UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Quarterly Period Ended June 30, 2005.

o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Transition Period From __________ to __________.

Commission File Number 1-13676

CENTRUE FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware		36-3846489
(State or Other Jurisdiction of Incorporation		(I.R.S. Employer Identification Number)
or Organization)

310 South Schuyler Avenue, Kankakee, Illinois		60901
(Address of Principal Executive Offices)		(Zip Code)

(Registrant’s telephone number, including area code)

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

Yes þ No o

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

As of August 12, 2005, there were 2,366,939 issued and outstanding shares of the Issuer’s common stock.

 

 

CENTRUE FINANCIAL CORPORATION

INDEX

		Page
		Number
Part I. FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Income and Comprehensive Income			4
Consolidated Statements of Cash Flows			5-6
Notes to Consolidated Financial Statements			7-12
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations			12-25
Item 3.Quantitative and Qualitative Disclosures About Market Risk			25-27
Item 4.Controls and Procedures			27
Part II. OTHER INFORMATION
Item 1.Legal Proceedings			28
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3.Defaults Upon Senior Securities			28
Item 4.Submission of Matters to a Vote of Security Holders			28-29
Item 5.Other Information			29
Item 6.Exhibits			29
SIGNATURES			30
Certification
Certification
Certification
Certification
Certification
Certification

PART I. — FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

		June 30,				December 31,
		2005				2004
		(dollars in thousands)
Assets
Cash and due from banks		$	16,628			$	10,760
Interest bearing due from banks and other			6,299				2,526
Federal funds sold			2,667				—
Cash and cash equivalents			25,594				13,286
Certificates of Deposit			50				149
Investment Securities available-for-sale, at fair value			124,052				124,763
Loans, net of allowance for loan losses of $5,740 and $5,475			425,099				418,963
Loans held for sale			5,754				416
Premises and equipment			21,750				18,267
Goodwill			13,480				12,446
Life insurance contracts			9,288				9,110
Non-marketable equity securities			4,970				4,211
Accrued interest receivable			2,876				2,570
Intangible assets			2,065				1,774
Real estate held for sale			1,734				3,002
Other assets			2,890				2,896
Total Assets		$	639,602			$	611,853
Liabilities
Deposits:
Noninterest bearing		$	62,614			$	53,919
Interest bearing			451,308				441,858
Total Deposits			513,922				495,777
Short-term borrowings			12,578				14,188
Long-term borrowings			63,136				55,473
Other liabilities			5,336				3,239
Total Liabilities			594,972				568,677
Stockholders’ Equity
Preferred stock, $.01 par value – 500,000 shares authorized and unissued			—				—
Common stock, $.01 par value – 5,500,000 authorized; 4,200,300 shares issued and outstanding			42				42
Additional paid-in capital			29,722				28,998
Retained income, partially restricted			46,014				43,925
Accumulated other comprehensive income (loss)			(427	)			27
Unearned restricted stock (19,300 and 26,400 shares)			(406	)			(512	)
Treasury stock, (1,833,361 and 1,819,634 shares), at cost			(30,315	)			(29,304	)
Total Stockholders’ Equity			44,630				43,176
Total Liabilities and Stockholders’ Equity		$	639,602			$	611,853

See notes to the accompanying consolidated financial statements

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30								June 30
		2005				2004				2005				2004
		(dollars in thousands, except per share data)
Interest and dividend income:
Loans		$	6,687			$	6,144			$	12,872			$	12,438
Investments			1,229				1,059				2,396				1,999
Deposits with banks and other			15				18				23				94
FHLB stock dividends			56				52				105				108
Total interest and dividend income			7,987				7,273				15,396				14,639
Interest expense:
Deposits			2,155				1,918				4,100				4,017
Long-term borrowings			866				467				1,589				1,048
Short-term borrowings			69				218				125				331
Total interest expense			3,090				2,603				5,814				5,396
Net interest income			4,897				4,670				9,582				9,243
Provision for loan losses			251				300				501				600
Net interest income after provision for loan losses			4,646				4,370				9,081				8,643
Noninterest income:
Fee income			1,330				990				2,429				1,881
Net gain on sale of securities			—				—				183				89
Net gain (loss) on sale of real estate held for sale			(8	)			46				(6	)			39
Net gain on sale of loans			158				317				289				423
Increase in cash surrender value of life Insurance contracts			87				99				178				199
Other			140				51				198				121
Total noninterest income			1,707				1,503				3,271				2,752
Noninterest expense:
Compensation and benefits			2,503				2,134				4,790				4,397
Occupancy, net			391				325				778				720
Furniture and equipment			803				354				1,133				689
Advertising			80				57				160				121
Data processing			160				137				318				300
Telephone and postage			153				152				324				281
Amortization of intangibles			72				61				133				107
Legal and professional fees			319				166				461				402
Other			791				761				1,450				1,439
Total noninterest expense			5,272				4,147				9,547				8,456
Income before income taxes			1,081				1,726				2,805				2,939
Income tax expense			228				544				716				911
Net income		$	853			$	1,182			$	2,089			$	2,028
Other comprehensive income (loss):
Change in unrealized gains or losses on available for sale securities, net of related income taxes			577				(1,843	)			(323	)			(1,530	)
Less: reclassification adjustment for gains included in net income net of related income taxes			—				—				131				59
Other comprehensive income (loss)			577				(1,843	)			(454	)			(1,589	)
Comprehensive income (loss)		$	1,430			$	(661	)		$	1,635			$	439
Basic earnings per share		$	0.36			$	0.47			$	0.88			$	0.79
Diluted earnings per share		$	0.36			$	0.46			$	0.88			$	0.79
Dividends per share			—				—			$	—			$	0.075

See the accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

		Six Months Ended
		June 30
		2005				2004
		(dollars in thousands)
Operating activities
Net income		$	2,089			$	2,028
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			501				600
Depreciation and amortization			1,145				850
Net amortization on investments			111				(171	)
Amortization of intangibles			133				107
Deferred income taxes			1,977				818
Origination of loans held for sale			(14,017	)			(14,923	)
Proceeds from sales of loans held for sale			14,015				14,622
Gain on sale of loans			(289	)			(423	)
Gain on sale of securities			(183	)			(89	)
(Gain) loss on sale of real estate held for sale			6				(39	)
Compensation expense for restricted stock			103				147
Increase in cash surrender value of life insurance contracts			(178	)			(199	)
Federal Home Loan Bank stock dividends			(120	)			(108	)
Changes in:
Accrued interest receivable			(197	)			(54	)
Other assets and other liabilities, net			456				584
Net cash provided by operating activities			5,552				3,750
Investing activities
Proceeds from maturities of certificates of deposit			99				100
Purchases of available for sale securities			(9,786	)			(40,460	)
Proceeds from sales of available for sale securities			9,015				3,948
Proceeds from maturities of available for sale securities			7,383				18,132
Proceeds from maturities of held-to-maturity securities			—				211
Proceeds from sales of real estate held for sale			1,612				196
Acquisitions, net			357				38
Net (increase) decrease in loans			5,776				(3,430	)
Purchases of bank premises and equipment			(2,200	)			(443	)
Net cash (used in) provided by investing activities			12,256				(21,709	)
Financing activities
Net increase (decrease) in deposits			(9,612	)			(11,840	)
Net change in short-term borrowings			(1,610	)
Proceeds from long-term borrowings			21,405				11,795
Repayments of long-term borrowings			(13,742	)			(12,934	)
Proceeds from exercise of stock options			62				94
Dividends paid			—				(195	)
Purchase of treasury stock			(2,003	)			(2,317	)
Net cash used in financing activities			(5,500	)			(15,398	)
Net increase (decrease) in cash and cash equivalents			12,308				(33,357	)
Cash and cash equivalents – beginning of year			13,286				45,605
Cash and cash equivalents – end of period		$	25,594			$	12,248

		Six Months Ended
		June 30
		2005				2004
		(dollars in thousands)
Supplemental disclosure of cash flow information
Interest paid		$	4,787			$	5,513
Income taxes paid			525				1,290
Real estate acquired in settlement of loans			195				519
Acquisitions, net:
Assets acquired:
Certificates of Deposit		$	—			$	(298	)
Investments			(6,561	)			(8,616	)
Loans, net			(12,608	)			(7,342	)
Loans held for sale			(5,047	)			—
Interest receivable			(109	)			(104	)
Premises and equipment			(2,428	)			(269	)
Goodwill			(1,034	)			(1,013	)
Intangibles			(424	)			(774	)
Real Estate held for sale			(155	)			—
Non-marketable securities			(639	)			—
Other assets			(108	)			(157	)
Liabilities assumed:
Deposits			27,757				18,524
Other liabilities			56				87
Treasury Stock issued			1,657				—
Cash received, net of cash paid		$	357			$	38

See the accompanying notes to consolidated financial statements.

CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005

Note 1 — Basis of Presentation

     The consolidated financial statements of Centrue Financial Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The December 31, 2004 balance sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Operating results for the three and six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report for the Company on Form 10-K for the year ended December 31, 2004.

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

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

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

     Certain 2004 amounts have been reclassified where appropriate to conform to the consolidated financial statement presentation used in 2005.

     The Company has a stock-based employee compensation plan, which is described more fully in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

		Three Months Ended								Six Months Ended
		June 30								June 30
		2005				2004				2005				2004
		(dollars in thousands, except per share data)
Net income, as reported		$	853			$	1,182			$	2,089			$	2,028
Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes			142				185				191				224
Pro forma net income		$	711			$	997			$	1,898			$	1,804
Earnings per share:
Basic – as reported		$	0.36			$	0.47				0.88				0.79
Basic – pro forma			0.30				0.39				0.80				0.70
Diluted – as reported			0.36				0.46				0.88				0.79
Diluted – pro forma			0.30				0.39				0.80				0.70

The fair value of options granted in 2005 and 2004 has been estimated using the Black-Scholes option-pricing model with the following weighted average assumptions.

		Three Months Ended								Six Months Ended
		June 30								June 30
		2005				2004				2005				2004
Number of options granted			25,000				20,000				25,000				25,500
Risk-free interest rate			4.27	%			4.45	%			4.27	%			4.37	%
Expected life, in years			5				10				5				10
Expected volatility			16	%			23	%			16	%			23	%
Expected dividend yield			—				—				—				0.27	%
Estimated weighted average fair value per option			6.74				11.97				6.74				11.41

Note 3 – Earnings Per Share

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

		Three Months Ended								Six Months Ended
		June 30								June 30
		2005				2004				2005				2004
		(dollars in thousands, except share and per share data)
Basic
Net income		$	853			$	1,182			$	2,089			$	2,028
Average common shares outstanding			2,379,121				2,536,965				2,369,233				2,558,500
Net income per common share – basic		$	0.36			$	0.47			$	0.88			$	0.79
Diluted
Net income		$	853			$	1,182			$	2,089			$	2,028
Average common shares outstanding			2,379,121				2,536,965				2,369,233				2,558,500
Dilutive potential due to stock options			5,784				8,240				7,414				8,968
Average common shares outstanding			2,384,905				2,545,205				2,376,647				2,567,468
Net income per common share – diluted		$	0.36			$	0.46			$	0.88			$	0.79

Note 3 – Liquidity and Capital Resources

     The Company maintains a certain level of cash and other liquid assets to fund normal volumes of loan commitments, deposit withdrawals and other obligations. The following table summarizes significant contractual obligations and other commitments at June 30, 2005 (in thousands):

		Time				Long-term
Years Ended December 31,		Deposits				Borrowings (1)				Total
2005		$	114,726			$	2,668			$	117,394
2006			94,681				31,041				125,722
2007			33,180				11,449				44,629
2008			11,828				5,156				16,984
2009			4,533				10,165				14,698
thereafter			2,752				2,657				5,409
Total		$	261,700			$	63,136			$	324,836
Financial instruments whose contract amounts represent credit risk:
Commitment to originate loans										$	15,356
Commitments to extend credit											22,845
Standby letters of credit											7,641
Total										$	370,678

Note 4 – Investments

Continuous gross unrealized losses of investments in debt and equity securities as of June 30, 2005 (in thousands) which are classified as temporary were as follows:

		Continuous unrealized losses								Continuous unrealized
		existing for less than 12								losses existing greater
		months								than 12 months								Total
Description of						Unrealized								Unrealized								Unrealized
Securities		Fair Value				losses				Fair Value				losses				Fair Value				losses
U.S. government agencies		$	52,018			$	278			$	—			$	—			$	52,018			$	278
Municipals			4,726				30				16,721				440				21,447				470
Mortgage backed securities			1,954				12				6,183				139				8,137				151
Corporate			—				—				1,988				80				1,988				80
Total temporarily impaired securities		$	58,698			$	320			$	24,892			$	659			$	83,590			$	979

The unrealized losses on investment securities that have been in a continuous loss position for more than 12 consecutive months are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company.

Note 5 – Junior Subordinated Debt Owed to Unconsolidated Trusts

     The Company issued $10.0 million in each of April 2002 and April 2004 in cumulative trust preferred securities through newly formed special-purpose trusts, Kankakee Capital Trust I (Trust I) and Centrue Statutory Trust II (Trust II). The proceeds of the offerings were invested by the trusts in junior subordinated deferrable interest debentures of Trust I and Trust II. Trust I and Trust II are wholly-owned unconsolidated subsidiaries of the Company, and their sole assets are the junior subordinated deferrable interest debentures. Distributions are cumulative and are payable quarterly at a variable rate of 3.70% and 2.65% over the LIBOR rate, respectively, (at a rate of 7.11% and 6.07% at June 30, 2005) per annum of the stated liquidation amount of $1,000 per preferred security. Interest expense on the trust preferred securities was $334,000 and $218,000 for the three months ended June 30, 2005 and 2004, and $633,000 and $331,000 for the six months ended June 30, 2005 and 2004, 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.

Note 6 – Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)” or the “Statement”). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the

Statement. (Modifications of share-based payments will be treated as replacement awards with the cost of the incremental value recorded in the financial statements.)

On April 14, 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that amends the compliance dates for Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). Under the new rule, the Company is required to adopt SFAS No. 123R in the first quarter of fiscal 2006, beginning January 1, 2006. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

Note 7. – Acquisition of Illinois Community Bancorp, Inc.

     On April 8, 2005, the Company acquired for cash and stock all of the outstanding shares of Illinois Community Bancorp, Inc. (“ICB”) for a total cost of $3.3 million. As a result of the acquisition, ICB was dissolved and Illinois Community Bank became a wholly owned subsidiary of the Company. 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 $424,000 and a preliminary goodwill calculation of $1.0 million. The Company expects to continue to adjust the goodwill amount as acquisition related costs are realized. It is anticipated that the final goodwill amount will be determined during the third quarter of 2005. The intangible assets are being amortized over ten years. At closing, ICB had assets of $29.8 million, including $17.7 million of loans, deposits of $27.8 million and stockholders’ equity of $1.4 million. It is anticipated that Illinois Community Bank will be merged into Centrue Bank during the third quarter of 2005.

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

GENERAL

     The Company serves the financial needs of families and local businesses in its primary market areas through Centrue Bank’s main banking office at 310 South Schuyler Avenue, Kankakee, Illinois and nineteen branch offices, as well as through its newly acquired subsidiary, Illinois Community Bank located in Effingham, Illinois. The Company’s market areas include central and southern Illinois, western Indiana and the metropolitan St. Louis, Missouri markets. The Company’s business involves attracting deposits from the general public and using such deposits to originate commercial business, commercial real estate, consumer, multi-family, construction and residential mortgage loans in its market areas. The Company also invests in investment securities and various types of short term liquid assets. The Company has approximately 200 full time equivalent employees.

FINANCIAL CONDITION

     The Company’s total assets were $639.6 million at June 30, 2005, an increase of $27.7 million or 4.5%, from $611.9 million at December 31, 2004. Fluctuations in asset accounts were represented by an increase in cash and cash equivalents of $12.3 million, net loans and loans held for sale of $11.5 million, goodwill of $1.0 million and premises and equipment of $3.5 million. These increases were partially offset by a decrease in investment securities of $711,000 and a decrease in real estate held for sale of $1.3 million.

     Cash and cash equivalents increased $12.3 million or 92.6% to $25.6 million from $13.3 million. The increase in cash and cash equivalents was primarily due to the acquisition of ICB. Investment securities decreased $711,000 or (0.6%) to $124.1 million from $124.8 million. The decrease in investment securities was a result of short-term liquidity needs. The decrease in real estate held for sale of $1.3 million or (42.2%) was primarily due to the sale of a portion of the Company’s largest real estate owned property. Management has entered into a contract to sell the remaining portion of the property and anticipates closing during the third quarter of 2005.

     Net loans, including loans held for sale, increased $11.5 million or 2.7% to $430.9 million from $419.4 million. The increase in loans was primarily due to the ICB acquisition.

     Premises and equipment increased $3.5 million, or 19.1%, primarily due to the costs associated with the construction of the Company’s new facility in Fairview Heights, Illinois and the acquisition of ICB.

     Goodwill increased $1.0 million or 8.3% to $13.4 million from $12.4 million. Intangible assets increased $291,000 or 16.4% to $2.1 million from $1.8 million. The increase in goodwill and intangible assets was a result of the ICB acquisition.

     Nonmarketable equity securities increased $759,000 or 18.0% to $5.0 million from $4.2 million, again primarily due to the acquisition of ICB.

     Deposits increased $18.1 million or 3.7% to $513.9 million from $495.8 million. The net increase in deposits was primarily attributable to the acquisition of ICB and was partially offset by a reduction in certificates of deposit as a result of our more disciplined pricing strategy on deposits. Short-term borrowings decreased $1.6 million from $14.2 million to $12.6 million and long-term borrowings increased $7.7 million to $63.1 million from $55.4 million in 2004. The decrease in short-term borrowings and increase in long-term borrowings was due to the Company’s decision to lengthen liabilities in a rising interest rate environment.

     Stockholders’ equity increased $1.5 million or 3.4% to $44.6 million from $43.1 million at December 31, 2004. There were 2,366,939 shares of common stock outstanding at June 30, 2005, compared to 2,380,666 shares at December 31, 2004. Equity per share of common stock increased by $0.72 to $18.86 at June 30, 2005 from $18.14 at December 31, 2004.

ASSET QUALITY

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

     During the second quarter, total nonperforming loans decreased $1.3 million from the end of 2004, which was mainly attributable to loans that were repaid from two large commercial borrowers. Foreclosed assets decreased $1.3 million due to the sale of a portion of the Company’s largest real estate owned property. Management has entered into a contract to sell the remaining portion of the property and expects the closing to occur during the third quarter of 2005.

		June 30				December 31
		2005				2004				Change
		(dollars in thousands)
Non-accruing loans		$	5,266			$	6,769			$	(1,503	)
Accruing loans delinquent 90 days or more			389				222				167
Total nonperforming loans			5,655				6,991				(1,336	)
Foreclosed assets			1,734				3,002				(1,268	)

		June 30				December 31
		2005				2004				Change
		(dollars in thousands)
Troubled debt restructuring			39				42				(3	)
Total nonperforming assets		$	7,428			$	10,035			$	(2,607	)
Allowance for loan losses to total loans			1.32	%			1.29	%
Allowance for loan losses to nonperforming loans			101.51	%			78.32	%
Nonperforming loans to total loans			1.31	%			1.65	%
Nonperforming assets to total loans and foreclosed property			1.72	%			2.35	%
Nonperforming assets to total assets			1.16	%			1.64	%

     One measure of the adequacy of the allowance for loan losses is the ratio of the allowance for loan losses to total loans. The ratio of the allowance for loan losses to total loans was 1.32% and 1.29% at June 30, 2005 and December 31, 2004, respectively. The ratio of the allowance for loan losses to non-performing loans increased to 101.51% as of June 30, 2005 compared to 78.32% at December 31, 2004. The increase in this ratio, which excludes foreclosed assets and restructured troubled debt, was the result of the decrease of $1.3 million of nonperforming loans and an increase in allowance for loan losses of $265,000.

     Total classified loans at June 30, 2005 decreased to $12.9 million compared to $19.4 million at December 31, 2004. The Company has adopted a new loan policy and implemented new loan approval, documentation and monitoring processes. The Company has also recruited and employed an experienced commercial lending team including three new regional presidents, each of whom is an experienced commercial lender, as well as two other seasoned 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. These initiatives have already had a positive impact on the monitoring of the loan portfolio. The Company will continue to attempt to improve the loan monitoring processes.

     The Company recognized charge offs in the amount of $797,000 and $874,000 during the second quarter and first six-months of 2005 and $508,000 and $707,000 for the second quarter and first six-months of 2004. The Company had recoveries of $187,000 and $379,000 for the second quarter and first six-months of 2005 and $106,000 for the second quarter and first six-months of 2004. The provision for loan losses was $251,000 and $501,000 for the second quarter and first six months of 2005, compared to $300,000 and $600,000 for the second quarter and first six months of 2004. The provision for loan losses represents management’s judgment of the cost associated with credit risk inherent in the loan portfolio. Factors which influence management’s determination of the provision for loan losses include, among other things, size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, a review of individual loans and historical loan loss experience. The Company acquired $259,000 of allowance for loan losses with the ICB acquisition in the second quarter of 2005.

     The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management’s methodology to determine the adequacy of the allowance for loan losses considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth and composition of the loan portfolio. Based upon the Company’s quarterly analysis of the adequacy of the allowance for loan losses, considering remaining collateral of loans with more than a normal degree of risk, historical loan loss percentages and economic conditions, it is management’s belief that the allowance for loan losses at June 30, 2005 was adequate. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

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

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

CRITICAL ACCOUNTING POLICIES

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

     Allowance for Loan Losses — The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, which collateralize loans. Management believes it uses the best information

available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the Company believes it has established its existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Bank’s loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.

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

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

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

RESULTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

     For the second quarter ended June 30, 2005, net income decreased to $853,000 from $1.2 million for the same period in 2004. Net income for the six months ended June 30, 2005 increased to $2.1 million from $2.0 million for the same period in 2004. Return on average assets for the second quarter and first six months of 2005 was 0.54% and 0.68% compared to 0.77% and 0.67% for 2004. Return on average equity for the second quarter and first six months of 2005 was 7.98% and 9.73%, compared to 10.55% and 8.96% for 2004.

     The second quarter of 2005 operating results included non-recurring expenses of $666,000 ($0.22 per share, after tax). The non-recurring expenses included $464,000 ($0.16 per share, after tax) of asset write downs and other related expenses due to the Company’s core processing system conversion. The Company expects these expenses to be recovered within one year as a result of reduced data processing costs. Management converted its systems to Jack Henry & Associates’ Silverlake data processing system which will allow the Company to expand our products and improve delivery of services to our customer base. The non-recurring expenses also included $202,000 ($0.06 per share, after tax) of professional fees due to a terminated transaction associated with the Company’s merger and acquisition activity.

     The Company’s comparable results for the second quarter of 2004 included a partial reversal of a valuation allowance for mortgage servicing rights of $50,000 and a gain of $127,000 from the sale of its credit card portfolio.

     Net interest income for the three month and six month periods increased $227,000 and $339,000 or 4.9% and 3.7% from 2004. Interest income increased by $714,000 and $757,000 for the three month and six month periods. The net interest margin for the second quarter increased to 3.49% compared to 3.40% on a tax equivalent basis for 2004. For the six month periods, the net interest margin increased to 3.52% compared to 3.36% on a tax equivalent basis for 2004.

		TABLE I
		NET INTEREST INCOME ANALYSIS (UNAUDITED)
		CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES
		Three Months Ended June 30,
		2005												2004
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
		(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (3)		$	441,340			$	6,703				6.09	%		$	438,137			$	6,154				5.65	%
Investments securities (2) (3)			123,754				1,297				4.20	%			113,591				1,123				3.98	%
Other interest-earning assets			3,641				15				1.65	%			6,352				18				1.14	%
FHLB stock			4,322				56				5.20	%			3,455				52				6.03	%
Total interest-earning assets			573,057				8,071				5.65	%			561,535				7,347				5.26	%
Other assets			64,184												52,869
Total assets		$	637,241											$	614,404
Interest-bearing liabilities:
Certificate accounts		$	246,650				1,728				2.81	%		$	262,945				1,600				2.45	%
Savings deposits			101,424				182				0.72	%			93,725				136				0.58	%
Demand and NOW deposits			89,597				263				1.18	%			95,362				182				0.77	%
Borrowings			86,009				917				4.28	%			59,332				685				4.64	%
Total interest-bearing liabilities			523,680				3,090				2.37	%			511,364				2,603				2.05	%
Non-interest bearing demand deposits			65,453												52,751
Other liabilities			5,258												5,357
Total liabilities			594,391												569,472
Stockholders’ equity			42,850												44,932
Total liabilities and stockholders’ equity		$	637,241											$	614,404
Net interest income (3)						$	4,981											$	4,744
Net interest rate spread											3.28	%											3.21	%
Net earning assets		$	49,377											$	50,171
Net yield on average interest-earning assets (net interest margin)											3.49	%											3.40	%
Average interest-earning assets to average interest-bearing liabilities							109.43	%											109.81	%

     For the second quarter of 2005, tax equivalent interest income increased $724,000, to $8.1 million. The increase was primarily attributable to an increase in average earning assets and an increase in interest rates. Average earning assets increased $11.5 million to $573.1 million from $561.5 million in 2004. The average tax equivalent rate earned on earning assets increased 39 basis points to 5.65% from 5.26%. The increase in the average balance of interest-earning assets was primarily due to earning assets obtained in the ICB acquisition. The

increase in the yield earned on interest-earning assets was due to increases in the federal funds rate and prime lending rates.

     Interest expense in the second quarter increased $487,000 to $3.1 million from $2.6 million in 2004. The increase was primarily attributable to an increase in the rate paid on average interest bearing liabilities and an increase in the average balance of interest bearing liabilities. Average interest-bearing liabilities increased $12.3 million to $523.7 million from $511.4 million. The rate paid on interest bearing liabilities increased 32 basis points to 2.37% from 2.05% in 2004. The increase in average interest-bearing liabilities was primarily attributable to interest-bearing liabilities associated with the ICB acquisition. The increase in the average yield on interest-bearing liabilities resulted from an increase in deposit rates to remain competitive with local competition.

		TABLE II
		NET INTEREST INCOME ANALYSIS (UNAUDITED)
		CENTRUE FINANCIAL CORPORATION AND SUBSIDIARIES
		Six Months Ended June 30,
		2005												2004
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
		(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (3)		$	430,025			$	12,908				6.05	%		$	434,175			$	12,466				5.77	%
Investments securities (2) (3)			121,271				2,534				4.21	%			104,022				2,099				4.06	%
Other interest-earning assets			3,009				23				1.54	%			20,073				94				0.94	%
FHLB stock			3,969				105				5.34	%			3,389				108				6.43	%
Total interest-earning assets			558,274				15,570				5.62	%			561,659				14,767				5.29	%
Other assets			60,995												50,953
Total assets		$	619,269											$	612,612
Interest-bearing liabilities:
Certificate accounts		$	245,209				3,304				2.72	%		$	267,492				3,358				2.52	%
Savings deposits			95,107				315				0.67	%			90,795				284				0.63	%
Demand and NOW deposits			89,040				481				1.09	%			91,287				375				0.83	%
Borrowings			81,013				1,714				4.27	%			60,960				1,379				4.55	%
Total interest-bearing liabilities			510,369				5,814				2.30	%			510,534				5,396				2.13	%
Non-interest bearing demand deposits			61,756												51,560
Other liabilities			3,856												5,008
Total liabilities			575,981												567,102
Stockholders’ equity			43,288												45,510
Total liabilities and stockholders’ equity		$	619,269											$	612,612
Net interest income (3)						$	9,756											$	9,371
Net interest rate spread											3.32	%											3.16	%
Net earning assets		$	47,905											$	51,125
Net yield on average interest-earning assets (net interest margin)											3.52	%											3.36	%
Average interest-earning assets to average interest-bearing liabilities							109.39	%											110.01	%

     For the six months ended June 30, 2005, tax equivalent interest income increased $803,000, to $15.6 million. The increase was primarily attributable to an increase in interest rates. Average earning assets decreased $3.4 million to $558.3 million from $561.7 million in 2004. The average tax equivalent rate earned on earning assets increased 33 basis points to 5.62% from 5.29%. The decrease in the average balance of interest-earning assets was

primarily due to a decrease in investment securities and federal funds sold offset by the additional assets obtained in the ICB acquisition. The increase in the yield earned on interest-earning assets was due to increases in the federal funds and prime lending rates.

     Interest expense during the first half of the year increased $418,000 to $5.8 million from $5.4 million in 2004. The increase was primarily attributable to an increase in the rate paid on average interest bearing liabilities, offset by a slight decrease in the average balance of interest bearing liabilities. Average interest-bearing liabilities decreased $165,000 to $510.4 million from $510.5 million. The rate paid on interest bearing liabilities increased 17 basis points to 2.30% from 2.13% in 2004. The average interest-bearing liabilities remained stable primarily due to lost deposits being offset by the addition of interest-bearing liabilities associated with the acquisition of ICB. The increase in the average yield on interest-bearing liabilities resulted from increasing market interest rates to remain competitive with local competition.

     The provision for loan losses was $251,000 and $501,000 for the second quarter and first six months of 2005, compared to $300,000 and $600,000 for the second quarter and first six months of 2004.

		Three Months Ended
		June 30								Change
		2005				2004				Amount				Percent
		(dollars in thousands)
Noninterest income:
Fee income		$	1,330			$	990			$	340				34.3	%
Net gain (loss) on sale of real estate held for sale			(8	)			46				(54	)			(117.4	)
Net gain on sale of loans			158				317				(159	)			(50.2	)
Increase in cash surrender value of life insurance contracts			87				99				(12	)			(12.1	)
Other			139				51				88				172.5
Total		$	1,706			$	1,503			$	203				13.5	%