UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

or

Commission File Number 1-15025

CENTRUE FINANCIAL CORPORATION

Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 10, 2004, there were 2,423,316 issued and outstanding shares of the Issuer’s common stock.

CENTRUE FINANCIAL CORPORATION

INDEX

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PART I. — FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY

See the accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY

See the accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY

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See the accompanying notes to consolidated financial statements.

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CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2004

Note 1 — Basis of Presentation

     The consolidated financial statements of Centrue Financial Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The December 31, 2003 balance sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Operating results for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report for the Company on Form 10-K for the year ended December 31, 2003.

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

     In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

     Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of mortgage servicing rights and goodwill. In connection with the determination of the allowance for loan losses and the valuation of real estate acquired by foreclosure, management obtains independent appraisals for significant properties.

     Certain 2003 amounts have been reclassified where appropriate to conform to the consolidated financial statement presentation used in 2004 with no effect on previously reported net income or stockholders’ equity.

     The Company has a stock-based employee compensation plan, which is described more fully in the Company’s annual report on Form 10-K for the year ended December 31, 2003. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair

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value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

Note 2 — Common Stock Split

     On October 30, 2003, the Company issued 1,282,761 additional shares to affect a 2-for-1 common stock split. All share and per share amounts have been retroactively adjusted for this split as if it occurred on January 1, 2003.

Note 3 — Earnings Per Share

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

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Note 4 — Acquisition of Parish Bank and Trust Company

     On March 5, 2004, the Company acquired for cash all of the outstanding shares of Parish Bank and Trust Company (“Parish Bank”) for a total cost of $4.5 million, including related expenses of $123,000. The acquisition was accounted for using the purchase method of accounting. As such, the results of operations of the acquired entity are excluded from the consolidated financial statements of income for the periods prior to the acquisition date. The purchase price has been allocated based on the fair values at the date of acquisition. This allocation resulted in intangible assets of $774,000 and goodwill of $1.0 million. The intangible assets are being amortized over ten years. At closing, Parish Bank had assets of $21.5 million, including $7.3 million of loans, deposits of $18.5 million and stockholders’ equity of $2.9 million. This acquisition was not considered material to the Company as a whole and therefore, proforma information is not included.

Note 5 — Adoption of FASB Interpretation No. 46

     The Company adopted FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (Revised December 2003) in connection with its consolidated financial statements for the quarter and nine-months ended September 30, 2004. FIN 46 establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The implementation of FIN 46, as revised, required the Company to de-consolidate its investment in Kankakee Capital Trust I as of January 1, 2004, because the

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Company is not the primary beneficiary. The Company’s prior financial statements were not reclassified to de-consolidate the Company’s investment in the Trust. There was no impact on shareholders equity or net income upon adoption of the standard.

Note 6 — Recent Accounting Pronouncements

     In December 2003, the American Institute of Certified Public Accountants released Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable to credit quality. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 is not expected to have a material impact on the Company’s financial statements.

     In March 2004, the FASB released EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). The EITF 03-1 provides guidance for determining when an investment is impaired and whether the impairment is other than temporary as well as guidance for quantifying the impairment.

     In September 2004, the FASB approved for issuance a FASB Staff Position (FSP). FSP EITF Issue 03-1-1, Effective Date of paragraphs 10-20 of EIT Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. FSP EITF Issue 03-1-1 delays the effective date, originally set for periods beginning after June 15, 2004, for measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-1. However, it does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The adoption of EITF 03-1-1- is not expected to have a material impact on the Company’s financial statements.

     In March 2004, the Securities and Exchange Commission released Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 provides general guidance that must be applied when an entity determines the fair value of a loan commitment accounted for as a derivative. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004 The adoption of SAB 105 did not have a material impact on the Company’s financial statements.

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Note 7 — Junior Subordinated Debt Owed to Unconsolidated Trusts

     The Company issued $10.0 million in each of April 2002 and April 2004 in cumulative trust preferred securities through newly formed special-purpose trusts, Kankakee Capital Trust I (Trust I) and Centrue Statutory Trust II (Trust II). The proceeds of the offerings were invested by the trusts in junior subordinated deferrable interest debentures of Trust I and Trust II. Trust I and Trust II are wholly-owned unconsolidated subsidiaries of the Company, and their sole assets are the junior subordinated deferrable interest debentures. Distributions are cumulative and are payable quarterly at a variable rate of 3.70% and 2.65% over the LIBOR rate, respectively, (at a rate of 5.07% and 4.54% at September 30, 2004) per annum of the stated liquidation amount of $1,000 per preferred security. Interest expense on the trust preferred securities was $238,000 and $135,000 for the three months ended September 30, 2004 and 2003, and $569,000 and $411,000 for the nine months ended September 30, 2004 and 2003, respectively. The obligations of the trusts are fully and unconditionally guaranteed, on a subordinated basis, by the Company. The trust preferred securities for Trust I are mandatorily redeemable upon the maturity of the debentures on April 7, 2032, or to the extent of any earlier redemption of any debentures by the Company, and are callable beginning April 7, 2007. The trust preferred securities for Trust II are mandatorily redeemable upon the maturity of the debentures on April 22, 2034, or to the extent of any earlier redemption of any debentures by the Company, and are callable beginning April 22, 2009. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s capital stock. For regulatory purposes, the trust preferred securities qualify as Tier I capital subject to certain provisions.

On May 6, 2004, the Board of Governors of the Federal Reserve System issued a Notice of Proposed Rulemaking in which it proposed to allow the continued inclusion of trust preferred securities in the Tier 1 capital of bank holding companies, subject to stricter standards. The Federal Reserve is proposing to limit the aggregate amount of a bank holding company’s cumulative perpetual preferred stock, trust preferred securities and other minority interests to 25% of a company’s core capital elements, net of goodwill. Current regulations do not require the deduction of goodwill. The proposal also provides that amounts of qualifying trust preferred securities and certain minority interests in excess of the 25% limit may be included in Tier 2 capital but would be limited, together with subordinated debt and limited-life preferred stock, to 50% of Tier 1 capital. The proposal provides a three-year transition period for bank holding companies to meet these quantitative limitations. At this time, it is not possible to predict the impact that this proposal would have on the Company.

Note 8 — Investments With Other Than Temporary Impairment

Continuous gross unrealized losses of investments in debt and equity securities as of September 30, 2004 (in thousands) which are classified as temporary were as follows:

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The unrealized losses on investment securities that have been in a continuous loss position for more than 12 consecutive months consist of three municipal securities with a fair market value of $529,000 and two mortgage backed securities with a fair market value of $4.7 million. The unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company.

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

GENERAL

     The Company serves the financial needs of families and local businesses in its primary market areas through its main banking office at 310 South Schuyler Avenue, Kankakee, Illinois and eighteen branch offices. The Company’s market areas include central and southern Illinois, western Indiana and the metropolitan St. Louis, Missouri markets. The Company’s business involves attracting deposits from the general public and using such deposits to originate commercial business, commercial real estate, consumer, multi-family, construction and residential mortgage loans in its market areas. The Company also invests in investment securities and various types of short term liquid assets.

     On October 9, 2003, the Company merged with Aviston Financial Corporation. At the time of the merger, Aviston Financial had approximately $98.0 million in total assets and operated three locations in southwestern Illinois, including its newest office in Fairview Heights, which is 10 miles from downtown St. Louis. Subsequent to the merger, the remaining corporation changed its name to Centrue Financial Corporation. On October 17, 2003, the subsidiary banks were merged to form Centrue Bank, a state-chartered commercial bank. On March 5, 2004, the Company acquired Parish Bank and Trust Company in Momence, Illinois, which was merged into Centrue Bank. At the time of the acquisition, Parish Bank had approximately $21.5 million in total assets. At September 30, 2004, the Company has approximately 171 full time equivalent employees.

FINANCIAL CONDITION

     The Company’s total assets were $603.9 million at September 30, 2004, a decrease of $5.3 million or 0.9%, from $609.2 million at December 31, 2003. Changes in asset accounts were represented by an increase in investment securities of $20.2 million, net loans and loans held for sale of $2.3 million, goodwill of $1.0 million, nonmarketable equity securities of $861,000 and

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intangible assets of $606,000. These increases were offset by a decrease in cash and cash equivalents of $30.5 million and other assets of $1 million.

     Cash and cash equivalents decreased $30.5 million or 66.9% to $15.1 million from $45.6 million. Investment securities increased $20.2 million or 22.8% to $108.8 million from $88.6 million. The increase in investment securities and decrease in cash and cash equivalents was primarily as a result of the Company repositioning lower yielding liquid investments such as federal funds sold to higher yielding investment securities and commercial loans. This repositioning has had a positive impact on the Company’s net interest margin.

     Net loans, including loans held for sale, increased $2.3 million or 0.5% to $428.1 million from $425.8 million. The increase in net loans was offset by the sale of $15.6 million of long-term fixed rate mortgage loans that had previously been held in the Company’s loan portfolio. Management decided to improve its interest rate risk position through the reduction of 25-30 year fixed rate mortgages held in the Company’s portfolio. The Company has retained servicing on all of the loans sold and recognized a minimal gain on the transactions. The increase in loans was primarily due to the Company adding several experienced commercial loan officers in the latter part of 2003 and first part of 2004. The addition of these officers and the Company’s concentration of efforts on growing the commercial loan portfolio have contributed to our increase in loans.

     Goodwill increased $1.0 million or 8.9% to $12.4 million from $11.4 million. Intangible assets increased $606,000 or 49.3% to $1.8 million from $1.2 million. The increase in goodwill and intangible assets was a result of the acquisition of Parish Bank.

     Nonmarketable equity securities increased $861,000 or 26.1% to $4.2 million from $3.3 million. The increase in nonmarketable equity securities was primarily due to the deconsolidation of the Company’s trust preferred securities which resulted in an increase of $620,000.

     Other assets decreased $1 million or 22.1% to $3.4 million from $4.4 million. The decrease in other assets was primarily due to a decrease in deferred tax assets.

     Borrowings decreased $12.8 million or 23.6% to $41.6 million from $54.4 million. The decrease in borrowings was due to borrowings (which had a rate of 4%) that matured late in March, 2004 and September, 2004.

     Junior subordinated debt owed to unconsolidated trusts (trust preferred securities) increased $10.0 million or 100.0% to $20.0 million from $10.0 million. In April, 2004, the Company issued an additional$10.0 million in trust preferred securities which have been used for repurchases of common stock and other corporate purposes.

     Stockholders’ equity decreased $2.6 million or 5.7% to $43.0 million from $45.6 million at December 31, 2003. Equity per share of common stock increased by $0.22 to $17.73 at September 30, 2004 from $17.51 at December 31, 2003. The decrease in stockholders’ equity and increase in equity per share was due to the Company repurchasing 189,500 shares of common stock in 2004, at a total cost of $5.4 million, partially offset by net income of $3.3 million.

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ASSET QUALITY

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

     Total nonperforming loans increased $4.4 million due to an increase of non-accrual loans. The increase was primarily due to two large commercial borrowers. The loans to one of these borrowers totaling $2.9 million matured at year end 2003. During the first quarter of 2004, the Company had ongoing negotiations to resolve and extend the maturity but was unable to achieve a satisfactory agreement. During the second quarter of 2004, when negotiations indicated that full collection of principal and interest was questionable, the Company decided to place the loans on nonaccrual status until final resolution. The Company expects a resolution in 2004 and does not anticipate a material loss. The second borrower has a $2.0 million commercial loan that was previously on the Company’s watch list, although the borrower continued to make payments as agreed. This borrower filed bankruptcy and ceased making loan payments during the second quarter of 2004. During the third quarter, the Company charged-off $1.2 million relating to a third commercial borrower. The loan was fully reserved for prior to the charge-off. As such, the charge-off had no effect on the Company’s determination of the adequacy of the allowance for loan losses during the third quarter. Management is in various stages of workout or liquidation with the remaining nonperforming loans.

TABLE 1 — Nonperforming Loans

     One measure of the adequacy of the allowance for loan losses is the ratio of the allowance for loan losses to total loans. The ratio of the allowance for loan losses to total loans was 1.54% at September 30, 2004 compared to 1.72% at December 31, 2003. The decrease in this ratio was primarily the result of the $1.2 million charge-off for one commercial loan. The loan had

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been previously classified and reserved preceding the charge-off, which was recorded during the third quarter. The ratio of the allowance for loan losses to non-performing loans decreased to 67.96% as of September 30, 2004 compared to 136.34% at December 31, 2003. The decrease in this ratio, which excludes foreclosed assets and restructured troubled debt, was the result of the increase of $4.4 million of nonperforming loans.

     Total loans which management has classified on the Company’s internal “watch list” at September 30, 2004 decreased to $20.2 million compared to $25.1 million at December 31, 2003. During 2003, the Company adopted a new loan policy and implemented new loan approval, documentation and monitoring processes. The Company also recruited and employed an experienced commercial lending team including three new regional presidents, each of whom is an experienced commercial lender, as well as other seasoned commercial lenders. These initiatives have had a positive impact on the monitoring of the loan portfolio. The Company will continue to attempt to improve the loan monitoring processes.

     The Company recognized charge offs in the amount of $1.3 million and $2.0 million during the third quarter and first nine months of 2004 and $261,000 and $3.4 million for the third quarter and first nine-months of 2003. The Company had recoveries of $20,000 and $126,000 for the third quarter and first nine-months of 2004 and $8,000 for the third quarter and first nine-months of 2003. The provision for loan losses was $300,000 and $900,000 for the third quarter and first nine months of 2004, compared to $272,000 and $4.0 million for the third quarter and first nine months of 2003. The provision for loan losses represents management’s judgment of the cost associated with credit risk inherent in the loan portfolio. Factors which influence management’s determination of the provision for loan losses include, among other things, size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, a review of individual loans and historical loan loss experience. The decrease in the provision for loan losses for the nine-month period ending September 30, 2004 compared to the same period of 2003 was primarily reflective of lower net charge-offs and improvements in asset quality. In addition, the Company acquired $156,000 of allowance for loan losses with the Parish acquisition in the first quarter of 2004.

     The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management’s methodology to determine the adequacy of the allowance for loan losses considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth and composition of the loan portfolio. Based upon the Company’s quarterly analysis of the adequacy of the allowance for loan losses, considering remaining collateral of loans with more than a normal degree of risk, historical loan loss percentages and economic conditions, it is management’s belief that the allowance for loan losses at September 30, 2004 was adequate. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

     Mortgage Servicing Rights — The Company recognizes as a separate asset the rights to service mortgage loans for others. The value of mortgage servicing rights is amortized in

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relation to the servicing revenue expected to be earned. Mortgage servicing rights are periodically evaluated for impairment based upon the fair value of those rights. Estimating the fair value of the mortgage servicing rights involves judgment, particularly of estimated prepayment speeds of the underlying mortgages serviced. Net income could be affected if management’s assumptions and estimates differ from actual prepayments.

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

RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

     For the third quarter ended September 30, 2004, net income increased $410,000 to $1.2 million from $823,000 for the same period in 2003. Net income for the nine-months ended September 30, 2004 increased $2.6 million to $3.3 million from $691,000 for the same period in 2003. Return on average assets for the third quarter and first nine months of 2004 was 0.81% and 0.71%, compared to 0.64% and 0.18% for 2003. Return on average equity for the third quarter and first nine months of 2004 was 11.86% and 9.87%, compared to 10.54% and 2.72% for 2003.

     The Company’s results for the quarter and nine-months ended September 30, 2003, included loan loss provisions of $272,000 and $4.0 million compared to provisions of $300,000 and $900,000 for the three and nine-month periods in 2004. The three months ended September 30, 2003 also included additional fee income of $373,000, which reflected a revaluation in the value of mortgage servicing rights.

     Net interest income for the three month and nine month periods increased $1.1 million and $2.7 million or 30.6% and 23.9% from 2003. Interest income increased by $1.0 million and $1.7 million for the three month and nine-month periods. The net interest margin for the third quarter increased to 3.47% compared to 3.08% for 2003. For the nine-month periods, the net interest margin increased to 3.41% compared to 3.14% for 2003. The increase in the net interest margin was primarily a result of the Company’s sensitivity to increased interest rates and initiatives that were implemented over the last twelve months to reposition the balance sheet. Lower earning assets, such as federal funds sold, were replaced with higher yielding loans and tax-advantaged investments. In addition, the Company’s cost of funds decreased due to an increase in non-interest bearing demand deposit accounts as a percentage of total deposits and a reduction in the percentage of certificates of deposit to total deposits from 55.5% at December 31, 2003 to 51.5% at September 30, 2004.

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TABLE 2
NET INTEREST INCOME ANALYSIS
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY

     For the third quarter ended September 30, 2004, tax equivalent interest income increased $1.1 million, to $7.4 million. The increase was primarily attributable to an increase in average earning assets, partially offset by a decrease in interest rates. Average earning assets increased $86.5 million to $555.4 million from $468.9 million in 2003. The average tax equivalent rate earned on earning assets decreased 3 basis points to 5.33% from 5.36%. The

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increase in the average balance of interest-earning assets was primarily due to earning assets acquired in the Aviston Financial and Parish Bank acquisitions. The decrease in the yield earned on interest-earning assets was the result of the sale of $15.6 million of mortgage loans to reduce interest rate risk and the gradual repricing of loans and investments to lower interest rates throughout 2003 and the first two quarters of 2004. These decreases were partially offset by higher loan rates during the third quarter of 2004. The prime rate has increased 75 basis points since June 29, 2004, which has had a positive impact on loan rates.

     Interest expense in the third quarter decreased $94,000 to $2.6 million from $2.7 million in 2003. The decrease was primarily attributable to a decrease in the rate paid on average interest bearing liabilities, partially offset by an increase in the average balance of interest bearing liabilities. Average interest-bearing liabilities increased $59.8 million to $507.5 million from $447.7 million. The rate paid on interest bearing liabilities decreased 35 basis points to 2.04% from 2.39% in 2003. The increase in average interest-bearing liabilities was primarily attributable to interest-bearing liabilities assumed in the Aviston Financial and Parish Bank acquisitions. The decrease in the average yield on interest-bearing liabilities resulted from decreasing market interest rates and continuing improvement in the deposit mix, with a significant growth of noninterest bearing deposits and a lower percentage of certificates of deposit to deposits.

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TABLE 3
NET INTEREST INCOME ANALYSIS
CENTRUE FINANCIAL CORPORATION AND SUBSIDIARY

     For the nine months ended September 30, 2004, tax equivalent interest income increased $2.0 million, to $22.3 million. The increase was primarily attributable to an increase in average earning assets, partially offset by a decrease in interest rates. Average earning assets increased $79.2 million to $559.5 million from $480.3 million in 2003. The average tax

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equivalent rate earned on earning assets decreased 33 basis points to 5.32% from 5.65%. The increase in the average balance of interest-earning assets was primarily due to earning assets acquired in the Aviston Financial and Parish Bank acquisitions. The decrease in the yield earned on interest-earning assets was the result of the sale of $15.6 million of mortgage loans to reduce interest rate risk and the gradual repricing of loans and investments to lower interest rates throughout 2003 and the first nine months of 2004.

     Interest expense during the first three quarters of the year decreased $1.0 to $8.0 million from $9.0 million in 2003. The decrease was primarily attributable to a decrease in the rate paid on average interest bearing liabilities, partially offset by an increase in the average balance of interest bearing liabilities. Average interest-bearing liabilities increased $56.7 million to $509.5 million from $452.8 million. The rate paid on interest bearing liabilities decreased 56 basis points to 2.10% from 2.66% in 2003. The increase in average interest-bearing liabilities was primarily attributable to interest-bearing liabilities assumed in the Aviston Financial and Parish Bank acquisitions. The decrease in the average yield on interest-bearing liabilities resulted from decreasing market interest rates and continuing improvement in the deposit mix, with a significant growth of noninterest deposits and a lower percentage of certificates of deposit to deposits.

     The provision for loan losses was $300,000 and $900,000 for the third quarter and first nine months of 2004, compared to $272,000 and $4.0 million for the third quarter and first nine months of 2003. The decrease in the provision for loan losses for the nine month period was primarily due to a decrease in net charge-offs. Several initiatives to more effectively monitor the risk involved in the loan portfolio were put in place during the latter part of 2003 and have continued in 2004. The amount of the provision for losses on loans is determined through regular review of the various elements of the loan portfolio, and by a review of overall adequacy, based on circumstances and factors known at the time of the review.

TABLE 4 — Noninterest Income and Expense

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     For the third quarter of 2004, noninterest income increased $55,000 to $1.6 million from $1.5 million in 2003. The increase in noninterest income was primarily due to an increase in fee income, partially offset by decreases in all other categories of noninterest income. Fee income increased $177,000 to $1.2 million from $1.1 million in 2003. The increase in fee income was primarily due to a new overdraft protection program that began in June of 2004. Additionally, noninterest income for 2003 included fee income of $373,000 related to the revaluation of mortgage servicing rights.

     Noninterest expense increased $802,000 to $4.3 million compared to $3.5 million for 2003. The increase in noninterest expense was primarily due to increases in compensation and benefits of $433,000, furniture and equipment of $95,000, and other noninterest expense of $200,000. Each of these increases was primarily due to the addition of personnel and branches that were added due to the merger with Aviston Financial in the fourth quarter of 2003, Parish Bank in March 2004 and the opening of two new offices within the last year.

     Income tax expense for the third quarter of 2004 decreased $72,000 to $502,000 from $574,000 in 2003. The effective income tax rate for 2004 was 28.9% compared to 41.1% for 2003. The decrease in the effective rate was due to several initiatives implemented during 2004 to minimize the Company’s income tax expenses, including the purchase of tax exempt investment securities.

TABLE 5 — Noninterest Income and Expense

     For the nine month period ended September 30, 2004, noninterest income decreased $50,000 compared to the same period in 2003. The decrease in noninterest income was primarily due to a decrease in gain on sale of loans of $456,000, a decrease in gain on sale of branch of $478,000, and a decrease in other noninterest income of $155,000. These decreases were partially offset by an increase in fee income of $1.0 million. The decrease in gain on sale

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of loans in 2004 was primarily due to the higher volume of refinancing that occurred during 2003. Due to the rate structure moving higher in 2004 and the large amount of loans that refinanced during 2002 and 2003, the amount of refinancing greatly decreased and the majority of the gain on loans in 2004 was primarily attributable to new loans. Additionally, during the second quarter of 2004, the Company sold its credit card portfolio and recorded a gain in the amount of $127,000. The decision to sell the credit card portfolio was made due to the cost related to processing the credit card transactions, loan loss exposure to these unsecured loans and the marginal profitability of carrying and servicing the portfolio. The Company has continued to offer credit card services through an affiliation with a third party. This arrangement has allowed the Company to continue to offer credit card services without the risk and cost associated with the credit card loans while sharing in future revenue. The gain on sale of branch in 2003 was a result of the sale of the Hoopeston branch in February of 2003. The increase in fee income was primarily due to an increase in fees assessed on customer accounts and transactions to better reflect the competitive environment as well as a new overdraft protection program that began in June of 2004. The decrease in other noninterest income was the result of various immaterial items.

     Noninterest expense increased $2.0 million compared to the same period in 2003. The increase in noninterest expense was primarily due to increases in compensation and benefits of $1.0 million, furniture and equipment of $400,000, and other noninterest expense of $403,000. Each of these increases was primarily due to the addition of personnel and branches that were added due to the merger with Aviston Financial in the fourth quarter of 2003, Parish Bank in March 2004 and the opening of two new offices within the last year.

     Income tax expense for the nine months ended September 30, 2004 increased $1.2 million to $1.4 million from $196,000 for the same period in 2003. The Company’s effective tax rate was 30.3% and 22.1% for 2004 and 2003, respectively. The 2004 effective tax rate reflects the level of tax expense anticipated by the Company while the 2003 effective tax rate reflects the tax impact of significant net losses incurred in the second quarter of 2003.

LIQUIDITY AND CAPITAL RESOURCES

     The Company maintains a certain level of cash and other liquid assets to fund normal volumes of loan commitments, deposit withdrawals and other obligations. The following table summarizes significant contractual obligations and other commitments at September 30, 2004 (in thousands):