (the 2003 Stock
Option Plan). The number of shares of common stock
authorized under the 2003 Stock Option Plan is 233,000. The
option exercise price of an incentive stock option must be at
least equal to the fair market value per share of the common
stock on the date of grant. The 2003 Stock Option Plan also
provides for the issuance of nonqualified stock options,
restricted stock and stock appreciation rights and limited stock
appreciation rights.

45




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Activity in the stock option plan was as follows:

|                                                                   |  |        |         |           |  |        |        |           |  |        |         |           |  |   |        |  |  |  |         |   |  |   |        | 
|------------------------------------------------------------------ |  | ------ | ------- | --------- |  | ------ | ------ | --------- |  | ------ | ------- | --------- |  | - | ------ |  |  |  | ------- | - |  | - | ------ | 
|                                                                   |  |        |         |           |  |       
|                                                                   |  | 2003   |         | 2002      |  | 2001  
|                                                                   |  |        |         |           |  |       
|                                                                   |  |        |         | Weighted- |  |        |        | Weighted- |  |        |         | Weighted-
|                                                                   |  |        |         | Average   |  |        |        | Average   |  |        |         | Average  
|                                                                   |  |        |         | Exercise  |  |        |        | Exercise  |  |        |         | Exercise 
|                                                                   |  | Shares |         | Price     |  | Shares |        | Price     |  | Shares |         | Price    
|Fixed Options                                                      |  |        |         |           |  |        |        |           |  |        |         |          
|Outstanding at beginning of year                                   |  |        | 9,500   |           |  | $      | 14.632 |           |  |        | 70,770  |           |  | $ | 5.859  |  |  |  | 100,670 |   |  | $ | 5.175  | 
|Granted                                                            |  |        | 107,000 |           |  |        | 22.666 |           |  |        | 5,000   |           |  |   | 18.575 |  |  |  | 5,000   |   |  |   | 13.195 | 
|Exercised                                                          |  |        | (12,700 | )         |  |        | 15.988 |           |  |        | (66,270 | )         |  |   | 5.561  |  |  |  | (34,900 | ) |  |   | 4.938  | 
|Forfeited                                                          |  |        | (2,000  | )         |  |        | 26.250 |           |  |        |        |           |  |   |       |  |  |  |        |   |  |   |       | 
|                                                                   |  |        |         |           |  |        |        |           |  |        |         |           |  |   |        |  |  |  |         |   |  |   |        | 
|Outstanding at end of year                                         |  |        | 101,800 |           |  |        | 22.690 |           |  |        | 9,500   |           |  |   | 14.632 |  |  |  | 70,770  |   |  |   | 5.859  | 
|                                                                   |  |        |         |           |  |        |        |           |  |        |         |           |  |   |        |  |  |  |         |   |  |   |        | 
|Options exercisable at year-end                                    |  |        | 46,800  |           |  |        |        |           |  |        | 9,500   |           |  |   |        |  |  |  | 35,385  |   |  |   |        | 
|                                                                   |  |        |         |           |  |        |        |           |  |        |         |           |  |   |        |  |  |  |         |   |  |   |        | 
|Weighted-average fair value of options granted
    during the year |  |        |         |           |  | $      | 9.70   |           |  |        |         |           |  | $ | 3.54   |  |  |  |         |   |  | $ | 5.41   | 
|                                                                   |  |        |         |           |  |        |        |           |  |        |         |           |  |   |        |  |  |  |         |   |  |   |        | 

|               |        |                     |  |                     |         |          |  |              |     |          |  |   |        |  |  |  |        |  |  |   |        | 
|-------------- | ------ | ------------------- |  | ------------------- | ------- | -------- |  | ------------ | --- | -------- |  | - | ------ |  |  |  | ------ |  |  | - | ------ | 
|               |        |                     |  |                    
|               |        | Options Outstanding |  | Options Exercisable
|               |        |                     |  |                    
|               |        | Outstanding         |  | Weighted            |         | Weighted |  | Outstanding  |     | Weighted
|               |        | as of               |  | Average             |         | Average  |  | as of        |     | Average 
|               |        | December 31,        |  | Contractual         |         | Exercise |  | December 31, |     | Exercise
|               |        | 2003                |  | Life (in Years)     |         | Price    |  | 2003         |     | Price   
|Exercise Price |        |                     |  |                     |         |          |  |              |     |         
|$              | 18.575 |                     |  |                     | 5,000   |          |  |              | 8.9 |          |  | $ | 18.575 |  |  |  | 5,000  |  |  | $ | 18.575 | 
|               | 19.000 |                     |  |                     | 21,800  |          |  |              | 9.3 |          |  |   | 19.000 |  |  |  | 21,800 |  |  |   | 19.000 | 
|               | 20.250 |                     |  |                     | 20,000  |          |  |              | 9.4 |          |  |   | 20.250 |  |  |  | 20,000 |  |  |   | 20.250 | 
|               | 23.185 |                     |  |                     | 15,000  |          |  |              | 9.5 |          |  |   | 23.185 |  |  |  |       |  |  |   | 23.185 | 
|               | 26.250 |                     |  |                     | 40,000  |          |  |              | 9.8 |          |  |   | 26.250 |  |  |  |       |  |  |   | 26.250 | 
|               |        |                     |  |                     |         |          |  |              |     |          |  |   |        |  |  |  |        |  |  |   |        | 
|               |        |                     |  |                     | 101,800 |          |  |              | 9.5 |          |  | $ | 22.690 |  |  |  | 46,800 |  |  | $ | 22.690 | 
|               |        |                     |  |                     |         |          |  |              |     |          |  |   |        |  |  |  |        |  |  |   |        | 

Stockholders Rights Plan

On May 14, 1999, the Companys Board of
Directors adopted a Stockholders Rights Plan. The Plan
provided for the distribution of one Right on June 15,
1999, for each share of the Companys outstanding common
stock as of May 24, 1999. The Rights have no immediate
economic value to stockholders because they cannot be exercised
unless and until a person, group or entity acquires 15% or more
of the Companys common stock or announces a tender offer.
The Plan also permits the Companys Board of Directors to
redeem each Right for one cent under various circumstances.


In general, the Rights Plan provides that if a
person, group or entity acquires a 15% or larger stake in the
Company or announces a tender offer, and the Companys
Board chooses not to redeem the Rights, all holders of Rights,
other than the 15% stockholder or the tender offeror, will be
able to purchase a certain amount of the Companys common
stock for half of its market price.

Restricted Stock Awards

On October 30, 2003, the Company issued
restricted stock awards to certain key employees and directors.
The shares awarded to participants totaled 27,800, at a market
price of $29.50 per share. The shares vest over either a two or
five year period. As the shares vest, they will be charged to
compensation expense at the market price at date of grant.


Directors Deferred Compensation Plan

The Company has a deferred compensation plan for
nonemployee directors of the Company in which a participating
director may defer directors fees in the form of
phantom stock units. For


46




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FINANCIAL


STATEMENTS







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directors electing to participate in the plan, a
deferred compensation account, included in other liabilities on
the consolidated balance sheet, is credited with phantom stock
units. Phantom stock units shall also be increased by any
dividends or stock splits declared by the Company. At
December 31, 2003, the liability for deferred compensation
was $43,000 which represented approximately 1,770 phantom stock
units.

Note 16. Commitments and Contingencies

In the normal course of business, there are
outstanding various contingent liabilities such as claims and
legal action, which are not reflected in the consolidated
financial statements. In the opinion of management, the ultimate
resolution of these matters is not expected to have a material
effect on the financial position or on the results of operations
of the Company and its subsidiary.


Note 17. Financial Instruments

The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit, standby
letters of credit, and financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest
rate risk. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular
classes of financial instruments.


The Banks exposure to credit loss, in the
event of nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters
of credit, is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.

Financial instruments whose contract amount
represent credit risk follows:

|                                   |  |                |        |      |  |   |        | 
|---------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                   |  |               
|                                   |  | December 31,  
|                                   |  |               
|                                   |  | 2003           |        | 2002
|                                   |  |                |        |     
|                                   |  |               
|                                   |  | (in thousands)
|Commitments to originate new loans |  | $              | 13,803 |      |  | $ | 19,100 | 
|Commitments to extend credit       |  |                | 46,451 |      |  |   | 31,106 | 
|Standby letters of credit          |  |                | 2,506  |      |  |   | 1,228  | 

Such commitments are recorded in the financial
statements when they are funded or related fees are incurred or
received. These commitments are principally at variable interest
rates.

Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.

Standby letters of credit written are conditional
commitments issued by the bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued
to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The
credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to
customers. In the event the customer does not perform in
accordance with the terms of the agreement with the third party,
the Bank would be required to fund the commitment. The maximum
potential amount of future payments the Bank could be required
to make is represented by the contractual amount shown in the
summary above. If the commitment is funded, the Bank would be
entitled to seek recovery from the customer. At
December 31, 2003 and 2002, no amounts have been recorded
as liabilities for the Banks potential obligations under
these guarantees.

The Company and the Bank do not engage in the use
of interest rate swaps, futures, forwards, or option contracts.

47




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FINANCIAL


STATEMENTS







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Note 18. Fair Value of Financial Instruments

The following table reflects a comparison of
carrying amounts and the fair values of the financial
instruments:


|             |                             |                |   |            |  |          |   |            |  |  |   |         |  |  |   |         | 
|------------ | --------------------------- | -------------- | - | ---------- |  | -------- | - | ---------- |  |  | - | ------- |  |  | - | ------- | 
|             |                             |               
|             |                             | December 31   
|             |                             |               
|             |                             |                |   |           
|             |                             | 2003           |   | 2002      
|             |                             |                |   |           
|             |                             | Carrying       |   |            |  | Carrying |   |           
|             |                             | Amount         |   | Fair Value |  | Amount   |   | Fair Value
|             |                             |                |   |            |  |          |   |           
|             |                             |               
|             |                             | (in thousands)
|Assets:      |                             |                |   |            |  |          |   |            |  |  |   |         |  |  |   |        
|             | Cash and cash equivalents   |                | $ | 45,605     |  |          | $ | 45,605     |  |  | $ | 47,426  |  |  | $ | 47,426  | 
|             | Certificates of deposit     |                |   | 50         |  |          |   | 50         |  |  |   | 50      |  |  |   | 50      | 
|             | Investment securities       |                |   | 88,604     |  |          |   | 88,624     |  |  |   | 83,731  |  |  |   | 83,741  | 
|             | Loans, gross                |                |   | 433,311    |  |          |   | 445,733    |  |  |   | 390,763 |  |  |   | 395,142 | 
|             | Loans held for sale         |                |   |           |  |          |   |           |  |  |   | 128     |  |  |   | 130     | 
|             | FHLB stock                  |                |   | 3,298      |  |          |   | 3,298      |  |  |   | 2,740   |  |  |   | 2,740   | 
|             | Accrued interest receivable |                |   | 2,552      |  |          |   | 2,552      |  |  |   | 2,796   |  |  |   | 2,796   | 
|Liabilities: |                             |                |   |            |  |          |   |            |  |  |   |         |  |  |   |        
|             | Deposits                    |                | $ | 494,352    |  |          | $ | 498,772    |  |  | $ | 431,814 |  |  | $ | 435,816 | 
|             | Borrowings                  |                |   | 54,396     |  |          |   | 55,323     |  |  |   | 59,700  |  |  |   | 62,220  | 
|             | Trust preferred debentures  |                |   | 10,000     |  |          |   | 10,000     |  |  |   | 10,000  |  |  |   | 10,000  | 
|             | Accrued interest payable    |                |   | 451        |  |          |   | 451        |  |  |   | 472     |  |  |   | 472     | 

The fair values utilized in the table were
derived using the information described below for the group of
instruments listed. It should be noted that the fair values
disclosed in this table do not represent market values of all
assets and liabilities of the Company and, thus, should not be
interpreted to represent a market or liquidation value for the
Company.

The following methods and assumptions were used
by the Company in estimating the fair value disclosures for
financial instruments:

Cash and cash equivalents and certificates of
deposit:The carrying amounts reported
in the balance sheet for cash and short-term instruments
approximate those assets fair values.

Investment
securities:Fair values for securities
are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted
market prices of comparable instruments. The carrying amounts of
accrued interest approximate their fair values.

Nonmarketable equity securities and FHLB
stock:Those securities are carried at
cost, as fair values are not readily determinable.

Loans:For
variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for fixed-rate loans are
estimated using discounted cash flow analyses using interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amounts of
accrued interest approximate their fair value.

Loans held for sale:Fair values are based on quoted market price.

Off-balance-sheet
instruments:Fair values for the
Banks off-balance-sheet instruments (guarantees and loan
commitments) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements and the counterparties credit standing. The
fair value for such commitments is nominal.

Deposits:The fair
values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the balance sheet date. The
carrying amounts for variable-rate, fixed-term money market
accounts approximate their fair values at the balance sheet
date. Fair values for

48




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FINANCIAL


STATEMENTS







---



fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The
carrying amounts of advance payments by borrowers for taxes and
insurance approximate their fair value.

Borrowed funds:Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value
of existing debt. The Trust Preferred Debentures are privately
held; therefore the carrying amount approximates fair value.

Accrued interest
payable:The carrying amounts of
accrued interest payable approximate their fair value.

Note 19. Sale of Branch

On February 14, 2003, the Company sold its
Hoopeston bank branch at a premium resulting in a gain of
$478,000. The branch had approximately $6.4 million in
loans and $19.4 million in deposits.


Note 20. Condensed Parent Company Only Financial Statements

|                                      |                                           |                |        |         |   |   |        |         |  
|------------------------------------- | ----------------------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                      |                                           |               
|                                      |                                           | December 31,  
|                                      |                                           |               
|                                      |                                           | 2003           |        | 2002   
|Statements of financial condition     |                                           |                |        |        
|                                      |                                           |               
|                                      |                                           | (in thousands)
|Assets:                               |                                           |                |        |         |   |   |        |        
|                                      | Cash and cash equivalents                 |                | $      | 76      |   |   | $      | 8,728   |  
|                                      | Certificate of deposit                    |                |        | 50      |   |   |        | 50      |  
|                                      | Investment securities, available-for-sale |                |        | 379     |   |   |        | 465     |  
|                                      | Equity in net assets of Centrue Bank      |                |        | 57,715  |   |   |        | 41,614  |  
|                                      | Investment in Kankakee Capital Trust I    |                |        | 310     |   |   |        | 310     |  
|                                      | Other assets                              |                |        | 803     |   |   |        | 538     |  
|                                      |                                           |                |        |         |   |   |        |        
|                                      |                                           | $              | 59,333 |         |   | $ | 51,705 |        
|                                      |                                           |                |        |         |   |   |        |        
|Liabilities and stockholders equity: |                                           |                |        |         |   |   |        |        
|                                      | Trust preferred debentures                |                | $      | 10,000  |   |   | $      | 10,000  |  
|                                      | Other borrowings                          |                |        | 2,840   |   |   |        |        |  
|                                      | Other liabilities                         |                |        | 850     |   |   |        | 598     |  
|                                      | Common stock                              |                |        | 42      |   |   |        | 36      |  
|                                      | Additional paid-in capital                |                |        | 28,929  |   |   |        | 15,022  |  
|                                      | Retained income                           |                |        | 39,231  |   |   |        | 38,517  |  
|                                      | Accumulated comprehensive income          |                |        | 1,088   |   |   |        | 1,631   |  
|                                      | Unearned restricted stock                 |                |        | (820    | ) |   |        |        |  
|                                      | Treasury stock                            |                |        | (22,827 | ) |   |        | (14,099 | )
|                                      |                                           |                |        |         |   |   |        |        
|                                      |                                           | $              | 59,333 |         |   | $ | 51,705 |        
|                                      |                                           |                |        |         |   |   |        |        

49




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FINANCIAL


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---



|                                                 |                                  |                          |       |       |  |      |       |       |  |   |       |       | 
|------------------------------------------------ | -------------------------------- | ------------------------ | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                 |                                  |                         
|                                                 |                                  | Years Ended December 31,
|                                                 |                                  |                         
|                                                 |                                  | 2003                     |       | 2002  |  | 2001
|Statements of income                             |                                  |                          |       |       |  |     
|                                                 |                                  |                         
|                                                 |                                  | (in thousands)          
|Dividends from subsidiary                        |                                  | $                        | 1,894 |       |  | $    | 1,875 |       |  | $ | 1,715 |      
|Interest income                                  |                                  |                          | 41    |       |  |      | 141   |       |  |   | 54    |      
|Net gain on sale of investments                  |                                  |                          | 8     |       |  |      |      |       |  |   |      |      
|                                                 |                                  |                          |       |       |  |      |       |       |  |   |       |      
|                                                 | Operating income                 |                          |       | 1,943 |  |      |       | 2,016 |  |   |       | 1,769 | 
|                                                 |                                  |                          |       |       |  |      |       |       |  |   |       |      
|Equity in undistributed earnings of Centrue Bank |                                  |                          | 415   |       |  |      | 1,177 |       |  |   | 1,821 |      
|Interest expense                                 |                                  |                          | 611   |       |  |      | 452   |       |  |   |      |      
|Other expenses                                   |                                  |                          | 983   |       |  |      | 986   |       |  |   | 471   |      
|                                                 |                                  |                          |       |       |  |      |       |       |  |   |       |      
|                                                 | Income before income tax benefit |                          |       | 764   |  |      |       | 1,755 |  |   |       | 3,119 | 
|Income tax benefit                               |                                  |                          | 599   |       |  |      | 478   |       |  |   | 142   |      
|                                                 |                                  |                          |       |       |  |      |       |       |  |   |       |      
|                                                 | Net income                       |                          | $     | 1,363 |  |      | $     | 2,233 |  |   | $     | 3,261 | 
|                                                 |                                  |                          |       |       |  |      |       |       |  |   |       |      

|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |        |        |        |  
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------- | ------ | ---- | ------ | ----- | ------ | ------ | ----- | ---- | ------ | ------ | ------ | -
|                                                 |                                                                                       |                                                 
|                                                 |                                                                                       | Years Ended December 31,                        
|                                                 |                                                                                       |                                                 
|                                                 |                                                                                       | 2003                                             |                                                         | 2002   |      | 2001  
|Statements of cash flows                         |                                                                                       |                                                  |                                                         |        |      |       
|                                                 |                                                                                       |                                                 
|                                                 |                                                                                       | (in thousands)                                  
|Operating activities:                            |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 | Net income                                                                            |                                                  | $                                                       | 1,363  |      |        | $     | 2,233  |        |       | $    | 3,261  |       
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                  |                                                         |        |      |        |       |        |        |       |      |        |       
|                                                 | Gain on sale of securities                                                            |                                                  |                                                         | (8     | )    |        |       |       |        |       |      |       |       
|                                                 |                                                                                       | Equity in undistributed earnings of Centrue Bank |                                                         |        | (415 | )      |       |        | (1,177 | )     |      |        | (1,821 | )     
|                                                 |                                                                                       | Other                                            |                                                         |        | (772 | )      |       |        | (68    | )     |      |        | (89    | )     
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 |                                                                                       |                                                  | Net cash provided by operating activities               |        |      | 168    |       |        |        | 988   |      |        |        | 1,351  |  
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|Investing activities:                            |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 | Available-for-sale investment securities:                                             |                                                  |                                                         |        |      |        |       |        |        |       |      |        |       
|                                                 |                                                                                       | Proceeds from sale of securities                 |                                                         |        | 96   |        |       |        |       |       |      |        |       |       
|                                                 |                                                                                       | Purchases                                        |                                                         |        | (14  | )      |       |        | (22    | )     |      |        | (24    | )     
|                                                 | Purchase of State Bank of Aviston                                                     |                                                  |                                                         | 20     |      |        |       |       |        |       |      |       |       
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 |                                                                                       |                                                  | Net cash provided by (used in) investing
    activities |        |      | 102    |       |        |        | (22   | )    |        |        | (24    | )
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|Financing activities:                            |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 | Purchase of treasury stock                                                            |                                                  |                                                         | (9,308 | )    |        |       | (3,202 | )      |       |      | (1,543 | )     
|                                                 | Dividends paid                                                                        |                                                  |                                                         | (649   | )    |        |       | (680   | )      |       |      | (583   | )     
|                                                 | Proceeds from issuance of trust preferred
    debentures                              |                                                  |                                                         |       |      |        |       | 10,000 |        |       |      |       |       
|                                                 | Proceeds from borrowings                                                              |                                                  |                                                         | 933    |      |        |       |       |        |       |      |       |       
|                                                 | Payments on borrowings                                                                |                                                  |                                                         | (100   | )    |        |       |       |        |       |      |       |       
|                                                 | Proceeds from exercise of stock options                                               |                                                  |                                                         | 202    |      |        |       | 539    |        |       |      | 278    |       
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 |                                                                                       |                                                  | Net cash provided by (used in) financing
    activities |        |      | (8,922 | )     |        |        | 6,657 |      |        |        | (1,848 | )
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|Increase (decrease) in cash and cash equivalents |                                                                                       |                                                  | (8,652                                                  | )      |      |        | 7,623 |        |        |       | (521 | )     
|Cash and cash equivalents:                       |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 | Beginning of period                                                                   |                                                  |                                                         | 8,728  |      |        |       | 1,105  |        |       |      | 1,626  |       
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       
|                                                 | End of period                                                                         |                                                  | $                                                       | 76     |      |        | $     | 8,728  |        |       | $    | 1,105  |       
|                                                 |                                                                                       |                                                  |                                                         |        |      |        |       |        |        |       |      |       

50




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##### 





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NOTES TO


CONSOLIDATED


FINANCIAL


STATEMENTS







---



Note 21. Quarterly Results of Operations (Unaudited)

|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |       | 
|--------------------------------- | -------------------------------------------------------------- | ---------------------------- | ----- | ------------ |  | ------- | ----- | -------- |  | - | ------ | ------ | - | - | ----- | ----- | 
|                                  |                                                                |                             
|                                  |                                                                | Year Ended December 31, 2003
|                                  |                                                                |                             
|                                  |                                                                |                             
|                                  |                                                                | Three Months Ended          
|                                  |                                                                | December 31                  |       | September 30 |  | June 30 |       | March 31
|                                  |                                                                |                              |       |              |  |         |       |         
|Interest income                   |                                                                | $                            | 7,164 |              |  | $       | 6,339 |          |  | $ | 6,641  |        |   | $ | 7,333 |      
|Interest expense                  |                                                                |                              | 2,980 |              |  |         | 2,696 |          |  |   | 2,979  |        |   |   | 3,342 |      
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      
|                                  | Net interest income                                            |                              |       | 4,184        |  |         |       | 3,643    |  |   |        | 3,662  |   |   |       | 3,991 | 
|Provision for loan losses         |                                                                |                              | 101   |              |  |         | 272   |          |  |   | 3,683  |        |   |   | 66    |      
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      
|                                  | Net interest income (loss) after provision for
    loan losses |                              |       | 4,083        |  |         |       | 3,371    |  |   |        | (21    | ) |   |       | 3,925 | 
|Other income                      |                                                                |                              | 1,315 |              |  |         | 1,534 |          |  |   | 1,116  |        |   |   | 1,741 |      
|Other expense                     |                                                                |                              | 4,633 |              |  |         | 3,508 |          |  |   | 3,601  |        |   |   | 3,669 |      
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      
|                                  | Income (loss) before income taxes                              |                              |       | 765          |  |         |       | 1,397    |  |   |        | (2,506 | ) |   |       | 1,997 | 
|Income taxes                      |                                                                |                              | 93    |              |  |         | 574   |          |  |   | (1,003 | )      |   |   | 626   |      
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      
|                                  | Net income (loss)                                              |                              | $     | 672          |  |         | $     | 823      |  |   | $      | (1,503 | ) |   | $     | 1,371 | 
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      
|Basic earnings (loss) per share   |                                                                | $                            | 0.27  |              |  | $       | 0.44  |          |  | $ | (0.80  | )      |   | $ | 0.64  |      
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      
|Diluted earnings (loss) per share |                                                                | $                            | 0.26  |              |  | $       | 0.44  |          |  | $ | (0.80  | )      |   | $ | 0.64  |      
|                                  |                                                                |                              |       |              |  |         |       |          |  |   |        |        |   |   |       |      

|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |       | 
|--------------------------------- | ------------------------------------------------------- | ------------------------------------- | ----- | ------------ |  | ------- | ----- | -------- | - | - | ----- | ----- |  | - | ----- | ----- | 
|                                  |                                                         |                                      
|                                  |                                                         | Year Ended December 31, 2002         
|                                  |                                                         |                                      
|                                  |                                                         |                                      
|                                  |                                                         | Three Months Ended                   
|                                  |                                                         | December 31                           |       | September 30 |  | June 30 |       | March 31
|                                  |                                                         |                                       |       |              |  |         |       |         
|                                  |                                                         |                                      
|                                  |                                                         | (in thousands, except per share data)
|Interest income                   |                                                         | $                                     | 7,899 |              |  | $       | 8,119 |          |   | $ | 8,316 |       |  | $ | 7,780 |      
|Interest expense                  |                                                         |                                       | 3,852 |              |  |         | 4,063 |          |   |   | 4,238 |       |  |   | 3,933 |      
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      
|                                  | Net interest income                                     |                                       |       | 4,047        |  |         |       | 4,056    |   |   |       | 4,078 |  |   |       | 3,847 | 
|Provision for loan losses         |                                                         |                                       | 234   |              |  |         | 3,144 |          |   |   | 464   |       |  |   | 148   |      
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      
|                                  | Net interest income after provision for loan
    losses |                                       |       | 3,813        |  |         |       | 912      |   |   |       | 3,614 |  |   |       | 3,699 | 
|Other income                      |                                                         |                                       | 1,397 |              |  |         | 1,082 |          |   |   | 1,114 |       |  |   | 959   |      
|Other expense                     |                                                         |                                       | 3,479 |              |  |         | 3,239 |          |   |   | 3,376 |       |  |   | 3,380 |      
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      
|                                  | Income (loss) before income taxes                       |                                       |       | 1,731        |  |         |       | (1,245   | ) |   |       | 1,352 |  |   |       | 1,278 | 
|Income taxes                      |                                                         |                                       | 541   |              |  |         | (456  | )        |   |   | 414   |       |  |   | 385   |      
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      
|                                  | Net income (loss)                                       |                                       | $     | 1,190        |  |         | $     | (789     | ) |   | $     | 938   |  |   | $     | 893   | 
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      
|Basic earnings (loss) per share   |                                                         | $                                     | 0.51  |              |  | $       | (0.34 | )        |   | $ | 0.39  |       |  | $ | 0.37  |      
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      
|Diluted earnings (loss) per share |                                                         | $                                     | 0.51  |              |  | $       | (0.34 | )        |   | $ | 0.39  |       |  | $ | 0.36  |      
|                                  |                                                         |                                       |       |              |  |         |       |          |   |   |       |       |  |   |       |      

51




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##### 





---



CORPORATE


INFORMATION







---



CORPORATE INFORMATION

Corporate Headquarters

Centrue Financial Corporation


310 South Schuyler Avenue


P.O. Box 3


Kankakee, Illinois 60901-0003


(815) 937-4440


(815) 937-3674 FAX


Special Counsel

Barack Ferrazzano Kirschbaum Perlman &
Nagelberg LLC


333 West Wacker Drive


Suite 2700


Chicago, Illinois 60606


(312) 984-3100


Transfer Agent and Registrar

The Companys transfer agent, LaSalle Bank
N.A., maintains all stockholder records and can assist with
stock transfer and registration, address changes, corrections in
social security or tax identification numbers and 1099 tax
reporting questions. If you have any questions, please contact
the stock transfer agent at the address below:


LaSalle Bank N.A.

135 S. LaSalle Street, Suite 1960


Chicago, Illinois 60603


Attn: Shareholder Services


(312) 904-2458


Independent Auditors

McGladrey & Pullen, LLP


1806 Fox Drive


Champaign, Illinois 61820


WEB SITE ACCESS TO UNITED STATES SECURITIES AND
EXCHANGE COMMISSION FILINGS

All reports filed electronically by the Company
with the United Stated Securities Exchange Commission (the
SEC), including the annual report on Form 10-K,
quarterly reports on Form 10-Q, and current events reports
on Form 8-K, as well as any amendments to those reports are
accessible at no cost on our internet site at www.centrue.com
and on the SECs web site at www.sec.gov. We will also
provide you with a copy free of charge by contacting:

Centrue Financial Corporation

310 South Schuyler Avenue


P.O. Box 3


Kankakee, Illinois 60901-0003


(815) 937-4440


CORPORATE GOVERNANCE

The Companys corporate governance practices
are described in the following documents, which are available on
the Companys Web site at www.centrue.com or which may be
obtained in print form from us at the above address:




|  |                            
|- | ---------------------------
| | Audit Committee charter    
| | Executive Committee charter
| | Code of Conduct            

52




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##### 





---



CORPORATE


INFORMATION







---



Quarterly Press Releases

Copies of Centrue Financial Corporations
quarterly press releases and other public information are
available upon request, without charge by contacting:


Centrue Financial Corporation

310 South Schuyler Avenue


P.O. Box 3


Kankakee, IL 60901-0003


(815) 937-4440


Annual Meeting

The annual meeting of stockholders will be held
at 10:00 a.m. on Friday, April 24, 2003, at the offices of
Barack Ferrazzano Kirschbaum Perlman & Nagelberg LLC,
located at 333 West Wacker Drive, Suite 2700, Chicago,
Illinois. Stockholders are encouraged to attend.


Common Stock  Market and Dividend
Information

The common stock of the Company is traded on the
American Stock Exchange under the symbol CFF. At March 4,
2004, there were 2,607,816 shares of the Companys common
stock issued and outstanding and there were approximately 635
holders of record.


The price range of the Companys common
stock from January 1, 2002 through March 4, 2004, is
set forth in the following table:

|                                       |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|                                       |  |      |       |     
|                                       |  | 2003 |       | 2002
|                                       |  |      |       |     
|                                       |  | High |       | High |  | High |       | Low
|                                       |  |      |       |      |  |      |       |    
|1st Quarter                            |  | $    | 19.70 |      |  | $    | 17.90 |     |  | $ | 19.70 |  |  | $ | 11.00 | 
|2nd Quarter                            |  |      | 23.10 |      |  |      | 18.20 |     |  |   | 20.25 |  |  |   | 11.50 | 
|3rd Quarter                            |  |      | 28.30 |      |  |      | 23.00 |     |  |   | 19.75 |  |  |   | 12.35 | 
|4th Quarter                            |  |      | 32.30 |      |  |      | 25.70 |     |  |   | 18.93 |  |  |   | 12.60 | 
|January 1, 2003, through March 4, 2004 |  |      | 28.20 |      |  |      | 27.60 |     |  |   |       |  |  |   |       | 

The Company paid its first cash dividend since
becoming a public company during the first quarter of 1995. Cash
dividends in the total amount of $.30 per share and $.28 per
share were paid during 2003 and 2002, respectively. The Board of
Directors of the Company declared a quarterly cash dividend of
$.075 per share payable on March 1, 2004, to stockholders
of record as of February 16, 2004. Future dividends will depend
primarily upon the Companys earnings, financial condition
and need for funds, as well as restrictions imposed by
regulatory authorities regarding dividend payments and net worth
requirements. See Note 14 of the Notes to Consolidated Financial
Statements for additional information regarding restrictions on
the payment of dividends by the Bank to the Company.

53




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##### 





---



DIRECTORS AND


OFFICERS







---



DIRECTORS AND OFFICERS

As of March 1, 2004


Centrue Financial Corporation Directors

Chairman of the
Board, Michael A. Griffith

President and Chief Executive Officer, Centrue
Financial Corporation , Thomas A. Daiber


President, Gundaker Commercial Group,
Inc. , Michael J. Hejna


President, Smith, Koelling, Dykstra & Ohm,
PC , Mark L. Smith


Retired; Former Executive Director, Kankakee
YMCA , Wesley E. Walker


Centrue Financial Corporation Officers

President and Chief Executive
Officer, Thomas A. Daiber

Chief Financial
Officer , James M. Lindstrom


Secretary , Lynn
OBrien


Centrue Bank, Directors and Officers

Chairman of the
Board,Michael A. Griffith

Directors, Mark L.
Smith, Michael J. Hejna, Wesley E. Walker, Thomas A. Daiber,


President and Chief Executive
Officer, Thomas A. Daiber


Chief Financial
Officer, James M. Lindstrom


Chief Lending
Officer, Bradley S. Rench


President, Centrue
North, Michael A. OGorman


President, Centrue
South, Bryan L. Marsh


President, Centrue
East, John N. Kempen


President, Centrue
West, Keith M. Roseland


Senior Vice
President, Carol S. Hoekstra


Vice Presidents: Robert E. Bardash, Donald E. Bayston, John A. Betts, 
 Hollice Clark, Cynthia T. Knebel, Staci Lightfoot, Marsha S.
Lloyd, 
 Christopher W. Maschoff, Rick R. Parks, Terry L. Ralston, 
 Dorcilla C. Schoolman, Lynda L. Tite, Adam B. Yeazel


54




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##### 





---





OFFICE LOCATIONS







---








55