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CENTRUE FINANCIAL CORPORATION

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2004 ANNUAL REPORT

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CORPORATE PROFILE

Beginning on February 25, 2005, the common stock of the Company has been publicly traded on the Nasdaq National Market System under the symbol “TRUE.” Prior to February 25, 2005, it was 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
Report of Independent Registered Public Accounting Firm			29
Consolidated Financial Statements			30
Notes to Consolidated Financial Statements			36
Corporate Information			63
Directors and Officers			65
Office Locations/ Map			66

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Dear Stockholder,

We are pleased to provide this 2004 annual report reflecting the results for our first full year of operations since Centrue Financial Corporation was formed in October 2003 through the merger of Kankakee Bancorp, Inc. and Aviston Financial Corporation. The strategic initiatives that we implemented following the merger have allowed us to significantly improve our financial performance during 2004. For the year ended December 31, 2004, we reported net income of $4.9 million, a significant increase compared to $1.4 million in 2003. Earnings per share tripled to $1.95 per share in 2004. Our return on average assets and average stockholders’ equity for the year also improved to 0.80% and 10.96% respectively.

As evidenced by our financial results, we placed a high priority on improving our profitability during 2004, although our assets did grow slightly as well. Our net interest income benefited from our increasing emphasis on commercial loans along with the growth in our investment securities portfolio. We have also become much more disciplined with our deposit pricing, and our net interest margin consequently improved to 3.42% in 2004 from 3.16% in 2003. Our deposit mix changed significantly as we reduced certificates of deposit by $16.9 million, or 6%, during the year. At the same time we increased non-interest checking accounts by $9.6 million, or 22%, and also began offering sweep accounts with the balances in these accounts having already grown to $8.6 million by year end.

We also took action to enhance our fee income which increased $1.5 million, or 52%, in 2004, primarily through the implementation of an overdraft protection product and restructured fee schedules. During the last year, we also formed strategic alliances to deliver brokerage, trust and credit card products. Our customers will benefit from enhanced products, and we will be able to deliver these products more cost efficiently.

We have assembled a talented group of officers and employees, with the majority of our senior officers having joined Centrue within the last two years. We continue to add experienced bankers in positions throughout our organization, both from acquisitions and by attracting them from other banks within our markets. Our bankers enjoy an atmosphere where they are empowered to make decisions and to meet the needs of our customers. One of our primary initiatives for 2005 is our True Blue program which is being undertaken to reinforce the culture to provide superior customer service.

We are not satisfied with our current level of classified assets and continue working diligently to reduce problem assets and improve our overall asset quality. During 2004, we hired a commercial banker with over twenty years of experience as our Chief Credit Officer. This position is responsible for all credit administration functions and for the independent review and monitoring of our loan portfolio. We believe that the creation of this new position has strengthened the internal controls over our lending functions and will allow us to reduce our classified assets while prudently expanding our commercial loan portfolio.

We continue to maximize the use of the capital entrusted to us, and in 2004 we repurchased 232,706 shares, or 9%, of our common stock. Over the last three years we have repurchased 899,470 shares of our stock at an average price of $21 per share. We completed the transfer of our stock listing on February 25, 2005 and are now traded on Nasdaq under the symbol “TRUE”. We believe that our listing on Nasdaq will provide more liquidity and visibility for our Centrue stockholders.

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On December 31, 2004, we announced the proposed acquisition of Illinois Community Bancorp, Inc. and its subsidiary bank in Effingham, Illinois. This acquisition will allow us to expand our geographic coverage between our existing locations in Champaign and Metro East St. Louis. Illinois Community Bancorp has assets of $33 million, and the acquisition is expected to close in the second quarter of 2005, subject to regulatory and stockholder approvals.

During 2005, we will continue to focus on long-term profitability as we also search for opportunities within our market area to expand our geographic footprint, both through acquisitions and internally. We look forward to the opening of our newly constructed facility in Fairview Heights, Illinois scheduled for the second quarter of 2005. We have also entered into an agreement with a third party vendor to improve our data processing and item processing services. We believe that the transition to this new relationship in 2005 will allow us to improve customer service, as well as our productivity.

We appreciate the continued loyalty and support of our shareholders, customers and employees, and we are committed to making 2005 another successful year for Centrue.

Sincerely,

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

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FINANCIAL HIGHLIGHTS

			Years Ended December 31,
			2004				2003				2002				2001				2000
			(Dollars in thousands, except per share data)
Selected Financial Condition Data:
Total assets			$	611,853			$	609,411			$	546,404			$	490,280			$	459,894
Loans, net, including loans held for sale				419,379				426,043				384,517				394,744				338,998
Investment securities held-to-maturity (1)				149				942				1,143				1,554				2,066
Investment securities available-for-sale				124,763				87,712				82,638				46,391				73,221
Deposits				495,777				496,257				431,964				415,279				387,679
Total borrowings				49,661				54,396				59,700				30,000				29,000
Trust preferred securities				20,000				10,000				10,000				—				—
Stockholders’ equity				43,176				45,643				41,107				41,191				39,289
Shares outstanding (3)				2,380,666				2,606,022				2,331,762				2,432,716				2,526,216
For the period:
	Net interest income after provision for loan losses		$	17,548			$	11,358			$	12,037			$	13,528			$	12,852
	Net income			4,889				1,363				2,233				3,261				2,584
Per common share (3):
	Book value per share outstanding		$	18.14			$	17.51			$	17.63			$	16.93			$	15.56
	Tangible book value per share outstanding (2)			12.16				12.66				15.81				15.11				13.65
	Basic earnings per share			1.96				0.65				0.94				1.34				1.03
	Diluted earnings per share			1.95				0.65				0.93				1.31				1.00
Financial ratios:
	Stockholders’ equity to total assets			7.06%				7.49%				7.52%				8.40%				8.54%
	Non-performing assets to total assets			1.64%				1.00%				2.03%				0.45%				0.76%
	Net charge-offs to average loans			0.77%				1.53%				0.01%				0.02%				0.02%
	Net interest margin			3.42%				3.16%				3.22%				3.16%				3.25%
	Efficiency ratio (5)			67.90%				72.77%				65.40%				70.97%				74.42%
	Return on average assets			0.80%				0.25%				0.42%				0.69%				0.60%
	Return on average stockholders’ equity			10.96%				4.00%				5.42%				8.20%				6.95%
	Average equity to average assets			7.31%				6.33%				7.70%				8.41%				8.70%
	Dividend payout Ratio (4)			3.83%				46.15%				30.32%				18.32%				24.12%

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(1)	Includes certificates of deposit.
(2)	Calculated by subtracting goodwill and other intangible assets from stockholders’ equity.
(3)	All share and per share information for years prior to 2003 have been restated for the 2 for 1 stock split in October 2003.
(4)	Calculated by dividing dividends per share by earnings per share.
(5)	Calculated by net interest income plus noninterest income excluding securities gains divided by noninterest expense.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

The Company had its first full year as Centrue Financial in 2004. Since the 2003 merger, a new experienced management team has been assembled by Thomas A. Daiber, who joined the Company as CEO. Senior officer positions filled with new executives since 2003 included the Chief Financial Officer, Chief Credit 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 three other seasoned commercial lenders. While operating as one significant business unit, 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.

Net income increased 258.7% to $4.9 million in 2004 compared to $1.4 million in 2003. Assets grew 0.4% from $609.4 million at the end of 2003 to $611.9 million at the end of 2004. During 2004, the Company divested $20.2 million of long-term fixed rate 1-4 family mortgage loans in order to improve the interest rate risk profile. Without the mortgage loan sales, total assets would have increased by $22.7 million or 3.7%.

The Company has had an aggressive capital management plan over the last three 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, 466,540 shares of stock at a total cost of $9.3 million ($19.95 per share) in 2003 and an additional 232,706 shares of stock at a total cost of $6.5 million ($27.99 per share) in 2004. The Company executed a 2 for 1 stock split in the form of a dividend 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 capital base to maximize stockholders’ return on equity. The Company will continue to evaluate opportunities in 2005 in an effort to continue 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 and 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.

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Mission and Goals

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;
	•	attain 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;
	•	employment of experienced and dedicated officers and employees;
	•	establishment of regional banking centers with a local regional president;
	•	expansion of the Company’s geographic presence through strategic acquisitions and de novo branches;
	•	the origination of commercial real estate, consumer, commercial business, and, multi-family and construction loans;
	•	forming strategic alliances for ancillary banking services such as trust, brokerage and credit card services designed to enhance product offerings for customers while increasing efficiency;
	•	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

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

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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 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 assessments as of September 30, 2002, 2003 and 2004. 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.

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

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

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

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2004, approximately 36% are tied to the prime rate and immediately reprice. The increase in rates should have a positive impact on the Bank’s ability to generate interest income on commercial loans. The Company expects to see tightening of key net interest margin drivers due to the fact that long-term rates have not increased while short-term rates have increased 125%.

Results of Operations

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Net Interest Income Analysis

			Year Ended December 31, 2004												Year Ended December 31, 2003												Year Ended December 31, 2002
			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)		$	433,406			$	24,955				5.76	%		$	366,305			$	23,523				6.42	%		$	394,523			$	27,615				7.00	%
	Investment securities (2)			108,825				4,424				4.07	%			75,088				3,554				4.73	%			72,869				3,842				5.27	%
	Other interest-earning assets			12,037				119				0.99	%			49,296				313				0.63	%			28,082				518				1.84	%
	FHLB stock			3,462				214				6.18	%			2,929				195				6.66	%			2,634				139				5.28	%
Total interest-earning assets				557,730				29,712				5.33	%			493,618				27,585				5.59	%			498,108				32,114				6.45	%
Other assets				52,308												45,080												37,185
Total assets			$	610,038											$	538,698											$	535,293
Interest-bearing liabilities:
	Time deposits		$	261,473				6,467				2.47	%		$	243,629				7,564				3.10	%		$	254,239				10,412				4.10	%
	Savings deposits			90,580				560				0.62	%			78,450				860				1.10	%			72,196				1,397				1.94	%
	Interest Bearing Demand deposits			92,698				780				0.84	%			83,001				792				0.95	%			73,312				1,485				2.03	%
	Total interest bearing deposits			444,751				7,807				1.76	%			405,080				9,216				2.28	%			399,747				13,294				3.33	%
	Borrowings			63,991				2,843				4.44	%			62,115				2,780				4.48	%			63,038				2,793				4.43	%
Total interest-bearing liabilities				508,742				10,650				2.09	%			467,194				11,996				2.57	%			462,785				16,087				3.48	%
Non-Interest Bearing Demand Deposits				52,654												33,719												27,133
Other liabilities				4,039												3,700												4,170
Total liabilities				565,435												504,614												494,088
Stockholders’ equity				44,603												34,084												41,205
Total liabilities and stockholders’ equity			$	610,038											$	538,698											$	535,293
Net interest income							$	19,062											$	15,589											$	16,027
Net interest rate spread												3.24	%											3.02	%											2.97	%
Net earning assets			$	48,988											$	26,424											$	35,323
Net yield on average interest-earning assets (net interest margin)												3.42	%											3.16	%											3.22	%
Average interest-earning assets to average interest-bearing liabilities								109.63	%											105.66	%											107.63	%

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(1)	Calculated on a tax-equivalent basis assuming a 34% tax rate, 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 $276, $142, and $45 for 2004, 2003, and 2002, respectively.
(2)	Calculated on a tax-equivalent basis assuming a 34% tax rate.

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,

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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,
				2004 vs. 2003												2003 vs. 2002
				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			$	4,024			$	(2,595	)		$	1,429			$	(1,899	)		$	(2,193	)		$	(4,092	)
	Investment securities				1,425				(555	)			870				114				(402	)			(288	)
	Other interest-earning assets				(315	)			124				(191	)			254				(459	)			(205	)
	Federal Home Loan Bank stock				33				(14	)			19				17				39				56
		Total interest-earning assets		$	5,167			$	(3,040	)		$	2,127			$	(1,514	)		$	(3,015	)		$	(4,529	)
Interest bearing liabilities:
	Certificate accounts			$	530			$	(1,627	)		$	(1,097	)		$	(422	)		$	(2,426	)		$	(2,848	)
	Savings deposits				118				(418	)			(300	)			112				(649	)			(537	)
	Interest Bearing Deposits				87				(99	)			(12	)			176				(869	)			(693	)
	Borrowings				83				(20	)			63				(41	)			28				(13	)
		Total interest-bearing liabilities		$	818			$	(2,164	)		$	(1,346	)		$	(175	)		$	(3,916	)		$	(4,091	)
Net interest income												$	3,473											$	(438	)

Comparison of Operating Results for 2004 to 2003

General

Net Interest Income

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higher throughout the end of 2004. This increase raised short-term interest rates as well as the prime rate and had a positive effect on net interest income during the second half of 2004.

Interest Income

Tax equivalent interest on loans was $25.0 million for 2004, an increase of $1.5 million, or 6.1%, as compared to 2003. This was primarily attributable to an increase of $67.1 million in average outstanding loans as well as a decrease in the yield on loans from 6.42% during 2003 to 5.76% during 2004. The decrease in yields on loans resulted from loans repricing to lower interest rates during 2003 and early 2004.

Tax equivalent interest earned on investment securities and other interest-earning assets and dividends on Federal Home Loan Bank of Chicago (“FHLB”) stock totaled $4.8 million for 2004, compared to $4.1 million for 2003. This represented an increase of 17.2% during 2004. This was primarily due to an increase in average yield on these assets from 3.19% in 2003 to 3.83% in 2004, which was partially offset by a decrease in the average balance of these assets from $127.3 million in 2003 to $124.3 million in 2004. The overall increase in average yields was primarily due to the Company shifting lower yielding federal funds sold to higher yielding investment securities.

Interest Expense

During 2004, average interest bearing deposits increased by $39.7 million, to $444.8 million for 2004, compared to $405.1 million for 2003. The rate paid on interest bearing deposits decreased 52 basis points to 1.76% from 2.28%. 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 that occurred in October of 2003 and the Parish acquisition that occurred in March of 2004.

During both 2004 and 2003, $2.8 million of the Company’s interest expense related to borrowings. While interest expense on borrowed funds remained constant, the average balance of borrowed funds increased $1.9 million from $62.1 million in 2003 to $64.0 million in 2004. The increase in the average balance was partially offset by a decrease of four basis points in the average interest rate on borrowed funds to 4.44% in 2004 from 4.48% in 2003.

Provision for Loan Losses

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reserved for loan losses. In line with the asset quality program, it was determined that the Company could lower the provision for loan losses for 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 $5.5 million allowance for loan losses at December 31, 2004 is adequate. However, there can be no assurance that the allowance for loan losses will be adequate to cover all future 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. Further information is included in the asset quality section of this report on page 19.

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 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, 2004 and 2003:

		2004				2003
		(Dollars in thousands)
Total loans		$	424,854			$	433,514
Total assets			611,853				609,411
Allowance for loan losses			5,475				7,471
Net loan charge-offs			3,352				5,610
Nonperforming loans			6,991				5,480
Nonperforming assets			10,035				6,080
Net loan charge-offs as a percentage of average loans			0.77	%			1.53	%
Nonperforming assets to total assets			1.64	%			1.00	%
Allowance for loan losses to gross loans			1.29	%			1.72	%
Allowance for loan losses to nonperforming loans			78.31	%			136.34	%

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.

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Noninterest Income

Noninterest Expenses

Income Taxes

Comparison of Operating Results for 2003 to 2002

General

Net Interest Income

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bearing liabilities of $4.4 million. 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 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

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 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

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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.

Noninterest Income

Noninterest Expenses

Income Taxes

Financial Condition

Lending Activities

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financial services include 1-4 family residential, multi-family, commercial business, commercial real estate, consumer loans and all types of construction loans. In addition, to increase overall profitability and portfolio mix, we continue to focus our loan growth rate on commercial lending which will move us to be more in line with our commercial banking peers. From time to time, the Company has also utilized loan purchases to supplement loan originations.

Net loans decreased by $7.1 million or 1.7% to $418.9 million at December 31, 2004 from $426.0 million at December 31, 2003. Loans held for sale were $416,000 at December 31, 2004. There were no loans held for sale at December 31, 2003. The decrease in net loans was primarily attributable to the sale of $20.2 million of long-term fixed rate 1-4 family mortgage loans in order to improve the Company’s interest rate risk profile. Without the mortgage loan sales, net loans would have increased by $13.1 million. During the course of the year in 2004, market rates increased marginally following a significant decrease in the preceding two years. The Company has re-focused its loan efforts on the commercial portfolio and as a result experienced a high volume of commercial loan origination. The Company expects to continue to focus on increasing the commercial loan portfolio during 2005.

Loan Composition. The following table provides information concerning the composition of the Company’s loan portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for loan losses) as of the dates indicated. Loans held for sale are included in one-to-four family real estate loans.

				December 31,
				2004								2003								2002								2001								2000
				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
				(Dollars in thousands)
Real Estate Loans:
	One-to-four family			$	175,640				41.09	%		$	212,578				48.70	%		$	228,623				58.24	%		$	247,435				61.79	%		$	211,891				61.47	%
	Multi-family				15,655				3.66				16,461				3.77				13,672				3.48				11,983				2.99				11,608				3.37
	Commercial				101,516				23.75				77,142				17.67				56,589				14.41				48,543				12.12				39,564				11.48
	Construction and Development				31,014				7.26				28,640				6.56				21,286				5.42				22,555				5.63				17,797				5.16
	Total real estate loans				323,825				75.76				334,821				76.70				320,170				81.55				330,516				82.53				280,860				81.48
	Commercial loans				61,090				14.29				58,235				13.34				33,301				8.48				31,255				7.80				23,750				6.89
Consumer Loans:
	Home equity				28,188				6.60				24,305				5.57				22,560				5.75				18,407				4.60				17,815				5.17
	All other consumer				14,303				3.35				19,185				4.39				16,558				4.22				20,288				5.07				22,262				6.46
	Total consumer loans				42,491				9.95				43,490				9.96				39,118				9.97				38,695				9.67				40,077				11.63
	Total loans				427,406				100.00	%			436,546				100.00	%			392,589				100.00	%			400,466				100.00	%			344,687				100.00	%
Less:
	Loans in process				2,283								2,467								1,043								2,671								3,341
	Deferred fees and discounts				269								565								505								470								192
	Allowance for loan losses				5,475								7,471								6,524								2,582								2,156
		Total loans, net		$	419,379							$	426,043							$	384,517							$	394,743							$	338,998

As of December 31, 2004, the total amount of loans due after December 31, 2005, which had predetermined interest rates was $249.4 million, while the total amount of loans due after such date which had floating or adjustable interest rates was $111.2 million.

As a state chartered commercial bank, the amount of loans the Bank is permitted to make to any one borrower is generally limited to 25% of the Bank’s unimpaired capital and surplus. At

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December 31, 2004, the Bank’s regulatory loan-to-one borrower limit was $12.7 million. Additionally, as part of the Bank’s loan policy and strategic plan the Bank sets guidelines on the percentage of each type of loan for the loan’s portfolio. The concentrations of loans by type are regularly reviewed by the chief credit officer and loan committee. As of December 31, 2004, the Bank did not have any concentrations in loan types that are not already disclosed.

Investment Activities

The composition and maturities of the investment securities portfolio at December 31, 2004, are indicated in the following table, at amortized cost which excludes unrealized gains (losses) on securities available for sale.

			At December 31, 2004
			Less Than								1 to 5								5 to 10								Over 10
			1 Year								Years								Years								Years								Total
			Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
			(Dollars in thousands)
Securities available for sale
U.S. Treasury and government agency securities			$	2,072				5.30	%		$	67,372				4.15	%		$	1,500				4.45	%		$	—				—			$	70,944				4.19	%
Municipal bonds				566				6.76				3,866				5.67				19,150				4.77				—				—				23,582				4.97
Corporate bonds				—				—				2,076				4.26				—				—				—				—				2,076				4.26
Mortgage backed securities				136				4.50				3,510				4.27				572				5.43				19,178				4.82	%			23,396				4.75
Other securities				—				—				—				—				—				—				4,720				4.69				4,720				4.69
	Total		$	2,774				5.56	%		$	76,824				4.23	%		$	21,222				4.77	%		$	23,898				4.80	%		$	124,718				4.46	%

Office properties and equipment increased $1.2 million to $18.3 million at December 31, 2004 compared to $17.1 million at December 31, 2003. The increase was primarily attributable to the construction of a new branch office in Fairview Heights, Illinois, as well as various equipment upgrades.

Goodwill increased $1.0 million to $12.4 million at December 31, 2004 compared to $11.4 million at December 31, 2003. The increase in goodwill was a result of the purchase of Parish Bank and Trust Company 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.

Real estate held for sale increased $2.7 million to $3.0 million at December 31, 2004 compared to $319,000 at December 31, 2003. The increase in real estate held for sale was primarily attributable to one large commercial property that was transferred to the Company as a deed in lieu of foreclosure in December of 2004. The Company received an independent appraisal on this property in December of 2004 which indicated the market value exceeded the carrying value.

Deposits

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while maintaining collateralized balances. The balances for the sweep repurchase program are included in short-term borrowings. During 2004, 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 and was able to increase checking and sweep accounts and decreased certificate of deposit accounts. In 2005, the Company will continue to look for ways to reduce its overall cost of funds, including pursuing lower rate deposits.

The following table sets forth the composition of deposits and the percentage of each category to total deposits for the periods presented.

			December 31, 2004								December 31, 2003
			Amount				Percent				Amount				Percent
			(Dollars in thousands)
Noninterest bearing demand deposits			$	53,919				10.88	%		$	44,305				8.93	%
Interest bearing demand deposits				48,495				9.78				48,411				9.76
Savings and money market deposits				134,876				27.20				128,203				25.83
Time deposits $100,000 or more				61,274				12.36				39,649				7.99
Time deposits less than $100,000				197,213				39.78				235,689				47.49
	Total deposits		$	495,777				100.00	%		$	496,257				100.00	%

Borrowings

Short-term borrowings increased $12.8 million from $1.4 million in 2003 to $14.2 million in 2004. Short-term borrowings consist of overnight advances from the FHLB, customer repurchase agreements, and federal funds purchased. The increase was due to an increase of $8.6 million of customer repurchase agreements and $3.5 million of federal funds purchased.

Long-term borrowings decreased $7.4 million from $62.9 million in 2003 to $55.5 million in 2004. Long-term borrowings consist of advances from the FHLB, notes payable, funds from securities sold under agreements to repurchase and junior subordinated debt owed to unconsolidated trusts (trust preferred securities). Securities sold under agreements to repurchase decreased $9.2 million and borrowings from the FHLB decreased $8.2 million. These decreases were partially offset by an increase of trust preferred securities of $10 million.

Stockholders’ equity on a per share basis increased by 3.6% from $17.51 at December 31, 2003, to $18.14 at December 31, 2004. Total stockholders’ equity decreased by $2.4 million or 5.3% to $43.2 million at December 31, 2004. The decrease in stockholder’s equity, as well as the increase

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Asset Quality

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, 2004, total non-performing assets increased by $3.9 million, or 63.9%, to $10.0 million from $6.1 million at December 31, 2003. The increase in nonperforming assets was primarily due to foreclosure on a $2.9 million property which is now in foreclosed assets, as well as an increase in non-performing loans of $1.4 million due to one large commercial borrower that filed bankruptcy during 2004.

The following table represents the amount of loans that were on non-accrual, past due 90 days and still accruing and forgone interest for each of the last five fiscal years.

		December 31,
		2004				2003				2002				2001				2000
		(Dollars in thousands)
Non-accrual loans		$	6,769			$	3,248			$	6,834			$	730			$	680
Loans past due 90 days and still accruing			222				2,232				3,439				391				1,890
Troubled debt restructurings			42				281				480				611				439
Interest income recognized on non-accrual loans and troubled debt restructurings			—				199				70				—				—
Foregone interest on non-accrual loans			520				525				387				33				32

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. 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 which is an experienced commercial lender, as well as three other seasoned commercial lenders. In 2004, the Company recruited a Chief Credit Officer to strengthen our monitoring of credit quality and the overall loan portfolio. His duties include responsibility for all credit administration activities and to oversee an independent review of new and existing loans in the portfolio. Company management performs a quarterly analysis of the adequacy of the allowance for loan losses. Management classifies problem loans into one of four categories: Special Mention Substandard, Doubtful, and Loss. During the year ended December 31, 2004, total classified loans decreased by $5.7 million to $19.4 million from $25.1 million at December 31, 2003. This decrease was due in part to the Company’s implementation of an ongoing 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 was designed to assist management in focusing collection efforts in problem areas and should result in a lower charge-off ratio. Classified loans increased dramatically during 2003 and have begun to decrease through 2004. The Company will continue to work at attempting to reduce the volume of classified loans through 2005.

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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, 2004, such loans amounted to approximately $12.4 million, as compared to $14.3 million at December 31, 2003.

Analysis of Allowance for Loan Losses. The following table sets forth an analysis of the Company’s allowance for loan losses.

			Year Ended December 31,
			2004				2003				2002				2001				2000
			(Dollars in thousands)
Balance at beginning of period			$	7,471			$	6,524			$	2,582			$	2,156			$	2,171
Charge-offs:
	One-to-four family			—				—				2				—				—
	Commercial real estate			1,333				1,134				—				28				3
	Consumer			235				144				79				61				124
	Commercial business			2,079				4,964				—				14				8
				3,647				6,242				81				103				135
Recoveries:
	One-to-four family			14				—				—				—				—
	Commercial real estate			110				583				—				1				28
	Consumer			16				46				22				24				27
	Commercial business			155				3				11				1				15
				295				632				33				26				70
Net charge-offs				(3,352	)			(5,610	)			(48	)			(77	)			(65	)
Additions charged to operations				1,200				4,122				3,990				503				50
Additions through acquisitions				156				2,435				—				—				—
Balance at end of period			$	5,475			$	7,471			$	6,524			$	2,582			$	2,156
Ratio of net charge-offs during the period to average loans outstanding during the period				0.77	%			1.53	%			0.01	%			0.02	%			0.02	%
Ratio of net charge-offs during the period to average non-performing assets				31.63	%			110.06	%			0.75	%			3.07	%			2.75	%

The balance in the allowance for loan losses and the related amount charged to operations is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management’s estimate of future potential losses.

During 2003 and 2004, the Company undertook a comprehensive review of its loan procedures and implemented a new comprehensive loan policy. This process indicated the need for additional allocations of commercial related loans during 2004. 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

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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 establishes historical loss percentages and evaluates problem loans and adjusts allocations as necessary. 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. The following table represents the allocation of the allowance for loan losses by loan category.

			December 31,
			2004								2003								2002								2001								2000
							Percent of								Percent of								Percent of								Percent of								Percent of
							Each								Each								Each								Each								Each
							Category to								Category to								Category to								Category to								Category to
			Amount				Total Loans				Amount				Total Loans				Amount				Total Loans				Amount				Total Loans				Amount				Total Loans
			(Dollars in thousands)
One-to-four family			$	581				41.09	%		$	1,012				48.70	%		$	224				58.24	%		$	157				61.79	%		$	209				61.47	%
Multi-family				76				3.66				197				3.77				7				3.48				6				2.99				24				3.37
Commercial real estate				1,979				23.75				2,455				17.67				3,212				14.41				933				12.12				825				11.48
Construction and development				183				7.26				1,673				6.56				1,403				5.42				532				5.63				350				5.16
Commercial				2,194				14.29				1,454				13.34				1,434				8.48				729				7.80				581				6.89
Consumer				348				9.95				336				9.96				244				9.97				225				9.67				167				11.63
Unallocated				114				—				344				—				—				—				—				—				—				—
	Total		$	5,475				100.00	%		$	7,471				100.00	%		$	6,524				100.00	%		$	2,582				100.00	%		$	2,156				100.00	%

Asset/ Liability Management

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. The Funds Management Committee generally uses three types of analysis in measuring and reviewing the Company’s interest rate sensitivity. These are Static GAP analysis, Dynamic Interest Rate Risk Analysis and Economic Value of Equity (“EVE”).

The Static GAP analysis consists of examining the matching of assets and liabilities and 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

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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. 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.

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, 2004. 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 five repricing categories as follows: three months or less — 20%, after three through twelve months — 20%, after one through three years — 20%, after three through five years — 20%, and after five years — 20%. Money market deposits have been allocated between the categories as follows: after

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three through twelve months — 50% and after one through three 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)			$	7,039			$	5,627			$	24,213			$	23,034			$	127,836			$	187,749
Adjustable rate one-to-four family (including commercial real estate and construction loans)				32,647				21,893				30,013				17,372				3,137				105,062
Construction & Development				16,852				2,695				7,961				2,770				736				31,014
Commercial business loans				30,561				4,992				14,762				8,539				2,236				61,090
Consumer loans				25,798				1,775				6,408				5,757				2,753				42,491
Investment securities and other				1,563				1,210				29,541				47,393				45,056				124,763
Federal Funds Sold, interest bearing due from banks, money market funds, and certificates of deposit				2,625				50				—				—				—				2,675
	Total interest-earning assets			117,085				38,242				112,898				104,865				181,754				554,844
Savings deposits				17,598				17,598				17,598				17,598				17,598				87,990
Now and money market				9,699				33,142				33,142				9,699				9,699				95,381
Certificates under $100,000				53,552				98,707				33,111				11,843				—				197,213
Certificates of $100,000 or more				37,076				16,844				5,208				2,146				—				61,274
Borrowings				37,676				13,234				10,790				5,321				2,640				69,661
	Total interest-bearing liabilities			155,601				179,525				98,849				46,607				29,937				511,519
Interest-earning assets less interest-bearing liabilities			$	(38,516	)			(141,283	)			13,049			$	58,258			$	151,817			$	43,325
Cumulative interest-rate sensitivity gap			$	(38,516	)		$	(179,799	)		$	(166,750	)		$	(108,492	)		$	43,325
Cumulative interest-rate gap as a percentage of assets				(6.29	)%			(29.39	)%			(27.25	)%			(17.73	)%			7.08	%

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, 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.

The dynamic interest rate risk analysis calculates risk to net interest income under three different scenarios, including flat, upward and downward rate shifts. The analysis assumes that rates change over a 12 month time frame. The analysis calculates net interest spread, net interest margin, loan to deposit, cost of funds, ratio of earning assets and capital. The model assumes that as principal runs off, principal is reinvested into the same category. Other assumptions which are varied include: loan rates, investment yields and growth rates. 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

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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, 2004, the simulation model indicated that over a twelve month horizon if interest rates were to increase 100 basis points, net income would increase $236,000. If interest rates were to decrease 100 basis points, net income would decrease $377,000.

The economic value of equity calculation uses information about the Company’s assets, liabilities and off-balance sheet items, market interest rate levels and assumptions about the behavior of the assets and liabilities, to calculate the Company’s equity value. The economic value of equity is the market value of assets minus the market value of liabilities, adjusted for off-balance sheet items divided by the market value of assets. The economic value of equity is then subjected to immediate and permanent upward changes of 300 basis points in market interest rate levels, in 100 basis point increments, and a downward change of 100 basis points. The resulting changes in equity value and net interest income at each increment are measured against pre-determined, minimum EVE ratios for each incremental rate change, as approved by the board in the interest rate risk policy.

The following table presents the Bank’s EVE ratios for the various rate change levels at December 31, 2004 and 2003:

		EVE Ratios
Changes in Interest Rates		2004				2003
300 basis point rise			7.54%				7.87%
200 basis point rise			7.88%				7.94%
100 basis point rise			8.06%				8.13%
Base rate scenario			7.91%				7.45%
100 basis point decline			6.60%				6.08%

The preceding table indicates that at December 31, 2004, in the event of an immediate and permanent 100 basis point increase in prevailing market interest rates, the Bank’s EVE ratio, would be expected to increase and that in the event of an immediate and permanent decrease in prevailing market interest rates, the Bank’s EVE ratio would be expected to decrease.

At December 31, 2004, the EVE increases in a rising rate scenario because the Company is asset sensitive and would have more interest earning assets repricing than interest-bearing liabilities. This effect is increased by periodic and lifetime limits on changes in rate on most adjustable-rate, interest-earning assets. The EVE decreases in a falling rate scenario because of the limits on the Company’s ability to decrease rates on some of its deposit sources, such as money market accounts and NOW accounts, and by the ability of borrowers to repay loans ahead of schedule and refinance at lower rates.

The EVE ratio is calculated by the Company’s fixed income investment advisor, and reviewed by management, on a quarterly basis utilizing information about the Company’s assets, liabilities and off-balance sheet items, which is provided by the Company. The calculation is designed to estimate the effects of hypothetical rate changes on the EVE, utilizing projected cash flows, and is based on numerous assumptions, including relative levels of market interest rates, loan prepayments speeds and deposit decay rates. Actual changes in the EVE, in the event of market interest rate changes of the type and magnitude used in the calculation, could differ significantly. Additionally, the calculation does not account for possible actions taken by Funds Management to mitigate the adverse effects of changes in market interest rates.

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

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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. It appears that the Company’s market risk is reasonable at this time.

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 and the Company has no market risk sensitive instruments held for trading purposes. 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.

Liquidity and Capital Resources

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 2004, the Company acquired Parish Bank and Trust Company. This transaction was an investing activity that was 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 $10 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 2004, the Company repurchased 232,706 shares of its common stock.

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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, 2004 (in thousands):

		Time				Long-term
Years Ended December 31,		Deposits				Borrowings (1)				Total
2005		$	206,179			$	23,722			$	229,901
2006			27,545				9,341				36,886
2007			10,774				11,449				22,223
2008			9,513				156				9,669
2009			4,476				10,165				14,641
thereafter			—				640				640
Total		$	258,487			$	55,473			$	313,960
Financial instruments whose contract amounts represent credit risk:
Commitment to originate loans										$	10,694
Commitments to extend credit											48,121
Standby letters of credit											2,750
Total										$	375,525

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(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 and $2 million maturing in fiscal year 2008 and 2011 which are callable in 2005. Trust preferred debentures of $10 million mature in both 2032 and 2034, but are callable in 2007 and 2009.

The Company’s most liquid assets are cash, cash in banks and highly liquid, short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. Securities available-for-sale may also be utilized to meet liquidity needs. At December 31, 2004 and 2003, these liquid assets totaled $13.3 million and $45.6 million, respectively. The level of liquid assets at December 31, 2003 was higher than usual due to a number of factors, including sales of loans and higher than expected prepayments on loans and investment securities. 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, 2004, the Company had outstanding long-term borrowings totaling $55.5 million, of which $25.0 million were advances from the FHLB, $9.2 million were funds from reverse repurchase agreements, $20.0 million were junior subordinated debt owed to unconsolidated trusts, and $1.3 million were funds from notes payable.

At December 31, 2004, the Company had outstanding commitments to originate mortgage loans of $10.7 million, of which 64.1% 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, 2004, totaled $206.2 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 $48.1 million at December 31, 2004.

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At December 31, 2004, the Company and Bank met all capital requirements as set by federal and state regulatory agencies. See Note 13 of the Notes to Consolidated Financial Statements and the discussion of the Company’s financial condition above.

Dividends

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 $2.5 million, $1.9 million and $1.9 million to the Company, its sole stockholder, during 2004, 2003 and 2002, respectively.

Cash dividends in the total amount of $.075, $.30, and $.29 per share were paid by the Company during 2004, 2003 and 2002, respectively. As previously announced, the Company discontinued payment of its quarterly cash dividend in 2004. The payment of future dividends, if any, 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

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.

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	•	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.

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McGladrey & Pullen

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

We have audited the accompanying consolidated balance sheets of Centrue Financial Corporation and Subsidiary as of December 31, 2004 and 2003, 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, 2004. 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 standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

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CONSOLIDATED BALANCE SHEETS

					2004				2003
					(in thousands,
					except share and
					per share data)
Assets
Cash and due from banks					$	10,760			$	13,558
Interest bearing due from banks and other						2,526				14,373
Federal funds sold						—				17,216
Money market funds						—				458
			Cash and cash equivalents			13,286				45,605
Certificates of deposit						149				50
Investment securities:
	Available-for-sale, at fair value					124,763				87,712
	Held-to-maturity, at cost (fair value: 2004 $0; 2003 $912)					—				892
Loans, net of allowance for loan losses of $5,475 in 2004 and $7,471 in 2003						418,963				426,043
Loans held for sale						416				—
Office properties and equipment						18,267				17,113
Goodwill						12,446				11,433
Life insurance contracts						9,110				8,752
Non-marketable equity securities						4,211				3,298
Accrued interest receivable						2,570				2,552
Intangible assets						1,774				1,229
Real estate held for sale						3,002				319
Other assets						2,896				4,413
			Total assets		$	611,853			$	609,411
Liabilities and Stockholders’ Equity
Liabilities
	Deposits
		Noninterest bearing			$	53,919			$	44,305
		Interest bearing				441,858				451,952
			Total deposits			495,777				496,257
	Short-term borrowings					14,188				1,448
	Long-term borrowings					55,473				62,948
	Other liabilities					3,239				3,115
			Total liabilities			568,677				563,768
Commitments and Contingencies (Notes 15 and 16)
Stockholders’ Equity
	Preferred stock, $.01 par value; authorized and unissued, 500,000 shares					—				—
	Common stock, $.01 par value; 5,500,000 shares authorized; 4,200,300 shares issued					42				42
	Additional paid-in capital					28,998				28,929
	Retained income, partially restricted					43,925				39,231
	Accumulated other comprehensive income					27				1,088
	Unearned restricted stock (19,750 and 27,800 shares in 2004 and 2003, respectively)					(512	)			(820	)
	Treasury stock (1,819,634 and 1,594,278 shares in 2004 and 2003, respectively), at cost					(29,304	)			(22,827	)
			Total stockholders’ equity			43,176				45,643
			Total liabilities and stockholders’ equity		$	611,853			$	609,411

See Accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF INCOME

					2004				2003				2002
					(in thousands,
					except per share data)
Interest and dividend income:
	Loans				$	24,884			$	23,442			$	27,615
	Investment securities:
		Taxable				3,584				3,466				3,777
		Tax exempt				597				60				65
	Deposits with banks and other					119				313				518
	FHLB dividends					214				195				139
			Total interest and dividend income			29,398				27,476				32,114
Interest expense:
	Deposits					7,807				9,216				13,294
	Short-term borrowings					115				47				—
	Long-term borrowings					2,728				2,733				2,793
			Total interest expense			10,650				11,996				16,087
			Net interest income			18,748				15,480				16,027
Provision for loan losses						1,200				4,122				3,990
			Net interest income after provision for loan losses			17,548				11,358				12,037
Noninterest income:
	Fee income					4,357				2,874				2,535
	Net gain on sales of securities					85				8				—
	Net gain on sales of real estate held for sale					104				253				52
	Net gain on sales of loans held for sale					886				1,271				1,116
	Gain on sale of branch					—				478				—
	Increase in cash surrender value of life insurance contracts					358				403				349
	Other					217				419				459
			Total noninterest income			6,007				5,706				4,511
Noninterest expenses:
	Compensation and benefits					8,587				7,786				7,151
	Occupancy					1,435				1,398				1,249
	Furniture and equipment					1,370				945				612
	Advertising					279				440				325
	Data processing services					615				514				417
	Telephone and postage					611				534				453
	Amortization of intangibles					229				147				184
	Legal and professional fees					670				894				711
	Other					2,954				2,753				2,330
			Total noninterest expenses			16,750				15,411				13,432
			Income before income taxes			6,805				1,653				3,116
Income taxes						1,916				290				883
			Net income		$	4,889			$	1,363			$	2,233
Basic Earnings Per Share					$	1.96			$	0.65			$	0.94
Diluted Earnings Per Share					$	1.95			$	0.65			$	0.93
Dividends Per Share					$	0.075			$	0.30			$	0.29

See Accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ 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, 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)				—				—				—				(548	)			—				—				(548	)
	Less: Reclassifications adjustment for gains included in net income, net of tax of $3				—				—				—				5				—				—				5
																													(553	)
		Comprehensive income																											810
Purchase of 466,540 shares of treasury stock					—				—				—				—				—				(9,308	)			(9,308	)
Exercise of stock options					—				20				—				—				—				182				202
Restricted stock awards					—				422				—				—				(820	)			398				—
Stock issued in acquisition (700,300 shares)					6				13,465				—				—				—				—				13,471
Dividends paid on common stock—$.30 per share					—				—				(649	)			—				—				—				(649	)
Balance, December 31, 2003					42				28,929				39,231				1,088				(820	)			(22,827	)			45,643
Comprehensive income:
	Net income				—				—				4,889				—				—				—				4,889
	Unrealized gain (loss) on securities available-for-sale arising during the period, net of tax of $(530)				—				—				—				(1,114	)			—				—				(1,114	)
	Less: Reclassifications adjustment for gains included in net income, net of tax of $32				—				—				—				53				—				—				53
																													(1,061	)
		Comprehensive income																											3,828
Purchase of 232,706 shares of treasury stock					—				—				—				—				—				(6,514	)			(6,514	)
Exercise of stock options					—				41				—				—				—				148				189
Restricted stock awards					—				28				—				—				(66	)			38				—
Forfeit of restricted stock					—				—				—				—				149				(149	)			—
Amortization of restricted stock awards					—				—				—				—				225				—				225
Dividends paid on common stock— $.075 per share					—				—				(195	)			—				—				—				(195	)
Balance, December 31, 2004				$	42			$	28,998			$	43,925			$	27			$	(512	)		$	(29,304	)		$	43,176

See Accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

						2004				2003				2002
						(in thousands)
Cash Flows from Operating Activities
	Net income					$	4,889			$	1,363			$	2,233
	Adjustments to reconcile net income to net cash from operating activities:
		Provision for loan losses					1,200				4,122				3,990
		Depreciation					1,722				1,293				894
		Amortization of investments, net					103				179				69
		Amortization of intangibles					229				147				184
		Amortization of restricted stock					225				—				—
		Deferred income taxes					1,284				551				(1,400	)
		Origination of loans held for sale					(31,008	)			(56,224	)			(58,865	)
		Proceeds from sales of loans held for sale					51,651				57,623				60,698
		Net gain on sales of loans held for sale					(886	)			(1,271	)			(1,116	)
		Net gain on sales of securities					(85	)			(8	)			—
		Net gain on sales of real estate held for sale					(104	)			(253	)			(52	)
		Gain on sale of branch					—				(478	)			—
		Increase in cash surrender value of life insurance contracts					(358	)			(403	)			(349	)
		Federal Home Loan Bank stock dividend					(213	)			(229	)			(133	)
		Changes in:
			Accrued interest receivable				86				559				27
			Other assets and liabilities, net				1,584				(2,760	)			1,159
				Net cash provided by operating activities			30,319				4,211				7,339
Cash Flow from Investing Activities
	Purchases of available for sale securities						(88,785	)			(37,784	)			(52,040	)
	Proceeds from sales of available for sale securities						5,943				96				—
	Proceeds from maturities of available for sale securities						52,148				47,226				17,279
	Purchases of held-to-maturity securities						—				—				(195	)
	Proceeds from maturities of held-to-maturity securities						242				201				604
	Proceeds from maturities of certificates of deposit						199				—				—
	Proceeds from sales of real estate held for sale						648				678				601
	Cash paid for branch sale						—				(12,315	)			—
	Purchase of Aviston Financial Corporation, net of cash acquired						—				2,984				—
	Purchase of Parish Bank & Trust Company, net of cash acquired						38				—				—
	Net (increase) decrease in loans						(10,205	)			19,547				5,033
	Purchases of office properties and equipment, net						(2,607	)			(6,767	)			(2,874	)
	Purchases of life insurance contracts						—				—				(8,000	)
				Net cash from investing activities			(42,379	)			13,866				(39,592	)

(Continued)

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CONSOLIDATED STATEMENTS OF CASH FLOWS

					2004				2003				2002
					(in thousands)
Cash Flows from Financing Activities
	Net increase (decrease) in deposit accounts					(19,004	)			1,355				16,660
	Proceeds from long-term borrowings					14,000				104				52,600
	Repayments of long-term borrowings					(21,475	)			(12,400	)			(12,900	)
	Change in short-term borrowings					12,740				798				—
	Proceeds from exercise of stock options					189				202				539
	Dividends paid					(195	)			(649	)			(680	)
	Purchase of treasury stock					(6,514	)			(9,308	)			(3,202	)
			Net cash from financing activities			(20,259	)			(19,898	)			53,017
			Increase (decrease) in cash and cash equivalents			(32,319	)			(1,821	)			20,764
Cash and cash equivalents:
	Beginning of year					45,605				47,426				26,662
	End of year				$	13,286			$	45,605			$	47,426
Supplemental Disclosures of Cash Flow Information
	Cash paid during the year for:
		Interest			$	10,651			$	12,017			$	16,044
		Income taxes			$	1,478			$	1,104			$	1,854
Supplemental Disclosures of Noncash Investing Activities:
	Real estate acquired through foreclosure				$	3,254			$	428			$	462
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			$	—

(Continued)

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CONSOLIDATED STATEMENTS OF CASH FLOWS

					2004				2003				2002
					(in thousands)
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 paid, net of cash acquired		$	—			$	(2,984	)		$	—
Acquisition of Parish Bank & Trust Company:
	Cash paid				$	4,400			$	—			$	—
	Cost incurred					123				—				—
			Total cost		$	4,523			$	—			$	—
	Assets acquired:
		Cash and cash equivalents			$	(4,561	)		$	—			$	—
		Certificates of deposit				(298	)			—				—
		Investments				(8,616	)			—				—
		Nonmarketable equity securities				(85	)			—				—
		Loans				(7,342	)			—				—
		Accrued interest receivable				(104	)			—				—
		Premises and equipment				(269	)			—				—
		Other assets				(72	)			—				—
		Goodwill				(1,013	)			—				—
		Intangible assets				(774	)			—				—
	Liabilities assumed:
		Non-interest bearing deposits				5,462				—				—
		Interest bearing deposits				13,062				—				—
		Other liabilities				87				—				—
			Net assets acquired		$	(4,523	)		$	—			$	—
			Cash acquired, net of cash paid		$	38			$	—			$	—

See Accompanying Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Operations

Basis of Consolidation

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.

Use of Estimates

Comprehensive Income

Cash and Cash Equivalents

Securities

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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 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.

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

The accrual of interest income on loans is discontinued at the time the loan is 90 days past due or earlier 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.

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.

Loans Held for Sale

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

Allowance for Loan Losses

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

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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.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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 Company does not separately identify individual consumer and residential loans for impairment disclosures.

Real Estate Held for Sale

Office Properties and Equipment

Non-Marketable Equity Securities

Intangible Assets

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Goodwill

Loan Servicing

Income Taxes

Earnings Per Share

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.

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

			December 31,
			2004				2003				2002 (1)
Net income available to common shareholders			$	4,889,000			$	1,363,000			$	2,233,000
Basic average shares outstanding				2,490,789				2,098,386				2,387,110
Diluted potential common shares:
	Stock option equivalents			11,847				2,891				8,740
Diluted average shares outstanding				2,502,636				2,101,277				2,395,850
Basic earnings per share			$	1.96			$	0.65			$	0.94
Diluted earnings per share			$	1.95			$	0.65			$	0.93

(1)	The earnings per common share for the year ended December 31, 2002 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, 2002.

Trust Assets

Stock-Based Employee Compensation

				2004				2003				2002
				(in thousands,
				except per share data)
Net income, as reported				$	4,889			$	1,363			$	2,233
Deduct total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects					(264	)			(328	)			(6	)
Pro forma net income				$	4,625			$	1,035			$	2,227
Earnings per share:
	Basic:
		As reported		$	1.96			$	0.65			$	0.94
		Pro forma			1.86				0.49				0.94
	Diluted:
		As reported		$	1.95			$	0.65			$	0.93
		Pro forma			1.84				0.49				0.93

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The fair value of the stock options granted in 2004, 2003 and 2002 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.

		2004				2003				2002
Number of options granted			65,500				107,000				5,000
Risk-free interest rate			4.04%-4.45%				3.41%-4.27%				1.44%
Expected life, in years			10				5-10				1
Expected volatility			22%-23%				22%-25%				25%
Expected dividend yield			0.00%-1.25%				1.14%-1.29%				1.62%
Estimated weighted average fair value per option			$11.71				$9.70				$3.54

Emerging Accounting Standards

The Statement is effective at the beginning of the third quarter of 2005. The Company is currently evaluating the allowable methods of applying the Standard.

The impact of this Statement on the Company in 2005 and beyond will depend upon various factors, among them being the Company’s future compensation strategy. The pro forma compensation costs presented in the table above and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not be indicative of amounts which should be expected in future periods.

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Management does not expect the adoption of this statement to have a material impact on the Company’s consolidated financial statements.

On September 30, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within

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the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company.

In March 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 105, Application of Accounting Principles to Loan Commitments, which provides guidance regarding loan commitments that are accounted for as derivative instruments. In this SAB, the SEC determined that an interest rate lock commitment should generally be valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates. This SAB did not have any effect on the Company’s financial position or results of operations.

Adoption of FASB Interpretation No. 46

Reclassification

Note 2. Common Stock Split

Note 3. Business Acquisitions

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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, 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.

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.

On December 31, 2004, the Company signed a definitive agreement with Illinois Community Bancorp, Inc. (“ICBI”) to acquire all of the outstanding stock of ICBI for a total cost of $3.3 million of which 50% will be in the form of cash and 50% will be in the form of common stock of the Company. The proposed acquisition is expected to close in the second quarter of 2005, subject to regulatory approval and the approval of ICBI stockholders.

Note 4. Goodwill and Intangible Assets

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Goodwill and intangible asset disclosures are as follows:

				As of December 31, 2004
				Gross Carrying				Accumulated
				Amount				Amortization
				(in thousands)
Amortized intangible assets:
	Core deposit intangible			$	2,990			$	1,216
Aggregate amortization expense:
	For the year ended December 31, 2004			$	229
Estimated amortization expense:
	For the year ended:
		2005		$	235
		2006		$	235
		2007		$	235
		2008		$	235
		2009		$	235
		Thereafter		$	599
Goodwill:				$	12,446

Note 5. Investment Securities

			Available-for-Sale
							Gross				Gross
			Amortized				Unrealized				Unrealized				Fair
			Cost				Gains				Losses				Value
			(in thousands)
December 31, 2004
U. S. government and agency securities			$	70,944			$	263			$	58			$	71,149
Municipal bonds				23,582				47				278				23,351
Mortgage-backed securities				23,396				291				157				23,530
Corporate bonds				2,076				—				76				2,000
Mutual funds				400				—				15				385
Other securities				4,320				28				—				4,348
	Total		$	124,718			$	629			$	584			$	124,763

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

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Held-to-Maturity

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(in thousands)

December 31, 2003

Municipal bonds

$

892

$

20

$

—

$

912

During 2004, the Company reclassified their remaining $650,000 of held-to-maturity securities to available-for-sale. The decision to reclassify the securities was due to all new purchases being classified as available-for-sale and the belief that all current investments should be classified as available for sale.

The amortized cost and fair value of securities classified as available-for-sale at December 31, 2004, 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.

			Available-for-Sale
			Amortized				Fair
			Cost				Value
			(in thousands)
Due within 1 year			$	2,638			$	2,636
Due after 1 year through 5 years				73,314				73,455
Due after 5 through 10 years				20,650				20,409
Due after 10 years				—				—
Mortgage-backed securities				23,396				23,530
Mutual fund shares				400				385
Other securities				4,320				4,348
	Total		$	124,718			$	124,763

Investment securities available-for-sale with a carrying value of approximately $70.5 million and $34.4 million at December 31, 2004 and 2003, respectively, were pledged to secure public deposit accounts and for other purposes as required or permitted by law.

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2004 and 2003 (in thousands), are summarized as follows:

			December 31, 2004
			Less than 12 Months								12 Months or More								Total
			Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
			Value				Losses				Value				Losses				Value				Losses
Securities available for sale:
	U.S. government and agency securities		$	30,342			$	58			$	—			$	—			$	30,342			$	58
	Municipal bonds			17,259				277				528				1				17,787				278
	Mortgage-backed securities			5,312				104				4,343				53				9,655				157
	Corporate bonds			1,999				76				—				—				1,999				76
	Mutual funds			—				—				385				15				385				15
			$	54,912			$	515			$	5,256			$	69			$	60,168			$	584

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			December 31, 2003
			Less than 12 Months								12 Months or More								Total
			Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
			Value				Losses				Value				Losses				Value				Losses
Securities available for sale:
	U.S. government and agency securities		$	3,872			$	27			$	—			$	—			$	3,872			$	27
	Municipal bonds			663				11				—				—				663				11
	Mortgage-backed securities			9,664				116				—				—				9,664				116
	Mutual funds			400				21				—				—				400				21
			$	14,599			$	175			$	—			$	—			$	14,599			$	175

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. 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.

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 $528,000, two mortgage backed securities with a fair market value of $4.3 million and one mutual fund security with a fair market value of $385,000. The unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company.

Realized gains and losses were as follows:

			Year Ended December 31,
			2004				2003				2002
			(in thousands)
Realized gains			$	90			$	8			$	—
Realized losses				(5	)			—				—
	Net gain		$	85			$	8			$	—

The tax expense applicable to these net realized gains and losses amounted to $32,000, $3,000, and $0, respectively.

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Note 6. Loans

			December 31,
			2004				2003
			(in thousands)
Real estate mortgage loans:
	One-to-four family		$	175,224			$	212,578
	Multifamily			15,655				16,461
	Commercial			101,516				77,142
	Construction and development			31,014				28,640
				323,409				334,821
Commercial loans				61,090				58,235
Consumer loans:
	Home equity loans			28,188				24,305
	All other consumer loans			14,303				19,185
				42,491				43,490
Gross loans				426,990				436,546
Less:
	Deferred loan fees, net			269				565
	Undisbursed portion of loan proceeds			2,283				2,467
	Allowance for loan losses			5,475				7,471
			$	418,963			$	426,043

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.

Changes in the allowance for loan losses were as follows:

			Year Ended December 31,
			2004				2003				2002
			(in thousands)
Balance at beginning of year			$	7,471			$	6,524			$	2,582
	Provision for loan losses			1,200				4,122				3,990
	Purchased allowance			156				2,435				—
	Charge-offs			(3,647	)			(6,242	)			(81	)
	Recoveries			295				632				33
Balance at end of year			$	5,475			$	7,471			$	6,524

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Information about impaired loans and non-accrual loans as of and for the years ended December 31, 2004, 2003 and 2002 is as follows:

			December 31,
			2004				2003				2002
			(in thousands)
Impaired loans with a valuation allowance			$	4,934			$	4,545			$	4,820
Impaired loans without a valuation allowance				906				—				350
	Total impaired loans		$	5,840			$	4,545			$	5,170
Related valuation allowance			$	1,348			$	2,524			$	3,162
Non-accrual loans, excluding impaired loans			$	1,176			$	1,438			$	1,664
Loans past due ninety days or more and still accruing			$	222			$	2,232			$	3,439
Average monthly balance of impaired loans (based on month-end balances)			$	6,512			$	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, 2004 and 2003, one-to-four family real estate mortgage loans of approximately $181.8 million and $157.1 million, respectively, were pledged to secure advances from the Federal Home Loan Bank of Chicago.

Note 7. Loan Servicing

			December 31,
			2004				2003
			(in thousands)
Mortgage loan portfolios serviced for:
	Freddie Mac		$	136,433			$	104,606
	Fannie Mae			1,383				1,885
			$	137,816			$	106,491

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits, were approximately $1.1 million and $809,000 at December 31, 2004 and 2003, respectively.

A summary of the changes in the balance of mortgage servicing rights in 2004 and 2003 is as follows:

		December 31,
		2004				2003
		(in thousands)
Balance, beginning		$	822			$	725
Servicing assets recognized during the year			372				485
Amortization of servicing assets			(138	)			(388	)
Balance, ending		$	1,056			$	822

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The aggregate changes in the valuation allowances for mortgage servicing rights in 2004 and 2003 were as follows:

		December 31,
		2004				2003
		(in thousands)
Balance, beginning		$	206			$	169
Additions			—				506
Reductions			(50	)			(469	)
Balance, ending		$	156			$	206

Note 8. Office Properties and Equipment

		December 31,
		2004				2003
		(in thousands)
Land		$	5,984			$	4,963
Buildings and improvements			12,445				11,851
Construction in progress			2,179				—
Land acquired for future use			126				1,438
Furniture and equipment			9,561				9,326
			30,295				27,578
Less: Accumulated depreciation and amortization			12,028				10,465
		$	18,267			$	17,113

Depreciation and amortization expense amounted to $1.7 million, $1.3 million and $894,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

The Company has a signed contract to construct a facility in Fairview Heights, Illinois for a total cost of approximately $4.3 million exclusive of $1.1 million for land already purchased, with an estimated completion date during the second quarter of 2005.

Note 9. Deposits

			December 31,
			2004				2003
			(in thousands)
Demand deposits—noninterest bearing			$	53,919			$	44,305
Savings				87,990				84,816
NOW				48,495				48,411
Money market				46,886				43,387
Time deposits, $100,000 or more				61,274				39,649
Other time deposits				197,213				235,689
	Interest bearing deposits			441,858				451,952
	Total deposits		$	495,777			$	496,257

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As of December 31, 2004, time deposits had scheduled maturity dates as follows:

Year of Maturity		Amount
		(in thousands)
2005		$	206,179
2006			27,545
2007			10,774
2008			9,513
2009			4,476
		$	258,487

Note 10. Short-Term Borrowings

			December 31,
			2004				2003
Federal funds purchased			$	3,500			$	—
Securities sold under repurchase agreements				8,563				—
Line of credit				2,125				1,448
	Total short-term borrowings		$	14,188			$	1,448

Securities sold under agreements to repurchase, which are classified as secured borrowings, mature daily. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction.

The securities underlying the agreements to repurchase are under the control of the Bank.

Note 11. Long-Term Borrowings

		December 31,
		2004				2003
		(in thousands)
Reverse repurchase agreements		$	9,200			$	18,400
Other borrowings			1,318				1,392
Junior subordinated debt owed to unconsolidated trusts			20,000				10,000
Federal Home Loan Bank advances			24,955				33,156
Total		$	55,473			$	62,948

At December 31, 2004, reverse repurchase agreements of $9.2 million are due in March 2005 and bear an interest rate of 4.63%. At December 31, 2003, reverse purchase agreements of $18.4 million were due in the amount of $9.2 million each in March 2004 and March 2005.

At December 31, 2004 and 2003, other borrowings of $1.3 and $1.4 million, respectively, consisted of a note payable to an individual. The note payable bears an imputed rate of interest of 5.25% and matures in 2012 with semi-annual payments of $100,000.

Securities available-for-sale with a carrying value of approximately $9.2 million were pledged to collateralize the repurchase agreements as of December 31, 2004. The advances from the FHLB are collateralized by one-to-four family residential mortgages.

The weighted average maturity date of Federal Home Loan Bank advances was approximately 25 months and 33 months and the weighted average interest rates were approximately 4.16% and 4.00% at December 31, 2004 and 2003, respectively.

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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 6.0% and 5.15% at December 31, 2004) per annum of the stated liquidation amount of $1,000 per preferred security. Interest expense on the trust preferred securities was $851,000, $558,000 and $452,000 for the years ended December 31, 2004, 2003 and 2002, 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 March 1, 2005, the Board of Governors of the Federal Reserve System issued a final rule regarding the continued inclusion of trust preferred securities in the Tier 1 capital of bank holding companies, subject to stricter standards effective March 31, 2009. As a result of the final rule, the Federal Reserve will 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. Regulations in place at the time the Company placed its currently outstanding trust preferred securities did not require the deduction of goodwill. The final rule 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 will be limited, together with subordinated debt and limited-life preferred stock, to 50% of Tier 1 capital. The final rule provides a five-year transition period for bank holding companies to meet these quantitative limitations. While management does not anticipate that the final rule will have an impact on the Company when the five-year transition period expires, it is not possible to predict the final impact of the rule on the Company.

Future payments at December 31, 2004, for all long-term borrowings were as follows:

Year Ended			Amount
			(in thousands)
2005			$	16,722
2006				9,341
2007				1,449
2008				5,156
2009				165
Thereafter				22,640
	Total		$	55,473

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Note 12. Income Taxes

		Year Ended December 31,
		2004				2003				2002
		(in thousands)
Current		$	632			$	(261	)		$	2,283
Deferred			1,284				551				(1,400	)
		$	1,916			$	290			$	883

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

			Year Ended December 31,
			2004				2003				2002
			(in thousands)
Expected income taxes			$	2,382			$	579			$	1,091
Income tax effect of:
	State income tax (carryforward), net of federal benefit			—				—				(180	)
	Income taxed at lower rate			(68	)			(16	)			(31	)
	Increase in cash surrender value of life insurance			(125	)			(137	)			(122	)
	Tax exempt interest, net			(237	)			(80	)			(106	)
	Utilization of state net operating loss carryforwards			—				—				180
	Reduction in valuation allowance for deferred taxes			(169	)			—				—
	Other			133				(56	)			51
			$	1,916			$	290			$	883

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

				December 31,
				2004				2003
				(in thousands)
Deferred tax assets:
	Allowance for loan losses			$	2,075			$	2,900
	State net operating loss carryforwards				245				169
	Federal net operating loss carryforwards				691				—
	Accrued benefits				204				164
	OREO				—				20
	Premises and equipment				—				581
	Other				104				35
		Total deferred tax assets			3,319				3,869
	Less: Valuation allowance for deferred tax assets				—				169
		Total deferred tax assets, net of valuation allowance			3,319				3,700
Deferred tax liabilities:
	Unrealized gain on securities available-for-sale				(13	)			(511	)
	Deferred loan costs (fees)				(344	)			(404	)
	Stock dividend on FHLB stock				(386	)			(297	)
	Premises and equipment				(467	)			—
	Mortgage servicing rights				(350	)			(239	)
	Intangible assets				(501	)			(278	)
	Basis in acquired assets				(193	)			(120	)
		Total deferred tax liabilities			(2,254	)			(1,849	)
Net deferred tax assets				$	1,065			$	1,851

Retained earnings at December 31, 2004 and 2003 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, 2004 and 2003.

As of December 31, 2004, the Company had Illinois net operating loss carryforwards of approximately $3.4 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.

At December 31, 2004, the Company also had Federal net operating loss carryforwards of approximately $2.3 million for income tax purposes which expire through 2023.

Note 13. Stockholders’ Equity and Regulatory Capital

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Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined by the regulations) to average assets (as defined) and Total and Tier I capital (as defined) to risk-weighted assets (as defined). Management believes, as of December 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which it is subject.

As of December 31, 2004, the most recent notification from the Bank’s primary regulators, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

																			To be Well
																			Capitalized Under
											For Capital								Prompt Corrective
			Actual								Adequacy Purposes								Action Provisions
			Amount				Ratio				Amount				Ratio				Amount				Ratio
			(Dollars in thousands)
As of December 31, 2004
Tier 1 Capital to Average Assets
	Centrue Financial		$	43,312				7.32	%		$	23,674				4.00	%			N/A
	Centrue Bank			45,656				7.81	%			23,382				4.00	%		$	29,227				5.00	%
Tier I Capital to Risk Weighted Assets
	Centrue Financial			43,312				11.01	%			15,742				4.00	%			N/A
	Centrue Bank			45,656				11.32	%			16,136				4.00	%			24,204				6.00	%
Total Capital to Risk Weighted Assets
	Centrue Financial			53,857				13.69	%			31,483				8.00	%			N/A
	Centrue Bank			50,703				12.57	%			32,272				8.00	%			40,340				10.00	%

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	%

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

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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 $1.1 million as of December 31, 2004.

Federal and state banking regulations place certain restrictions on dividends paid by the Bank to the Company. At December 31, 2004, the Bank’s retained earnings available for payment of dividends was $4.8 million. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Note 14. Officer, Director and Employee Plans

The Company formerly had an Employee Stock Ownership (the “ESOP”) plan which during 2004, was merged into the Company’s 401(k) Plan. All participant balances were considered 100% vested upon the merger. During 2003 and 2002, the Company made a direct cash contribution totaling $120,000, to the ESOP. Costs related to the merger of the ESOP into the 401(k) during 2004 amounted to approximately $17,000.

Stock Option Plan

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 400,000. 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.

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Activity in the stock option plan was as follows:

		2004								2003								2002
						Weighted-								Weighted-								Weighted-
						Average								Average								Average
						Exercise								Exercise								Exercise
		Shares				Price				Shares				Price				Shares				Price
Fixed Options
Outstanding at beginning of year			101,800			$	22.690				9,500			$	14.632				70,770			$	5.859
Granted			65,500				27.234				107,000				22.666				5,000				18.575
Exercised			(10,000	)			19.000				(12,700	)			15.988				(66,270	)			5.561
Forfeited			(10,000	)			26.000				(2,000	)			26.250				—				—
Outstanding at end of year			147,300				24.720				101,800				22.690				9,500				14.632
Options exercisable at year-end			65,800								46,800								9,500
Weighted-average fair value of options granted during the year						$	11.71							$	9.70							$	3.54

				Options Outstanding												Options Exercisable
				Outstanding				Weighted				Weighted				Outstanding				Weighted
				as of				Average				Average				as of				Average
				December 31,				Contractual				Exercise				December 31,				Exercise
				2004				Life (in Years)				Price				2004				Price
Exercise Price
$	18.575				5,000				7.9			$	18.575				5,000			$	18.575
	19.000				11,800				8.3				19.000				11,800				19.000
	20.250				20,000				8.4				20.250				20,000				20.250
	23.185				15,000				8.5				23.185				3,000				23.185
	26.250				30,000				8.8				26.250				6,000				26.250
	26.500				20,000				9.4				26.500				20,000				26.500
	27.500				40,000				9.8				27.500				—				—
	27.970				5,500				9.1				27.970				—				—
					147,300				9.0			$	24.720				65,800			$	22.479

Stockholders’ Rights Plan

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

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to compensation expense at the market price at date of grant. During 2004, 5,400 restricted shares vested to participants and 5,050 restricted shares were forfeited.

		Number of Shares
		2004				2003				2002
Under restriction, beginning of year			27,800				—				—
Granted			2,400				27,800				—
Restrictions released			(5,400	)			—				—
Forfeited and reissuable			(5,050	)			—				—
Under restriction, end of year			19,750				27,800				—

Compensation expense is recognized for financial statement purposes over the period of performance. Compensation expense of $225,000 was recognized for the year ended December 31, 2004. No compensation expense was recognized for the year ended December 31, 2003 or 2002.

Directors’ Deferred Compensation Plan

Note 15. Commitments and Contingencies

Note 16. 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,
		2004				2003
		(in thousands)
Commitments to originate new loans		$	10,694			$	13,803
Commitments to extend credit			48,121				46,451
Standby letters of credit			2,750				2,506

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.

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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, 2004 and 2003, 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.

Note 17. Fair Value of Financial Instruments

			December 31,
			2004								2003
			Carrying								Carrying
			Amount				Fair Value				Amount				Fair Value
			(in thousands)
Assets:
	Cash and cash equivalents		$	13,286			$	13,286			$	45,605			$	45,605
	Certificates of deposit			149				149				50				50
	Investment securities			124,763				124,763				88,604				88,624
	Loans, gross			424,438				428,198				433,311				445,733
	Loans held for sale			416				416				—				—
	Nonmarketable equity securities			4,211				4,211				3,298				3,298
	Accrued interest receivable			2,570				2,570				2,552				2,552
Liabilities:
	Deposits		$	495,777			$	497,657			$	496,257			$	498,772
	Short-term borrowings			14,188				14,188				1,448				1,448
	Long-term borrowings			55,473				55,725				62,948				63,875
	Accrued interest payable			568				568				451				451

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.

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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: 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 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.

Short-term borrowings: The carrying amounts of federal funds purchased, securities sold under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values.

Long-term borrowings: 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 18. Sale of Branch

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Note 19. Condensed Parent Company Only Financial Statements

			December 31,
			2004				2003
Statements of financial condition
			(in thousands)
Assets:
	Cash and cash equivalents		$	370			$	76
	Certificate of deposit			50				50
	Investment securities, available-for-sale			6,450				379
	Equity in net assets of Centrue Bank			59,916				57,715
	Investment in Capital Trusts			620				310
	Other assets			1,103				803
			$	68,509			$	59,333
Liabilities and stockholders’ equity:
	Long-term borrowings		$	23,443			$	12,840
	Other liabilities			1,890				850
	Common stock			42				42
	Additional paid-in capital			28,998				28,929
	Retained income			43,925				39,231
	Accumulated comprehensive income			27				1,088
	Unearned restricted stock			(512	)			(820	)
	Treasury stock			(29,304	)			(22,827	)
			$	68,509			$	59,333

			Years Ended December 31,
			2004				2003				2002
Statements of income
			(in thousands)
Dividends from subsidiary			$	2,596			$	1,894			$	1,875
Interest income				198				41				141
Net gain (loss) on sale of investments				(5	)			8				—
	Operating income			2,789				1,943				2,016
Equity in undistributed earnings of Centrue Bank				3,271				415				1,177
Interest expense				1,057				611				452
Other expenses				739				983				986
	Income before income tax benefit			4,264				764				1,755
Income tax benefit				625				599				478
	Net income		$	4,889			$	1,363			$	2,233

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					Years Ended December 31,
					2004				2003				2002
Statements of cash flows
					(in thousands)
Operating activities:
	Net income				$	4,889			$	1,363			$	2,233
	Adjustments to reconcile net income to net cash provided by operating activities:
		Gain (loss) on sale of securities				5				(8	)			—
		Equity in undistributed earnings of Centrue Bank				(3,271	)			(415	)			(1,177	)
		Compensation expense for restricted stock				225				—				—
		Other				363				(772	)			(68	)
			Net cash provided by operating activities			2,211				168				988
Investing activities:
	Available-for-sale investment securities:
		Proceeds from sale of securities				1,996				96				—
		Purchases				(8,996	)			(14	)			(22	)
		Maturities of securities				1,000				—				—
	Purchase of State Bank of Aviston					—				20				—
			Net cash provided by (used in) investing activities			(6,000	)			102				(22	)
Financing activities:
	Purchase of treasury stock					(6,514	)			(9,308	)			(3,202	)
	Dividends paid					(195	)			(649	)			(680	)
	Proceeds from issuance of junior subordinated debentures					10,000				—				10,000
	Proceeds from borrowings					2,603				933				—
	Payments on borrowings					(2,000	)			(100	)			—
	Proceeds from exercise of stock options					189				202				539
			Net cash provided by (used in) financing activities			4,083				(8,922	)			6,657
Increase (decrease) in cash and cash equivalents						294				(8,652	)			7,623
Cash and cash equivalents:
	Beginning of period					76				8,728				1,105
	End of period				$	370			$	76			$	8,728

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Note 20. Quarterly Results of Operations (Unaudited)

			Year Ended December 31, 2004
			Three Months Ended
			December 31				September 30				June 30				March 31
			(in thousands, except per share data)
Interest income			$	7,402			$	7,358			$	7,273			$	7,365
Interest expense				2,653				2,602				2,603				2,792
	Net interest income			4,749				4,756				4,670				4,573
Provision for loan losses				300				300				300				300
	Net interest income after provision for loan losses			4,449				4,456				4,370				4,273
Other income				1,666				1,589				1,503				1,249
Other expense				3,984				4,310				4,147				4,309
	Income before income taxes			2,131				1,735				1,726				1,213
Income taxes				502				502				544				368
	Net income		$	1,629			$	1,233			$	1,182			$	845
Basic earnings per share			$	0.66			$	0.50			$	0.47			$	0.33
Diluted earnings per share			$	0.66			$	0.50			$	0.46			$	0.33

			Year Ended December 31, 2003
			Three Months Ended
			December 31				September 30				June 30				March 31
			(in thousands, except per share data)
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

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CORPORATE INFORMATION

Corporate Headquarters

Special Counsel

Transfer Agent and Registrar

LaSalle Bank N.A.

Independent Registered Public Accounting Firm

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

CORPORATE GOVERNANCE

     • Audit Committee charter

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Quarterly Press Releases

Annual Meeting

Common Stock – Market and Dividend Information

The price range of the Company’s common stock from January 1, 2003 through March 4, 2005, is set forth in the following table:

		2004								2003
		High				Low				High				Low
1st Quarter		$	28.24			$	27.45			$	19.70			$	17.90
2nd Quarter			28.01				25.76				23.10				18.20
3rd Quarter			28.05				27.30				28.30				23.00
4th Quarter			28.21				27.15				32.30				25.70
January 1, 2005, through March 4, 2005			30.00				27.80

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 $.075 per share and $.30 per share were paid during 2004 and 2003, respectively. As previously announced, the Company discontinued payment of its quarterly cash dividend in 2004. The payment of future dividends, if any, 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 13 of the Notes to Consolidated Financial Statements for additional information regarding restrictions on the payment of dividends by the Bank to the Company.

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DIRECTORS AND OFFICERS

Centrue Financial Corporation Directors

Chairman of the Board, Centrue Financial Corporation and Chief Executive Officer, GPD Pharma, Michael A. Griffith

Centrue Financial Corporation Officers

President and Chief Executive Officer, Thomas A. Daiber

Centrue Bank, Directors and Officers

Chairman of the Board, Michael A. Griffith

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