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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004
Commission File No.: 0-27740 CITIZENS FIRST FINANCIAL CORP.  DELAWARE
    
    37-1351861(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer I.D. No.)
 2101 North Veterans Parkway, Bloomington, Illinois 61704  Registrants telephone number:   (309) 661-8700
Securities registered pursuant to Section 12(g) of the Act:Common Stock par value $0.01 per share
(Title of class) Securities registered pursuant to Section 12(b) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 past 90 days.     Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).     Yes o No þ The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e.,
persons other than directors and executive officers of the registrant is $30,009,294 and is based
upon the last sales price of $22.97 as quoted on The Nasdaq National Market on June 30, 2004, the
last business day of the registrants most recently completed second quarter. The Registrant had 1,611,450 shares of Common Stock outstanding as of March 23, 2005. DOCUMENTS INCORPORATED BY REFERENCE NONE




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INDEX PAGEPART IItem 1 Business
    
    
    1Item 2 Properties
    
    
    19Item 3 Legal Proceedings
    
    
    20Item 4 Submission of Matters to a Vote of Security Holders
    
    
    21Supplemental Information - Executive Officers of the RegistrantPART IIItem 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    22Item 6 Selected Financial Data
    
    
    23Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 7A Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 8 Financial Statements and Supplementary Data
    
    
    39Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    79Item 9A Controls and Procedures
    
    
    79Item 9B Other Information
    
    
    80PART IIIItem 10 Directors and Executive Officers of the Registrant
    
    
    80Item 11 Executive Compensation
    
    
    82Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    88Item 13 Certain Relationships and Related Transactions
    
    
    90Item 14 Principal Accountant Fees and Services
    
    
    91Item 15 Exhibits and Financial Statement Schedules
    
    
    92Signatures
    
    
    94Code of EthicsConsent of BKD, LLPSection 302 Certification of C. William LandefeldSection 302 Certification of Dallas G. SmileySection 906 Certification of C. William LandefeldSection 906 Certification of Dallas G. Smiley
  i




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PART 1 
 Item 1 Business General Citizens First Financial Corp. (the Company) was incorporated under Delaware law in January
1996. The Company completed an initial public offering of 2,817,500 shares of common stock on May
1, 1996 in connection with the conversion of Citizens Savings Bank, (the Bank) from the mutual to
stock form of ownership (the Conversion). The Company is a savings and loan holding company and
is subject to regulation by the Office of Thrift Supervision (OTS), and the Securities and
Exchange Commission (SEC). Currently, the Company does not transact any material business other
than through its subsidiary, the Bank. At December 31, 2004, the Company had total assets of $328.3
million, total deposits of $231.0 million and total stockholders equity of $36.0 million. The
Companys principal business is conducted primarily through its subsidiary, the Bank. Accordingly,
the discussion in this Report addresses the Companys operations as they are conducted through the
Bank. The Bank was originally chartered in 1888 by the State of Illinois and in 1989 became a
federally chartered savings bank. In April 1999, the Bank was converted from a federally chartered
savings bank to an Illinois state savings bank. The Banks principal business consists of the
acceptance of retail deposits from the general public in the area surrounding its branch offices
and the investment of those deposits, together with funds generated from operations and borrowings,
in commercial, agricultural, residential real estate mortgage, commercial real estate, consumer and
other loans. The Bank originates loans for investment and for sale. Currently, the Banks policy
is to sell, on a servicing retained basis, most longer-term fixed rate one-to-four family mortgage
loans it originates as a method of controlling its growth, managing its interest rate risk and
increasing its loan servicing fee income. The Banks revenues are derived principally from
interest on its mortgage, consumer and commercial loans, loan servicing fees and, to a lesser
extent, the interest on its securities. The Banks primary source of funds are deposits, principal
and interest payments on loans and securities, borrowings from the Federal Home Loan Bank of
Chicago and, to a lesser extent, proceeds from the sale of loans and securities. The Bank has a
wholly-owned service corporation, CSL Service Corporation, an Illinois-chartered corporation that
had been a participant in a real estate joint venture. The service corporation sold its interest in
the real estate joint venture in May 2004. In November 2004, the Company entered into an Agreement and Plan of Merger with Main Street
Trust, Inc. (Main Street), an Illinois corporation. Main Street Trust, Inc. will acquire all of
the Companys issued and outstanding shares of common stock. Each of the Companys shareholders
will have the option of receiving either 1.1051 shares of Main Streets stock for each share of the
Companys stock or $35.00 of cash for each share of the Companys common stock or a combination of
both. The transaction has been approved by state and federal regulators and is expected to close
in the second quarter of 2005. At a special meeting of shareholders on March 8, 2005 shareholders
approved the merger agreement. Market Area and Competition The Company is a community-oriented savings institution offering a variety of financial
products and services to meet the needs of the communities it serves. The Companys deposit
gathering is concentrated in the communities surrounding its five offices located in the
municipalities of Bloomington, Normal and Fairbury, Illinois, which are part of McLean and
Livingston Counties. McLean County comprises the greater Bloomington/Normal metropolitan area and
Livingston County is adjacent to the greater Bloomington/Normal metropolitan area. The economy in
McLean and Livingston Counties has historically benefited from the presence of the national and
regional headquarters of State Farm Insurance Company, the Mitsubishi Motors Corporation, Illinois
Farm Bureau, Illinois State University and Illinois Wesleyan University as well as a variety of
agricultural related businesses. These counties are the primary market area for the Banks lending
and deposit gathering activities. The Company faces significant competition both in making loans and in attracting deposits.
The greater Bloomington/Normal metropolitan area is a highly competitive 1




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market. The Company faces
direct competition from a significant number of financial institutions operating in its market
area, many with a state-wide or regional presence and in some cases a national presence. Many of
these financial institutions are significantly larger and have greater financial resources than the
Company. State Farm Insurance Company, Bloomington-Normals largest business, has a savings bank,
which it operates through its agents on a national basis. The Companys competition for loans comes
principally from commercial banks, savings and loan associations, mortgage banking companies,
credit unions and insurance companies. Its most direct competition for deposits has historically
come from savings and loan associations and commercial banks. In addition, the Company faces
increasing competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as a result of the
lifting of restrictions on the interstate operations of financial institutions. Investment Activities The investment policy of the Company, as approved by the Board of Directors, requires
management to maintain adequate liquidity and generate a favorable return on investments without
incurring undue interest rate and credit risk. The Company has invested primarily in U.S.
government sponsored agency issued mortgage-backed securities, U.S. Agency securities, federal
funds sold, a Federal Home Loan Bank demand investment account and eligible mutual funds. SFAS 115
requires the Company to designate its securities as held to maturity, available for sale or held
for trading. The Company does not currently maintain a portfolio of securities categorized as held
to maturity or held for trading. The Companys investment securities generally consist of U.S.
Agency obligations and mortgage-backed and mortgage-related securities. The Companys
mortgage-backed securities consist of pass through certificates representing interests in pools of
fixed and adjustable rate mortgage loans issued or guaranteed by GNMA, FHLMC or FNMA. At December
31, 2004, the Companys portfolio of investment and mortgage-backed securities totaled $26.1
million, all of which was categorized as available for sale. In recent periods, the Company has primarily invested in securities in order to maintain
liquid assets for its operations and as a means of utilizing its excess funding not necessary for
loan originations. The Board of Directors reviews all of the activity in the investment portfolio
on a monthly basis. Lending Activities Origination, Sale, Servicing and Purchase of LoansThe Companys loan origination activities
are conducted primarily by its loan personnel, operating at its five offices. All loans originated
by the Company are underwritten by the Company pursuant to the Companys policies and procedures.
The Company originates both adjustable-rate and fixed-rate mortgage loans, commercial loans and
consumer loans. The Companys ability to originate loans is dependent upon the relative customer
demand for the type of loan and demand for fixed-rate or adjustable-rate loans, which is affected
by the current and expected future level of interest rates. While the Company has in the past, from time to time, sold adjustable-rate one- to four-family
loans and retained mortgage loans with terms of 10 years or more, it is currently the general
policy of the Company to originate for sale in the secondary market one-to-four family fixed-rate
mortgage loans with maturities exceeding ten years and to originate for investment all
adjustable-rate one-to-four family mortgage loans and fixed-rate one-to-four family mortgage loans
with maturities of ten years or less. One-to-Four Family Mortgage LendingThe Company currently offers both fixed-rate and
adjustable-rate mortgage loans secured by one-to-four family residences located in the Companys
primary market area, with maturities of up to thirty years. While the Company has originated such
loans secured by properties outside its market area, substantially all of such loans at December
31, 2004 were secured by property located in the Companys primary market area. One-to-four family mortgage loan
originations are generally obtained from the Companys loan representatives operating in its branch
offices and their contacts with the local real estate industry, existing or past customers, and
members of the local communities. 2




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Multi-Family LendingThe Company originates fixed and adjustable-rate multi-family mortgage
loans generally secured by 5 to 70 unit apartment and student housing buildings located in the
Companys primary market area. In deciding on whether to make a multi-family loan, the Company
considers the qualifications and financial condition of the borrower as well as the value and
condition of the underlying property. The factors considered by the Company include: the net
operating income of the mortgaged premises before debt service and depreciation; the debt coverage
ratio (the ratio of net earnings to debt service); and the ratio of loan amount to appraised value. Commercial Real Estate LendingThe Company originates commercial real estate loans that are
generally secured by properties used for business purposes such as small office buildings or a
combination of residential and retail facilities located in the Companys primary market area. Loans secured by commercial real estate properties, like multi-family loans, generally involve
larger principal amounts and a greater degree of risk than one-to-four family residential mortgage
loans. Because payments on loans secured by commercial real estate properties are often dependent
on successful operation or management of the properties, repayment of such loans may be subject to
adverse conditions in the real estate market or the economy. The Company seeks to minimize these
risks through its underwriting standards, which require such loans to be qualified on the basis of
the propertys income and debt coverage ratio. Construction and Land LendingThe Company originates loans for the acquisition and
development of commercial and residential property located in its primary market area. These loans
are offered to local developers and individuals. The majority of the Companys construction loans
are originated primarily to finance the construction of one-to-four family, owner-occupied
residential properties and multi-family properties located in the Companys primary market area.
Such loans are offered for the construction of properties that are pre-sold or for which permanent
financing has been secured, as well as for properties that are not pre-sold or for which permanent
financing has not been secured. Construction and land development financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a
construction loan is largely dependent upon the accuracy of the initial estimate of the propertys
value at completion of construction or development compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate, the Company may be
confronted with a project, when completed, having a value which is insufficient to assure full
repayment. Commercial LendingThe Company offers commercial loans to businesses operating in the
Companys primary market area on a selective basis. Unlike mortgage loans, which generally are made on the basis of the borrowers ability to make
repayment from his or her employment and other income, and which are secured by real property the
value of which tends to be more easily ascertainable, commercial business loans are of higher risk
and typically are made on the basis of the borrowers ability to make repayment from the cash flow
of the borrowers business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be difficult to appraise and may
fluctuate in value based on the success of the business. Included in this total are agricultural
loans made within our lending area. These agricultural loans are generally offered with one year
terms in amounts up to $500,000 and are generally secured by crops, equipment, other assets and
personal guarantees. Consumer and Other LendingThe Companys portfolio of consumer and other loans primarily
consists of fixed-rate, fixed-term home equity loans, adjustable home equity lines of credit, loans
secured by automobiles, home improvement loans, loans secured by deposit accounts and unsecured
personal loans. Loan ServicingThe Company generally services all loans it retains for investment and also
services a portfolio of one-to-four family mortgage loans for others which is primarily generated
from its loan sale activity. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, 3




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supervising foreclosures and property dispositions in the event
of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and
generally administering the loans. Deposit Activities DepositsThe Company offers a variety of deposit accounts with a range of interest rates and
terms. The Companys deposit accounts consist of savings, NOW accounts, checking accounts, money
market accounts, certificate and brokered deposit accounts. The Company also offers certificate of
deposit accounts with balances in excess of $100,000 at negotiated rates (jumbo certificates) and
Individual Retirement Accounts (IRAs). For the year ended December 31, 2004 the balance of core
deposits (savings, money market and demand deposit accounts) totaled $90.1 million, or 39.0% of
total deposits. The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The Companys deposits
are obtained predominantly from the areas in which its branch offices are located. The Company
relies primarily on customer service and long-standing relationships with customers to attract and
retain these deposits; however, market interest rates and rates offered by competing financial
institutions significantly affect the Companys ability to attract and retain deposits. The Company
uses traditional means of advertising its deposit products, including radio and print media and
generally does not solicit deposits from outside its market area. While certificate accounts in
excess of $100,000 are accepted by the Company, the Company does not actively solicit such
deposits. The Company has attempted to increase its deposit customer base and decrease its
dependency on certificate accounts by offering interest free checking accounts without minimum
balance requirements. The Company has $4.9 million of brokered deposits with maturities from 10 to
21 months at an average rate of 2.4%. Brokered deposits are an alternative source of liquidity that
offers the Company the opportunity to obtain funds at a competitive interest rate. Statistical Data INVESTMENT SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and approximate market
value of the investment securities at the dates indicated were: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable for sale at December 31,
2004U.S. government agencies
    
    $
    9,800
    
    
    $
    14
    
    
    $
    94
    
    
    $
    9,720Mortgage-backed securities
    
    
    15,288
    
    
    
    174
    
    
    
    112
    
    
    
    15,350Other securities
    
    
    1,000
    
    
    
    
    
    
    
    15
    
    
    
    985Total available for sale
    
    $
    26,088
    
    
    $
    188
    
    
    $
    221
    
    
    $
    26,055
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable for sale at December 31,
2003:U.S. government agencies
    
    $
    6,802
    
    
    $
    
    
    
    $
    48
    
    
    $
    6,754Mortgage-backed securities
    
    
    12,978
    
    
    
    155
    
    
    
    135
    
    
    
    12,998Other securities
    
    
    1,003
    
    
    
    
    
    
    
    9
    
    
    
    994Total available for sale
    
    $
    20,783
    
    
    $
    155
    
    
    $
    192
    
    
    $
    20,746
 4




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The balance of Federal Home Loan Bank of Chicago stock owned at December 31 is as follows: Cost(Dollars in thousands)2004
    
    
    2003$
    16,153
    
    
    $
    15,206
 Federal Home Loan Bank stock is stated at cost and is a required investment for institutions that
are members of the Federal Home Loan Bank system. The required investment in the common stock is
based on a predetermined formula. The Federal Home Loan Bank stock is recognized based on the price
at which it may be resold to the Federal Home Loan Bank. The yield on the stock is approximately 5.50% at December 31, 2004. The maturity distribution (dollars in thousands) and average yields for the securities
available for sale portfolio at December 31, 2004 were: Within 1 Year
    
    
    1 - 5 Years
    
    
    5 - 10 YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. government agencies
    
    $
    
    
    
    
    
    %
    
    $
    2,301
    
    
    
    3.50
    %
    
    $
    7,419
    
    
    
    4.01
    %Mortgage-backed securities
    
    
    
    
    
    
    
    %
    
    
    94
    
    
    
    6.00
    %
    
    
    3,576
    
    
    
    4.01
    %Other securities
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Total
    
    $
    
    
    
    
    
    %
    
    $
    2,395
    
    
    
    3.60
    %
    
    $
    4,048
    
    
    
    4.01
    %
 Marketable EquityDue After 10 Years
    
    
    Securities
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. government agencies
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    9,720
    
    
    
    3.89
    %Mortgage-backed securities
    
    
    11,680
    
    
    
    4.89
    %
    
    
    
    
    
    
    
    %
    
    
    15,350
    
    
    
    4.69
    %Other securities
    
    
    
    
    
    
    
    %
    
    
    985
    
    
    
    2.62
    %
    
    
    985
    
    
    
    2.62
    %Total
    
    $
    11,680
    
    
    
    4.89
    %
    
    $
    985
    
    
    
    2.62
    %
    
    $
    26,055
    
    
    
    4.31
    %
 With the exception of securities of U.S. government agencies and corporations, the Company did
not hold any securities of a single issuer, payable from and secured by the same source of revenue
or taxing authority, the book value of which exceeded 10% of stockholders equity at December 31,
2004. LOAN PORTFOLIO Types of Loans (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial &
agricultural loans
    
    $
    30,536
    
    
    $
    38,047
    
    
    $
    33,438
    
    
    $
    27,667
    
    
    $
    20,622Real estate loans:Construction
    
    
    27,626
    
    
    
    36,577
    
    
    
    37,545
    
    
    
    36,908
    
    
    
    40,141Commercial
    
    
    71,633
    
    
    
    86,368
    
    
    
    82,008
    
    
    
    79,667
    
    
    
    71,566Residential
    
    
    107,300
    
    
    
    120,936
    
    
    
    128,692
    
    
    
    138,439
    
    
    
    150,914Consumer and other loans
    
    
    7,501
    
    
    
    9,866
    
    
    
    9,754
    
    
    
    10,783
    
    
    
    13,246Total
    
    
    244,596
    
    
    
    291,794
    
    
    
    291,437
    
    
    
    293,464
    
    
    
    296,489Less:Undisbursed
portion of
loans (1)
    
    
    7,353
    
    
    
    9,317
    
    
    
    8,846
    
    
    
    4,200
    
    
    
    11,174Allowance for loan
losses
    
    
    2,736
    
    
    
    3,072
    
    
    
    3,753
    
    
    
    2,421
    
    
    
    1,826Loans, net
    
    $
    234,507
    
    
    $
    279,405
    
    
    $
    278,838
    
    
    $
    286,843
    
    
    $
    283,489
    5




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Loans held for sale at December 31, 2004, 2003, 2002, 2001, and 2000 were $587,202, $376,088,
$6,098,342, $6,910,101 and $1,494,359, respectively, and were not included in the above totals. 6




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Maturities and Sensitivities of Loans to Changes in Interest Rates Presented in the table below are the maturities of loans (excluding commercial real estate,
residential real estate, consumer and other loans) outstanding as of December 31, 2004. Also
presented are the amounts due after one year, classified according to the sensitivity to changes in
interest rates. MaturingWithin
    
    
    1-5
    
    
    Over 5(Dollars in thousands)
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    TotalCommercial & agricultural
loans
    
    $
    21,041
    
    
    $
    8,626
    
    
    $
    869
    
    
    $
    30,536Real estate loans-
Construction
    
    
    27,626
    
    
    
    
    
    
    
    
    
    
    
    27,626Total
    
    $
    48,667
    
    
    $
    8,626
    
    
    $
    869
    
    
    $
    58,162
 Maturing1  5
    
    
    Over(Dollars in thousands)
    
    Years
    
    
    5 YearsLoans maturing after one year with:Fixed rates
    
    $
    8,626
    
    
    $
    869Variable rate
    
    
    
    
    
    
    Total
    
    $
    8,626
    
    
    $
    869
 Risk Elements December(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Nonaccruing loans
    
    $
    725
    
    
    $
    2,452
    
    
    $
    4,410
    
    
    $
    3,177
    
    
    $
    1,493Loans contractually
past due 90 days or
more other
than nonaccruing
    
    
    
    
    
    
    7
    
    
    
    1,753
    
    
    
    2,613
    
    
    
    3,767Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,334
    
    
    
    301
 Nonaccruing loans are loans which are reclassified to nonaccruing status when in managements
judgment the collateral value and financial condition of the borrower do not justify accruing
interest. Interest previously recorded but not deemed collectible is reversed and charged against
current income. Interest income on these loans is then recognized when collected. Restructured loans are loans for which the contractual interest rate has been reduced or other
concessions are granted to the borrower because of deterioration in the financial condition of the
borrower resulting in the inability of the borrower to meet the original contractual terms of the
loans. Interest income of $55,000 for the year ended December 31, 2004, was recognized on the
nonaccruing loans listed in the table above, whereas interest income of $67,000 would have been
recognized under their original loan terms. The Company accounts for impaired loans in accordance with SFAS No. 114 and No. 118,
Accounting by Creditors for an Impairment of a Loan and Accounting by Creditors for Impairment
of a Loan  Income Recognition and Disclosures. These Statements require that impaired loans
within the scope of these Statements be measured at the present value of expected future cash flows
discounted at the loans effective interest rate, or as a practical expedient, at the loans observable market price or fair
value of the collateral, if the loan is collateral dependent. A loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to 7




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collect all
amounts due, both principal and interest, according to the contractual terms of the note. Balance atImpaired Loans:
    
    December 31,2004(Dollars in thousands)Impaired loans with an allowance
    
    $
    5,255Impaired loans for which the discounted cash flows or
collateral value exceeds the carrying value of the loan
    
    
    8,426Total impaired loans
    
    $
    13,681
 Year EndedImpaired Loans:
    
    December 31, 2004(Dollars in thousands)Average balance of impaired loans
    
    $
    22,976Interest income recognized on impaired loans
    
    $
    1,372Cash-basis interest included above
    
    $
    1,369
 Allowance for Loan Losses and Impaired Loans The Company maintains an allowance for loan losses to absorb losses inherent in the loan
portfolio. The allowance for losses decreased from $3,072,000 at December 31, 2003 to $2,736,000 at
December 31, 2004, a decrease of $336,000 or 10.9%. The decrease
was primarily due to recoveries in 2004 of charge-off loans in prior
years of $410,000, a reduction in the overall loan portfolio, and the
Companys continued emphasis to improve asset quality. (See Managements Discussion and Analysis of
Financial Condition and Results of Operations.) The allowance is based on ongoing assessments of
the estimated probable losses inherent in the loan portfolio. The methodology for assessing the
appropriateness of the allowance consists of several key elements, which include a formula
allowance, and a specific allowance for identified problem loans. The formula allowance is calculated by applying loss factors to outstanding loans based on the
internal risk grade of such loans. Changes in risk grades of both performing and non-performing
loans affect the amount of the formula allowance. Loss factors are based on historical loss
experience and may be adjusted for significant factors that, in managements judgment, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are based on (1) historical
loss experience over a three-year period, which management believes approximates a business cycle;
(2) individual evaluations of residential, commercial real estate, construction, agricultural,
commercial and consumer loans; (3) expected charge-offs by loan classification for one-year; (4)
general economic and business conditions affecting the Companys lending areas; (5) collateral
values; (6) loan volumes and concentrations; (7) seasoning of the loan portfolio; (8) specific
industry conditions and (9) recent loss experience in particular segments of the portfolio. A specific allowance is established in cases where management has identified significant
conditions or circumstances related to a loan that management believes indicate the probability
that a loss has been incurred. The allowance for loan losses is based upon estimates of probable losses inherent in the loan
portfolio. The amount of actual losses can vary significantly from the estimated amounts. The
methodology includes several features that are intended to reduce the differences between estimated
and actual losses. The Company closely monitors any difference of actual and estimated losses and
adjusts the methodology accordingly. The Company generates commercial, mortgage and consumer loans from customers located primarily
in Central Illinois. The Companys loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the Company has a
diversified loan portfolio, a substantial portion of their debtors ability to honor their
contracts is dependent upon economic conditions in 8




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##### Table of Contents



Central Illinois. Although the risk of
non-payment for any reason exists with respect to all loans, certain other more specific risks are
associated with each type of loan. The primary risks associated with commercial loans are quality
of the borrowers management and the impact of national and local economic factors. Currently, the
business atmosphere remains stable for the local economy in the McLean, Livingston and Tazewell
County areas. Risk associated with real estate loans include concentrations of loans in a loan
type, such as residential real estate, decline in real estate values and a sudden rise in interest
rates. Individual loans face the risk of borrowers unemployment as a result of deteriorating
economic conditions or renewed contract differences between unions and management of several large
companies in the Companys market area. The Companys strategy with respect to addressing and
managing these types of risks is for the Company to follow its loan policies and underwriting
criteria. The Company has substantially increased its investment in commercial, commercial real estate
and construction and land loans in the last five years. Because of the higher degree of risk
associated with these types of loans, the Company has increased its allowance for loan losses to
reflect this increased risk. A provision for loan losses is charged to income to increase the allowance to a level deemed
to be adequate based on managements evaluation. When a loan or a part thereof is considered by
management to be uncollectible, a charge is made against the allowance. Recoveries of previously
charged-off loans are credited back to the allowance. The following table summarizes the changes
in the allowance for loan losses for the last five years: Summary of Loan Loss Experience (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at January 1
    
    $
    3,072
    
    
    $
    3,753
    
    
    $
    2,421
    
    
    $
    1,826
    
    
    $
    1,679Loans charged off:Commercial loans
    
    
    (58
    )
    
    
    (834
    )
    
    
    (100
    )
    
    
    
    
    
    
    Real estate loans:Construction and land
    
    
    
    
    
    
    (1,834
    )
    
    
    (100
    )
    
    
    (130
    )
    
    
    (2,800
    )Commercial
    
    
    
    
    
    
    (110
    )
    
    
    (53
    )
    
    
    
    
    
    
    Residential
    
    
    (160
    )
    
    
    (394
    )
    
    
    (123
    )
    
    
    
    
    
    
    (103
    )Consumer and other loans
    
    
    (56
    )
    
    
    (16
    )
    
    
    (95
    )
    
    
    (50
    )
    
    
    Total charge-offs
    
    
    (274
    )
    
    
    (3,188
    )
    
    
    (471
    )
    
    
    (350
    )
    
    
    (2,903
    )Loan recoveries:Commercial loans
    
    
    12
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Real estate loans:Construction and land
    
    
    389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other loans
    
    
    10
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    411
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    Total net recoveries (charge-offs)
    
    
    137
    
    
    
    (3,143
    )
    
    
    (471
    )
    
    
    (350
    )
    
    
    (2,903
    )Provision (credit) for loan losses
    
    
    (473
    )
    
    
    2,462
    
    
    
    1,803
    
    
    
    945
    
    
    
    3,050Balance at December 31
    
    $
    2,736
    
    
    $
    3,072
    
    
    $
    3,753
    
    
    $
    2,421
    
    
    $
    1,826Ratio of net recoveries
(charge-offs) during the period
to average loans outstanding
during the period
    
    
    0.05
    %
    
    
    (1.14
    )%
    
    
    (0.16
    )%
    
    
    (0.12
    )%
    
    
    (1.03
    )%
 Management believes the allowance for loan losses is adequate to absorb probable loan losses
and that the policies and procedures in place to identify and monitor loans for potential losses
are satisfactory. 9




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##### Table of Contents



Allocation of the Allowance for Loan Losses Presented below is an analysis of the composition of the allowance for loan losses (in
thousands of dollars) and percent of loans in each category to total loans: 2004
    
    
    2003
    
    
    2002% of loans
    
    
    % of loans
    
    
    % of loansin each
    
    
    in each
    
    
    in eachcategory
    
    
    category
    
    
    categoryto total
    
    
    to total
    
    
    to totalAmount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loansCommercial loans
    
    $
    867
    
    
    
    12.48
    %
    
    $
    980
    
    
    
    13.04
    %
    
    $
    969
    
    
    
    11.47
    %Real estate loans:Construction and land
    
    
    927
    
    
    
    11.29
    %
    
    
    1,089
    
    
    
    12.54
    %
    
    
    1,917
    
    
    
    12.88
    %Commercial
    
    
    280
    
    
    
    29.29
    %
    
    
    217
    
    
    
    29.60
    %
    
    
    270
    
    
    
    28.14
    %Residential
    
    
    581
    
    
    
    43.87
    %
    
    
    664
    
    
    
    41.45
    %
    
    
    367
    
    
    
    44.16
    %Consumer and other loans
    
    
    81
    
    
    
    3.07
    %
    
    
    122
    
    
    
    3.37
    %
    
    
    230
    
    
    
    3.35
    %Total
    
    $
    2,736
    
    
    
    100.0
    %
    
    $
    3,072
    
    
    
    100.0
    %
    
    $
    3,753
    
    
    
    100.0
    %
 2001
    
    
    2000% of loans
    
    
    % of loansin each
    
    
    in eachcategory
    
    
    categoryto total
    
    
    to totalAmount
    
    
    loans
    
    
    Amount
    
    
    loansCommercial loans
    
    $
    302
    
    
    
    9.43
    %
    
    $
    440
    
    
    
    6.96
    %Real estate loans
Construction and land
    
    
    1,077
    
    
    
    12.58
    %
    
    
    325
    
    
    
    13.54
    %Commercial
    
    
    580
    
    
    
    27.15
    %
    
    
    400
    
    
    
    24.14
    %Residential
    
    
    375
    
    
    
    47.17
    %
    
    
    495
    
    
    
    50.90
    %Consumer and other loans
    
    
    87
    
    
    
    3.67
    %
    
    
    136
    
    
    
    4.46
    %Total
    
    $
    2,421
    
    
    
    100.0
    %
    
    $
    1,826
    
    
    
    100.0
    %
 The allowance for loan losses in each category of loans have changed for the years 2000
through 2004 reflecting the changes in the types of loans that the Company was originating, the
degree of risk associated with these loans and the performance of specific loans. 10




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##### Table of Contents



DEPOSITS AND BORROWINGS Deposits The following table shows the average amount of deposits and average rate of interest paid
thereon for the years indicated. 2004

    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average(Dollars in thousands)
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateBalance at December 31:Noninterest-bearing
deposits
    
    $
    23,550
    
    
    
    
    
    
    $
    23,195
    
    
    
    
    
    
    $
    20,911
    
    
    
    Money market deposit
accounts
    
    
    24,046
    
    
    
    1.38
    %
    
    
    26,057
    
    
    
    1.57
    %
    
    
    24,260
    
    
    
    2.49
    %Savings deposits
    
    
    18,372
    
    
    
    0.66
    %
    
    
    18,392
    
    
    
    0.82
    %
    
    
    17,201
    
    
    
    1.38
    %NOW accounts
    
    
    24,325
    
    
    
    0.48
    %
    
    
    22,565
    
    
    
    0.73
    %
    
    
    21,332
    
    
    
    1.14
    %Certificate of deposit and
other time deposits
    
    
    140,922
    
    
    
    3.02
    %
    
    
    153,868
    
    
    
    3.28
    %
    
    
    159,362
    
    
    
    4.17
    %Total deposits
    
    $
    231,215
    
    
    
    2.09
    %
    
    $
    244,077
    
    
    
    2.36
    %
    
    $
    243,066
    
    
    
    3.18
    %
 As of December 31, 2004, certificates of deposit and other time deposits (including brokered
deposits) of $100,000 or more mature as follows: Maturing(Dollars in thousands)3 Months
    
    
    3-6
    
    
    6-12
    
    
    Over 12or less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    TotalCertificates of deposit and other
time deposits
    
    $
    12,777
    
    
    $
    2,191
    
    
    $
    6,487
    
    
    $
    14,161
    
    
    $
    35,616Per cent
    
    
    35.87
    %
    
    
    6.15
    %
    
    
    18.22
    %
    
    
    39.76
    %
    
    
    100.00
    %
 RETURN ON EQUITY AND ASSETS 2004
    
    
    2003
    
    
    2002Return on assets (net income divided by
average total assets)
    
    
    0.88
    %
    
    
    0.47
    %
    
    
    0.55
    %Return on equity (net income divided by
average equity)
    
    
    8.77
    %
    
    
    5.00
    %
    
    
    6.11
    %Dividend payout ratio (dividends per
share divided by net income per share)
    
    
    20.20
    %
    
    
    36.90
    %
    
    
    24.06
    %Equity to assets ratio (average equity
divided by average total assets)
    
    
    10.08
    %
    
    
    9.29
    %
    
    
    8.99
    %
 Subsidiary Activities At December 31, 2004, the Bank had a wholly-owned service corporation, CSL Service Corporation
(CSL), an Illinois chartered company. During 2004 CSL sold its interest in a joint venture real
estate development (Williamsburg Place LLC). At December 31, 2004 CSL was inactive. 11




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##### Table of Contents



Personnel As of December 31, 2004, the Company had 74 authorized full-time employee positions and 22
authorized part-time employee positions. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees to be good. REGULATION AND SUPERVISION General The Company, as a savings and loan holding company, is required to file certain reports with,
and otherwise comply with the rules and regulations of the OTS under the Home Owners Loan Act, as
amended (the HOLA). The Bank is an Illinois state chartered savings bank and its deposit accounts are insured up
to applicable limits by the FDIC under the Savings Association Insurance Fund (the SAIF). The
Bank is subject to extensive regulation by the Illinois Department of Financial and Professional
Regulation (the IDFPR), as its chartering authority, and by the FDIC, as deposit insurer. The
Bank must file reports with the IDFPR and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approval prior to entering into certain transactions
such as establishing branches and mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the IDFPR and the FDIC to assess the Banks compliance with
various regulatory requirements and its financial condition. This regulation and supervision
establishes a framework of activities in which a savings bank can engage and is intended primarily
for the protection of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities discretion in connection with their supervisory and enforcement activities
and examination policies, including policies with respect to classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the IDFPR, the FDIC or through legislation, could have a material adverse
impact on the Company and the Bank and their operations and stockholders. The Holding Company will
also be required to file certain reports with and otherwise comply with the rules and regulations,
of the OTS, the IDFPR and the Securities and Exchange Commission (the SEC) under the federal
securities laws. Certain of the regulatory requirements applicable to the Bank and to the Holding
Company are referred to below or elsewhere herein. However, the description of such requirements is
not exhaustive and it does not purport to be a complete description of the applicable laws and
regulations. The IDFPR has established a schedule for the assessment of supervisory fees upon all
Illinois savings banks to fund the operations of the IDFPR. These supervisory fees are computed on
the basis of each savings banks total assets (including consolidated subsidiaries) and are payable
at the end of each calendar quarter. A schedule of fees has also been established for certain
filings made by Illinois savings banks with the IDFPR. The IDFPR also assesses fees for
examinations conducted by the IDFPRs staff, based upon the number of hours spent by the IDFPRs
staff performing the examination. During the year ended December 31, 2004, the Bank paid
approximately $72,000 in supervisory fees and expenses. Bank Regulations Capital Requirements.Under the Illinois Savings Bank Act (the ISBA) and the regulations of
the IDFPR, an Illinois savings bank must maintain a minimum capital at a level not less than that
required to maintain insurance of deposits by the FDIC. The IDFPR has the authority to require an
Illinois savings bank to maintain a higher level of capital if deemed necessary based on the
savings banks financial condition, history, management or earnings prospects. 12




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##### Table of Contents



The FDIC has also adopted risk-based capital guidelines to which the Bank is subject. The Bank
is required to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher
levels of capital being required for the categories perceived as representing greater risk. The
guidelines divide a savings banks capital into two tiers. The first tier (Tier I) includes
common equity, retained earnings, certain non-cumulative perpetual preferred stock (excluding
auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and purchased credit card
relationships subject to certain limitations). Supplementary (Tier II) capital includes, among
other items, cumulative perpetual and long-term limited life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan
and lease losses, subject to certain limitations, less required deductions. Savings banks are
required to maintain a total risk-based capital ratio of 8%, of which at least 4% must be Tier I
capital. In addition, the FDIC has established regulations prescribing a minimum Tier I leverage ratio.
These regulations provide for a minimum Tier I leverage ratio of 3% for banks that meet certain
specified criteria, including that they have the highest examination rating and are not
experiencing or anticipating significant growth. All other banks are required to maintain a Tier I
leverage ratio of at least 4%. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant. The following is a summary of the Banks regulatory capital at December 31, 2004: Total Capital to Risk-Weighted Assets
    
    
    16.7
    %Tier I Leverage Ratio
    
    
    9.9
    %Tier I to Risk-Weighted Assets
    
    
    15.4
    %
 The FDIC, along with other federal banking agencies, adopted a regulation providing that the
agencies will take account of the exposure of a banks capital and economic value to changes in
interest rate risk in assessing a banks capital adequacy. Standards for Safety and Soundness.The federal banking agencies have adopted Interagency
Guidelines Establishing Standards for Safety and Soundness. The Guidelines set forth safety and
soundness standards in various areas such as internal controls, audit, systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and quality, earnings and compensation
that the banking agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance with the standard. Lending Restriction.The Bank is prohibited by the ISBA from making secured or unsecured loans
for business, commercial or agricultural purposes representing in the aggregate an amount in excess
of 15% of its total assets, unless the OBRE authorizes in writing a higher percentage limit for
such loans upon the request of an institution. The Bank is also subject to a loans-to-one borrower limitation. Under the ISBA, the total
loans and extensions of credit by the Bank to any person outstanding at one time must not exceed
the greater of $500,000 or 25% of the Banks total capital plus general loan loss reserves. In
addition, the Bank may make loans in an amount equal to an additional 10% of the Banks capital
plus general loan loss reserves if secured by readily marketable collateral. Dividend Limitations.Under the ISBA, dividends may only be declared when the total capital of
the Bank is greater than that required by the ISBA. Dividends may be paid by the Bank out of its
net profits. The written approval of the IDFPR must be obtained, however, before a savings bank
having total capital of less than 6% of total assets may declare dividends in any year in an amount in excess of 50% of its net
profits for that year. A savings bank may not declare dividends in excess of its net profits in any
year without the approval of the IDFPR. Finally, the Bank will be unable to pay dividends in an
amount which would reduce its capital below the greater of (i) the amount required by the FDIC
capital regulations or otherwise specified by the FDIC, (ii) the amount required by the IDFPR or
(iii) the amount required for the liquidation 13




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##### Table of Contents



account established by the Bank in connection with
the Banks conversion to stock form. The IDFPR and the FDIC also have the authority to prohibit the
payment of any dividends by the Bank if the IDFPR or the FDIC determines that the distribution
would constitute an unsafe or unsound practice. Prompt Corrective Regulatory Action.Federal law requires, among other things, that the
federal bank regulatory authorities take prompt corrective action with respect to banks that do
not meet minimum capital requirements. For these purposes, the law establishes various capital
categories. The FDIC has adopted regulations to implement the prompt corrective action legislation.
Under the regulations, an institution is deemed to be undercapitalized if it has a total
risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or
generally a leverage ratio of less than 4%. An institution is deemed to be significantly
undercapitalized if it has a risk-based capital ratio of less than 6%, a Tier I risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be
critically undercapitalized if it has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2%. Undercapitalized banks are subject to growth, capital distribution (including dividend) and
other limitations and are required to submit a capital restoration plan. A banks compliance with
such plan must be guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5% of the Banks total assets when deemed undercapitalized or the
amount necessary to achieve the status of adequately capitalized. If an undercapitalized bank
fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized banks are subject to one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or dismiss directors or officers. Critically undercapitalized
institutions also may not make any payment of principal or interest on certain subordinated debt or
extend credit for a highly leveraged transaction or enter into any material transactions outside
the ordinary course of business. In addition, subject to a narrow exception, the appointment of a
receiver or conservator is required for a critically undercapitalized institution within 270 days
after it obtains such status. Transactions with Affiliates.Transactions between depository institutions and their
affiliates are governed by federal law. An affiliate of a savings bank is any company or entity
that controls, is controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding company of a savings
bank and any companies which are controlled by such parent holding company are affiliates of the
savings bank. Generally, the extent to which the savings bank or its subsidiaries may engage in
covered transactions, including loans, with any one affiliate is limited to 10% of such savings
banks capital stock and surplus, and there is an aggregate limit on all such transactions with all
affiliates of 20% of such capital stock and surplus. Federal law also establishes specific
collateral requirements for loans or extensions of credit to, or guarantees or acceptances on
letters of credit issued on behalf of an affiliate. Covered transactions and a broad list of other
specified transactions with an affiliate also must be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with non-affiliates. Federal law also restricts a savings bank with respect to loans to directors, executive
officers, and principal stockholders. Loans to directors, executive officers and stockholders who
control, directly or indirectly, 10% or more of voting securities of a savings bank, and certain
related interests of any of the foregoing, may not exceed the savings banks total capital and
surplus. Loans to directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons, except that such insiders may
receive preferential loans made pursuant to a compensation program that is widely available to the
Banks employees and does not give preference to the insider over other employees. Federal law also
requires that the board of directors approve loans to insiders exceeding a certain amount. There
are additional limitations on loans to executive officers. Enforcement.The IDFPR and the FDIC have extensive enforcement authority over
Illinois-chartered savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue 14




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##### Table of Contents



cease and desist orders and to
remove directors and officers. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and to unsafe or unsound practices. The IDFPR is given authority by the ISBA to appoint a conservator or receiver for an Illinois
savings bank under certain circumstances including, but not limited to, insolvency, a substantial
dissipation of assets due to violation of law, regulation or order of the IDFPR or an unsafe or
unsound practice or the likelihood that the savings bank will be unable to meet the demands of
depositors or pay its obligations in the normal course of business. The FDIC also has authority
under federal law to appoint a conservator or receiver for an insured savings bank under certain
circumstances. Insurance of Deposit Accounts.Deposits of the Bank are presently insured by the SAIF. The
FDIC maintains a risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of the three subcategories based on examination
ratings and other supervisory information. An institutions assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points of assessable deposits for the
healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make
payments on bonds issued in the late 1980s by the Financing Corporation (FICO) to recapitalize
the predecessor to the SAIF. Payments toward the FICO bonds amounted to $36,000 in 2004. The FDIC has authority to increase insurance assessments. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses and results of
operations of the Bank. Management cannot predict what insurance assessment rates will be in the
future. Insurance of deposits may be terminated by the FDIC upon finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The
Bank does not know of any practice, condition or violation that might lead to termination of
deposit insurance. Federal Reserve System.The Federal Reserve Board regulations require depository institutions
to maintain non-interest earning reserves against their transaction accounts (primarily NOW and
regular checking accounts). The Federal Reserve Board regulations generally require that reserves
be maintained against aggregate transaction accounts as follows: for the first $7.0 million of net
transaction accounts there is no reserve; for net transaction accounts totaling over $7.0 million
and up to $47.6 million the reserve requirement is 3%; and for net transaction accounts greater
than $47.6 million, the reserve requirement is $1.218 million plus 10% against that portion of
total transaction accounts in excess of $47.6 million. The above dollar amounts and percentages are
subject to periodic adjustment by the Federal Reserve Board. The Bank is in compliance with the
foregoing requirement. Federal Home Loan Bank System.The Bank is a member of the Federal Home Loan Bank (the FHLB)
system, which consists of 12 regional FHLBs. The FHLBs provides a central credit facility primarily
for member institutions. The Bank, as a member of the FHLB of Chicago, is required to acquire and hold shares of capital stock in an amount at
least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the
FHLB, whichever is greater. The Bank is in compliance with this requirement with an investment in
FHLB stock at December 31, 2004 of $16,152,500. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could result in the FHLBs imposing a higher rate
of interest on advances to their members. For the years ended December 31, 2004, 2003 and 2002,
dividends from the FHLB to the Bank amounted to approximately $921,000, $686,000, and $242,000,
respectively. 15




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##### Table of Contents



Holding Company Regulation .Federal law allows a state savings bank that qualifies as a
qualified thrift lender to elect to be treated as a savings association for purposes of the
savings and loan holding company provisions of federal law. Such election results in its holding
company being regulated as a savings and loan holding company by the OTS rather than as a bank
holding company by the Federal Reserve Board. The Bank has made such election and has received
approval from the OTS for the Company to become a savings and loan holding company. The Company has
registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Additionally, the Bank is required to notify the OTS at least 30 days before declaring any dividend
to the Company. Because the Bank is chartered under Illinois law, the Company is also subject to
registration with and regulation by the IDFPR. As a unitary savings and loan company, the Company is generally not restricted under existing
laws as to the types of business activities in which it may engage. The Gramm-Leach-Bliley Act of
1999 provides that no company may acquire control of a savings association after May 4, 1999,
unless it engages only in the financial activities permitted for financial holding companies under
the law and for multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage
in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority
for activities with respect to unitary savings and loan holding companies existing prior to May 4,
1999, such as the Company, so long as the Bank continues to comply with the qualified thrift lender
test. Upon any non-supervisory acquisition by the Company of another savings association as a
separate subsidiary, the Company would become a multiple savings and loan holding company and would
be subject to extensive limitations on the types of business activities in which it could engage.
Federal law limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, subject to prior approval of the OTS, and to
other activities authorized by OTS regulation. Multiple savings and loan holding companies are
prohibited from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary
company engaged in activities other than those permitted by federal law. Federal law prohibits a savings and loan holding company, directly or indirectly, or through
one or more subsidiaries, from merging with or acquiring more than 5% of the voting stock of
another savings institution or holding company thereof without prior written approval of the OTS.
In evaluating applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the convenience and
needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings
and loan holding company controlling savings institutions in more than one state, except: (i)
interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition
of a savings institution in another state if the laws of the state of the target savings institution permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan holding company
acquisitions. In order to elect and continue to be regulated as a savings and loan holding company by the
OTS, the Bank must continue to qualify as a qualified thrift lender. This requires the Bank to
maintain compliance with the test for a domestic building and loan association, as defined in the
Internal Revenue Code, or with a Qualified Thrift Lender Test. Under the Test, a savings
association is required to maintain at least 65% of its portfolio assets (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii)
the value of property used to conduct business) in certain qualified thrift investments
(including residential mortgages and related investments, certain mortgage-backed and related
securities, and credit card loans, student loans and small business loans) in at least 9 months out
of each 12 month period. A holding company of a savings institution that fails to qualify as a
qualified thrift lender must either convert to 16




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##### Table of Contents



a bank holding company and thereby become subject to
the regulation and supervision of the Federal Reserve Board or operate under certain restrictions.
As of December 31, 2003, the Bank maintained in excess of 65% of its portfolio assets in qualified
thrift investments. The Bank also met the test in each of the prior 12 months and, therefore, is a
qualified thrift lender. FEDERAL AND STATE INCOME TAXATION Federal Taxation General. The Company and its affiliates file a consolidated federal income tax return. To the
extent a member of the consolidated group incurs a loss which is utilized to reduce the
consolidated groups federal tax liability, that member will be reimbursed by those members that
would have incurred federal tax liability if not for the members tax loss. Amounts provided for income tax expense are based upon income reported for financial statement
purposes and do not necessarily represent amounts currently payable to federal or other tax
authorities. Deferred income taxes, which principally arise from the temporary differences related
to the recognition of certain income and expense items for financial reporting purposes and the
period in which they affect federal and state taxable income, are included in the amounts provided
for income taxes. Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the 1996 Act), which was
enacted on August 20, 1996, made significant changes to provisions of the Internal Revenue Code of
1986 (the Code) relating to a savings institutions use of bad debt reserves for federal income
tax purposes and requires such institutions to recapture (i.e. include in income) certain portions
of their accumulated bad debt reserves. Prior to the enactment of the 1996 Act, the Bank was
permitted to establish tax reserves for bad debts and to make annual additions thereto, which
additions, within specified formula limits, were deducted in arriving at the Banks taxable income.
The Banks deduction with respect to qualifying loans, which are generally loans secured by
certain interests in real property, could be computed using an amount based on a six-year moving
average of the Banks actual loss experience (the Experience Method), or a percentage equal to 8%
of the Banks taxable income (the PTI Method), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to the non-qualifying
reserve. The Banks deduction with respect to non-qualifying loans was required to be computed
under the Experience Method. The 1996 Act.Under the 1996 Act, for its current and future taxable years as a Small Bank,
the Bank is permitted to make additions to its bad debt reserves for Federal income tax purposes
under the Experience Method based on total loans. However, the Bank is required to recapture (i.e.
include in income) over a six-year period the excess of the balance of its bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As of December 31,
1995, the Banks bad debt reserve exceeded the balance of such reserve as of December 31, 1987 by $326,713. This excess has been fully recaptured into taxable income as of
December 31, 2004. Distributions.Under the 1996 Act, if the Bank makes non-dividend distributions to the
Company, such distributions will be considered to have been made from the Banks unrecaptured bad
debt reserves (including the balance of its reserves as of December 31, 1987) to the extent
thereof, and an amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Banks income. In general, the term non-dividend distributions
is defined as distributions in excess of the Banks current and accumulated earnings and profits,
as calculated for federal income tax purposes, distributions in redemption of stock, and
distributions in partial or complete liquidation. Dividends paid out of the Banks current or
accumulated earnings and profits will not cause this pre-1988 reserve to be included in the Banks
income. The amount of additional taxable income created by a non-dividend distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if the Bank makes a non-dividend distribution to the Company, approximately 65%
of the amount of such distribution (but not in excess of the amount of such reserves) would be
included in income for federal income tax purposes, 17




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##### Table of Contents



assuming a 35% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of
its bad debt reserves. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of corporations. The
corporate dividends received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Company and the Bank will not file a consolidated tax
return, except that if the Company owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividend received may be excluded. State Taxation Illinois State Taxation. The Company and its subsidiaries are required to file Illinois income
tax returns and pay tax at an effective tax rate of approximately 4.7% on Illinois taxable income,
assuming a 35% Federal income tax rate. For these purposes, Illinois taxable income, generally
means federal taxable income subject to certain modifications, the primary one of which is the
exclusion of interest income from United States Treasury obligations. The Company and its subsidiaries file one combined corporation return for State of Illinois
income tax purposes. Delaware State Taxation.As a Delaware holding company not earning income in Delaware, the
Company is exempted from Delaware Corporate income tax but is required to file an annual report
with and pay an annual franchise tax to the State of Delaware. Critical Accounting Policies The accounting and reporting policies of the Company are in accordance with accounting
principles generally accepted in the United States and conform to general practices within the
banking industry. The Companys significant accounting policies are described in detail in the
notes to the Companys consolidated financial statements for the year ended December 31, 2004. The
preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions. The financial
position and results of operations can be affected by these estimates and assumptions and are
integral to the understanding of reported results. Critical accounting policies are those policies
that management believes are the most important to the portrayal of the Companys financial
condition and results, and they require management to make estimates that are difficult,
subjective, or complex. Allowance for Credit Losses- The allowance for credit losses provides coverage for probable
losses inherent in the Companys loan portfolio. Management evaluates the adequacy of the allowance
for credit losses each quarter based on changes, if any, in underwriting activities, the loan
portfolio composition (including product mix and geographic, industry or customer-specific
concentrations), trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant management estimates.
Many factors can affect managements estimates of specific and expected losses, including
volatility of default probabilities, rating migrations, loss severity and economic and political
conditions. The allowance is increased through provisions charged to operating earnings and reduced
by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of
the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual
credit relationships and an analysis of the migration of commercial loans and actual loss
experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan
mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical
losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance
for credit losses relating to impaired loans is based on the loans observable market price, the
collateral for certain collateral-dependent loans, or the discounted cash flows using the loans
effective interest rate. Regardless of the extent of the Companys analysis of customer performance, portfolio trends
or risk management processes, certain inherent but undetected losses 18




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##### Table of Contents



are probable within the loan
portfolio. This is due to several factors including inherent delays in obtaining information
regarding a customers financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the interpretation of
economic trends. Volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogeneous credits and the sensitivity of
assumptions utilized to establish allowances for homogenous groups of loans are among other
factors. The Company estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Companys evaluation of imprecision risk associated
with the commercial and consumer allowance levels and the estimated impact of the current economic
environment. Mortgage Servicing Rights-Mortgage servicing rights (MSRs) associated with loans originated
and sold, where servicing is retained, are capitalized and included in other intangible assets in
the consolidated balance sheet. The value of the capitalized servicing rights represents the
present value of the future servicing fees arising from the right to service loans in the
portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent
impairment tests. The methodology used to determine the valuation of MSRs requires the development
and use of a number of estimates, including anticipated principal amortization and prepayments of
that principal balance. Events that may significantly affect the estimates used are changes in
interest rates, mortgage loan prepayment speeds and the payment performance of the underlying
loans. The carrying value of the MSRs is periodically reviewed for impairment based on a
determination of fair value. For purposes of measuring impairment, the servicing rights are
compared to a valuation prepared based on a discounted cash flow methodology, utilizing current
prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation
allowance and is recorded as amortization of intangible assets. Forward Looking Statements This annual report on Form 10-K (including certain information incorporated by reference)
contains forward-looking statements, including certain plans, expectations, goals and projections,
which are subject to numerous assumptions, risks and uncertainties. These forward-looking
statements are identified by the use of terms such as believes, anticipates, estimates,
expects, projects or similar words. Actual results could differ materially from those contained
or implied by such statements for a variety of factors including, but not limited to:
 changes in general and/or local economic conditions; movements in interest rates; competitive
pressures on product pricing and services; success and timing of business strategies, and; the
nature, extent and timing of governmental actions and reforms. These risks and uncertainties should
be considered in evaluating forward-looking statements and undue reliance should not be placed on
such statements. 
 Item 2 Properties The Bank conducts its business through an executive and full-service office located in
Bloomington and four other full service branch offices. The Company believes that the Banks
current facilities are adequate to meet the present and immediately foreseeable needs of the Bank
and the Company. 19




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##### Table of Contents



Original Year
    
    
    Net Book Value atLocation
    
    Leased or Owned
    
    
    Leased or Acquired
    
    
    December 31, 2004
    
    
    Deposits per Office(Dollars in thousands)Executive Branch Office:2101 North Veterans Parkway*Bloomington, Illinois 61704
    
    Owned
    
    
    1997
    
    
    $
    3,007
    
    
    $
    60,713Branch Offices:301 Broadway*Normal, Illinois 61761
    
    Leased
    
    
    1963
    
    
    
    -0-
    
    
    
    46,1082402 E. Washington*
    
    Owned
    
    
    1980
    
    
    
    674
    
    
    
    38,073Bloomington, Illinois 617041722 Hamilton Road*
    
    Owned
    
    
    1995
    
    
    
    1,165
    
    
    
    22,689Bloomington, Illinois 61704115 N. Third Street*
    
    Owned
    
    
    1981
    
    
    
    562
    
    
    
    58,516Fairbury, Illinois 61739Total
    
    
    
    
    
    
    
    
    
    $
    5,408
    
    
    $
    226,099
    None of the properties owned by the Company are subject to any encumbrance. 20




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##### Table of Contents



Item 3 Legal Proceedings The registrant is not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the registrants financial condition or
results of operations. 
 Item 4 Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of 2004 to a vote of security holders,
through the solicitation of proxies or otherwise. 
 SUPPLEMENTAL
INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions with the Company and subsidiary bank of all executive officers of the
Company are listed below: Officers with the Company
    
    Principal OccupationName and Age
    
    And Subsidiary Bank
    
    During Past Five YearsC. William Landefeld, 65
    
    President and Chief
Executive Officer,
Citizens First
Financial Corp.;
President and Chief
Executive Officer,
Citizens Savings
Bank.
    
    President and Chief
Executive Officer,
Citizens First
Financial Corp. since
1996; President and
Chief Executive
Officer, Citizens
Savings Bank since
1987.Dallas G. Smiley, 58
    
    Executive Vice
President, Secretary,
Treasurer and Chief
Financial Officer,
Citizens First
Financial Corp.;
Executive Vice
President, Secretary,
Treasurer and Chief
Financial Officer,
Citizens Savings
Bank.
    
    Executive Vice
President, Secretary,
Treasurer and Chief
Financial Officer,
Citizens First
Financial Corp. since
2004, Executive Vice
President, Secretary,
Treasurer and Chief
Financial Officer,
Citizens Savings Bank
since 2004, Senior
Vice President,
Secretary, Treasurer
and Chief Financial
Officer, Citizens
First Financial Corp.
since 2003, Senior
Vice President,
Secretary, Treasurer
and Chief Financial
Officer, Citizens
Savings Bank since
2003, Senior Vice
President, Treasurer
and Chief Financial
Officer, Citizens
First Financial Corp.
since 1996, Senior
Vice President,
Treasurer and Chief
Financial Officer,
Citizens Savings Bank
since 1995, Vice
President, Treasurer
and Chief Financial
Officer, Citizens
Savings Bank
1987-1995.
 21




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##### Table of Contents



PART II 
 Item 5 Market for the Registrants Common Equity and Related Stockholder Matters Citizens First Financial Corp.s common stock trades on NASDAQ under the symbol CFSB. At
December 31, 2004, 1,550,473 shares of the Companys common stock were held of record by 351
persons or entities, not including the number of persons or entities holding stock in nominee or
street name through various brokers or banks. Per Share 2004High
    
    
    Low
    
    
    Dividends DeclaredFirst Quarter
    
    
    $
    26.75
    
    
    
    $
    20.00
    
    
    
    $
    0.10Second Quarter
    
    
    $
    25.50
    
    
    
    $
    22.55
    
    
    
    $
    0.10Third Quarter
    
    
    $
    24.50
    
    
    
    $
    22.04
    
    
    
    $
    0.10Fourth Quarter
    
    
    $
    33.49
    
    
    
    $
    23.50
    
    
    
    $
    0.102003High
    
    
    Low
    
    
    Dividends DeclaredFirst Quarter
    
    
    $
    25.59
    
    
    
    $
    21.80
    
    
    
    $
    0.10Second Quarter
    
    
    $
    25.00
    
    
    
    $
    22.15
    
    
    
    $
    0.10Third Quarter
    
    
    $
    25.00
    
    
    
    $
    22.25
    
    
    
    $
    0.10Fourth Quarter
    
    
    $
    28.50
    
    
    
    $
    24.50
    
    
    
    $
    0.10
 Citizens First Financial Corp. did not repurchase any shares of its common stock during the quarter
ended December 31, 2004. 22




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##### Table of Contents



Item 6 Selected Financial Data Selected Financial Data(in thousands, except share data) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Summary of OperationsInterest income
    
    $
    17,373
    
    
    $
    19,533
    
    
    $
    22,257
    
    
    $
    24,641
    
    
    $
    25,049Interest expense
    
    
    6,676
    
    
    
    8,861
    
    
    
    11,316
    
    
    
    14,713
    
    
    
    14,348Net interest income
    
    
    10,697
    
    
    
    10,672
    
    
    
    10,941
    
    
    
    9,928
    
    
    
    10,701Provision (credit) for loan
losses
    
    
    (473
    )
    
    
    2,462
    
    
    
    1,803
    
    
    
    945
    
    
    
    3,050Noninterest income
    
    
    2,607
    
    
    
    3,259
    
    
    
    2,430
    
    
    
    2,309
    
    
    
    3,857Noninterest expense
    
    
    9,063
    
    
    
    8,890
    
    
    
    8,298
    
    
    
    7,835
    
    
    
    8,399Income before income tax
    
    
    4,714
    
    
    
    2,579
    
    
    
    3,270
    
    
    
    3,457
    
    
    
    3,109Income tax expense
    
    
    1,727
    
    
    
    943
    
    
    
    1,340
    
    
    
    1,375
    
    
    
    1,279Net income
    
    $
    2,987
    
    
    $
    1,636
    
    
    $
    1,930
    
    
    $
    2,082
    
    
    $
    1,830Per ShareBasic earnings per share
    
    $
    1.98
    
    
    $
    1.11
    
    
    $
    1.31
    
    
    $
    1.39
    
    
    $
    1.00Diluted earnings per share
    
    $
    1.87
    
    
    $
    1.01
    
    
    $
    1.21
    
    
    $
    1.32
    
    
    $
    0.97Cash dividends paid
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.31
    
    
    $
    0.23
    
    
    $
    0.20Book value at December 31
    
    $
    23.25
    
    
    $
    22.00
    
    
    $
    21.92
    
    
    $
    20.41
    
    
    $
    18.69Market value at December 31
    
    $
    32.49
    
    
    $
    25.50
    
    
    $
    25.30
    
    
    $
    17.70
    
    
    $
    11.88Ratios Based on Net IncomeReturn on average stockholders
equity
    
    
    8.77
    %
    
    
    5.00
    %
    
    
    6.11
    %
    
    
    6.84
    %
    
    
    5.24
    %Return on average assets
    
    
    0.88
    %
    
    
    0.47
    %
    
    
    0.55
    %
    
    
    0.63
    %
    
    
    0.56
    %Net interest margin on averageearnings assets
    
    
    3.35
    %
    
    
    3.26
    %
    
    
    3.27
    %
    
    
    3.16
    %
    
    
    3.52
    %Dividend payout ratio
    
    
    20.20
    %
    
    
    36.90
    %
    
    
    24.06
    %
    
    
    16.53
    %
    
    
    20.52
    %Year-End Balance Sheet DataTotal assets
    
    $
    328,266
    
    
    $
    349,515
    
    
    $
    357,056
    
    
    $
    339,934
    
    
    $
    329,890Net loans (1)
    
    
    235,094
    
    
    
    279,781
    
    
    
    284,937
    
    
    
    293,753
    
    
    
    284,983Securities
    
    
    26,055
    
    
    
    20,746
    
    
    
    20,712
    
    
    
    15,686
    
    
    
    15,054Deposits
    
    
    231,009
    
    
    
    250,013
    
    
    
    249,163
    
    
    
    236,643
    
    
    
    228,115Other borrowings
    
    
    58,675
    
    
    
    63,975
    
    
    
    72,825
    
    
    
    69,643
    
    
    
    67,985Total stockholders equity
    
    
    36,047
    
    
    
    32,992
    
    
    
    31,894
    
    
    
    30,912
    
    
    
    29,307Average equity to average assets
    
    
    10.08
    %
    
    
    9.29
    %
    
    
    8.99
    %
    
    
    9.16
    %
    
    
    10.76
    %
    23




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##### Table of Contents



Item 7
    Managements Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of our financial condition at December 31, 2004 and December 31, 2003
and our results of operations for the years ended December 31, 2004, 2003 and 2002. The purpose of
this discussion is to focus on information about our financial condition and results of operations,
which is not otherwise apparent from the consolidated financial statements. The following
discussion should be read along with the consolidated financial statements and the related notes
included herein. OVERVIEW General Citizens First Financial Corp. (the Company) is the thrift holding company for Citizens Savings
Bank (the Bank). The Bank was originally chartered in 1888 by the State of Illinois and in 1989
became a federally chartered savings bank. In April 1999, the Bank was converted from a federally
chartered savings bank to an Illinois state savings bank. The Banks principal business consists of
the acceptance of retail deposits from the general public in the area surrounding its main and
branch offices and the investment of these deposits, together with funds generated from operations
and borrowings into loans and investment securities. The Bank originates one-to-four family
residential mortgages, commercial, multi-family, construction and land, commercial real estate,
agricultural, consumer and other loans. The Bank has a wholly-owned service corporation, CSL
Service Corporation (CSL), which is an Illinois-chartered corporation that had invested in
Williamsburg LLC (Williamsburg), a real estate development joint venture. CSL, who was a 50%
owner of Williamsburg, sold its interest in May 2004. The accounts of Williamsburg are consolidated
into the Companys financial statements. In November 2004, the Company entered into an Agreement and Plan of Merger with Main Street Trust,
Inc. (Main Street), an Illinois corporation. Main Street Trust, Inc. will acquire all of the
Companys issued and outstanding shares of common stock. Each of the Companys shareholders will
have the option of receiving either 1.1051 shares of Main Streets stock for each share of the
Companys stock or $35.00 of cash for each share of the Companys common stock or a combination of
both. The transaction has been approved by state and federal regulators and is expected to close
in the second quarter of 2005. At a special meeting of shareholders on March 8, 2005 shareholders
approved the merger agreement Diluted earnings per share increased from $1.01 for the year ended December 31, 2003 to $1.87 for
the year ended December 31, 2004, primarily because of decreased losses on foreclosed assets and
provision for loan losses and increased net gain from sale of premises and equipment, offset by
decreased net gains on loan sales. Financial Condition
The $44.7 million decrease in loans, net of allowance for loan losses and loans held for sale were
used primarily to reduce deposits by $19.0 million and long-term debt by $5.3 million, and increase
available-for-sale securities by $5.3 million and cash and cash equivalents by $21.3 million. The decrease in loans, net of allowances for loan losses and loans held for sale was primarily due
to a $14.7 million decrease in commercial real estate loans, $ 13.6 million decrease in residential
real estate portfolio loans, $9.0 million decrease in real estate construction loans and a $7.5
million decrease in commercial and agricultural loans. The decreases were primarily due to a
decrease in loan originations resulting from increased local competition and emphasis by the
Company in 2004 to correct deficiencies noted by the Companys regulators. During January 2004, the Banks Board of Directors entered into a Memorandum of Understanding
(MOU) with the Illinois Office of Banks and Real Estate and the Federal Deposit Insurance
Corporation (Regulators). After meeting the terms of the MOU, in December 2004, the Regulators
terminated the MOU. 24




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##### Table of Contents



Results of Operations
Net income increased from $1.6 million in 2003 to $3.0 million in 2004 primarily because of a $2.9
million reduction in the provision (credit) for loan losses, a $659,000 increase in net gain on
sale of premises and equipment, a $618,000 decrease in net loss on foreclosed assets, offset by a
$1.2 million decrease in net gains on loan sales, a $563,000 increase in salaries and employee
benefits expense and a $541,000 increase in professional fees and other expenses. The decrease in net gains on loan sales was the result of decreased loan sales in 2004 reflecting
the increasing interest rate environment that existed through most of 2004. These higher interest
rates significantly decreased the amount of residential loan refinancing in 2004. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 and DECEMBER 31, 2003 Total assets decreased from $349.5 million at December 31, 2003 to $328.3 million at December 31,
2004. The $21.2 million or 6.1% decrease was primarily due to the decrease in loans, offset by an
increase in interest-bearing deposits and federal funds sold and available for sale securities. Cash and cash equivalents increased from $16.8 million at December 31, 2003 to $38.1 million at
December 31, 2004, an increase of $21.7 million or 126.8%. The increase occurred primarily because
of the decrease of gross loans of $45.2 million, offset by the decreases of $19.0 million in
deposits and $5.3 million in long-term debt. Available for sale securities increased from $20.7 million at December 31, 2003 to $26.1 million at
December 31, 2004, an increase of $5.4 million or 26.1%. The increase was primarily due to the
purchase of $11.3 million of investment securities which was offset by $5.9 million in maturities
and principal paydowns. Loans, net of allowance for loan losses and including mortgage loans held for sale, decreased from
$279.8 million at December 31, 2003 to $235.1 million at December 31, 2004, a decrease of $44.7
million or 16.0%. The decrease was primarily due to decreases of $14.7 million in commercial real
estate loans, $13.6 million in residential real estate loans, $9.0 million in real estate
construction loans and $7.5 million in commercial and agricultural loans. The decreases were due to
loan repayments. The Company sells primarily fixed rate residential loans in the secondary market
(primarily to the Federal Home Loan Mortgage Corporation) as a source of income from gains on sale
and servicing fees and as a means of controlling interest rate risk. The Company sold $6.9 million
in loans during 2004. The Company serviced $83.5 million and $96.1 million at December 31, 2004 and
December 31, 2003, respectively. The Company has a significant concentration in construction and commercial real estate loans
related to the real estate market in Bloomington-Normal, Illinois. Management believes that due to
the continued strength of this market, this concentration does not pose a significant risk to the
Company. The allowance for loan losses is established through a provision for loan losses based on
managements evaluation of the risks inherent in the loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and can be estimated based on
information available to management at such time. While management believes the allowance for loan
losses is sufficient to cover future loan losses inherent in its loan portfolio at this time, no
assurances can be given that the level of the allowance for loan losses will be sufficient to cover
future loan losses incurred or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance for loan losses. The
allowance is based upon a number of factors, including asset classification, economic trends,
industry experience and trends, industry and geographic concentrations, estimated collateral value,
managements assessments of the credit risk inherent in the portfolio, historical loan loss
experience, and the Companys underwriting policies. Management will continue to monitor and modify the allowance for loan losses as conditions dictate. Various
regulatory agencies, as an integral part of their examination process, periodically review the
allowance for loan 25




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##### Table of Contents



losses. These agencies may require additional valuation allowances, based on
their judgments of the information available at the time of the examination. The Companys policy is to charge off loans when it is determined that they are no longer
collectible. The policy for loans secured by real estate, which comprise the majority of the loan
portfolio, is to establish loss reserves in accordance with the loan classification process, based
on accounting principles generally accepted in the United States of America. The Companys policy
is to obtain an appraisal or evaluation on all real estate acquired through foreclosure at the time
of foreclosure. The allowance for loan losses decreased from $3,072,000 at December 31, 2003 to $2,736,000 at
December 31, 2004, a decrease of $336,000 or 10.9%. The decrease was primarily due to recoveries in
2004 of charged-off loans in prior years of $410,000, a reduction in the overall loan portfolio and
the Companys continued emphasis to improve asset quality. Included in those recoveries was a
$389,000 payment from the bankruptcy trustee for a commercial developer. Due to the large amount of
recoveries, a reduction in the overall loan portfolio and the Companys continued emphasis to
improve asset quality, the Company recorded a credit to the provision for loan losses of $473,000
during 2004. During 2004, $274,000 of loans were charged-off to the allowance for loan losses. The Companys non-performing and potential problem loans increased from $8,428,000 at December 31,
2003 to $10,218,000 at December 31, 2004, an increase of $1,790,000. The non-performing and
potential problem loans were considered impaired as of December 31, 2004 and December 31, 2003. The
Company has established a loss reserve of $1,513,000 for non-performing and potential problem loans
and believes that it has adequately reserved for any potential loss. Non-performing loans, which are loans past due 90 days or more and non-accruing loans, decreased
from $2,459,000 at December 31, 2003 to $724,000 at December 31, 2004. The ratio of the Companys
allowance for loan losses to total non-performing loans was 377.6% and 124.9% at December 31, 2004
and December 31, 2003, respectively. Management believes that the problems with these borrowers are
identified and not indicative of the loan portfolio in total. Non-accruing loans decreased from $2,452,000 at December 31, 2003 to $724,000 at December 31, 2004,
a decrease of $1,728,000 or 70.4%. At December 31, 2004, non-accrual loans consist of four 1-4
family residential loans with a balance of $408,000, one real estate non-farm/non-residential loan
with a balance of $16,000, one commercial and industrial loan with a balance of $298,000 and one
consumer loan with a balance of $2,000. The Company has established a loss reserve of $298,000 for
non-accrual loans. Accruing loans delinquent greater than 90 days decreased from $7,000 at December 31, 2003 to $-0-
at December 31, 2004. Potential problem loans are loans that are not classified as non-accrual or 90 days or more
delinquent, but due to factors regarding the borrower, the loan or the economy may represent a

possible loss to the Company. Potential problem loans increased from $5,969,000 at December 31,
2003 to $9,494,000 at December 31, 2004, an increase of $3,525,000. The Company has established
loan loss reserves of $1,215,000 at December 31, 2004 for all potential problem loans. As of
December 31, 2004, $6,220,000 of the potential problem loans relates to five borrowers. The first
borrower with potential problem loans of $1,568,000 is a developer which is a concern to the
company because of the concentration of unsecured loans. The second borrower with a potential
problem loan of $1,286,000, is an owner of a commercial facility in Florida that had experienced
damage in the 2004 hurricanes. The third borrower with potential problem loans of $1,609,000 is a
manufacturing and sales company, which has experienced recent losses. The fourth borrower with
potential problem loans of $821,000 is a land development venture, which is a concern to the
Company because of delays in the sale of properties. The fifth borrower with potential problem
loans of $935,000 is a developer with recent financial difficulties. The remaining potential problem loans have a balance of $3,274,000 and consist of
thirty-two residential loans with a balance of $2,207,000, six commercial and industrial loans with
a balance of $344,000, three non-farm/non-residential loan with a balance of $557,000, three
construction and land development loans with a balance of $113,000 and nine consumer loans with a
balance of $53,000. For all of the potential problem loans, the Company believes that it has
adequately reserved for any potential loss. 26




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##### Table of Contents



Other assets especially mentioned (OAEM) loans decreased from $15,638,000 at December 31, 2003 to
$3,463,000 at December 31, 2004, a decrease of $12,175,000. The primary reason for the decrease was
a commercial development loan which had been classified as an OAEM asset at December 31, 2003. This
loan had a balance of $11,437,000 at December 31, 2003. During 2004 the loan was re-written with
terms that improved the Banks collateral and repayment position. OAEM loans are loans that are not
classified as non-accrual, delinquent or potential problem, but still require monitoring by the
Company due to factors regarding the borrower, the loan or the economy. At December 31, 2004, OAEM
loans consists of twenty-three residential loans with a balance of $1,990,000, two
non-farm/non-residential loans with a balance of $1,399,000, one commercial and industrial loan
with a balance of $43,000 and six consumer loans with a balance of $31,000. Premises and equipment decreased from $6,183,000 at December 31, 2003 to $5,515,000 at December 31,
2004, a decrease of $668,000. The decrease was primarily due to depreciation expense of $634,000
during 2004 and the sale of the Companys Normal branch facility in December 2004 which had a book
value of $326,000. The Company recognized a gain of approximately $680,000 from the sale and is
currently leasing the facility until a new building is constructed. Federal Home Loan Bank stock increased from $15,206,000 at December 31, 2003 to $16,153,000 at
December 31, 2004, an increase of $947,000 due primarily to the receipt of $921,000 in FHLB stock
dividends. Foreclosed assets decreased from $2,135,000 at December 31, 2003 to $92,000 at December 31, 2004, a
decrease of $2,043,000 or 96.0%. The decrease was primarily due to the sale of foreclosed assets.
During 2004, $631,000 in loans were transferred to foreclosed assets and $2,052,000 of foreclosed
assets were sold with a net loss of $121,000. In addition, $148,000 was depreciated for certain
foreclosed assets held greater than one year. Foreclosed assets at December 31, 2004 consist
entirely of residential properties. Properties transferred to foreclosed assets are appraised or
evaluated and, if required, loss reserves are established by management. Mortgage servicing rights decreased from $469,000 at December 31, 2003 to $356,000 at December 31,
2004, a decrease of $113,000. The decrease was primarily due to the amortization of $154,000 of
servicing rights in 2004 offset by $41,000 of new capitalized servicing rights. Other assets increased from $413,000 at December 31, 2003 to $938,000 at December 31, 2004, an
increase of $525,000. The increase was primarily due to a $692,000 decrease in accrued income tax
receivable. Deposits decreased from $250.0 million at December 31, 2003 to $231.0 million at December 31, 2004,
a decrease of $19.0 million or 7.6%. The decrease was primarily due to a decrease of $13.4 million
in time deposits and $5.1 million in brokered time deposits. With the increased balances of cash
and cash equivalents, the Company did not aggressively compete for certificate of deposit accounts
during 2004. Long-term debt decreased from $64.0 million at December 31, 2003 to $58.7 million at December 31,
2004, a decrease of $5.3 million or 8.1%, due to repayments during 2004. During 2004, the Bank
repaid $30.3 million of maturing Federal Home Loan Bank (FHLB) advances with an average interest
rate of 4.9% and obtained $25.0 million of new FHLB advances at an average rate of 1.6%. Minority interest in real estate joint venture decreased from $383,000 at December 31, 2003 to $-0-
at December 31, 2004 due to the sale in May 2004 of the Companys interest in the real estate joint
venture. Other liabilities increased from $1.3 million at December 31, 2003 to $1.7 million at December 31,
2004, an increase of $400,000. The primary reason for the increase was a $342,000 increase in
accruals for employee and director benefit programs. The employee benefit accruals increased due to
no bonuses being paid for 2003. During 2004 the Company achieved its bonus targets and accrued
$185,000. The accruals for director benefits increased because of an increase in the anticipated
expense of the director retirement benefit. 27




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##### Table of Contents



Total stockholders equity increased by $3,055,000, from $32,992,000 at December 31, 2003 to
$36,047,000 at December 31, 2004. The increase resulted from the earnings of the Company of
$2,987,000 for the year ended December 31, 2004, the tax benefit related to stock options exercised
of $450,000 and exercised stock options of $936,000, offset by the purchase of treasury shares of
$703,000, the payment of $614,000 in dividends to stockholders and a decrease in unrealized
appreciation on available-for-sale securities of $1,000. 28




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##### Table of Contents



Citizens First Financial Corp. and Subsidiary
Consolidated Average Balance Sheet (Dollars in thousands) For
the years ended December 31,At December 312004
    
    
    
    2004
    
    
    
    2004
    
    
    
    2004
    
    
    
    2003
    
    
    
    2003
    
    
    
    2003
    
    
    
    2002
    
    
    
    2002
    
    
    
    2002Average
    
    
    
    
    
    
    
    Average
    
    
    
    Average
    


    

    
    
    
    Average
    
    
    
    Average
    
    
    
    
    
    
    
    AverageYield/Cost
    
    
    
    Balance
    
    
    
    Interest
    
    
    
    Yield/Cost
    
    
    
    Balance
    
    
    
    Interest
    
    
    
    Yield/Cost
    
    
    
    Balance
    
    
    
    Interest
    
    
    
    Yield/CostAssetsDeposits & short-term
investments
    
    
    
    2.06
    %
    
    
    $
    26,469
    
    
    
    $
    344
    
    
    
    
    1.30
    %
    
    
    $
    19,433
    
    
    
    $
    204
    
    
    
    
    1.05
    %
    
    
    $
    18,912
    
    
    
    $
    299
    
    
    
    
    1.58
    %Investment securities
    
    
    
    4.29
    %
    
    
    
    23,322
    
    
    
    
    920
    
    
    
    
    3.94
    %
    
    
    
    22,123
    
    
    
    
    844
    
    
    
    
    3.82
    %
    
    
    
    19,716
    
    
    
    
    980
    
    
    
    
    4.97
    %Loans receivable
    

    
    
    5.79
    %
    
    
    
    253,402
    
    
    
    
    15,188
    
    
    
    
    5.99
    %
    
    
    
    276,555
    
    
    
    
    17,799
    
    
    
    
    6.44
    %
    
    
    
    291,307
    
    
    
    
    20,737
    
    
    
    
    7.12
    %FHLB stock
    
    
    
    5.50
    %
    
    
    
    15,681
    
    
    
    
    921
    
    
    
    
    5.87
    %
    
    
    
    9,332
    
    
    
    
    686
    
    
    
    
    7.35
    %
    
    
    
    4,611
    
    
    
    
    242
    
    
    
    
    5.25
    %Total interest-earning
assets
    
    
    
    5.25
    %
    
    
    $
    318,874
    
    
    
    $
    17,373
    
    
    
    
    5.45
    %
    
    
    $
    327,443
    
    
    
    $
    19,533
    
    
    
    
    5.97
    %
    
    
    $
    334,546
    
    
    
    $
    22,258
    
    
    
    
    6.65
    %Non-interest earning assets
    
    
    
    
    
    
    
    
    24,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,965Total assets
    
    
    
    
    
    
    
    $
    337,851
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    352,021
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    351,511Liabilities & equityMoney market accounts
    
    
    
    1.32
    %
    
    
    $
    24,046
    
    
    
    $
    333
    
    
    
    
    1.38
    %
    
    
    $
    26,057
    
    
    
    $
    408
    
    
    
    
    1.57
    %
    
    
    $
    24,260
    
    
    
    $
    603
    
    
    
    
    2.49
    %Passbook accounts
    
    
    
    0.60
    %
    
    
    
    18,372
    
    
    
    
    122
    
    
    
    
    0.66
    %
    
    
    
    18,392
    
    
    
    
    151
    
    
    
    
    0.82
    %
    
    
    
    17,201
    
    
    
    
    237
    
    
    
    
    1.38
    %NOW accounts
    
    
    
    0.45
    %
    
    
    
    24,325
    
    
    
    
    116
    
    
    
    
    0.48
    %
    
    
    
    22,565
    
    
    
    
    164
    
    
    
    
    0.73
    %
    
    
    
    21,332
    
    
    
    
    244
    
    
    
    
    1.14
    %Certificate accounts
    
    
    
    2.88
    %
    
    
    
    140,922
    
    
    
    
    4,250
    
    
    
    
    3.02
    %
    
    
    
    153,868
    
    
    
    
    5,054
    
    
    
    
    3.28
    %
    
    
    
    159,362
    
    
    
    
    6,643
    
    
    
    
    4.17
    %Total interest-bearing
deposits
    
    
    
    2.20
    %
    
    
    $
    207,665
    
    
    
    $
    4,821
    
    
    
    
    2.32
    %
    
    
    $
    220,882
    
    
    
    $
    5,777
    
    
    
    
    2.62
    %
    
    
    $
    222,155
    
    
    
    $
    7,727
    
    
    
    
    3.48
    %Borrowings
    
    
    
    2.82
    %
    
    
    
    59,674
    
    
    
    
    1,855
    
    
    
    
    3.11
    %
    
    
    
    69,744
    
    
    
    
    3,084
    
    
    
    
    4.42
    %
    
    
    
    72,391
    
    
    
    
    3,589
    
    
    
    
    4.96
    %Total interest-bearing
liabilities
    
    
    
    2.34
    %
    
    
    
    267,339
    
    
    
    
    6.676
    
    
    
    
    2.50
    %
    
    
    
    290,626
    
    
    
    
    8,861
    
    
    
    
    3.05
    %
    
    
    
    294,546
    
    
    
    
    11,316
    
    
    
    
    3.84
    %Non-interest bearing
Liabilities
    
    
    
    
    
    
    
    
    36,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,356Total liabilities
    
    
    
    
    
    
    
    
    303,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,902Stockholders equity
    
    
    
    
    
    
    
    
    34,046
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,719
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,609Total liabilities &
stockholders equity
    
    
    
    
    
    
    
    $
    337,851
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    352,021
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    351,511Net interest spread
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    $
    10,697
    
    
    
    
    2.95
    %
    
    
    
    
    
    
    
    $
    10,672
    
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    $
    10,942
    
    
    
    
    2.81
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.35
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.26
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.27
    %Ratio of interest earning
assets to interest bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    119.28
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    112.67
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    113.58
    %
 29




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##### Table of Contents



Rate/Volume Analysis.The following table presents the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing liabilities have affected the
Companys interest income and interest expense during the periods indicated. Information is
provided in each category with respect to: (1) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (2) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (3) net change. The changes attributable to the combined impact of
volume and rate have been allocated proportionally to change due to volume and change due to rate. Year-to-Date 2004
    
    
    
    Year-to-Date 2003Compared to
    
    
    
    Compared toYear-to-Date 2003
    
    
    
    Year-to-Date 2002Increase (Decrease)
    
    
    
    Increase (Decrease)Due to
    
    
    
    Due toVolume
    
    
    
    Rate
    
    
    
    Total Change
    
    
    
    Volume
    
    
    
    Rate
    
    
    
    Total Change(in thousands)Interest Income:Deposits with
financial
institutions
    
    
    $
    84
    
    
    
    $
    56
    
    
    
    $
    140
    
    
    
    $
    8
    
    
    
    ($
    103
    )
    
    
    ($
    95
    )Securities
    
    
    
    47
    
    
    
    
    29
    
    
    
    
    76
    
    
    
    
    110
    
    
    
    
    (246
    )
    
    
    
    (136
    )Loans
    
    
    
    (1,434
    )
    
    
    
    (1,177
    )
    
    
    
    (2,611
    )
    
    
    
    (1,015
    )
    
    
    
    (1,923
    )
    
    
    
    (2,938
    )FHLB stock
    
    
    
    394
    
    
    
    
    (159
    )
    
    
    
    235
    
    
    
    
    319
    
    
    
    
    125
    
    
    
    
    444Total interest income
    
    
    ($
    501
    )
    
    
    ($
    1,659
    )
    
    
    ($
    2,160
    )
    
    
    ($
    578
    )
    
    
    ($
    2,147
    )
    
    
    ($
    2,725
    )Interest Expense:Money-market
deposit
accounts
    
    
    
    (30
    )
    
    
    
    (45
    )
    
    
    
    (75
    )
    
    
    
    42
    
    
    
    
    (238
    )
    
    
    
    (196
    )Savings accounts
    
    
    
    (0
    )
    
    
    
    (29
    )
    
    
    
    (29
    )
    
    
    
    15
    
    
    
    
    (101
    )
    
    
    
    (86
    )NOW accounts
    
    
    
    12
    
    
    
    
    (60
    )
    
    
    
    (48
    )
    
    
    
    13
    
    
    
    
    (93
    )
    
    
    
    (80
    )Time and brokered
time deposits
    
    
    
    (408
    )
    
    
    
    (396
    )
    
    
    
    (804
    )
    
    
    
    (222
    )
    
    
    
    (1,367
    )
    
    
    
    (1,589
    )Long-term debt
    
    
    
    (402
    )
    
    
    
    (827
    )
    
    
    
    (1,229
    )
    
    
    
    (128
    )
    
    
    
    (377
    )
    
    
    
    (505
    )Total interest
expense
    
    
    
    (671
    )
    
    
    
    (1,514
    )
    
    
    
    (2,185
    )
    
    
    
    (280
    )
    
    
    
    (2,176
    )
    
    
    
    (2,456
    )Net interest income
    
    
    $
    170
    
    
    
    ($
    145
    )
    
    
    $
    25
    
    
    
    ($
    298
    )
    
    
    
    29
    
    
    
    ($
    269
    )
 30




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##### Table of Contents



COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 and DECEMBER 31, 2003 GENERAL Net income increased from $1,636,000 for the year ended December 31, 2003 to $2,987,000 for the
year ended December 31, 2004, an increase of $1,351,000. The increase was due primarily to a
decrease in the provision (credit) for loan losses, lower net gain on loan sales and a decrease in
net gains from sale of land in real estate joint venture, offset by a decrease in loss on
foreclosed assets. INTEREST INCOME Interest on loans decreased from $17,799,000 for the year ended December 31, 2003 to $15,188,000
for the year ended December 31, 2004, a decrease of $2,611,000 or 14.7%. Interest on loans
decreased due to a decrease in the average yield on loans outstanding of 45 basis points reflecting
the lower interest rate environment in 2004 and a $23.2 million decrease in the average balance of
outstanding loans resulting primarily from increased competition in the Bloomington-Normal market
and changes in lending practices resulting from the MOU. Interest on securities, federal funds sold and deposits with financial institutions and dividends
on Federal Home Loan Bank stock increased from $1,734,000 for the year ended December 31, 2003 to
$2,185,000 for the year ended December 31, 2004, an increase of $451,000 or 26.0%. The increase was
primarily due to a $14.6 million increase in the average balance of investment securities, FHLB
stock and interest-bearing deposits, offset by a 7 basis point decrease in the average yield of
these assets in 2004. INTEREST EXPENSE Interest on deposits decreased by $956,000 or 16.5%, from $5,777,000 for the year ended December
31, 2003 to $4,821,000 for the year ended December 31, 2004. The decrease was primarily due to a 30
basis point decrease in the average cost of deposits and a $13.2 million decrease in the average
balance of interest-bearing deposits. The interest on borrowings decreased by $1,299,000 or 39.9%, from $3,084,000 for the year ended
December 31, 2003 to $1,855,000 for the year ended December 31, 2004 as a result of a 131 basis
point decrease in the average cost of borrowings and a $10.0 million decrease in the average
balance of borrowings. During 2004, the Bank repaid $30.3 million of maturing Federal Home Loan
Bank (FHLB) advances with an average interest rate of 4.9% and obtained $25.0 million of new FHLB
advances at an average rate of 1.6%. PROVISION (CREDIT) FOR LOAN LOSSES The provision (credit) for loan losses was $473,000 for the year ended December 31, 2004, compared
to a provision of $2,462,000 for the year ended December 31, 2003, a change of $2,935,000. The
change resulted primarily from recoveries in 2004 of charged-off loans in prior years of $410,000,
the decrease in the loan portfolio and the Companys review of the adequacy of its allowance for
loan losses. The credit and provision for both periods reflect managements analysis of the
Companys loan portfolio based on information which is currently available to it at such time. In
particular, management considers the level of nonperforming loans and potential problem loans. While
management believes that the allowance for loan losses is sufficient based on information currently
available, no assurances can be made that future events or conditions or regulatory directives will
not result in increased provisions for loan losses or additions to the Companys allowance for
losses which may adversely affect net income. NONINTEREST INCOME Total noninterest income decreased by $651,000 or 20.0%, from $3,259,000 for the year ended
December 31, 2003 to $2,608,000 for the year ended December 31, 2004. The decrease was due
primarily to a decrease of $1,181,000 in net gains on loan sales, a decrease of $238,000 in net
gains from sale of land in a real estate joint venture, offset by a $659,000 increase in net gain
from sale of premises and equipment. Net gains on loan sales decreased from $1,309,000 in 2003 to
$128,000 in 2004 due to a decrease in loan sales from $72.1 million in 2003 to $6.9 million in 2004
resulting 31




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##### Table of Contents



from the higher interest rate environment and the resulting end of the increased volume of
refinance activity that the Bank experienced in 2003. The decrease in net gains from sale of land
in a real estate joint venture resulted from decreased lot sales in 2004. The Bank sold a branch
facility in December 2004 and recognized a gain of approximately $680,000. NONINTEREST EXPENSE Total noninterest expense increased from $8,891,000 for the year ended December 31, 2003 to
$9,063,000 for the year ended December 31, 2004, an increase of $172,000 or 1.9%. The increase was
primarily due to a $563,000 increase in salaries and employee benefits expense, a $541,000 increase
in professional fees and other expenses, offset by $618,000 decrease in loss on foreclosed assets,
decreases of $137,000 in minority interest in net income of real estate joint venture and $119,000
in amortization of mortgage servicing rights. The increase in salaries and benefits expense was
primarily due to a decrease in the amortization of deferred loan costs, relating to a decrease in
loan originations which are credited to salaries and benefits expense. The credit was $651,000 in
2003 compared to $193,000 in 2004. The decreased amortization of deferred costs was due to the
higher interest rate environment in 2004, which decreased the amount of refinanced loans. The
increase in professional and other expenses was primarily due to additional costs associated with
the merger with Main Street Trust and efforts to satisfy the MOU. The decrease in loss on
foreclosed assets reflected the lower balances of foreclosed assets and the write-downs that were
taken in 2003 on foreclosed assets. The decrease in minority interest in net income of real estate
joint venture was due to the lower sales volume in 2004. The Bank sold its investment in the real
estate joint venture in May 2004. The decrease in the amortization of mortgage servicing rights
resulted from the increase in interest rates in 2004 and the decreased prepayment of serviced loans
and the amortization of the associated mortgage servicing rights. INCOME TAX EXPENSE Total income tax expense was $1,727,000 for the year ended December 31, 2004, compared to $943,000
for the year ended December 31, 2003, an increase of $784,000 or 83.1%. The increase was
attributable to the increased taxable income for the year ended December 31, 2004. The effective
tax rate was 36.6% for the years ended December 31, 2004 and 2003, respectively. 32




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##### Table of Contents



COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 and DECEMBER 31, 2002 GENERAL Net income for the year ended December 31, 2003 decreased from $1,930,000 for the year ended
December 31, 2002 to $1,636,000 for the year ended December 31, 2003, a decrease of $294,000. The
decrease was due primarily to lower net interest income, an increase in the provision for loan
losses, and an increase in loss on foreclosed assets, offset by an increase in net gains on loan
sales and a decrease in salaries and employee benefits expense. INTEREST INCOME Interest on loans decreased from $20,737,000 for the year ended December 31, 2002 to $17,799,000
for the year ended December 31, 2003, a decrease of $2,938,000 or 14.2%. Interest on loans
decreased due to a decrease in the average yield on loans outstanding of 68 basis points reflecting
the lower interest rate environment in 2003 and a $14.7 million decrease in the average balance of
outstanding loans resulting primarily from lower balances of residential real estate loans due to
increased sales in the secondary market of these loans. Interest on securities, federal funds sold and deposits with financial institutions and dividends
on Federal Home Loan Bank stock increased from $1,521,000 for the year ended December 31, 2002 to
$1,734,000 for the year ended December 31, 2003, an increase of $213,000 or 14.0%. The increase was
primarily due to a $7.7 million increase in the average balance of investment securities, FHLB
stock and interest-bearing deposits, offset by a 23 basis point decrease in the average yield of
these assets in 2003. INTEREST EXPENSE Interest on deposits decreased by $1,950,000 or 25.2%, from $7,727,000 for the year ended December
31, 2002 to $5,777,000 for the year ended December 31, 2003. The decrease was primarily due to an
83 basis point decrease in the average cost of deposits, offset by a $1.3 million increase in the
average balance of deposits. The interest on borrowings decreased by $505,000 or 14.1%, from $3,589,000 for the year ended
December 31, 2002 to $3,084,000 for the year ended December 31, 2003 as a result of a 46 basis
point decrease in the average cost of borrowings and a $2.6 million decrease in the average balance
of borrowings. PROVISION FOR LOAN LOSSES The provision for loan losses was $2,462,000 for the year ended December 31, 2003 and $1,803,000
for the year ended December 31, 2002, an increase of $659,000 or 36.6%. NONINTEREST INCOME Total noninterest income increased by $829,000 or 34.1%, from $2,430,000 for the year ended
December 31, 2002 to $3,259,000 for the year ended December 31, 2003. The increase was due
primarily to an increase of $462,000 in net gains on loan sales, an increase of $220,000 in net
gains from sale of land in a real estate joint venture and an increase of $125,000 in cash
surrender value of life insurance. Net gains on loan sales increased in 2003 due to an increase of
$9.5 million in loan sales in 2003 resulting from the lower interest rate environment. The increase
in net gains from sale of land in a real estate joint venture resulted from increased lot sales in
2003. NONINTEREST EXPENSE Total noninterest expense increased from $8,298,000 for the year ended December 31, 2002 to
$8,891,000 for the year ended December 31, 2003, an increase of $593,000 or 7.1%. The increase was
primarily due to a $1.1 million increase in loss on foreclosed assets and a $100,000 increase in
minority interest in net income of real estate joint venture, offset by a $470,000 decrease in
salaries and benefits expense and a $170,000 decrease in amortization of mortgage servicing rights.
The increase in loss on foreclosed assets was primarily due to the previously discussed $1.1
million write-down of a retail development property included in foreclosed assets. The increase in
minority interest in net income of real estate joint venture was due to increased lot sales in
2003. The decrease in salaries and benefits expense was primarily due to a $615,000 decrease in
ESOP expense resulting from the allocation of the remaining ESOP shares in 2002 offset by a
$257,000 increase in compensation expense in 2003. 33




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##### Table of Contents



INCOME TAX EXPENSE Total income tax expense was $943,000 for the year ended December 31, 2003, compared to $1,340,000
for the year ended December 31, 2002, a decrease of $397,000 or 29.6%. The decrease was
attributable to the decreased taxable income for the year ended December 31, 2003. The effective
tax rates were 36.6% and 41.0% for the years ended December 31, 2003 and 2002, respectively. The
decrease in the effective tax rate was due primarily to the $615,000 ESOP expense in 2002, which
was a non-deductible expense for income tax purposes. This resulted in a $114,000 addition to the
tax expense for 2002. LIQUIDITY AND CAPITAL RESOURCES The Companys primary sources of funds are deposits, principal and interest payments on loans and
securities, sales of loans and securities and FHLB advances. While maturing and scheduled
amortization of loans are predictable sources of funds, deposit outflows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and competition. At December 31, 2004, the Bank exceeded all of its regulatory capital requirements with Tier 1
capital of $32.0 million or 15.4% of risk-weighted assets, which is above the required level of
$8.3 million or 4.0%; and total capital of $34.6 million or 16.7% of risk-weighted assets, which is
above the required level of $16.6 million or 8.0%. The Companys most liquid assets are cash, interest-bearing demand deposits and federal funds sold.
The level of these accounts is dependent on the operating, financing, lending and investing
activities during any given period. At December 31, 2004 and 2003, cash, interest-bearing demand
deposits and federal funds sold totaled $38.1 million and $16.8 million, respectively. The Company has other sources of liquidity if a need for additional funds arises, including FHLB
advances, loan sales, brokered deposits and federal funds. At December 31, 2004, the Company had
outstanding advances with the FHLB of $56.7 million. The FHLB maintains two limitations on the
availability of advances based on FHLB stock ownership and total assets. The Company currently
meets the stock limitation. Based on the total assets limitation, the Company may increase its
borrowings with the FHLB by approximately $56.1 million. The ability to borrow this amount would
require meeting regulatory mandated loan and collateral limits. Depending upon market conditions
and the pricing of deposit products and FHLB borrowings, the Company may utilize FHLB advances to
meet liquidity needs. The following table presents additional information about our contractual obligations as of
December 31, 2004, which by their terms have contractual maturity and termination dates subsequent
to December 31, 2004 (dollars in thousands): Next
    
    
    
    13-36
    
    
    
    37-60
    
    
    
    More thanContractual obligations
    
    
    12 months
    
    
    
    Months
    
    
    
    Months
    
    
    
    60 months
    
    
    
    TotalCertificates of deposits
    
    
    $
    80,443
    
    
    
    $
    46,511
    
    
    
    $
    13,951
    
    
    
    
    
    
    
    
    $
    140,905Federal Home Loan Bank advances
    
    
    
    24,000
    
    
    
    
    23,675
    
    
    
    
    9,000
    
    
    
    
    
    
    
    
    
    56,675Bank note payable
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Totals
    
    
    $
    106,443
    
    
    
    $
    70,186
    
    
    
    $
    22,951
    
    
    
    
    
    
    
    
    $
    199,580
 The Company anticipates that it will have liquidity to meet all known contractual obligations and
unfunded commitments, including loan commitments and reasonable borrower, depositor and creditor
requirements over the next twelve months. The Companys purchase obligations have no material
impact on its cash flow or liquidity and, accordingly, have not been included in the above table.
At December 31, 2004, the Company had outstanding commitments to originate loans aggregating
approximately $11.8 million.The commitments extend over varying periods of time with the majority
being disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to
$10.4 million, with the remainder at floating market rates. 34




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##### Table of Contents



OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2004, the Company had outstanding standby letters of credit of $549,000 and
unfunded loan commitments outstanding of $25.3 million. Because these commitments generally have
fixed expiration dates and many will expire without being drawn upon, the total commitment level
does not necessarily represent future cash requirements. If needed to fund these outstanding
commitments, the Company has the ability to fund these commitments. The following table presents
additional information about our unfunded commitments as of December 31, 2004, which by their terms
have contractual dates subsequent to December 31, 2004 (dollars in thousand): Next
    
    
    
    13-36
    
    
    
    37-60
    
    
    
    More thanUnfunded commitments:
    
    
    12 months
    
    
    
    Months
    
    
    
    Months
    
    
    
    60 months
    
    
    
    TotalLetter of credit
    
    
    $
    547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    547Lines of Credit
    
    
    
    25,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,284Totals
    
    
    $
    25,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,831
 IMPACT OF INFLATION The consolidated financial statements and related consolidated financial data presented herein have
been prepared in accordance with accounting principles generally accepted in the United States of
America in accordance with accounting principles and practices within the banking industry which
require the measurement of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a more significant
impact on a financial institutions performance than the effects of general levels of inflation. Impact of Accounting Changes In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which sets accounting
requirements for share-based compensation to employees, including employee-stock-purchase-plans
(ESPPs) and provides guidance on accounting for awards to non-employees. This Statement will
require the Company to recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees, but expresses no preference for a type of
valuation model. This Statement is effective for the Company on January 1, 2006. The effect to
the Company is estimated to be $131,000 based on the current stock options outstanding. On April
26, 2004, the Companys Board of Directors adopted the 2004 Equity Incentive Plan (Plan), which
provides for stock-based awards. At present, no stock awards have been made from the Plan.
Therefore, the effect of the adoption of this statement on the Company cannot be determined
currently. Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an
investment is considered impaired, whether impairment is other-than-temporary, and measurement of
an impairment loss. An investment is considered impaired if the fair value of the investment is
less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the
investor has the ability and intent to hold an investment for a reasonable period of time
sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment;
and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable
period of time outweighs evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to the difference between
the investments cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted
in 2003 and the Company began presenting the new disclosure requirements in its consolidated
financial statements for the year ended December 31, 2003. The recognition and measurement
provisions were initially effective for other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. However, in September 2004, the effective date of these
provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional
implementation guidance. 35




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##### Table of Contents



American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses
accounting for differences between the contractual cash flows of certain loans and debt securities
and the cash flows expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to credit quality. As
such, SOP 03-3 applies to loans and debt securities acquired individually, in pools or as part of a
business combination and does not apply to originated loans. The application of SOP 03-3 limits the
interest income, including accretion of purchase price discounts, that may be recognized for
certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess of contractual
cash flows over cash flows expected to be collected to be recognized as an adjustment of yield,
loss accrual or valuation allowance, such as the allowance for possible loan losses. SOP 03-3
requires that increases in expected cash flows subsequent to the initial investment be recognized
prospectively through adjustment of the yield on the loan or debt security over its remaining life.
Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired
in a business combination where the loans show signs of credit deterioration, SOP 03-3 represents a
significant change from current purchase accounting practice whereby the acquirees allowance for
loan losses is typically added to the acquirers allowance for loan losses. SOP 03-3 is effective
for loans and debt securities acquired by the Company beginning January 1, 2005. The adoption of
this new standard is not expected to have a material impact on the Companys financial statements. 
 Item 7A Quantitative and Qualitative Disclosures about Market Risk Sources of market risk include interest rate risk, foreign currency exchange rate, commodity price
risk and equity price risk. The Company is only subject to interest rate risk. The Company
purchased no financial instruments for trading purposes during 2004 or 2003. The principal objective of the Companys interest rate risk management function is to evaluate the
interest rate risk included in balance sheet accounts, determine the level of risk appropriate
given the Companys business strategy, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with the Board of Directors approved
guidelines. Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates. The Company monitors its interest rate risk as such risk
relates to its operating strategies. The Companys Board of Directors reviews the Companys
interest rate risk position on a quarterly basis. The Companys Asset/Liability Committee is
comprised of the Companys senior management under the direction of the Board of Directors, with
the Committee responsible for reviewing with the Board of Directors its activities and strategies,
the effect of those strategies on the Companys net interest margin, the market value of the
portfolio and the effect that changes in the interest rates will have on the Companys portfolio
and its exposure limits. The extent of the movement of interest rates is an uncertainty that could
have a negative impact on the earnings of the Company. In recent years, the Company has utilized the following strategies to manage interest rate risk:
(1) originating for investment adjustable rate residential mortgage and fixed rate one-to-four
family loans with maturities of 10 years or less; (2) generally selling fixed rate one-to-four
family mortgage loans with maturities exceeding 10 years in the secondary market without recourse
and on a servicing retained basis; (3) increasing its origination of shorter term and/or adjustable
rate commercial loans; and (4) investing in shorter term or adjustable rate investment securities
which generally bear lower yields as compared to longer term investments, but which may better
position the Company for increases in the market interest rates. The Company has also extended the
maturities of deposits and long term debt to better match the maturities and repricing of interest
earning assets. The matching of assets and liabilities may be analyzed by examining the extent to which such assets
and liabilities are interest rate sensitive and by monitoring the Company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 36




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##### Table of Contents



difference between the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing within that time
period. At December 31, 2004, the Companys one-year gap position, the difference between the
amount of interest-earning assets maturing or repricing within one year, and interest-bearing
liabilities maturing or repricing within one year was $12,924,000. 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 assets. Accordingly, during a period of rising
interest rates, a financial institution with a negative gap position would tend to have its
interest-bearing liabilities repricing upwards at a faster rate, which consequently may result in
the cost of its interest-bearing liabilities increasing at a rate faster than its yield on
interest-earning assets that if it had a positive gap. During a period of falling interest rates,
a financial institution with a negative gap would tend to have its interest-bearing liabilities
repricing downward at a faster rate than its interest-earning assets as compared to an institution
with a positive gap, which consequently may tend to positively affect the growth of its net
interest income. The following table sets forth the amount of interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2004, which are anticipated by the Company, based upon
assumptions, to reprice in each of the future time periods shown. Except, as stated below, the
amount of assets and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term repricing or the contractual maturity of the
asset or liability. The table sets forth an approximation of projected repricing of assets and
liabilities on December 31, 2004, on the basis of contractual maturities, anticipated prepayments,
and scheduled rate adjustments within the selected time intervals. Annual prepayment rates for
adjustable and fixed rate loans are assumed to be 17.5% and 11.0% respectively. Annual prepayment
rates for adjustable rate and fixed rate mortgage-backed securities are assumed to be 17.5% and
11.0% respectively. Money market deposits are assumed to be immediately rate sensitive, while
passbook accounts and NOW accounts are assumed to have decay rates of 12% annually. At December 31, 2004, the following table reflects that the Company had a positive asset gap due to
the level of loans, securities, deposits, and fed funds sold that are subject to repricing or
maturity during 2005. As such, the effect of an increase in rates of 100 basis points would
increase net interest income by approximately $129,240 in one year assuming no management
intervention. Due to cumulative negative liability gap for two years, an increase in interest
rates would decrease net interest income by approximately $17,465 for two years assuming no
management intervention. A fall in interest rates would have the opposite effect for the same
periods. In analyzing interest rate sensitivity, the Companys management considers these
differences and incorporates other assumptions and factors, such as balance sheet growth and
prepayments, to better measure interest rate risk. While the gap analysis provides an indication of interest rate sensitivity, experience has shown
that it does not fully capture the true dynamics of interest rate changes. Especially, the
analysis presents only a static measurement of asset and liability volumes based on contractual
maturity, cash flow estimates or repricing opportunity. It fails to reflect the differences in the
timing and degree of assets and liabilities due to interest rate changes. 37




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##### Table of Contents



Gap Table amount in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AfterYear 1
    
    
    
    Year 2
    
    
    
    Year 3
    
    
    
    Year 4
    
    
    
    Year 5
    
    
    
    Year 5
    
    
    Total
    
    
    
    ValueInterest-earning assets:LoansFixed rate
    
    
    $
    73,372
    
    
    
    $
    27,438
    
    
    
    $
    21,487
    
    
    
    $
    22,827
    
    
    
    $
    18,056
    
    
    
    $
    41,871
    
    
    
    $
    205,051
    
    
    
    $
    207,082Average interest rate
    
    
    
    5.76
    %
    
    
    
    5.87
    %
    
    
    
    6.07
    %
    
    
    
    5.83
    %
    
    
    
    5.72
    %
    
    
    
    6.08
    %
    
    
    
    5.87
    %Variable rate
    
    
    
    26,328
    
    
    
    
    3,001
    
    
    
    
    1,897
    
    
    
    
    849
    
    
    
    
    704
    
    
    
    
    0
    
    
    
    
    32,779
    
    
    
    
    32,779Average interest rate
    
    
    
    5.16
    %
    
    
    
    5.43
    %
    
    
    
    5.64
    %
    
    
    
    6.58
    %
    
    
    
    5.63
    %
    
    
    
    0.00
    %
    
    
    
    5.26
    %SecuritiesFixed rate
    
    
    
    916
    
    
    
    
    815
    
    
    
    
    3,027
    
    
    
    
    646
    
    
    
    
    3,021
    
    
    
    
    9,621
    
    
    
    
    18,046
    
    
    
    
    18,046Average interest rate
    
    
    
    4.79
    %
    
    
    
    4.79
    %
    
    
    
    3.81
    %
    
    
    
    4.70
    %
    
    
    
    4.84
    %
    
    
    
    4.18
    %
    
    
    
    4.30
    %Variable rate
    
    
    
    24,162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,162
    
    
    
    
    24,162Average interest rate
    
    
    
    4.87
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.87
    %Interest-bearing deposits/fed
funds sold
    
    
    
    32,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,667
    
    
    
    
    32,667Average interest rate
    
    
    
    2.06
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.06
    %Total interest-earning assets
    
    
    $
    157,445
    
    
    
    $
    31,254
    
    
    
    $
    26,411
    
    
    
    $
    24,322
    
    
    
    $
    21,781
    
    
    
    $
    51,492
    
    
    
    $
    312,705
    
    
    
    $
    314,736Interest-bearing liabilities:NOW and savings accounts
    
    
    $
    5,227
    
    
    
    $
    5,227
    
    
    
    $
    5,227
    
    
    
    $
    5,227
    
    
    
    $
    5,227
    
    
    
    $
    17,423
    
    
    
    $
    43,558
    
    
    
    $
    43,558Average interest rate
    
    
    
    0.51
    %
    
    
    
    0.51
    %
    
    
    
    0.51
    %
    
    
    
    0.51
    %
    
    
    
    0.51
    %
    
    
    
    0.51
    %
    
    
    
    0.51
    %Money market accounts
    
    
    
    23,894
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,894
    
    
    
    
    23,894Average interest rate
    
    
    
    1.32
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.32
    %Time depositsFixed rate
    
    
    
    76,539
    
    
    
    
    31,779
    
    
    
    
    13,138
    
    
    
    
    10,813
    
    
    
    
    3,138
    
    
    
    
    
    
    
    
    
    135,407
    
    
    
    
    135,663Average interest rate
    
    
    
    2.36
    %
    
    
    
    3.09
    %
    
    
    
    4.07
    %
    
    
    
    4.08
    %
    
    
    
    3.88
    %
    
    
    
    
    
    
    
    
    2.87
    %Variable rate
    
    
    
    3,861
    
    
    
    
    1,637
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,498
    
    
    
    
    5,498Average interest rate
    
    
    
    2.97
    %
    
    
    
    2.97
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.97
    %Long-term debt (1)Fixed rate
    
    
    
    24,000
    
    
    
    
    23,000
    
    
    
    
    675
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    0
    
    
    
    
    47,675
    
    
    
    
    62,977Average interest rate
    
    
    
    1.74
    %
    
    
    
    2.90
    %
    
    
    
    6.74
    %
    
    
    
    0.00
    %
    
    
    
    0.00
    %
    
    
    
    0.00
    %
    
    
    
    2.37
    %Variable rate
    
    
    
    11,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    
    11,000Average interest rate
    
    
    
    4.79
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.79
    %Total interest-bearing liabilities
    
    
    $
    144,521
    
    
    
    $
    61,643
    
    
    
    $
    19,040
    
    
    
    $
    16,040
    
    
    
    $
    8,365
    
    
    
    $
    17,423
    
    
    
    $
    267,032
    
    
    
    $
    282,590Interest-earning assets lessinterest-bearing liabilities
(Gap)
    
    
    $
    12,924
    
    
    
    ($
    30,389
    )
    
    
    $
    7,371
    
    
    
    $
    8,282
    
    
    
    $
    13,416
    
    
    
    $
    34,069
    
    
    
    $
    45,673
    
    
    
    $
    32,146Cumulative gap
    
    
    $
    12,924
    
    
    
    ($
    17,465
    )
    
    
    ($
    10,094
    )
    
    
    ($
    1,812
    )
    
    
    $
    11,604
    
    
    
    $
    45,673
    
    
    
    $
    45,673
    
    
    
    $
    32,146Cumulative gap as % ofInterest-earning assets
    
    
    
    4.13
    %
    
    
    
    -5.59
    %
    
    
    
    -3.23
    %
    
    
    
    -0.58
    %
    
    
    
    3.71
    %
    
    
    
    14.61
    %
    
    
    
    14.61
    %
    
    
    
    10.21
    %
   (1)
    
    Long term debt that contain call features are considered a variable rate instrument and are
shown in the first period subject to the call provision. 38




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##### Table of Contents





Item 8 Financial Statements and Supplementary Data Contents Report of Independent Registered Public Accounting Firm
    
    
    41Consolidated Financial StatementsBalance Sheets
    
    
    42Statements of Income
    
    
    44Statements of Stockholders Equity
    
    
    46Statements of Cash Flows
    
    
    48Notes to Financial Statements
    
    
    50
 39




---



##### Table of Contents



Report of Independent 
 Registered Public Accounting Firm
 Audit Committee, Board of Directors
     and Stockholders
Citizens First Financial Corp.
Bloomington, Illinois We have audited the accompanying consolidated balance sheets of Citizens First Financial Corp. as
of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit 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 described above present fairly, in all
material respects, the financial position of Citizens First Financial Corp. as of December 31, 2004
and 2003, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles generally accepted in
the United States of America. /sig/ BKD, LLP Decatur, Illinois
January 21, 2005
except for note 2
as to which the date
is March 8, 2005 40




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##### Table of Contents



Citizens First Financial Corp. 
 Consolidated Balance Sheets
December 31, 2004 and 2003
 2004
    
    
    2003AssetsCash and due from banks
    
    $
    5,436,604
    
    
    $
    6,692,128Interest-bearing demand deposits
    
    
    24,459,557
    
    
    
    6,890,528Federal funds sold
    
    
    8,207,013
    
    
    
    3,248,244Cash and cash equivalents
    
    
    38,103,174
    
    
    
    16,830,900Available-for-sale securities
    
    
    26,055,036
    
    
    
    20,745,891Loans held for sale
    
    
    587,202
    
    
    
    376,088Loans, net of allowance for loan
losses of $2,736,014 and $3,071,690
at December 31, 2004 and 2003
    
    
    234,507,250
    
    
    
    279,405,053Premises and equipment
    
    
    5,515,026
    
    
    
    6,183,306Federal Home Loan Bank stock
    
    
    16,152,500
    
    
    
    15,205,900Foreclosed assets held for sale, net
of allowance for losses of $22,000
and $1,313,000 at December 31, 2004
and 2003
    
    
    92,085
    
    
    
    2,134,825Interest receivable
    
    
    1,667,579
    
    
    
    2,086,988Deferred income taxes
    
    
    
    
    
    
    866,604Mortgage servicing rights
    
    
    356,045
    
    
    
    468,730Cash surrender value of life insurance
    
    
    4,292,074
    
    
    
    4,115,213Land in real estate joint venture
    
    
    
    
    
    
    682,664Other assets
    
    
    937,556
    
    
    
    413,123Total assets
    
    $
    328,265,527
    
    
    $
    349,515,285
 See
Notes to Consolidated Financial Statements
 41




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##### Table of Contents



2004
    
    
    2003Liabilities and Stockholders EquityLiabilitiesDepositsDemand
    
    $
    22,652,193
    
    
    $
    23,309,124Savings, NOW and money market
    
    
    67,451,868
    
    
    
    67,313,588Time
    
    
    135,994,870
    
    
    
    149,361,845Brokered time
    
    
    4,909,939
    
    
    
    10,028,221Total deposits
    
    
    231,008,870
    
    
    
    250,012,778Long-term debt
    
    
    58,675,000
    
    
    
    63,975,000Advances from borrowers for taxes and insurance
    
    
    416,400
    
    
    
    488,539Interest payable
    
    
    221,784
    
    
    
    310,783Deferred income taxes
    
    
    167,584
    
    
    
    Other liabilities
    
    
    1,728,814
    
    
    
    1,353,693Total liabilities
    
    
    292,218,452
    
    
    
    316,140,793Minority Interest in Real Estate Joint Venture
    
    
    
    
    
    
    382,707Commitments and Contingent LiabilitiesStockholders EquityPreferred stock, $.01 par value; authorized and
unissued  1,000,000 sharesCommon stock, $.01 par value;Authorized  8,000,000 sharesIssued  2,817,500Outstanding; 2004  1,550,473 shares, 2003 
1,499,475 shares
    
    
    28,175
    
    
    
    28,175Additional paid-in capital
    
    
    28,078,190
    
    
    
    27,909,984Retained earnings
    
    
    29,241,861
    
    
    
    26,869,527Accumulated other comprehensive loss
    
    
    (20,214
    )
    
    
    (19,567
    )57,328,012
    
    
    
    54,788,119Treasury stock, at costCommon: 2004  1,267,027 shares, 2003 
1,318,025 shares
    
    
    (21,280,937
    )
    
    
    (21,796,334
    )Total stockholders equity
    
    
    36,047,075
    
    
    
    32,991,785Total liabilities and stockholders equity
    
    $
    328,265,527
    
    
    $
    349,515,285
 42




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##### Table of Contents



Citizens First Financial Corp. 
 Consolidated Statements of Income
Years Ended December 31, 2004, 2003 and 2002
 2004
    
    
    2003
    
    
    2002Interest and Dividend IncomeLoans
    
    $
    15,187,852
    
    
    $
    17,798,763
    
    
    $
    20,736,994Securities  taxable
    
    
    920,268
    
    
    
    843,669
    
    
    
    979,881Federal funds sold
    
    
    131,339
    
    
    
    73,051
    
    
    
    144,614Dividends on Federal Home Loan
Bank stock
    
    
    921,200
    
    
    
    685,723
    
    
    
    242,397Deposits with financial
institutions and other
    
    
    212,086
    
    
    
    131,551
    
    
    
    153,923Total interest and
dividend income
    
    
    17,372,745
    
    
    
    19,532,757
    
    
    
    22,257,809Interest ExpenseDeposits
    
    
    4,821,313
    
    
    
    5,776,505
    
    
    
    7,727,165Long-term debt
    
    
    1,854,700
    
    
    
    3,083,899
    
    
    
    3,589,261Total interest expense
    
    
    6,676,013
    
    
    
    8,860,404
    
    
    
    11,316,426Net Interest Income
    
    
    10,696,732
    
    
    
    10,672,353
    
    
    
    10,941,383Provision (Credit) for Loan Losses
    
    
    (472,534
    )
    
    
    2,462,124
    
    
    
    1,803,006Net Interest Income After Provision
(Credit) for Loan Losses
    
    
    11,169,266
    
    
    
    8,210,229
    
    
    
    9,138,377Noninterest IncomeCustomer service fees
    
    
    1,103,955
    
    
    
    1,009,934
    
    
    
    930,470Net gains on loan sales
    
    
    127,692
    
    
    
    1,308,406
    
    
    
    845,941Net realized losses on sales of
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    (70,722
    )Net gains from sale of land in
real estate joint venture
    
    
    230,047
    
    
    
    467,871
    
    
    
    247,723Net gain from sale of premises and
equipment
    
    
    679,743
    
    
    
    20,577
    
    
    
    33,919Loan servicing fees
    
    
    207,708
    
    
    
    167,166
    
    
    
    203,467Increase in cash surrender value
of life insurance
    
    
    176,861
    
    
    
    124,852
    
    
    
    Other
    
    
    81,680
    
    
    
    160,422
    
    
    
    238,989Total noninterest income
    
    
    2,607,686
    
    
    
    3,259,228
    
    
    
    2,429,787
 See
Notes to Consolidated Financial Statements
 43




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##### Table of Contents



2004
    
    
    2003
    
    
    2002Noninterest ExpenseSalaries and employee benefits
    
    $
    4,493,273
    
    
    $
    3,930,481
    
    
    $
    4,399,528Net occupancy and equipment expenses
    
    
    1,078,955
    
    
    
    1,171,553
    
    
    
    1,193,125Data processing fees
    
    
    206,069
    
    
    
    205,624
    
    
    
    185,792Professional fees
    
    
    381,278
    
    
    
    258,937
    
    
    
    247,953Loss on foreclosed assets, net
    
    
    747,705
    
    
    
    1,365,579
    
    
    
    284,589Deposit insurance premium
    
    
    72,391
    
    
    
    38,433
    
    
    
    41,234Amortization of mortgage servicing
rights
    
    
    153,801
    
    
    
    273,000
    
    
    
    443,174Minority interest in net income of
real estate joint venture
    
    
    97,075
    
    
    
    233,935
    
    
    
    123,862Other
    
    
    1,832,110
    
    
    
    1,412,987
    
    
    
    1,378,805Total noninterest expense
    
    
    9,062,657
    
    
    
    8,890,529
    
    
    
    8,298,062Income Before Income Taxes
    
    
    4,714,295
    
    
    
    2,578,928
    
    
    
    3,270,102Provision for Income Taxes
    
    
    1,727,473
    
    
    
    943,152
    
    
    
    1,339,766Net Income
    
    $
    2,986,822
    
    
    $
    1,635,776
    
    
    $
    1,930,336Basic Earnings Per Share
    
    $
    1.98
    
    
    $
    1.11
    
    
    $
    1.31Diluted Earnings Per Share
    
    $
    1.87
    
    
    $
    1.01
    
    
    $
    1.21
 44




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##### Table of Contents



Citizens First Financial Corp. 
 Consolidated Statements of Stockholders Equity
Years Ended December 31, 2004, 2003 and 2002
 AdditionalCommon Stock
    
    
    Paid-inShares
    
    
    Amount
    
    
    CapitalBalance, January 1, 2002
    
    
    1,482,438
    
    
    $
    28,175
    
    
    $
    27,685,699Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    Change in unrealized
appreciation on
available-for-sale securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDividends on common stock, $ .31 per
share
    
    
    
    
    
    
    
    
    
    
    Purchase of stock
    
    
    (74,094
    )
    
    
    
    
    
    
    Stock options exercised
    
    
    14,960
    
    
    
    
    
    
    
    (45,172
    )Employee stock ownership plan shares
earned
    
    
    32,200
    
    
    
    
    
    
    
    293,262Balance, December 31, 2002
    
    
    1,455,504
    
    
    
    28,175
    
    
    
    27,933,789Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    Change in unrealized
depreciation on
available-for-sale securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDividends on common stock, $ .40 per
share
    
    
    
    
    
    
    
    
    
    
    Purchase of stock
    
    
    (54,577
    )
    
    
    
    
    
    
    Stock options exercised
    
    
    98,548
    
    
    
    
    
    
    
    (299,688
    )Tax benefit related to stock options
exercised
    
    
    
    
    
    
    
    
    
    
    275,883Balance, December 31, 2003
    
    
    1,499,475
    
    
    
    28,175
    
    
    
    27,909,984Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    Change in unrealized
depreciation on
available-for-sale securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDividends on common stock, $ .40 per
share
    
    
    
    
    
    
    
    
    
    
    Purchase of stock
    
    
    (23,782
    )
    
    
    
    
    
    
    Stock options exercised
    
    
    74,780
    
    
    
    
    
    
    
    (282,785
    )Tax benefit related to stock options
exercised
    
    
    
    
    
    
    
    
    
    
    450,991Balance, December 31, 2004
    
    
    1,550,473
    
    
    $
    28,175
    
    
    $
    28,078,190
 See
Notes to Consolidated Financial Statements
 45




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##### Table of Contents



AccumulatedUnearned
    
    
    OtherRetained
    
    
    ESOP
    
    
    Comprehensive
    
    
    TreasuryEarnings
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance, January 1, 2002
    
    $
    24,371,353
    
    
    $
    (322,000
    )
    
    $
    52,090
    
    
    $
    (20,902,847
    )
    
    $
    30,912,470Comprehensive incomeNet income
    
    
    1,930,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,930,336Change in unrealized appreciation on
available-for-sale securities, net of
taxes
    
    
    
    
    
    
    
    
    
    
    144,702
    
    
    
    
    
    
    
    144,702Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,075,038Dividends on common stock, $.31 per share
    
    
    (464,351
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (464,351
    )Purchase of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,427,230
    )
    
    
    (1,427,230
    )Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228,214
    
    
    
    183,042Employee stock ownership plan shares earned
    
    
    
    
    
    
    322,000
    
    
    
    
    
    
    
    
    
    
    
    615,262Balance, December 31, 2002
    
    
    25,837,338
    
    
    
    0
    
    
    
    196,792
    
    
    
    (22,101,863
    )
    
    
    31,894,231Comprehensive incomeNet income
    
    
    1,635,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,635,776Change in unrealized depreciation on
available-for-sale securities, net of
taxes
    
    
    
    
    
    
    
    
    
    
    (216,359
    )
    
    
    
    
    
    
    (216,359
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,419,417Dividends on
common stock, $.40 per share
    
    
    (603,587
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (603,587
    )Purchase of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,221,082
    )
    
    
    (1,221,082
    )Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,526,611
    
    
    
    1,226,923Tax benefit
related to stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,883Balance, December 31, 2003
    
    
    26,869,527
    
    
    
    0
    
    
    
    (19,567
    )
    
    
    (21,796,334
    )
    
    
    32,991,785Comprehensive incomeNet income
    
    
    2,986,822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,986,822Change in unrealized depreciation on
available-for-sale securities, net of
taxes
    
    
    
    
    
    
    
    
    
    
    (647
    )
    
    
    
    
    
    
    (647
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,986,175Dividends on common stock, $.40 per share
    
    
    (614,488
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (614,488
    )Purchase of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (702,678
    )
    
    
    (702,678
    )Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,218,075
    
    
    
    935,290Tax benefit related to stock options
exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450,991Balance, December 31, 2004
    
    $
    29,241,861
    
    
    $
    0
    
    
    $
    (20,214
    )
    
    $
    (21,280,937
    )
    
    $
    36,047,075
 46




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##### Table of Contents



Citizens First Financial Corp. 
 Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
 2004
    
    
    2003
    
    
    2002Operating ActivitiesNet income
    
    $
    2,986,822
    
    
    $
    1,635,776
    
    
    $
    1,930,336Items not requiring (providing) cashDepreciation and amortization
    
    
    634,272
    
    
    
    710,670
    
    
    
    742,193Provision (credit) for loan losses
    
    
    (472,534
    )
    
    
    2,462,124
    
    
    
    1,803,006Loss on foreclosed assets, net
    
    
    747,705
    
    
    
    1,365,579
    
    
    
    284,589Amortization of premiums and
discounts on securities
    
    
    80,533
    
    
    
    195,094
    
    
    
    147,316Amortization of mortgage servicing
rights
    
    
    153,801
    
    
    
    273,000
    
    
    
    443,174Provision for valuation allowance for
mortgage servicing rights
    
    
    
    
    
    
    (123,000
    )
    
    
    123,000Increase in cash surrender value of
life insurance
    
    
    (176,861
    )
    
    
    (124,852
    )
    
    
    Deferred income taxes
    
    
    1,034,598
    
    
    
    108,635
    
    
    
    (752,166
    )Net realized losses on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    70,722Net gain on sales of premises and
equipment
    
    
    (679,743
    )
    
    
    (20,577
    )
    
    
    (33,919
    )Net gain on loan sales
    
    
    (127,692
    )
    
    
    (1,308,406
    )
    
    
    (845,941
    )Loans originated for sale
    
    
    (7,043,490
    )
    
    
    (65,231,740
    )
    
    
    (61,081,927
    )Proceeds from sales of loans
originated for resale
    
    
    6,918,952
    
    
    
    72,050,233
    
    
    
    62,528,157Federal Home Loan Bank stock dividends
    
    
    (946,600
    )
    
    
    (509,000
    )
    
    
    (235,800
    )Compensation expense related to
employee stock ownership and
incentive plans
    
    
    
    
    
    
    
    
    
    
    615,262Net gains from sale of land in real
estate joint venture
    
    
    (230,047
    )
    
    
    (467,871
    )
    
    
    (247,723
    )Minority interest in net income of
real estate joint venture
    
    
    97,075
    
    
    
    233,935
    
    
    
    123,862Change inInterest receivable
    
    
    419,409
    
    
    
    366,008
    
    
    
    91,800Other assets
    
    
    (524,433
    )
    
    
    (158,889
    )
    
    
    158,186Interest payable
    
    
    (88,999
    )
    
    
    (61,760
    )
    
    
    (109,637
    )Other liabilities
    
    
    375,121
    
    
    
    (533,438
    )
    
    
    555,428Net cash provided by operating
activities
    
    
    3,157,889
    
    
    
    10,861,521
    
    
    
    6,309,918
 See
Notes to Consolidated Financial Statements
 47




---



##### Table of Contents



2004
    
    
    2003
    
    
    2002Investing ActivitiesPurchases of available-for-sale
securities
    
    $
    (11,329,764
    )
    
    $
    (11,922,979
    )
    
    $
    (15,548,546
    )Proceeds from maturities of
available-for-sale securities
    
    
    5,939,029
    
    
    
    11,335,972
    
    
    
    5,349,046Proceeds from sales of
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    5,191,203Net change in loans
    
    
    44,739,784
    
    
    
    (8,059,519
    )
    
    
    3,076,000Purchase of premises and equipment
    
    
    (286,249
    )
    
    
    (108,388
    )
    
    
    (144,511
    )Proceeds from sales of premises and
equipment
    
    
    1,000,000
    
    
    
    27,244
    
    
    
    157,244Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (10,000,000
    )
    
    
    Proceeds from the sale of foreclosed
assets
    
    
    1,925,588
    
    
    
    3,030,042
    
    
    
    1,959,545Proceeds from the sale of land in real
estate joint venture
    
    
    912,711
    
    
    
    673,197
    
    
    
    440,570Distribution to minority interest
portion of real estate joint venture
    
    
    (479,782
    )
    
    
    (295,388
    )
    
    
    (220,792
    )Purchase of life insurance
    
    
    
    
    
    
    (3,990,361
    )
    
    
    Net cash provided by (used
in) investing activities
    
    
    42,421,317
    
    
    
    (19,310,180
    )
    
    
    259,759Financing ActivitiesNet increase (decrease) in demand
deposits, money market, NOW and savings
accounts
    
    
    (518,651
    )
    
    
    1,477,328
    
    
    
    12,064,091Net increase (decrease) in certificates
of deposit and brokered deposits
    
    
    (18,485,257
    )
    
    
    (627,852
    )
    
    
    456,376Proceeds from long-term debt
    
    
    27,000,000
    
    
    
    15,000,000
    
    
    
    13,800,000Repayment of long-term debt
    
    
    (32,300,000
    )
    
    
    (23,850,000
    )
    
    
    (10,617,979
    )Purchase of treasury stock
    
    
    (702,678
    )
    
    
    (1,221,082
    )
    
    
    (1,427,230
    )Dividends paid
    
    
    (614,488
    )
    
    
    (603,587
    )
    
    
    (464,351
    )Proceeds from stock options exercised
    
    
    935,290
    
    
    
    1,226,923
    
    
    
    183,042Tax benefit related to stock options
exercised
    
    
    450,991
    
    
    
    275,883
    
    
    
    Net increase (decrease) in advances by
borrowers for taxes and insurance
    
    
    (72,139
    )
    
    
    19,027
    
    
    
    88,673Net cash provided by (used
in) financing activities
    
    
    (24,306,932
    )
    
    
    (8,303,360
    )
    
    
    14,082,622Increase (Decrease) in Cash and Cash
Equivalents
    
    
    21,272,274
    
    
    
    (16,752,019
    )
    
    
    20,652,299Cash and Cash Equivalents, Beginning of Year
    
    
    16,830,900
    
    
    
    33,582,919
    
    
    
    12,930,620Cash and Cash Equivalents, End of Year
    
    $
    38,103,174
    
    
    $
    16,830,900
    
    
    $
    33,582,919Supplemental Cash Flows InformationInterest paid
    
    $
    6,765,012
    
    
    $
    8,922,164
    
    
    $
    11,426,063Income taxes paid (net of refunds)
    
    
    952,651
    
    
    
    1,023,977
    
    
    
    1,649,878Real estate acquired in settlement of
loans
    
    
    630,553
    
    
    
    5,030,782
    
    
    
    3,428,559
 48




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##### Table of Contents



Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Citizens First Financial Corp. (Company) is a thrift holding company whose principal
activity is the ownership and management of its wholly-owned subsidiary, Citizens Savings
Bank (Bank). The Bank is primarily engaged in providing a full range of banking and
financial services to individual and corporate customers in Central Illinois. The Bank has
one wholly owned subsidiary, CSL Service Corporation. CSL Service Corporation entered into a
joint venture real estate development partnership (LLC) with two other investors and is a 50%
owner of the LLC. The primary business of the LLC is to purchase and develop commercial real
estate. CSL Service Corporation sold its remaining interest in the LLC to the other two
investors during 2004. The Company is subject to competition from other financial
institutions. The Company and Bank are subject to the regulation of certain federal and
state agencies and undergo periodic examinations by those regulatory authorities. Principles of Consolidation The consolidated financial statements include the accounts of the Company and the Bank. All
significant intercompany accounts and transactions have been eliminated in consolidation.
The accounts of the LLC have been consolidated into the Companys financial statements. The
cost basis investment in the real estate and the minority interest owned portion are
reflected on the consolidated balance sheets. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, mortgage servicing rights, and
prepayment assumptions used in determining amortization of premiums on mortgage backed
securities. In connection with the determination of the allowance for loan losses and the
valuation of foreclosed assets held for sale, management obtains independent appraisals for
significant properties. Management estimates mortgage servicing rights taking into
consideration changes in interest rates, current prepayment rates and expected future cash
flows and obtains an independent valuation for the assets. Management periodically reviews
the prepayment assumptions used in determining the amortization of premiums on mortgage
backed securities. 49




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##### Table of Contents



Cash Equivalents The Company considers all liquid investments with original maturities of three months or less
to be cash equivalents. Securities Available-for-sale securities, which include any security for which the Company has no
immediate plan to sell but which may be sold in the future, are carried at fair value.
Unrealized gains and losses are recorded, net of related income tax effects, in other
comprehensive income. Amortization of premiums and accretion of discounts are recorded as interest income from
securities; taking into account prepayment assumptions. Realized gains and losses are
recorded as net security gains (losses). Gains and losses on sales of securities are
determined on the specific-identification method. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized
through a valuation allowance by charges to income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at their outstanding principal balances adjusted for any
charge-offs and the allowance for loan losses. Interest income is reported on the interest
method. Generally, loans are placed on non-accrual status at ninety days and interest is
considered a loss, unless the loan is well secured and in the process of collection. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through
a provision for loan losses charged to income. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. 50




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##### Table of Contents



The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrowers ability to repay, estimated value 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. 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,
agricultural, 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 measurements. Land in Real Estate Joint Venture Land in real estate joint venture is carried at cost, with land and development costs
allocated to lots when incurred. Premises and Equipment Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged
to expense using the straight-line method over the estimated useful lives of the assets. Federal Home Loan Stock Federal Home Loan Bank stock is a required investment for institutions that are members of
the Federal Home Loan Bank system. The required investment in the common stock is based on a
predetermined formula. 51




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##### Table of Contents



Foreclosed Assets Held for Sale Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent
to foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in net loss from
foreclosed assets. Mortgage Servicing Rights Mortgage servicing rights on originated loans that have been sold are capitalized by
allocating the total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are amortized in
proportion to and over the period of estimated servicing revenues. Impairment of
mortgage-servicing rights is assessed based on the fair value of those rights. Fair values
are estimated using either an independent valuation or by discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the rights are
stratified based on the predominant risk characteristics of the underlying loans. The
predominant characteristic currently used for stratification is type of loan. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing rights for a
stratum exceed their fair value. Treasury Stock Treasury stock is stated at cost. Cost is determined by the first-in, first-out method. 52




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##### Table of Contents



Stock Options The Company has a stock-based employee compensation plan, which is described more fully in
Note 17. The Company accounted for this plan under the recognition and measurement
principles of 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 provisions of FASB
Statement No. 123R, Share-Based Payment, which is a revision to Statement No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation. See Note 22 in regard to
a future change in accounting principle. Years Ended December 31,2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    2,986,822
    
    
    $
    1,635,776
    
    
    $
    1,930,336Less: total stock-based
employee compensation
cost determined under
the fair value based
method, net of income
taxes.
    
    
    (93,588
    )
    
    
    (82,923
    )
    
    
    (109,706
    )Pro forma net income
    
    $
    2,893,234
    
    
    $
    1,552,853
    
    
    $
    1,820,630Earnings per share:Basic  as reported
    
    $
    1.98
    
    
    $
    1.11
    
    
    $
    1.31Basic  pro forma
    
    
    1.92
    
    
    
    1.05
    
    
    
    1.24Diluted as reported
    
    
    1.87
    
    
    
    1.01
    
    
    
    1.21Diluted pro forma
    
    
    1.81
    
    
    
    0.96
    
    
    
    1.14
 Income Taxes Deferred tax assets and liabilities are recognized for the tax effects of differences between
the financial statement and tax bases of assets and liabilities. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized. The Company files consolidated income tax returns with its
subsidiary. 53




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##### Table of Contents



Earnings Per Share Basic earnings per share have been computed based upon the weighted-average common shares
outstanding during each year. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shared in
the earnings of the Company Shares in the Companys employee stock ownership plan are considered outstanding for earnings
per share calculations when they are committed to be released; unallocated shares are not
considered outstanding. Reclassifications Certain reclassifications have been made to the 2002 and 2003 financial statements to conform
to the 2004 financial statement presentation. These reclassifications had no effect on net
income. Note 2: Merger Agreement In November 2004, the Company entered into an Agreement and Plan of Merger with Main Street
Trust, Inc. (Main Street), an Illinois corporation. Main Street Trust, Inc. will acquire
all of the Companys issued and outstanding shares of common stock. Each of the Companys
shareholders will have the option of receiving either 1.1051 shares of Main Streets stock
for each share of the Companys stock or $35.00 of cash for each share of the Companys
common stock or a combination of both. The transaction has been approved by state and
federal regulators and was approved by the Companys
shareholders on March 8, 2005 and is expected
to close in the second quarter of 2005. Upon approval by the shareholders, the Company
amended the existing stock option agreement and expects to settle all unexercised options based
upon the transaction price immediately prior to closing the transaction. Such action will
result in recording compensation expense for outstanding options in the first quarter of 2005. Note 3: Restriction on Cash and Due From Banks The Company is required to maintain reserve funds in cash and/or on deposit with the Federal
Reserve Bank. The reserve required at December 31, 2004, was $500,000. 54




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##### Table of Contents



Note 4: Securities The amortized cost and approximate fair values of securities available for sale are as
follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2004:U.S. government
agencies
    
    $
    9,799,546
    
    
    $
    14,000
    
    
    $
    (94,190
    )
    
    $
    9,719,356Mortgage-backed
securities
    
    
    15,288,530
    
    
    
    174,118
    
    
    
    (111,908
    )
    
    
    15,350,740Other securities
    
    
    1,000,000
    
    
    
    
    
    
    
    (15,060
    )
    
    
    984,940$
    26,088,076
    
    
    $
    188,118
    
    
    $
    (221,158
    )
    
    $
    26,055,036
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2003:U.S. government
agencies
    
    $
    6,802,487
    
    
    $
    
    
    
    $
    (48,247
    )
    
    $
    6,754,240Mortgage-backed
securities
    
    
    12,978,111
    
    
    
    155,173
    
    
    
    (134,746
    )
    
    
    12,998,538Other securities
    
    
    1,002,141
    
    
    
    
    
    
    
    (9,028
    )
    
    
    993,113$
    20,782,739
    
    
    $
    155,173
    
    
    $
    (192,021
    )
    
    $
    20,745,891
 55




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##### Table of Contents



The amortized cost and fair value of available-for-sale securities at December 31, 2004, by
contractual maturity, are shown below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. Amortized
    
    
    FairCost
    
    
    ValueOne to five years
    
    $
    2,325,428
    
    
    $
    2,301,380Five to ten years
    
    
    4,471,192
    
    
    
    4,409,3506,796,620
    
    
    
    6,710,730Mortgage-backed securities
    
    
    15,288,530
    
    
    
    15,350,740Other securities
    
    
    4,002,926
    
    
    
    3,993,566Totals
    
    $
    26,088,076
    
    
    $
    26,055,036
 The carrying value of securities pledged as collateral, to secure public deposits and for
other purposes, was $6,874,000 at December 31, 2004 and $6,217,000 at December 31, 2003. Gross gains of $157,025 and gross losses of $227,747 resulting from sales of
available-for-sale securities were realized for 2002. There were no sales of securities in
2004 or 2003. With the exception of securities of U.S. government agencies and corporations, the Company
did not hold any securities of a single issuer, payable from and secured by the same source
of revenue or taxing authority, the book value of which exceeded 10% of stockholders equity
at December 31, 2004. Certain investments in debt securities are reported in the financial statements at an amount
less than their historical cost. Total fair value of these investments at December 31, 2004
and 2003, was $13,915,807 and $13,879,790, which is approximately 53% and 67% of the
Companys available-for-sale investment portfolio. These declines primarily resulted from
recent increases in market interest rates. Based on evaluation of available evidence, including recent changes in market interest rates,
management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis
of the investment will be reduced and the resulting loss recognized in net income in the
period the other-than-temporary impairment is identified. 56




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##### Table of Contents



The following table shows the investments gross unrealized losses and fair value, aggregated
by investment category and length of time that individual securities have been in a
continuous unrealized loss position at December 31, 2004: Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalDescription of
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSecurities
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2004:U.S. government
agencies
    
    $
    3,455,450
    
    
    $
    (38,589
    )
    
    $
    4,246,980
    
    
    $
    (55,601
    )
    
    $
    7,702,430
    
    
    $
    (94,190
    )Mortgage-backed
securities
    
    
    75,038
    
    
    
    (1,219
    )
    
    
    5,153,399
    
    
    
    (110,689
    )
    
    
    5,228,437
    
    
    
    (111,908
    )Other securities
    
    
    
    
    
    
    
    
    
    
    984,940
    
    
    
    (15,060
    )
    
    
    984,940
    
    
    
    (15,060
    )Total
temporarily
impaired
securities
    
    $
    3,530,488
    
    
    $
    (39,808
    )
    
    $
    10,385,319
    
    
    $
    (181,350
    )
    
    $
    13,915,807
    
    
    $
    (221,158
    )
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalDescription of
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSecurities
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2003:U.S. government
agencies
    
    $
    5,802,487
    
    
    $
    (48,247
    )
    
    $
    
    
    
    $
    
    
    
    $
    5,802,487
    
    
    $
    (48,247
    )Mortgage-backed
securities
    
    
    6,187,447
    
    
    
    (112,356
    )
    
    
    896,743
    
    
    
    (22,390
    )
    
    
    7,084,190
    
    
    
    (134,746
    )Other securities
    
    
    993,113
    
    
    
    (9,028
    )
    
    
    
    
    
    
    
    
    
    
    993,113
    
    
    
    (9,028
    )Total
temporarily
impaired
securities
    
    $
    12,983,047
    
    
    $
    (169,631
    )
    
    $
    896,743
    
    
    $
    (22,390
    )
    
    $
    13,879,790
    
    
    $
    (192,021
    )
 57




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##### Table of Contents



Note 5: Loans and Allowance for Loan Losses Categories of loans at December 31, include: 2004
    
    
    2003Commercial and agricultural
    
    $
    30,536,297
    
    
    $
    38,046,955Real estate construction
    
    
    27,625,900
    
    
    
    36,577,259Commercial real estate
    
    
    71,633,177
    
    
    
    86,368,436Residential real estate
    
    
    107,299,556
    
    
    
    120,935,864Consumer and Other
    
    
    7,500,838
    
    
    
    9,865,757Total loans
    
    
    244,595,768
    
    
    
    291,794,271LessUndisbursed portion of loans
    
    
    (7,352,504
    )
    
    
    (9,317,528
    )Allowance for loan losses
    
    
    (2,736,014
    )
    
    
    (3,071,690
    )Net loans
    
    $
    234,507,250
    
    
    $
    279,405,053
 Activity in the allowance for loan losses was as follows: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    $
    3,071,690
    
    
    $
    3,753,324
    
    
    $
    2,421,460Provision (credit)
charged to expense
    
    
    (472,534
    )
    
    
    2,462,124
    
    
    
    1,803,006Recoveries
    
    
    410,738
    
    
    
    45,219
    
    
    
    Charge-offs
    
    
    (273,880
    )
    
    
    (3,188,977
    )
    
    
    (471,142
    )Balance, end of year
    
    $
    2,736,014
    
    
    $
    3,071,690
    
    
    $
    3,753,324
 Impaired loans totaled $13,681,000 and $24,066,000 at December 31, 2004 and 2003,
respectively. An allowance for loan losses of $1,513,000 and $1,655,000 relates to impaired
loans of $5,255,000 and $7,427,410, at December 31, 2004 and 2003, respectively. At December
31, 2004 and 2003, impaired loans of $8,426,000 and $16,638,590 had no related allowance for
loan losses. Interest of $1,371,703, $729,250 and $1,685,923 was recognized on average impaired loans of
$22,976,600, $22,410,190 and $21,074,038 for 2004, 2003 and 2002, respectively. Interest of
$1,368,829, $728,124 and $1,560,973 was recognized on impaired loans on a cash basis during
2004, 2003 and 2002, respectively. At December 31, 2004 and 2003, accruing loans delinquent 90 days or more totaled $0 and
$7,000, respectively. Non-accruing loans at December 31, 2004 and 2003 were $725,000 and
$2,452,000, respectively. 58




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##### Table of Contents



Note 6: Foreclosed Assets Held for Sale Activity in the allowance for losses on foreclosed assets was as follows: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    $
    1,313,000
    
    
    $
    233,650
    
    
    $
    Provision charged to expense
    
    
    484,000
    
    
    
    1,324,500
    
    
    
    283,650Charge-offs, net of
recoveries of $0 for 2004,
2003 and 2002
    
    
    (1,775,000
    )
    
    
    (245,150
    )
    
    
    (50,000
    )Balance, end of year
    
    $
    22,000
    
    
    $
    1,313,000
    
    
    $
    233,650
 Note 7: Premises and Equipment Major classifications of premises and equipment, stated at cost, are as follows: 2004
    
    
    2003Land
    
    $
    1,410,660
    
    
    $
    1,572,451Buildings and improvements
    
    
    6,179,056
    
    
    
    7,425,737Equipment
    
    
    4,197,632
    
    
    
    4,032,19011,787,348
    
    
    
    13,030,378Less accumulated depreciation
    
    
    (6,272,322
    )
    
    
    (6,847,072
    )Net premises and equipment
    
    $
    5,515,026
    
    
    $
    6,183,306
 Note 8: Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of mortgage loans serviced for others was $83,476,395,
$96,083,972 and $100,622,417 at December 31, 2004, 2003 and 2002, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and
included in demand deposits, were approximately $411,626, $430,211 and $465,670 at December
31, 2004, 2003 and 2002, respectively. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2004 and
2003 totaled $356,045 and $468,730, respectively. Comparable market values and a valuation
model that calculates the present value of future cash flows were used to estimate fair
value. For purposes of measuring impairment, risk characteristics including product type,
investor type, and interest rates, were used to stratify the originated mortgage servicing
rights. 2004
    
    
    2003
    
    
    2002Mortgage Servicing RightsBalance, beginning of year
    
    $
    468,730
    
    
    $
    529,563
    
    
    $
    761,267Servicing rights capitalized
    
    
    41,116
    
    
    
    212,167
    
    
    
    211,470Amortization of servicing rights
    
    
    (153,801
    )
    
    
    (273,000
    )
    
    
    (443,174
    )356,045
    
    
    
    468,730
    
    
    
    529,563Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (123,000
    )Balance, end of year
    
    $
    356,045
    
    
    $
    468,730
    
    
    $
    406,563
 59




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##### Table of Contents



Activity in the valuation allowance for mortgage servicing rights was as follows: 2003
    
    
    2002Balance, beginning of year
    
    $
    123,000
    
    
    $
    Additions
    
    
    
    
    
    
    123,000Reductions
    
    
    (123,000
    )
    
    
    Direct write downs
    
    
    
    
    
    
    Balance, end of year
    
    $
    
    
    
    $
    123,000
 60




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##### Table of Contents



Note 9: Interest-bearing Deposits Interest-bearing deposits in denominations of $100,000 or more were $52,907,197 at December
31, 2004 and $45,809,400 at December 31, 2003. At December 31, 2004, the scheduled maturities of time deposits, including brokered deposits,
are as follows: 2005
    
    $
    80,442,6672006
    
    
    33,373,1322007
    
    
    13,137,9862008
    
    
    10,812,5412009
    
    
    3,138,483$
    140,904,809
 Note 10: Long-Term Debt Long-term debt consisted of the following components: 2004
    
    
    2003Federal Home Loan Bank advances
    
    $
    56,675,000
    
    
    $
    61,975,000Bank note payable
    
    
    2,000,000
    
    
    
    2,000,000Total
    
    $
    58,675,000
    
    
    $
    63,975,000
 The Federal Home Loan Bank (FHLB) advances are secured by mortgage loans totaling $96,106,000
at December 31, 2004 and all FHLB stock owned by the Company. Advances, at interest rates
from 1.24% to 6.74%, are subject to restrictions or penalties in the event of prepayment. At
December 31, 2004, the Company had $9,000,000 in FHLB advances having a weighted average rate
of 4.95% which are callable. The bank note payable is due on June 1, 2005, with interest due at maturity adjusted to 1.75%
over LIBOR. The interest rate on the bank note was 4.07% as of December 31, 2004. The note
is secured by the stock of the Bank. 61




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##### Table of Contents



Aggregate annual maturities of long-term debt at December 31, 2004, are: 2005
    
    $
    26,000,0002006
    
    
    23,000,0002007
    
    
    675,0002008
    
    
    9,000,000$
    58,675,000
 Note 11: Income Taxes The provision for income taxes includes these components: 2004
    
    
    2003
    
    
    2002Taxes currently payableFederal
    
    $
    646,550
    
    
    $
    688,662
    
    
    $
    1,751,087State
    
    
    46,325
    
    
    
    145,855
    
    
    
    340,845692,875
    
    
    
    834,517
    
    
    
    2,091,932Deferred income taxesFederal
    
    
    917,333
    
    
    
    94,489
    
    
    
    (659,114
    )State
    
    
    117,265
    
    
    
    14,146
    
    
    
    (93,052
    )1,034,598
    
    
    
    108,635
    
    
    
    (752,166
    )Income tax expense
    
    $
    1,727,473
    
    
    $
    943,152
    
    
    $
    1,339,766
 A reconciliation of income tax expense at the statutory rate to the Companys actual income
tax expense is shown below: 2004
    
    
    2003
    
    
    2002Computed at the statutory rate
(34%)
    
    $
    1,602,860
    
    
    $
    876,836
    
    
    $
    1,111,835Increase (decrease) resulting fromState income taxes
    
    
    107,970
    
    
    
    74,045
    
    
    
    163,543Other
    
    
    16,643
    
    
    
    (7,729
    )
    
    
    64,388Actual tax expense
    
    $
    1,727,473
    
    
    $
    943,152
    
    
    $
    1,339,766
 During 2004 and 2003, participants in the stock option plan exercised and sold shares
resulting in a disqualifying disposition. The amount of the deductions for the Company
totaled $450,991 and $275,883 during 2004 and 2003, respectively, and are recognized as an
adjustment to additional paid in capital. 62




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##### Table of Contents



The tax effects of temporary differences related to deferred taxes shown on the balance
sheets were: 2004
    
    
    2003Deferred tax assetsAllowance for loan losses
    
    $
    1,001,092
    
    
    $
    1,131,401Deferred compensation
    
    
    501,612
    
    
    
    480,049Valuation of foreclosed assets
    
    
    8,540
    
    
    
    509,707Unrealized losses on
available-for-sale securities
    
    
    17,691
    
    
    
    17,281Other
    
    
    14,283
    
    
    
    29,9961,543,218
    
    
    
    2,168,434Deferred tax liabilitiesDepreciation
    
    
    (473,119
    )
    
    
    (431,377

    )Federal Home Loan Bank stock dividends
    
    
    (980,871
    )
    
    
    (623,368
    )Capitalized mortgage servicing rights
    
    
    (138,217
    )
    
    
    (181,961
    )Deferred loan fees
    
    
    (36,813
    )
    
    
    (52,654
    )Other
    
    
    (81,782
    )
    
    
    (12,470
    )(1,710,802
    )
    
    
    (1,301,830
    )Net deferred tax asset
    
    $
    (167,584
    )
    
    $
    866,604
 Retained earnings at December 31, 2004 and 2003, include approximately $2,144,000, for which
no deferred federal income tax liability has been recognized. These amounts represent 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 deferred income tax liabilities on the
preceding amounts that would have been recorded if they were expected to reverse into taxable
income in the foreseeable future were approximately $832,000 at December 31, 2004 and 2003,
respectively. 63




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##### Table of Contents



Note 12: Other Comprehensive Income (Loss) Other comprehensive income (loss) components and related taxes were as follows: 2004
    
    
    2003
    
    
    2002Unrealized gains (losses) on
available-for-sale securities
    
    $
    (1,057
    )
    
    $
    (358,508
    )
    
    $
    307,240Less reclassification adjustment for
realized losses included in income
    
    
    
    
    
    
    
    
    
    
    70,722Other comprehensive income
(loss), before tax effect
    
    
    (1,057
    )
    
    
    (358,508
    )
    
    
    236,518Tax expense (benefit)
    
    
    (410
    )
    
    
    (142,149
    )
    
    
    91,816Other comprehensive income (loss)
    
    $
    (647
    )
    
    $
    (216,359
    )
    
    $
    144,702
 Note 13: Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Banks financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures of the Banks assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Banks capital amounts and classification 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 Bank
to maintain minimum amounts and ratios (set forth in the following table). Management
believes, as of December 31, 2004 and 2003, that the Bank meets all capital adequacy
requirements to which it is subject. 64




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##### Table of Contents



As of December 31, 2004, the most recent notification from Federal Deposit Insurance
Corporation (FDIC) 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. There are no conditions or events since that notification that management believes
have changed the Banks category. To Be WellCapitalized UnderFor Capital
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(In Thousands)As of December 31, 2004Total capital
(to risk-weighted
assets)
    
    $
    34,588
    
    
    
    16.7
    %
    
    $
    16,597
    
    
    
    8.0
    %
    
    $
    20,747
    
    
    
    10.0
    %Tier I capital
(to risk-weighted
assets)
    
    
    31,994
    
    
    
    15.4
    
    
    
    8,299
    
    
    
    4.0
    
    
    
    12,448
    
    
    
    6.0Tier I capital
(to average assets)
    
    
    31,944
    
    
    
    9.9
    
    
    
    12,903
    
    
    
    4.0
    
    
    
    16,128
    
    
    
    5.0As of December 31, 2003Total capital
(to risk-weighted
assets)
    
    $
    32,869
    
    
    
    13.5
    %
    
    $
    19,438
    
    
    
    8.0
    %
    
    $
    24,298
    
    
    
    10.0
    %Tier I capital
(to risk-weighted
assets)
    
    
    29,847
    
    
    
    12.3
    
    
    
    9,719
    
    
    
    4.0
    
    
    
    14,579
    
    
    
    6.0Tier I capital
(to average assets)
    
    
    29,847
    
    
    
    8.6
    
    
    
    13,913
    
    
    
    4.0
    
    
    
    17,391
    
    
    
    5.0
 The Bank is subject to certain restrictions on the amount of dividends that it may declare
without prior regulatory approval. As an Illinois chartered savings bank, the Bank is subject to supervision, examination and
regulation by the Illinois Department of Financial and Professional Regulation and the
Federal Deposit Insurance Corporation (collectively, the Regulators). In January 2004, the
Banks Board of Directors entered into a Memorandum of Understanding (MOU) that required
the Bank to take various actions regarding the Banks lending operations. After meeting the
terms of the MOU, in December 2004, the Regulators terminated the MOU. 65




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##### Table of Contents



Note 14: Related Party Transactions At December 31, 2004 and 2003, the Company had loans outstanding to executive officers,
directors, significant shareholders and their affiliates (related parties). In managements opinion, such loans and other extensions of credit were made in the ordinary
course of business and were made on substantially the same terms (including interest rates
and collateral) as those prevailing at the time for comparable transactions with other
persons. Further, in managements opinion, these loans did not involve more than normal risk
of collectibility or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: Balance, January 1, 2004
    
    $
    11,736,901Change in composition of related parties
    
    
    37,756New loans, including renewals
    
    
    2,411,953Payments, etc. including renewals
    
    
    (8,600,876
    )Balance, December 31, 2004
    
    $
    5,585,734
 Note 15: Employee Benefits The Company has a defined contribution pension plan (combined profit sharing and 401(k) plan)
(Plan) covering substantially all employees. The amount of the annual profit-sharing
contribution is at the discretion of the Board of Directors. The Plan also provides for
matched employee contributions up to a maximum of 4% of the participants gross salary.
Employer contributions charged to expense for 2004, 2003 and 2002 were $247,275, $170,550 and
$204,000, respectively. The Company has a non-qualified supplemental retirement plan (SERP) covering certain
officers and key employees. The benefits provided under the SERP will make up the benefits
lost to the SERP participants due to limitations on compensation and maximum benefits under
the Companys tax qualified savings plan and ESOP. Benefits will be provided under the SERP
at the same time and in the same form as the related benefits will be provided under the
savings plan and ESOP. The Companys expense for the SERP was $125,161, $15,189 and $45,918
for 2004, 2003 and 2002, respectively. 66




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##### Table of Contents



Note 16: Employee Stock Ownership Plan The Bank has an employee stock ownership plan for the benefit of substantially all employees.
The ESOP borrowed $2,254,000 from the Company and used those funds to acquire 225,400 shares
of the Companys stock at $10 per share. Principal payments were made in even annual amounts
over a seven year period. The last principal payment was made on December 31, 2002. Shares issued to the ESOP were allocated to ESOP participants based on principal repayments
made by the ESOP on the loan from the Company. Shares totaling 32,200 for 2002 with an average fair value of $19.11 per share were committed
to be released, resulting in ESOP compensation expense of $615,262. There were no shares
committed to be released and no ESOP compensation expense for 2004 and 2003. The ESOP shares
as of December 31 were as follows: 2004
    
    
    2003Allocated shares
    
    
    200,026
    
    
    
    219,962Shares released for allocation
    
    
    
    
    
    
    Unreleased shares
    
    
    
    
    
    
    Total ESOP shares
    
    
    200,026
    
    
    
    219,962Fair value of unreleased shares at December 31
    
    $
    
    
    
    $
    
 67




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##### Table of Contents



Note 17: Stock Option Plan The Company has a fixed option plan under which the Company may grant options that vest
pro-rata over five years to selected officers and directors. The exercise price of each
option is intended to equal the fair value of the Companys stock on the date of grant. An
options maximum term is ten years. A summary of the status of the plan at December 31, 2004, 2003 and 2002, and changes during
the years then ended is presented below: 2004
    
    
    2003
    
    
    2002Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding,
beginning of
year
    
    
    262,100
    
    
    $
    12.87
    
    
    
    357,248
    
    
    $
    12.43
    
    
    
    359,708
    
    
    $
    12.31Granted
    
    
    2,500
    
    
    
    23.25
    
    
    
    10,000
    
    
    
    25.10
    
    
    
    12,500
    
    
    
    17.55Exercised
    
    
    74,780
    
    
    
    12.51
    
    
    
    98,548
    
    
    
    12.45
    
    
    
    14,960
    
    
    
    12.23Forfeited
    
    
    3,200
    
    
    
    11.69
    
    
    
    6,600
    
    
    
    12.07
    
    
    
    Outstanding,
end of year
    
    
    186,620
    
    
    $
    13.33
    
    
    
    262,100
    
    
    $
    12.87
    
    
    
    357,248
    
    
    $
    12.43Options
exercisable,
end of year
    
    
    163,120
    
    
    
    
    
    
    
    225,457
    
    
    
    
    
    
    
    301,510
 The fair value of options granted is estimated on the date of the grant using an
option-pricing model with the following weighted-average assumptions: 2004
    
    
    2003Dividend yields
    
    
    1.72
    %
    
    
    1.58
    %Volatility factors of
expected market price
of common stock
    
    
    20.68
    %
    
    
    11.96
    %Risk-free interest rates
    
    
    4.25
    %
    
    
    3.20
    %Expected life of options
    
    10 years
    
    10 yearsWeighted-average fair
value of options
granted during the year
    
    $
    6.96
    
    
    $
    4.89
 68




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##### Table of Contents



The following table summarizes information about stock options under the plan outstanding
at December 31, 2004: Options Outstanding
    
    Options ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$12.30
    
    
    109,220
    
    
    2.1 years
    
    $
    12.30
    
    
    
    109,220
    
    
    $
    12.3011.69
    
    
    38,400
    
    
    5 years
    
    
    11.60
    
    
    
    38,400
    
    
    
    11.6913.94
    
    
    2,500
    
    
    4.3 years
    
    
    13.94
    
    
    
    2,500
    
    
    
    13.9413.44
    
    
    5,000
    
    
    5.75 years
    
    
    13.44
    
    
    
    4,000
    
    
    
    13.4412.00
    
    
    9,000
    
    
    6 years
    
    
    12.00
    
    
    
    3,000
    
    
    
    12.0023.25
    
    
    2,500
    
    
    9.33 years
    
    
    23.25
    
    
    
    
    
    
    
    23.2525.10
    
    
    10,000
    
    
    9 years
    
    
    25.10
    
    
    
    2,000
    
    
    
    25.1017.55
    
    
    10,000
    
    
    8 years
    
    
    17.55
    
    
    
    4,000
    
    
    
    17.55186,620
    
    
    
    
    
    
    
    
    
    
    
    163,120
 Note 18: Earnings Per Share Earnings per share (EPS) were computed as follows: Year Ended December 31, 2004Weighted-
    
    
    Per ShareIncome
    
    
    Average Shares
    
    
    AmountBasic earnings per shareIncome available to
common stockholders
    
    $
    2,986,822
    
    
    
    1,506,717
    
    
    $
    1.98Effect of dilutive securities
stock options
    
    
    
    
    
    
    94,231Diluted earnings per shareIncome available to
common stockholders and
assumed conversions
    
    $
    2,986,822
    
    
    
    1,600,948
    
    
    $
    1.87
 69




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##### Table of Contents



Year Ended December 31, 2003Weighted-
    
    
    Per ShareIncome
    
    
    Average Shares
    
    
    AmountBasic earnings per shareIncome available to
common stockholders
    
    $
    1,635,776
    
    
    
    1,478,568
    
    
    $
    1.11Effect of dilutive securities
stock options
    
    
    
    
    
    
    136,246Diluted earnings per shareIncome available to
common stockholders and
assumed conversions
    
    $
    1,635,776
    
    
    
    1,614,814
    
    
    $
    1.01
 Year Ended December 31, 2002Weighted-
    
    
    Per ShareIncome
    
    
    Average Shares
    
    
    AmountBasic earnings per shareIncome available to
common stockholders
    
    $
    1,930,336
    
    
    
    1,469,003
    
    
    $
    1.31Effect of dilutive securities
stock options
    
    
    
    
    
    
    131,026Diluted earnings per shareIncome available to
common stockholders and
assumed conversions
    
    $
    1,930,336
    
    
    
    1,600,029
    
    
    $
    1.21
 70




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Note 19: Disclosures about Fair Value of Financial Instruments The following table presents estimated fair values of the Companys financial instruments.
The fair values of certain of these instruments were calculated by discounting expected cash
flows, which involves significant judgments by management and uncertainties. Fair value is
the estimated amount at which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. Because no
market exists for certain of these financial instruments and because management does not
intend to sell these financial instruments, the Company does not know whether the fair values
shown below represent values at which the respective financial instruments could be sold
individually or in the aggregate. December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assetsCash and cash
equivalents
    
    $
    38,103,174
    
    
    $
    38,103,174
    
    
    $
    16,830,900
    
    
    $
    16,830,900Available-for-sale
securities
    
    
    26,055,036
    
    
    
    26,055,036
    
    
    
    20,745,891
    
    
    
    20,745,891Loans held for sale
    
    
    587,202
    
    
    
    587,202
    
    
    
    376,088
    
    
    
    376,088Loans, net of
allowance for loan
losses
    
    
    234,507,250
    
    
    
    236,538,054
    
    
    
    279,405,053
    
    
    
    284,125,582Federal Home Loan
Bank stock
    
    
    16,152,500
    
    
    
    16,152,500
    
    
    
    15,205,900
    
    
    
    15,205,900Interest receivable
    
    
    1,667,579
    
    
    
    1,667,579
    
    
    
    2,086,988
    
    
    
    2,086,988Cash surrender
value of life
insurance
    
    
    4,292,074
    
    
    
    4,292,074
    
    
    
    4,115,213
    
    
    
    4,115,213Financial liabilitiesDeposits
    
    
    231,008,870
    
    
    
    231,265,251
    
    
    
    250,012,778
    
    
    
    251,322,278Long-term debt
    
    
    58,675,000
    
    
    
    57,102,433
    
    
    
    63,975,000
    
    
    
    64,977,140Advance payments
by borrowers for
taxes and
insurance
    
    
    416,400
    
    
    
    416,400
    
    
    
    488,539
    
    
    
    488,539Interest payable
    
    
    221,784
    
    
    
    221,784
    
    
    
    310,783
    
    
    
    310,783Unrecognized financial
instruments (net of
contract amount)Commitments to
originate loans
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Letters of credit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Lines of credit
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 71




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##### Table of Contents



The following methods and assumptions were used to estimate the fair value of each class of
financial instruments. Cash and Cash Equivalents, Federal Home Loan Bank Stock, and Cash Surrender Value of Life
Insurance The carrying amount approximates fair value. Securities Fair values equal quoted market prices, if available. If quoted market prices are not
available, fair value is estimated based on quoted market prices of similar securities. Loans Held for Sale For homogeneous categories of loans, such as mortgage loans held for sale, fair value is
estimated using the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. Loans The fair value of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest approximates its fair
value. Deposits Deposits include demand deposits, savings accounts, NOW accounts, and certain money market
deposits. The carrying amount approximates fair value. The fair value of fixed-maturity
time deposits is estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities. Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt. 72




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##### Table of Contents



Interest Payable and Advance Payments to Borrowers for Taxes and Insurance The fair value approximates carrying value. Commitments to Originate Loans, Letters of Credit and Lines of Credit The fair value of commitments to originate loans is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of forward sale commitments is estimated based
on current market prices for loans of similar terms and credit quality. The fair values of
letters of credit and lines of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date. Note 20: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure
of certain significant estimates and current vulnerabilities due to certain concentrations.
Estimates related to the allowance for loan losses, mortgage servicing rights, mortgage
backed securities premiums, and foreclosed assets held for sale are reflected in the
footnotes regarding loans, mortgage servicing rights, securities, and foreclosed assets held
for sale. Current vulnerabilities due to certain concentrations of credit risk are discussed
in the footnote on commitments and credit risk. Note 21: Commitments and Credit Risk The Company grants agribusiness, commercial, residential and consumer loans to customers
located primarily in Central Illinois. The Companys loans are generally secured by specific
items of collateral including real property, consumer assets and business assets. Although
the Company has a diversified loan portfolio, a substantial portion of its debtors ability
to honor their contracts is dependent upon economic conditions in Central Illinois. The
Company has a significant concentration in construction and commercial real estate loans
related to the real estate market in Bloomington-Normal. 73




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Commitments to Originate Loans Commitments to originate loans 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 a
portion of the commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Each customers creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary,
is based on managements credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate. At December 31, 2004 and 2003, the Company had outstanding commitments to originate loans
aggregating approximately $11,804,000 and $16,733,000, respectively. The commitments
extended over varying periods of time with the majority being disbursed within a one-year
period. Loan commitments at fixed rates of interest amounted to $10,405,000 and $15,842,000
at December 31, 2004 and 2003, respectively, with the remainder at floating market rates. Letters of Credit Letters of credit are conditional commitments issued by the Company 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 loans to customers. The Company had total outstanding letters of credit amounting to $549,000 and $1,267,000, at
December 31, 2004 and 2003, respectively. At December 31, 2004, the Banks deferred revenue
under standby letters of credit agreements was nominal. Lines of Credit Lines of credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Lines of credit generally have fixed expiration
dates. Since a portion of the line may expire without being drawn upon, the total unused
lines do not necessarily represent future cash requirements. Each customers
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on managements credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate. Management uses the same credit policies
in granting lines of credit as it does for on-balance-sheet instruments. 74




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At December 31, 2004, the Company had granted unused lines of credit to borrowers aggregating
approximately $6,400,000 and $3,212,000 for commercial lines and open-end consumers lines,
respectively. At December 31, 2003, unused lines of credit to borrowers aggregated
approximately $9,562,000 and $3,511,000 for commercial lines and for open-end consumer lines. Other Credit Risks The Company had federal funds sold to one institution totaling approximately $8,207,000 and
$3,248,000 at December 31, 2004 and 2003. The Company had a concentration of funds on
deposit with the Federal Home Loan Bank totaling approximately $24,460,000 and $6,891,000 at
December 31, 2004 and 2003. At December 31, 2004, approximately 3% of the Companys total time deposits consisted of
jumbo certificates of deposits which were issued through a broker and had minimum
denominations in excess of $100,000. Note 22: Future Change in Accounting Principle In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-based Compensation,that setsaccounting requirements for
share-based compensation to employees. This statement will require the Company to
recognize in the income statement the grant-date fair value of the stock options and other
equity-based compensation issued to employees, but expresses no preference for a type of
valuation model. This Statement is effective on July 1, 2005. The unvested stock options
that are outstanding on the effective date of SFAS No. 123R that were previously included as
part of the net income in Note 1 will be charged to expense over the remaining vesting
period, without any changes in measurement. The adoption of SFAS No. 123R is not expected to
have a material impact on the Companys results of operations, financial position or cash
flows. 75




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Note 23: Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of
operations and cash flows of the Company: Condensed Balance Sheets December 31,2004
    
    
    2003AssetsCash
    
    $
    44,778
    
    
    $
    70,255Interest-bearing demand deposits
    
    
    2,260,739
    
    
    
    661,132Total cash and cash equivalents
    
    
    2,305,517
    
    
    
    731,387Investment in common stock of subsidiary
    
    
    32,014,354
    
    
    
    30,362,756Loans, net of allowance for loan losses of $50,000
at December 31, 2004 and 2003
    
    
    3,565,426
    
    
    
    3,899,888Other
    
    
    716,444
    
    
    
    516,366Total assets
    
    $
    38,601,741
    
    
    $
    35,510,397LiabilitiesLong-term debt
    
    $
    2,000,000
    
    
    $
    2,000,000Other
    
    
    554,666
    
    
    
    518,612Total liabilities
    
    
    2,554,666
    
    
    
    2,518,612Stockholders Equity
    
    
    36,047,075
    
    
    
    32,991,785Total liabilities and stockholders equity
    
    $
    38,601,741
    
    
    $
    35,510,397
 76




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##### Table of Contents



Condensed Statements of Income Year Ended December 31,2004
    
    
    2003
    
    
    2002IncomeDividends from subsidiary
    
    $
    1,725,000
    
    
    $
    2,235,000
    
    
    $
    1,550,622Other income
    
    
    207,074
    
    
    
    262,155
    
    
    
    280,125Total income
    
    
    1,932,074
    
    
    
    2,497,155
    
    
    
    1,830,747ExpensesProvision for loan losses
    
    
    
    
    
    
    25,000
    
    
    
    Other expenses
    
    
    691,897
    
    
    
    377,215
    
    
    
    524,480Total expenses
    
    
    691,897
    
    
    
    402,215
    
    
    
    524,480Income Before Income Tax and
Equity in Undistributed
Income of Subsidiary
    
    
    1,240,177
    
    
    
    2,094,940
    
    
    

    1,306,267Income Tax Benefit
    
    
    (94,400
    )
    
    
    (56,808
    )
    
    
    (134,281
    )Income Before Equity in
Undistributed Income of
Subsidiary
    
    
    1,334,577
    
    
    
    2,151,748
    
    
    
    1,440,548Equity in Undistributed
Income (Expense) of
Subsidiary
    
    
    1,652,245
    
    
    
    (515,972
    )
    
    
    489,788Net Income
    
    $
    2,986,822
    
    
    $
    1,635,776
    
    
    $
    1,930,336
 77




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Condensed Statements of Cash Flows Year Ended December 31,2004
    
    
    2003
    
    
    2002Operating ActivitiesNet income
    
    $
    2,986,822
    
    
    $
    1,635,776
    
    
    $
    1,930,336Items not requiring
(providing) cashProvision for loan losses
    
    
    
    
    
    
    25,000
    
    
    
    Equity in undistributed
income of subsidiary
    
    
    (1,652,245
    )
    
    
    515,972
    
    
    
    (489,788
    )Net change in
Other assets
    
    
    (200,078
    )
    
    
    (85,685
    )
    
    
    (239,417
    )Other liabilities
    
    
    36,054
    
    
    
    36,640
    
    
    
    115,745Net cash provided by
operating activities
    
    
    1,170,553
    
    
    
    2,127,703
    
    
    
    1,316,876Investing ActivitiesNet change in ESOP loan
    
    
    
    
    
    
    
    
    
    
    309,200Net change in loans
    
    
    334,462
    
    
    
    (840,688
    )
    
    
    Net cash provided by
(used in) investing
activities
    
    
    334,462
    
    
    
    (840,688
    )
    
    
    309,200Financing ActivitiesRepayments of long-term debt
    
    
    
    
    
    
    (1,750,000
    )
    
    
    (500,000
    )Proceeds from stock options
exercised
    
    
    935,290
    
    
    
    1,226,923
    
    
    
    183,042Purchase of treasury stock
    
    
    (702,678
    )
    
    
    (1,221,082
    )
    
    
    (1,427,230
    )Dividends paid
    
    
    (614,488
    )
    
    
    (603,587
    )
    
    
    (464,351
    )Tax benefit related to stock
options exercised
    
    
    450,991
    
    
    
    275,883
    
    
    
    Net cash provided by
(used in) financing
activities
    
    
    69,115
    
    
    
    (2,071,863
    )
    
    
    (2,208,539
    )Net Change in Cash and Cash
Equivalents
    
    
    1,574,130
    
    
    
    (784,848
    )
    
    
    (582,463
    )Cash and Cash Equivalents at
Beginning of Year
    
    
    731,387
    
    
    
    1,516,235
    
    
    
    2,098,698Cash and Cash Equivalents at End
of Year
    
    $
    2,305,517
    
    
    $
    731,387
    
    
    $
    1,516,235
 78




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##### Table of Contents



Quarterly Financial Information The following is a summary of selected quarterly results of operations for the years ended December
31, 2004 and 2003: Quarter Ended In thousands except share data
    
    
    12/31
    
    
    
    09/30
    
    
    
    06/30
    
    
    
    03/31December 31, 2004Net interest income
    
    
    $
    2,624
    
    
    
    $
    2,582
    
    
    
    $
    2,735
    
    
    
    $
    2,756Provision (credit) for loan losses
    
    
    
    (364
    )
    
    
    
    141
    
    
    
    
    (76
    )
    
    
    
    (174
    )Noninterest income
    
    
    
    1,202
    
    
    
    
    429
    
    
    
    
    307
    
    
    
    
    669Noninterest expense
    
    
    
    2,686
    
    
    
    
    1,916
    
    
    
    
    1,953
    
    
    
    
    2,508Income before income tax
    
    
    
    1,504
    
    
    
    
    954
    
    
    
    
    1,165
    
    
    
    
    1,091Net income
    
    
    
    970
    
    
    
    
    599
    
    
    
    
    731
    
    
    
    
    687Basic earnings per share
    
    
    $
    0.64
    
    
    
    $
    0.40
    
    
    
    $
    0.48
    
    
    
    $
    0.46Diluted earnings per share
    
    
    $
    0.60
    
    
    
    $
    0.38
    
    
    
    $
    0.46
    
    
    
    $
    0.43December 31, 2003:Net interest income
    
    
    $
    2,693
    
    
    
    $
    2,745
    
    
    
    $
    2,648
    
    
    
    $
    2,586Provision for loan losses
    
    
    
    1,595
    
    
    
    
    476
    
    
    
    
    306
    
    
    
    
    85Noninterest income
    
    
    
    632
    
    
    
    
    1,013
    
    
    
    
    790
    
    
    
    
    824Noninterest expense
    
    
    
    2,311
    
    
    
    
    2,502
    
    
    
    
    1,964
    
    
    
    
    2,113Income before income tax
    
    
    
    (581
    )
    
    
    
    780
    
    
    
    
    1,168
    
    
    
    
    1,212Net income
    
    
    
    (324
    )
    
    
    
    497
    
    
    
    
    721
    
    
    
    
    742Basic earnings (loss) per share
    
    

($
    0.22
    )
    
    
    $
    0.33
    
    
    
    $
    0.49
    
    
    
    $
    0.51Diluted earnings (loss) per share
    
    

($
    0.22
    )
    
    
    $
    0.31
    
    
    
    $
    0.45
    
    
    
    $
    0.46
 
 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A Controls and Procedures (a) Disclosure controls and procedures. We evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2004. Our disclosure
controls and procedures are the controls and other procedures that we designed to ensure that we
record, process, summarize and report in a timely manner the information we must disclose in
reports that we file with or submit to the SEC. C. William Landefeld, our President and Chief
Executive Officer, and Dallas G. Smiley, our Executive Vice President and Chief Financial Officer,
reviewed and participated in this evaluation. Based on this evaluation, Messrs. Landefeld and
Smiley concluded that, as of the date of their evaluation, our disclosure controls were effective. (b) Internal controls. During the quarter ended December 31, 2004, there have not been any
significant changes in our internal accounting controls or in other factors that could
significantly affect those controls. 79




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##### Table of Contents



Item 9B Other Information None 
 PART III 
 Item 10 Directors and Executive Officers of the Registrant Position, Principal Occupation,Name and Age
    
    
    
    
    
    Business Experience and DirectorshipDr. Lowell M. Thompson
    
    
    66
    
    
    Director since 1987 and current Chairman.
Practicing dentist.Mary Ann Webb
    
    
    58
    
    
    Director since 2003. Partner in a certified
public accounting firm. Also a member of the
Audit, Nominating and Compensation Committees of
our Board of Directors.C. William Landefeld
    
    
    65
    
    
    Director, President and Chief Executive Officer
since 1987.Harold L. Hoeferle
    
    
    67
    
    
    Appointed to the Companys Board in December,
2000. Owner of Apartment Mart, Inc., a company
specializing in property management. Member of
the Audit Committee of our Board of Directors.Martin L. Hogan
    
    
    49
    
    
    Appointed to the Companys Board in August, 2001.
Owner/President of Central Illinois Development
which is responsible for the development and
compliance of 120 Subway Sandwich Restaurants in
50 counties in Central Illinois. Owner of 9
Subway restaurants in Central Illinois. Member
of the Nominating and Compensation Committees of
our Board of DirectorsArthur W. Mier
    
    
    62
    
    
    Appointed to the Companys Board in January,
2000. Director of the Bank since 1998. Regional
Manager of Choctaw-Kaul Distribution Company.
Member of the Audit and Nominating Committees of
our Board of Directors.L. Carl Borngasser
    
    
    67
    
    
    Appointed to the Companys Board in January,
2000. Director of the Bank since 1995. Retired
Executive Vice President of Citizens Savings
Bank. Member of the Audit and Compensation
Committees of our Board of Directors.
 Audit Committee Financial Expert Our Board of Directors has determined that we have an Audit Committee financial expert, as defined
by the Securities and Exchange Commission, serving on our Audit Committee. Mary Ann Webb is our
Audit Committee financial expert, and she is independent as independence for audit committee
members is defined in the National Association of Securities Dealers listing standards, as those
standards have been modified or supplemented. Code of Ethics The Company has adopted a Code of Ethics that applies to all of our employees, officers and
directors, including our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Our Code of Ethics 80




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##### Table of Contents



contains written standards that we believe are reasonably designed to deter wrongdoing and to
promote:  
    Honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships;
    Full, fair, accurate, timely, and understandable disclosure in reports and documents
that we file with, or submit to, the Securities and Exchange Commissions and in other
public communications we make;
    Compliance with applicable governmental laws, rules and regulations;
    The prompt internal reporting of violations of the code to an appropriate person or
persons named in the code; and
    Accountability for adherence to the code. This Code of Ethics is attached hereto as Exhibit 14. We will provide to any person without charge,
upon request, a copy of our Code of Ethics. Requests for a copy of our Code of Ethics should be
made to our Secretary at 2101 North Veterans Parkway, Bloomington, Illinois 61704. We intend to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a waiver
from, a provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions and that relates to any element of the code
definition enumerated in Securities and Exchange Commission, Regulation S-K, Item 406(b) by posting
such information on our Web site at http://www.csbnet.com within five business days
following the date of the amendment or waiver. Compliance With Section 16 Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers and
directors, and persons who own more than 10% of any registered class of the Companys equity
securities, to file reports of ownership and changes in ownership with the SEC. Executive
officers, directors and greater than 10% shareholders are required by regulation to furnish the
Company with copies of all Section 16(a) reports they file. Based on its review of the copies of the reports it has received and written representations
provided to the Company from the individuals required to file the reports, the Company believes
that all Directors and Executives of the Company filed all reports required on a timely basis
pursuant to Section 16 of the Securities Exchange Act of 1934. 81




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Item 11 Executive Compensation The following table shows, for the years ended December 31, 2004, 2003 and 2002, the cash
compensation paid by the Bank, as well as certain other compensation paid or accrued for those
years, to the Chief Executive Officer and other executive officers (Named Executive Officers)
who accrued salary and bonus in excess of $100,000 in fiscal year 2003. Compensation TableAnnual Compensation
    

Long-Term CompensationAwards
    
    PayoutsOther
    
    
    
    SecuritiesAnnual
    
    Restricted
    
    Underlying
    
    
    
    All OtherCompen-
    
    Stock
    
    Options/
    
    LTIP
    
    Compen-Name and Principal
    
    
    
    
    
    Salary
    
    Bonus
    
    sation
    
    Awards
    
    SARs
    
    Payouts
    
    sationPositions
    
    Year
    
    ($)(1)
    
    ($)(1)
    

($)(2)
    
    ($)(3)
    

(#)(4)
    

($)(5)
    
    ($)C. William Landefeld
    
    
    2004
    
    
    $
    265,535
    
    
    $
    21,692
    
    
    
    
    
    
    
    
    
    
    $
    19,884
    (6)President and Chief
    
    
    2003
    
    
    $
    265,535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38,141

(7)Executive Officer
    
    
    2002
    
    
    $
    259,424
    
    
    $
    18,623
    
    
    
    
    
    
    
    
    
    
    $
    114,017

(8)Dallas G. Smiley
    
    
    2004
    
    
    $
    160,000
    
    
    $
    20,000
    
    
    
    
    
    
    
    
    
    
    $
    10,948
    (6)Executive Vice President,

    
    
    2003
    
    
    $
    146,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,948
    (7)Treasurer, Chief
    
    
    2002
    
    
    $
    140,400
    
    
    $
    10,800
    
    
    
    
    
    
    
    
    
    
    $
    63,122
    (8)Financial Officerand CorporateSecretary
   (1)
    
    Under Annual Compensation, the column entitled Salary includes directors fees and amounts
deferred by the Named Executive Officer pursuant to the Banks 401(k) Plan, pursuant to which
employees may defer up to 15% of their compensation, up to the maximum limits under the
Internal Revenue Code of 1986, as amended (the Code). The level of salary may vary due to
limits imposed on contributions to 401(k) plans and employee stock ownership plans by the Code
(see, footnotes (6), (7), and (8) below). The column entitled Bonus consists of board
approved discretionary Bonuses.(2)
    
    For 2004, there were no (a) prerequisites over the lesser of $50,000 or 10% of the
individuals total Salary and Bonus for the year; (b) payments of above-market preferential
earnings on deferred compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock.(3)
    
    For 2004, 2003 and 2002, there were no stock awards to any Named Executive Officer.(4)
    
    For 2004, 2003 and 2002, there were no stock options granted to any Named Executive Officer.(5)
    
    For 2004, 2003 and 2002, there were no payouts or awards under any long-term incentive plan.(6)
    
    Includes $8,200 and $6,400 in employer contributions to the Banks 401(k) Plan for Messrs.
Landefeld and Smiley, respectively. Includes disability and life insurance premiums paid by
the Bank of $2,890 for Mr. Landefeld. Includes $1,821 in employer contribution to the
Supplemental Executive Retirement Plan (the SERP) for Mr. Landefeld for the excess amount
due under the 401(k) Plan and ESOP for the fiscal year ended December 31, 2004. Includes
contributions of $6,973 and $5,025 for Messrs. Landefeld and Smiley, respectively pursuant to
the Banks profit sharing plan. 82




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##### Table of Contents



(7)
    
    Includes $8,000 and $5,840 in employer contributions to the Banks 401(k) Plan for Messrs.
Landefeld and Smiley, respectively. Includes disability and life insurance premiums paid by
the Bank of $1,825 for Mr. Landefeld. Includes $21,581 in employer contribution to the
Supplemental Executive Retirement Plan (the SERP) for Mr. Landefeld for the excess amount
due under the 401(k) Plan and ESOP for the fiscal year ended December 31, 2003. Includes
contributions of $6,735 and $5,108 for Messrs. Landefeld and Smiley, respectively pursuant to
the Banks profit sharing plan.(8)
    
    Includes the value of 2,339 and 1,909 shares of Common Stock allocated to Messrs. Landefeld and
Smiley, respectively, pursuant to the Bank Employee Stock Ownership Plan (ESOP). Includes
$6,985 and $5,616 in employer contributions to the Banks 401(k) Plan for Messrs. Landefeld
and Smiley, respectively. Includes disability and life insurance premiums paid by the Bank
of $1,549 for Mr. Landefeld. Includes $39,556 and $1,995 in employer contribution to the
Supplemental Executive Retirement Plan (the SERP) for Messrs. Landefeld and Smiley,
respectively, for the excess amount due under the 401(k) Savings Plan and ESOP for the fiscal
year ended December 31, 2002. Includes contributions of $6,750 and $6,750 for Messrs.
Landefeld and Smiley, respectively pursuant to the Banks profit sharing plan. Total Options Exercised in 2004 and Year-End Values This table gives information for options exercised by each of the named executive officers in 2004
and the value (stock price less exercise price) of the remaining options held by those officers at
year-end price of the Common Stock. FISCAL YEAR-END OPTION/SAR VALUES Number of Securities
    
    Value of UnexercisedUnderlying Unexercised
    
    In-the-MoneyOptions/SARs at
    
    Options/SARs at FiscalShares Acquired
    
    Value Realized
    
    Fiscal Year-End (#)(1)
    
    Year End ($)(2)On Exercise
    
    ($)
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableC. William Landefeld
    
    
    29,750
    
    
    $
    506,494
    
    
    40,650/0
    
    $820,724/$0Dallas G. Smiley
    
    
    1,550
    
    
    $
    31,326
    
    
    40,650/0
    
    $820,724/$0
   (1)
    
    The options in this table have an exercise price of $12.30 and became exercisable
at an annual rate of 20% beginning November 12, 1997. The options expire ten (10)
years from the date of grant.(2)
    
    Based on market value of the underlying stock at the fiscal year end of $32.49,
minus the exercise price. The market price on March 1, 2005 was $33.29 per share. Option Grants in 2004 No options were granted to any of the Named Executive Officers in 2004. Other Compensation Arrangements Employment Agreements Agreements with C. William Landefeld. Main Street has entered into an employment agreement with C. William Landefeld, which will become
effective upon completion of the merger. This employment agreement provides for Mr. Landefelds
employment following the merger as an Executive Vice President of Main Street. The agreement is
for a two-year term and provides for an annual base salary of $150,000. The agreement also
provides for Mr. Landefelds participation in all plans or benefits that Main Street makes
available to all of its employees. 83




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##### Table of Contents



Either Main Street or Mr. Landefeld may terminate the employment agreement, at any time, upon 90
days prior written notice. Main Street may also terminate the employment agreement for cause, as
defined in the agreement, on 30 days prior written notice. If Main Street terminates Mr.
Landefelds employment without cause, he will be entitled to receive a payment equal to the total
amount of compensation that he would have received if he had remained employed for the full term of
the agreement, calculated as the sum of his base salary plus the value of any contributions that
would have been made to Mr. Landefeld or for his benefit under all applicable retirement and
benefit plans had he remained employed through the last day of the term. In this event, he will
also be entitled to continued health coverage for the full term of his agreement. These severance
payments are to be paid to Mr. Landefeld in equal monthly installments. Main Street will have no continuing obligation to Mr. Landefeld if he voluntarily terminates his
employment or if Main Street terminates him for cause, except in either case for salary and
benefits earned through the date of termination. Mr. Landefelds employment agreement includes a covenant limiting his ability for a period of one
year following a termination of his employment to compete with Main Street in an area encompassing
a 50-mile radius from each banking or other branch office location of Main Street and its
subsidiary banks. Main Street has also agreed that Mr. Landefeld, in connection with the change of control resulting
from the merger, will be entitled to receive a payment of $781,669.20, to be paid in 36 monthly
installments of $21,713.03 each following the effective time, in satisfaction of all obligations
that may be owed to him under his existing employment agreement with Citizens. This amount is
subject to reduction so that the total amount of payments or benefits provided to Mr. Landefeld
under the existing employment agreement or other benefit plans, when added to the sum of $5,000,
will not constitute an excess parachute payment under the Internal Revenue Code. Mr. Landefeld will also be entitled to receive, at or prior to the effective time of the merger,
(a) a distribution of 15,145 shares of Citizens common stock in respect of the Citizens
Supplemental Executive Retirement Plan, plus an additional amount, if any, attributable to the
Supplemental Executive Retirement Plan benefit he is entitled to for the 2004 plan year, (b)
payment of up to $50,000 under the Citizens 2004 Incentive Bonus Plan and (c) an annuity contract
(or cash in lieu thereof) to pay benefits to Mr. Landefeld under the Citizens Advisory Directors
Retirement Plan, provided that the aggregate cost to Citizens for purchasing the annuity contracts
(or cash in lieu thereof) for Mr. Landefeld and Directors Borngasser and Thompson shall not exceed
$510,000. Agreements with Dallas Smiley. Main Street has entered into an employment agreement with Dallas Smiley, which will become
effective upon completion of the merger. This employment agreement provides for Mr. Smileys
employment following the merger as a Senior Vice President of Main Street. The agreement is for a
term ending on December 31, 2005, and provides for an annual base salary of $100,000. The
agreement also provides for Mr. Smileys participation in all plans or benefits that Main Street
makes available to all of its employees. Either Main Street or Mr. Smiley may terminate the employment agreement, at any time, upon 90 days
prior written notice. Main Street may also terminate the employment agreement for cause, as
defined in the agreement, on 30 days prior written notice. If Main Street terminates Mr. Smileys
employment without cause, he will be entitled to receive a payment equal to the total amount of
compensation that he would have received if he had remained employed for the full term of the
agreement, calculated as the sum of his base salary plus the value of any contributions that would
have been made to Mr. Smiley or for his benefit under all applicable retirement and benefit 84




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##### Table of Contents



plans had he remained employed through the last day of the term. In this event, he will also be entitled
to continued health coverage for the full term of his agreement. These severance payments are to
be paid to Mr. Smiley in equal monthly installments. Main Street will have no continuing obligation to Mr. Smiley if he voluntarily terminates his
employment or if Main Street terminates him for cause, except in either case for salary and
benefits earned through the date of termination. Mr. Smileys employment agreement includes a covenant limiting his ability for a period of one year
following a termination of his employment to compete with Main Street in an area encompassing a
50-mile radius from each banking or other branch office location of Main Street and its subsidiary
banks. Main Street has also agreed that Mr. Smiley, in connection with the change of control resulting
from the merger, will be entitled to receive a payment of $631,964.01, to be paid in a single lump
sum at closing, in satisfaction of all obligations that may be owed to him under his existing
employment agreements with Citizens and Citizens Bank. This amount is subject to reduction so that
the total amount of payments or benefits provided to Mr. Smiley under the existing employment
agreement or other benefit plans, when added to the sum of $5,000, will not constitute an excess
parachute payment under the Internal Revenue Code. Mr. Smiley will also be entitled to receive, at or prior to the effective time of the merger, (a) a
distribution of 1,701 shares of Citizens common stock in respect of the Citizens Supplemental
Executive Retirement Plan, plus an additional amount, if any, attributable to the Supplemental
Executive Retirement Plan benefit he is entitled to
for the 2004 plan year, and (b) payment of up to $20,000 under the Citizens 2004 Incentive Bonus
Plan. 401(k)Plan The Bank maintains the Profit Sharing and Savings Plan (the Savings Plan), which is a
tax-qualified profit sharing and Salary reduction plan under Sections 401(a) and 401(k) of the
Code. The Savings Plan provides participants with retirement benefits and may also provide
benefits upon death, disability or termination of employment with the Bank. An employee who works
at least 1,000 scheduled hours per year is eligible to participate in the Savings Plan following
the completion of one year of service and attainment of age 21. A participant is always 100%
vested in his or her contributions. A participant must reach one year of vesting service (total
time employed) before attaining a vested interest in the employer contribution, which commences
following this one year period. Participants become 20% vested in employer matching contribution
after one year of service, and increase the vested percentage by 20% for each year of service
completed thereafter, until attaining 100% vesting after five years of service. Participants may make Salary reduction contributions to the Savings Plan up to the lesser of 15% of
annual base Salary or the legally permissible limit (currently $3,000 generally, and $16,000 for
employees who will reach age 50 by December 31, 2004). The Savings Plan provides that, with
respect to 4% contributed by the employee, the Bank will match 100% of such contribution with funds
to be invested at the direction of the employee. All participants receive a quarterly detailed
statement including information regarding market value of the participants investment and all
contributions made on his or her behalf. Any withdrawals prior to age 59 are subject to a 10% tax
penalty. Participants may borrow against the vested portion of their accounts. The Savings Plan has a profit-sharing component in addition to the matched employee contribution.
The amount of the annual profit-sharing contribution is at the discretion of the Board of
Directors. Employee Stock Ownership Plan and Trust 85




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The Bank established an ESOP and related trust for eligible employees effective on January 1, 1996.
Employees employed with the Bank as of January 1, 1996 and employees of the Company or the Bank
employed after such date, who have been credited with at least 1,000 hours during a twelve month
period and who have attained the age of 21 will become participants. The ESOP purchased 8% of the
Common stock issued in the Conversion. In order to fund the ESOPs purchase of Common Stock, the
ESOP borrowed funds from the Company equal to 100% of the aggregate purchase price of the Common
Stock. The loan was repaid principally from the Companys or the Banks contribution to the ESOP
over a period of seven years and the collateral for the loan was the Common Stock purchased by the
ESOP. Repayment of the loan was completed in 2002. In an agreement between Citizens and Main Street that was entered into concurrently with the merger
agreement, Citizens has agreed to terminate prior to closing its employee benefit plans, and to
take such actions as are necessary to properly distribute to the plan participants assets it holds
under the plans. On its part, Main Street has agreed that the former employees of Citizens or its
subsidiary will become participants in the employee benefit plans of Main Street or its
subsidiaries. Supplemental Executive Retirement Plan The Bank has implemented a non-qualified Supplemental Executive Retirement Plan (the SERP) to
provide certain officers and highly compensated employees, designated by the Board of Directors,
with additional retirement benefits. The benefits provided under the SERP will make up the
benefits lost to the SERP participants due to application of limitations on compensation and
maximum benefits applicable to the Banks tax qualified 401(k) Plan and ESOP. Benefits will be
provided under the SERP at the same time and in the same form as the related benefits will be
provided under the 401(k) Plan and ESOP. In an agreement between Citizens and Main Street that was entered into concurrently with the merger
agreement, Citizens has agreed to terminate prior to closing its employee benefit plans, and to
take such actions as are necessary to properly distribute to the plan participants assets it holds
under the plans. On its part, Main Street has agreed that the former employees of Citizens or its subsidiary will become
participants in the employee benefit plans of Main Street or its subsidiaries. Directors Compensation The Directors of the Company did not receive any fees or retainers for serving on the Companys
Board of Directors in fiscal 2003. However, the Directors did receive an annual retainer of
$15,000 for serving on the Board of the Bank. Also, Directors who are not also employees of the
Company receive $100 per committee meeting attended, except for the Audit Committee Chairman who
receives $200 for each Audit Committee meeting attended. In addition, the Company maintains two
compensation plans for Directors: 86




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##### Table of Contents




    Stock-Based Incentive Plan. The Company maintains the Incentive Plan for both
directors and employees. In 1996, each Outside Director of the Company and Bank at
that time was granted non-statutory stock options to purchase 9,390 shares of
Common Stock, and Stock Awards for 3,755 shares of Common Stock. The options and
stock awards to Outside Directors began vesting in five equal annual installments,
commencing November 12, 1997, the first anniversary of the effective date of the
grants. If a director ceases service due to death or disability, all unvested
options and stock awards vest immediately. In 1999, two new bank directors were
each granted nonstatutory stock options to purchase 12,500 shares of common stock
on terms identical to the terms of the options which were granted in 1996. No
stock awards were made in the years 1997  2001 inclusive, and no stock option
grants were made to directors in 1997, 1998 or 2000. In January 2002, three of the
Companys directors, Messrs. Hogan, Hoeferle and Mier, received stock awards of
720, 719, and 719 shares, respectively. The 2002 stock awards were immediately
vested. In addition, one director, Mr. Hoeferle, received stock options in January
2001 to purchase 10,000 shares on terms identical to the terms of previous grants
to directors. Also, Mr. Hogan received stock options in January 2002 to purchase
10,000 shares on the same terms. In December 2003, Ms. Webb received stock options
to purchase 10,000 shares on the same terms.
    Advisory Directors Retirement Plan. The Bank maintains an Advisory Directors
Retirement Plan (formerly known as the Directors Emeritus Retirement Plan) which
provides retirement benefits to duly elected Directors and Advisory Directors as of
December 31, 1997. The plan provides that in consideration for services and
consultation rendered as an Advisory Director, the Advisory Directors will receive
annual cash benefits equal to the annual directors fees received at the time of
retirement, up to an annual maximum of $12,650 per participant in a single premium
insurance annuity for each covered Advisory Director. Currently there are ten
Advisory Directors. In an agreement between Citizens and Main Street that was entered into concurrently with the merger
agreement, Citizens has agreed to terminate prior to closing its employee benefit plans, and to
take such actions as are necessary to properly distribute to the plan participants assets it holds
under the plans. On its part, Main Street has agreed that the former employees of Citizens or its
subsidiary will become participants in the employee benefit plans of Main Street or its
subsidiaries. Agreements with Directors
Borngasser and Thompson. Directors Carl S. Borngasser and Dr. Lowell M. Thompson will each be entitled to receive, at or
prior to the effective time of the Merger with Main Street, an annuity contract (or cash in lieu
thereof) to pay benefits to Messrs. Borngasser and Thompson under the Citizens Advisory Directors
Retirement Plan, provided that the aggregate cost to Citizens for purchasing the annuity contracts
(or cash in lieu thereof), along with an annuity contract (or cash) for Mr. Landefeld, shall not
exceed $510,000. Indemnification for Directors and Officers; Insurance. Main Street has agreed to honor for at least three years from the effective date of the merger all
of Citizens obligations with respect to indemnification currently provided by Citizens in its
certificate of incorporation or bylaws in favor of the current and former officers and directors
with respect to matters occurring prior to the effective time. In addition, Main Street has agreed to maintain for a period of two years
extended insurance coverage of acts or omissions occurring at or prior to 87




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the effective time with
respect to those persons who are currently covered by Citizens director and officer liability
insurance policies. 
 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters SECURITY OWNERSHIP OF DIRECTORS,
MOST HIGHLY COMPENSATED EXECUTIVE OFFICERS AND
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP Amount and
    
    OwnershipNature of Beneficial
    
    As a Percent ofName
    
    Ownership (1)
    
    ClassBorngasser, L. Carl
    
    25,266
    
    
    
    1.6%Hoeferle, Harold L
    
    10,719
    (2)
    
    
    **Hogan, Martin L
    
    7,847
    (3)
    
    
    **Landefeld, C. William.(Executive Officer and Director)
    
    150,417
    (4)
    
    
    9.6%Mier, Arthur W
    
    7,569
    (5)
    
    
    **Smiley, Dallas G. (Executive Officer)
    
    83,650
    (4)
    
    
    5.2%Thompson, Dr. Lowell M
    
    32,985
    
    
    
    2.1%Webb, Mary Ann
    
    3,600
    (6)
    
    
    **All directors and executive officers as a group
    
    321,989
    (7)
    
    
    19.9%
   (1)
    
    Each person effectively exercises sole (or shares with spouse or other immediate family
member) voting and dispositive power as to shares reported.(2)
    
    Excludes 2,000 shares subject to unexercisable options granted under the Incentive Plan.
Shares subject to options are exercisable on a cumulative basis in five equal annual
installments commencing on January 29, 2002.(3)
    
    Includes 6,000 shares subject to options granted under the Incentive Plan which are currently
exercisable or will become exercisable within 60 days and excludes 4,000 shares subject to
unexercisable options granted under the Incentive Plan. Shares subject to options are
exercisable on a cumulative basis in five equal annual installments commencing on January 28,
2003.(4)
    
    Includes 0 and 40,650 shares subject to options granted to Messrs. Landefeld and Smiley,
respectively, under the Incentive Plan which are currently exercisable. Shares subject to
options granted under the Incentive Plan commenced vesting at a rate of 20% per year beginning
November 12, 1997.(5)
    
    Includes 2,500 shares subject to options granted under the Incentive Plan which are currently
exercisable or will become exercisable within 60 days. Shares subject to options became
exercisable on a cumulative basis in five equal annual installments commencing on April 26,
1999.(6)
    
    Includes 2,000 shares subject to options granted under the Incentive Plan which are currently
exercisable or will become exercisable within 60 days and excludes 8,000 shares subject to
unexercisable options granted under the Incentive Plan. Shares subject to options are
exercisable on a cumulative basis in five equal annual installments commencing on December 15,
2004.(7)
    
    Includes a total of 51,150 options granted under the Incentive Plan which are currently
exercisable or will become exercisable within 60 days and excludes a total of 14,000 shares
subject to unexercisable options granted under the Incentive Plan.**
    
    Less than 1% ownership as a percent of class. 88




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SECURITY OWNERSHIP OF SHAREHOLDER
HOLDING 5% OR MORE Name and Address of
    
    Number
    
    PercentBeneficial Owner
    
    of Shares
    
    of ClassCitizens Savings Bank Employee Stock
Ownership Plan (ESOP)
2101 North Veterans Parkway
Bloomington, Illinois 61704
    
    200,931(1)
    
    12.5%C. William Landefeld
2101 North Veterans Parkway
Bloomington, Illinois 61704
    
    150,417(2)
    
    9.3%Millenco, L.P.
c/o Millenium Management, LLC
666 Fifth Avenue
New York, New York 10103
    
    120,194(3)
    
    7.5%Investors of America, Limited Partnership
1504 Highway, #395 N #8-00508
Gardnerville, Nevada 89410
    
    100,000(4)
    
    6.2%Dallas G. Smiley
2101 North Veterans Parkway
Bloomington, Illinois 61704
    
    83,650(5)
    
    5.2%
   (1)
    
    Shares of Common Stock were acquired by the ESOP in the Banks conversion from mutual to
stock form (the Conversion). The ESOP Committee administers the ESOP. First Bankers Trust
Company has been appointed as the corporate trustee for the ESOP (ESOP Trustee). The ESOP
Trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participants. As of September 30, 2004, all 200,931
shares have been allocated to ESOP participants accounts.(2)
    
    The above amount includes 13,225 shares which are owned by Mr. Landefelds wife over which
Mr. Landefeld shares voting and investment power. Mr. Landefeld has sole voting and
investment power with respect to all other shares. The amount above includes 40,650 shares
subject to options previously granted to Mr. Landefeld which are currently exercisable.(3)
    
    Based upon information disclosed in Schedule 13G filed with the SEC on February 9, 2005.(4)
    
    Based upon information disclosed in Schedule 13G filed with the SEC on February 3, 2005.(5)
    
    The amount above includes 40,650 shares subject to options previously granted to Mr. Smiley
which are currently exercisable. Equity Compensation Plan Information Number ofsecuritiesNumber of
    
    
    
    
    
    
    
    
    remaining availablesecurities to be
    
    
    
    
    
    
    
    
    for future issuanceissued upon
    
    
    
    Weighted-average
    
    
    
    under equityexercise of
    
    
    
    exercise price of
    
    
    
    compensation plansoutstanding
    
    
    
    outstanding
    
    
    
    (excludingoptions, warrants
    
    
    
    options, warrants
    
    
    
    securities inand rights
    
    
    
    and rights
    
    
    
    column (A)Plan Category
    
    
    (A)
    
    
    
    (B)
    
    
    
    (C)Equity
compensation plans
approved by
security holders
    
    
    
    186,620
    
    
    
    $
    13.33
    
    
    
    
    5,212Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    186,620
    
    
    
    $
    13.33
    
    
    
    
    5,212
 89




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Item 13 Certain Relationships and Related Transactions The Bank makes loans to directors and executive officers from time-to-time in the ordinary course
of business. The Banks current policy provides that all loans made by the Bank to its directors
and executive officers are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with other persons and do
not involve more than the normal risk of collectability or present other unfavorable features. 90




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Item 14 Principal Accountant Fees and Services Audit Fees Audit fees and expenses billed to the Company by BKD, LLP for the audit of the Companys financial
statements for the fiscal years ended December 31, 2004 and December 31, 2003, and for review of
the Companys financial statements included in the Companys quarterly reports on Form 10-Q, are as
follows: 2004
    
    2003$59,000
    
    $62,090
 Audit Related Fees Audit related fees and expenses billed to the Company by BKD, LLP for fiscal years 2004 and 2003
for services related to the performance of the audit or review of the Companys financial
statements that were not included under the heading Audit Fees, are as follows: 2004
    
    2003$22,000
    
    $9,462
 Tax Fees Tax fees and expenses billed to the Company for fiscal years 2004 and 2003 for services related to
tax compliance, tax advice and tax planning, consisting primarily of preparing the Companys
federal and state income tax returns for the previous fiscal periods and inclusive of expenses are
as follows: 2004
    
    2003$6,000
    
    $5,400
 All Other Fees Fees and expenses billed to the Company by BKD, LLP for all other services provided during fiscal
years 2004 and 2003 are as follows: 2004
    
    2003$-0-
    
    $-0-
 In accordance with Section 10A(i) of the Exchange Act, before BKD, LLP is engaged by us to render
audit or non-audit services, the engagement is approved by our Audit Committee. None of the
audit-related, tax and other services described in the table above were approved by the Audit
Committee pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X. None of the time devoted by BKD,
LLP on its engagement to audit the Companys financial statements for the year ended December 31,
2004 is attributable to work performed by persons other than BKD, LLP employees. 91




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Item 15 Exhibits and Financial Statement Schedules (1) The following documents are filed as a part of this report: (1) Financial Statements Consolidated Financial Statements of the Company are incorporated by reference to Item 8 of this report. PAGEReport of Independent Registered Public Accounting Firm
    
    
    40Consolidated Balance Sheets as of
December 31, 2004 and 2003
    
    
    41-42Consolidated Statements of Income for the
years ended December 31, 2004, 2003 and 2002
    
    
    43-44Consolidated Statements of Stockholders Equity
for the years ended December 31, 2004, 2003 and 2002
    
    
    45-46Consolidated Statements of Cash Flows for the
years ended December 31, 2004, 2003 and 2002
    
    
    47-48Notes to Consolidated Financial Statements
    
    
    49-78
 92




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The remaining information appearing in the Annual Report to Stockholders is not
deemed to be filed as part of this report, except as expressly provided herein.  (2)
    Financial Statement SchedulesAll schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.(3)
    ExhibitsThe following exhibits are filed as part of this report.2.1
    Agreement and Plan of Merger among Main Street Trust, Inc.,
Citizens Acquisition LLC and Citizens First Financial Corp. dated November 7,
2004.****3.1
    Certificate of Incorporation of Citizens First Financial Corp.*3.2
    Bylaws of Citizens First Financial Corp.**4.0
    Stock Certificate of Citizens First Financial Corp.*10.1
    Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan*10.2
    Form of Citizens Savings Bank, F.S.B. Supplemental Executive
Retirement Plan*10.3
    Form of Citizens Savings Bank, F.S.B. Employee Severance
Compensation Plan*10.4
    Citizens First Financial Corp. 1997 Stock-Based Incentive Plan***10.5
    C. William Landefeld Employment Agreement ****10.6
    Dallas G. Smiley Employment Agreement ****14.0
    Code of Ethics23.0
    Consent of BKD, LLP31.1
    Certification of C. William Landefeld Required by Rule 13a-14(a)31.2
    Certification of Dallas G. Smiley Required by Rule 13a-14(a)32.1
    Certification of C. William Landefeld required by Rule
13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
135032.2
    Certification of Dallas G. Smiley required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350   *
    
    Incorporated herein by reference to the Exhibits to
Form SB-2, Registration Statement, filed on January 24, 1997 and any
amendments thereto, Registration No. 333-556.**
    
    Incorporated by reference to Exhibit 99.1 to Current
Report on Form 8-K filed on September 1, 2000.***
    
    Incorporated herein by reference to the Proxy Statement for
the Special Meeting of Shareholders held on November 12, 1997.****
    
    Incorporated by reference from Registration Statement on Form
S-4 filed by Main Street Trust, Inc. on December 23, 2004. 93




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 31st day of March, 2005. CITIZENS FIRST FINANCIAL CORP.By:
    /s/ C. William LandefeldC. William LandefeldPresident, Chief Executive Officer
and Director Date: March 31, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities and on the dates
indicated. Name
    
    Title
    
    Date/s/ C. William Landefeld
    
    President, Chief Executive Officer and Director(principal executive officer)
    
    March 31, 2005C. William Landefeld/s/ Dallas G. Smiley
    
    Executive Vice President, Secretary, Treasurer and
Chief Financial Officer(principal accounting and financial officer)
    
    March 31, 2005Dallas G. Smiley/s/ Dr. Lowell M. Thompson
    
    Director
    
    March 31, 2005Dr. Lowell M. Thompson/s/ Harold L. Hoeferle
    
    Director
    
    March 31, 2005Harold L. Hoeferle/s/ Mary Ann Webb
    
    Director
    
    March 31, 2005Mary Ann Webb/s/ L. Carl Borngasser
    
    Director
    
    March 31, 2005L. Carl Borngasser/s/ Arthur W. Mier
    
    Director
    
    March 31, 2005Arthur W. Mier/s/ Martin L. Hogan
    
    Director
    
    March 31, 2005Martin L. Hogan
 94




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description2.1
    
    Agreement and Plan of Merger among Main Street Trust, Inc.,
Citizens Acquisition LLC and Citizens First Financial Corp. dated November 7,
2004.****3.1
    
    Certificate of Incorporation of Citizens First Financial Corp.*3.2
    
    Bylaws of Citizens First Financial Corp.**4.0
    
    Stock Certificate of Citizens First Financial Corp.*10.1
    
    Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan*10.2
    
    Form of Citizens Savings Bank, F.S.B. Supplemental Executive
Retirement Plan*10.3
    
    Form of Citizens Savings Bank, F.S.B. Employee Severance
Compensation Plan*10.4
    
    Citizens First Financial Corp. 1997 Stock-Based Incentive Plan***10.5
    
    C. William Landefeld Employment Agreement ****10.6
    
    Dallas G. Smiley Employment Agreement ****14.0
    
    Code of Ethics23.0
    
    Consent of BKD, LLP31.1
    
    Certification of C. William Landefeld Required by Rule 13a-14(a)31.2
    
    Certification of Dallas G. Smiley Required by Rule 13a-14(a)32.1
    
    Certification of C. William Landefeld required by Rule
13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
135032.2
    
    Certification of Dallas G. Smiley required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
   *
    
    Incorporated herein by reference to the Exhibits to
Form SB-2, Registration Statement, filed on January 24, 1997 and any
amendments thereto, Registration No. 333-556.**
    
    Incorporated by reference to Exhibit 99.1 to Current
Report on Form 8-K filed on September 1, 2000.***
    
    Incorporated herein by reference to the Proxy Statement for
the Special Meeting of Shareholders held on November 12, 1997.****
    
    Incorporated by reference from Registration Statement on Form
S-4 filed by Main Street Trust, Inc. on December 23, 2004. 95