##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission File Number: 0-32041
 CITIZENS FIRST BANCORP, INC.    Delaware
    
    38-3573582(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)525 Water Street, Port Huron, Michigan
    
    48060(Address of principal executive offices)
    
    (Zip Code)
 (810) 987-8300    Not Applicable    Registrants telephone number, including area code: (810) 987-8300
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
(Title of Class) 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 the past 90 days.
YesþXo 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 the 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 Rule
12b-2 of the Act).YesþXo The aggregate market value of the registrants voting and non-voting common equity held by
non-affiliates was $192,431,125 based upon the closing price of $23.52 as quoted on the
Nasdaq National Market on June 30, 2004. Solely for purposes of this calculation, the shares held
by the directors and executive officers of the registrant are deemed to be held by affiliates. As of March 9, 2005, the registrant had 8,486,845 shares of common stock outstanding. Documents Incorporated by Reference




---



TABLE OF CONTENTS INDEX PagePart IItem 1. Business
    
    4Item 2. Properties
    
    30Item 3. Legal Proceedings
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    30Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    30Item 6. Selected Financial Data
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    31Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    46Item 8. Financial Statements and Supplementary Data
    
    48Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    77Item 9A. Controls and Procedures
    
    77Item 9B.
Other Items
    
    78Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    78Item 11. Executive Compensation
    
    78Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    79Item 13. Certain Relationships and Related Transactions
    
    79Item 14. Principal Accountants Fees and Services
    
    79Part IVItem 15 Exhibits and Financial Statement Schedules
    
    79Signatures
    
    81Certifications of Chief Executive Officer and Chief
Financial OfficerConsent of BDO Seidman, LLPConsent of Plante & Moran, PLLC302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Executive Officer
  FORWARD-LOOKING STATEMENTS. The Company may from time to time make written or oral
forward-looking statements. These forward-looking statements may be contained in the Companys Form 10-K filed with the Securities and Exchange
Commission (the SEC), in other filings with the SEC and in other communications by the Company
and the Banks, which are made in good faith pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and financial performance,
including revenue creation, lending origination, operating efficiencies, loan sales, charge-offs,
loan loss allowances and provisions, growth opportunities, interest rates, acquisition and
divestiture opportunities, capital and other expenditures and synergies, efficiencies, cost savings
and funding and other advantages expected to be realized from various activities. The words, may,
could, should, would, will, believe, anticipate, estimate, expect, intend,
plan, project, predict, continue, and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include statements with respect to the Companys beliefs, plans,
strategies, objectives, goals, expectations, anticipations, estimates or intentions that are
subject to significant risks or uncertainties or that are based on certain assumptions. Future
results and the actual effect of plans and strategies are inherently uncertain, and actual results
could differ materially from those anticipated in the forward-looking statements, depending upon
various important factors, risks or uncertainties. The following factors, many of which are subject
to change based on various other factors, including factors beyond the Companys control, and other 2




---



##### Table of Contents



factors, including others discussed in the Companys Form
10-K, other factors identified in the Companys other filings with the SEC, as well as other
factors identified by management from time to time, could have a material adverse effect on the
Company and its subsidiaries and their operations or cause their financial performance to differ
materially from the plans, objectives, expectations, estimates or intentions expressed in the
Companys forward-looking statements:  
    The strength of the United States economy in general and the strength of the local economies in which the Company
conducts operations which may be less favorable than expected and may result in, among other things, a deterioration in
the credit quality and value of the Companys assets.
    The economic impact of past and any future terrorist attacks, acts of war or threats of war and the response of the
United States to any of these threats or attacks.
    The effects of, and changes in, federal, state and local laws, regulations, rules and policies including laws,
regulations, rules and policies affecting taxes, banking, securities, insurance and monetary and financial matters.
    The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate and other
policies of the Federal Reserve Board and policies of the United States Treasury.
    Inflation, interest rates, market and monetary fluctuations, including the effects of changes in the rate of
prepayments of the Companys assets.
    The quality or composition of the Companys loan portfolio.
    Demand for loan products and services.
    Deposit flows.
    The ability of the Company to compete with other financial institutions due to increases in competitive pressures in
the financial services sector.
    The ability of the Company to obtain new customers and to retain existing customers.
    The timely development of, and acceptance of, products and services of the Company and the perceived overall value of
these products and services by users, including the features, pricing and quality compared to competitors products and
services.
    The willingness of users to substitute competitors products and services for the Companys products and services.
    The Companys success in gaining regulatory approval of their products and services, when required.
    The impact of technological changes implemented by the Company and the Banks and by other parties, including third
party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences
to the Company and its customers. In this regard, the Company has entered into an agreement with Fiserv Solutions, Inc.
(Fiserv) to convert the Companys newly acquired subsidiary, Metrobank (see Note 2 to the Companys Consolidated
Financial Statements under Item 8 of this Report) from the Jack Henry to the Fiserv software package. There can be no assurance, however, that the
planned computer conversion will not be more difficult or expensive than anticipated or have unforeseen consequences.
    The ability of the Company to develop and maintain secure and reliable electronic systems.
    The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in
replacing key executives and employees in an effective manner.
    Consumer spending and saving habits which may change in a manner that adversely affects the Companys business.
    Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.
    Unanticipated litigation or disputes and the costs, effects and outcomes of existing or future litigation or disputes.
    The effects of, and changes in, accounting principles, guidelines, policies and practices, as may be adopted by state
and federal regulatory agencies and various accounting rulemakers.
    The ability of the Company to manage the risks associated with the foregoing as well as anticipated risks. This list of important factors is not exclusive. These risks and uncertainties should be considered
in evaluating forward-looking statements, and undue reliance should not be placed on these
statements. Neither the Company nor the Banks undertake - and each specifically disclaims any
obligation - to update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of the Company or the Banks or to release publicly the result of
any revisions that may be made to any forward-looking statements, including revisions to reflect
events or circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. 3




---



##### Table of Contents



Part I 
 Item 1. Business General Citizens First Bancorp, Inc. (the Bancorp) was organized in October 2000 as a Delaware
business corporation at the direction of Citizens First Savings Bank (Citizens) and is the
holding company for Citizens and Metrobank (Metrobank, see Note 2 to the Companys Consolidated
Financial Statements under Item 8 of this Report), state-chartered savings banks headquartered in Port Huron and Farmington
Hills, Michigan, respectively. The consolidated financial statements include the accounts of the
Bancorp and its wholly-owned subsidiaries (the Company) Citizens and Metrobank (the Banks).
Citizens also includes the accounts of its wholly owned subsidiaries, Citizens Financial Services,
Inc., and Citizens First Mortgage, LLC. Citizens Financial Services, Inc. includes the accounts of its
wholly owned subsidiary, and CFS Insurance Agency. As used in this Report, unless otherwise stated or
the context otherwise requires, all references to we, our, or us and similar references are
to the Company and/or the Banks and the consolidated subsidiaries of the Company and the Banks. The
Bancorp has no significant assets, other than all of the outstanding shares of the Banks and the
portion of the net proceeds it retained from the subscription offering at inception, and no
significant liabilities. The Companys commitment to community oriented banking is reflected in
its Certificate of Incorporation, which is posted on the
Companys website (www.cfsbank.com), as
well as in its corporate governance. The Companys Corporate Governance Guidelines are also posted
on that website. Management of the Company and Citizens are substantially similar. Metrobank has a separate
Board of Directors and shares Directors with the Company. As of December 31, 2004, senior
management of Metrobank included a different CEO, Commercial Lending Officer and CFO. Subsequently
thereafter, the CEO has been employed by the Company and the Commercial Lending Officer and CFO
have retired. Employees are generally employed by the Banks rather than by the Company.
Accordingly, the information set forth in this Report, including the Consolidated Financial
Statements and related financial data under Item 8 of this Report, relates primarily to the Banks and other consolidated
subsidiaries. The Company currently operates as a community-oriented financial institution that accepts
deposits from the general public in the communities surrounding its 20 full-service banking
offices. The deposited funds, together with funds generated from operations and borrowings, are
used by the Company to originate loans. The Companys principal lending activity is the origination
of mortgage loans for the purchase or refinancing of one- to four-family residential property. The
Company originates one- to four-family mortgage loans primarily for sale in the secondary market,
although the Company generally retains the servicing rights for these mortgage loans. The Company
also originates commercial and multi-family real estate loans, construction loans, commercial
loans, automobile loans, home equity loans and lines of credit and a variety of other consumer
loans. The Companys revenues are derived principally from the generation of interest and fees on
loans originated and held and, to a lesser extent, from gains and fees related to loans originated
for sale and interest and dividends earned on the Companys investments. The Companys primary
sources of funds consist of deposits, loan repayments, payments of interest on loans, proceeds from
the sale of loans originated for sale, maturities and sales of investment securities, borrowings
from correspondent banks and the Federal Home Loan Bank, cash on hand and cash on deposit. Market Area The Companys main office is in Port Huron, Michigan, which is in St. Clair County. The
Companys deposit gathering and lending activities, as well as its other primary business
operations, are principally concentrated in and around the communities surrounding its 20
full-service offices located in St. Clair, Sanilac, Huron, Lapeer and northern Macomb counties,
Michigan. Additionally due to overall growth and the acquisition of Metrobank with branches in
Oakland County, the Companys provides financial services beyond St. Clair County. Port Huron, the population center for St. Clair County, is located approximately sixty miles
northeast of Detroit and sixty miles east of Flint. St. Clair County is bounded by the counties of
Macomb to the south and west, Lapeer to the west and Sanilac to the north. The eastern boundary of
the County is the St. Clair River and Canada. Almost half of the total land area of St. Clair is
rural, and approximately one-third of the resident labor force commutes to jobs outside of the
County. As of 2003, St. Clair County had a population of approximately 169,000. The largest
employment sectors in St. Clair County are manufacturing, services, retail and government. The
Companys market area has a higher per capita median household income when compared to Michigan and
the United States. The market area for Oakland County consists of 873 square miles and, as of 2003, is home to
more than 1.2 million people and 63,000 businesses and agencies that employ more than 720,000
people. The strength of the countys business sector has helped it grow into an international
marketplace. During the last decade, the number of households in the county grew 14 percent while
the state of Michigan grew 6.1 percent. Oakland County ranks second in per capita income, ranking
the county in the top one percent of all counties in the United States. The education of the
population is also strong, as 89 percent of residents with ages over 25 have a 4




---



##### Table of Contents



high school degree and 38 percent have a Bachelors degree or higher. Management believes
that the characteristics of Oakland county provide a great opportunity for the Company. OPERATING STRATEGY The Companys strategy, in recent years, has been one of controlled balance sheet growth and
broader diversification of its loan products and loan portfolio. Beginning in 1995, the Company
determined that it would originate its fixed-rate one-to-four-family residential mortgage loans
primarily for sale, while generally retaining the servicing rights as to those mortgages. Since
that time, the Company has emphasized originating residential mortgage loans, commercial and
multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity
loans and lines of credit and a variety of consumer loans. It has also emphasized increasing
sources of noninterest income. To accomplish these objectives, the Company has sought to:  
    Operate as a community bank, expanding the services and products it offers, particularly
its commercial business products and deposit products offered to local municipalities and
government organizations.
    Provide excellent customer service and products by expanding delivery systems by using
new technology and expanding the capability of its customer call center through which
customers can receive various services via telephone.
    Invest in our employees through a variety of training programs to ensure our customers needs are exceeded.
    Expand its trust services by cross-selling benefits of the Trust Department.
    Continuously review technology requirements and enhancements to provide an excellent level of customer service.
    Reinvest in its communities.
    Continue to increase its emphasis on origination of quality commercial, commercial real
estate and consumer loans to increase the yields earned on its overall loan portfolio,
without incurring unacceptable credit risk.
    Increase originating automobile loans on a direct and indirect basis, at least in part by
increasing the number of vehicle dealers through which the Company finances automobile
purchases by consumers.
    Control credit risk by continuing to employ conservative underwriting standards to
minimize the level of problem assets.
    Manage interest rate risk by continuing to emphasize an appropriate mix of investments
and loans and deposit products. For more information about the interest rate risk to which
the Company is exposed and about how the Company attempts to manage that risk, see Item 7A,
Quantitative and Qualitative Disclosures About Market Risk. COMPETITION The Company faces intense competition for the attraction of deposits and origination of loans
in its market areas. The Companys most direct competition for deposits and loans have historically
come from the several financial institutions operating in the Companys market areas and, to a
lesser extent, from other financial service companies, such as brokerage firms, mortgage brokers,
credit unions and insurance companies. The Company also expects competition to increase in the
future as a result of legislative, regulatory and technological changes and the continuing trend of
institutional consolidation in the financial services industry. Technological advances, for
example, have lowered barriers to market entry, and have allowed banks, mortgage companies,
mortgage brokers and other competitors to expand their geographic reach by providing services over
the Internet and made it possible for non-depository institutions to offer products and services
that traditionally have been provided by banks. The Gramm-Leach-Bliley Act passed in 1999, which
permits affiliation among banks, securities firms and insurance companies, also has changed the
competitive environment in which the Company conducts business. Some of the institutions with which
the Company competes are significantly larger than the Company and, therefore, have significantly
greater resources. Competition for deposits and the origination of loans could limit the Companys
growth in the future. Additionally, we expect that entry into the Oakland county market to
increase competitive pressures on our sales team. Given the level of competition in the financial
institution industry, we continue to adhere to our strategic goals and duty to stockholders,
customers and employees of consistent, smart and well managed growth. 5




---



##### Table of Contents



Lending Activities General.The Companys loans are subject to federal and state laws and regulations. Interest rates
charged by the Company on loans are affected principally by the following:  
    the Companys current asset/liability strategy, which is to monitor and control the
financial position of the Company, including monitoring and controlling market risk such as
interest rate risk. (For more information, see Item 7A, Quantitative and Qualitative
Disclosures About Market Risk);
    the demand for various types of loans;
    the supply of money available for lending purposes; and
    the rates offered by competitors. These factors are, in turn, affected by general and economic conditions, consumer spending and
saving habits, monetary policies of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters and other factors. For a list of some
additional factors that may affect these items, see the section captioned Forward-Looking
Statements located after the table of contents at the beginning of this Report. Loan Portfolio Analysis.The following table sets forth the composition of the Companys loan
portfolio in dollar amounts (in thousands) and as a percentage of the portfolio at the dates
indicated: At December 31,2004
    
    
    2003
    
    
    2002Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of TotalReal estate loans:One- to four-family
    
    $
    404,655
    
    
    
    33.70
    %
    
    $
    386,531
    
    
    
    40.99
    %
    
    $
    414,939
    
    
    
    49.88
    %Commercial and multi-family (1)
    
    
    280,248
    
    
    
    23.34
    %
    
    
    241,097
    
    
    
    25.56
    %
    
    
    179,387
    
    
    
    21.57
    %Residential construction
    
    
    30,917
    
    
    
    2.57
    %
    
    
    24,996
    
    
    
    2.65
    %
    
    
    21,822
    
    
    
    2.62
    %Home equity and lines of credit
    
    
    113,202
    
    
    
    9.43
    %
    
    
    85,371
    
    
    
    9.05
    %
    
    
    72,724
    
    
    
    8.74
    %Total real estate loans
    
    
    829,022
    
    
    
    69.05
    %
    
    
    737,995
    
    
    
    78.25
    %
    
    
    688,872
    
    
    
    82.82
    %Commercial loans
    
    
    252,865
    
    
    
    21.06
    %
    
    
    107,742
    
    
    
    11.42
    %
    
    
    60,336
    
    
    
    7.25
    %Consumer loans:Vehicles (2)
    
    
    66,463
    
    
    
    5.54
    %
    
    
    59,392
    
    
    
    6.30
    %
    
    
    61,386
    
    
    
    7.38
    %Other
    
    
    52,321
    
    
    
    4.36
    %
    
    
    37,948
    
    
    
    4.02
    %
    
    
    21,221
    
    
    
    2.55
    %Total consumer loans
    
    
    118,784
    
    
    
    9.89
    %
    
    
    97,340
    
    
    
    10.32
    %
    
    
    82,607
    
    
    
    9.93
    %Total loans
    
    
    1,200,671
    
    
    
    100.00
    %
    
    
    943,077
    
    
    
    100.00
    %
    
    
    831,815
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    13,472
    
    
    
    
    
    
    
    11,664
    
    
    
    
    
    
    
    11,082Net deferred loan fees
    
    
    2,231
    
    
    
    
    
    
    
    2,212
    
    
    
    
    
    
    
    1,597Net loans
    
    $
    1,184,968
    
    
    
    
    
    
    $
    929,201
    
    
    
    
    
    
    $
    819,136
 [Additional columns below] 6




---



##### Table of Contents



[Continued from above table, first column(s) repeated] At March 31,2002
    
    
    2001Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of TotalReal estate loans:One- to four-family
    
    $
    385,765
    
    
    
    51.56
    %
    
    $
    395,484
    
    
    
    57.75
    %Commercial and multi-family (1)
    
    
    144,817
    
    
    
    19.36
    %
    
    
    113,715
    
    
    
    16.60
    %Residential construction
    
    
    27,541
    
    
    
    3.68
    %
    
    
    18,479
    
    
    
    2.70
    %Home equity and lines of credit
    
    
    71,266
    
    
    
    9.52
    %
    
    
    66,687
    
    
    
    9.74
    %Total real estate loans
    
    
    629,389
    
    
    
    84.12
    %
    
    
    594,365
    
    
    
    86.78
    %Commercial loans
    
    
    42,137
    
    
    
    5.63
    %
    
    
    22,676
    
    
    
    3.31
    %Consumer loans:Vehicles (2)
    
    
    61,661
    
    
    
    8.24
    %
    
    
    55,490
    
    
    
    8.10
    %Other
    
    
    15,015
    
    
    
    2.01
    %
    
    
    12,344
    
    
    
    1.80
    %Total consumer loans
    
    
    76,676
    
    
    
    10.25
    %
    
    
    67,834
    
    
    
    9.90
    %Total loans
    
    
    748,202
    
    
    
    100.00
    %
    
    
    684,875
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    11,020
    
    
    
    
    
    
    
    10,831Net deferred loan fees
    
    
    1,618
    
    
    
    
    
    
    
    1,595Net loans
    
    $
    735,564
    
    
    
    
    
    
    $
    672,449
   (1)
    
    Includes commercial construction loans which at December 31, 2004, December 31, 2003,
December 31, 2002, March 31, 2002, and March 31, 2001 totaled $33.1 million, $14.8 million,
$12.6 million, $9.9 million and $6.5 million, respectively.(2)
    
    Includes loans secured by automobiles, motorcycles, campers and other recreational vehicles. As shown in the above table, the trend has been to increase the percentage of the Companys
loan portfolio comprised of commercial and multi-family real estate loans and commercial loans and
to decrease the percentage of the Companys loan portfolio comprised of one- to four-family
residential mortgage loans although, at December 31, 2004, one-to four family residential mortgage
loans still constituted 34% of the Companys loan portfolio. Maturity of Loan Portfolio.The following table presents the dollar amount of loans (in thousands)
maturing in the Companys portfolio based on contractual terms to maturity or scheduled
amortization, but does not include potential prepayments. Demand loans, loans lacking a stated
schedule of repayments or stated maturity and overdrafts are reported as becoming due in one year
or less. Loan balances do not include undisbursed loan proceeds, net deferred loan origination
costs or the allowance for loan losses. At December 31, 2004CommercialOne- to
    
    
    and
    
    
    
    
    
    
    Home EquityFour-Family
    
    
    Multi-Family
    
    
    Residential
    
    
    and Lines
    
    
    
    
    
    
    
    
    
    
    TotalReal estate
    
    
    Real estate
    
    
    Construction
    
    
    of Credit
    
    
    Commercial
    
    
    Consumer
    
    
    LoansAmounts due in:One year or less
    
    $
    27,335
    
    
    $
    62,242
    
    
    $
    8,189
    
    
    $
    7,698
    
    
    $
    144,759
    
    
    $
    25,028
    
    
    $
    275,251One year to five years
    
    
    21,160
    
    
    
    151,754
    
    
    
    3,802
    
    
    
    75,552
    
    
    
    95,445
    
    
    
    72,884
    
    
    
    420,597More than five years
    
    
    356,160
    
    
    
    66,252
    
    
    
    18,926
    
    
    
    29,952
    
    
    
    12,661
    
    
    
    20,872
    
    
    
    504,823Total amount due
    
    $
    404,655
    
    
    $
    280,248
    
    
    $
    30,917
    
    
    $
    113,202
    
    
    $
    252,865
    
    
    $
    118,784
    
    
    $
    1,200,671
 7




---



##### Table of Contents



Scheduled contractual principal repayments of loans do not reflect the actual lives of
most loans. The average life of a loan generally is substantially less than its contractual term
because of prepayments. In addition, due-on-sale clauses on loans usually give the Company the
right to declare loans immediately due and payable under certain circumstances, including, for
example, if the borrower sells the real property with the mortgage and the loan is not repaid. The
average life of a mortgage loan tends to increase, however, when current mortgage loan market
interest rates are substantially higher than interest rates on existing mortgage loans and,
conversely, tends to decrease when interest rates on existing mortgage loans are substantially
higher than current mortgage loan market interest rates. Current mortgage loan market interest
rates are generally higher than rates on existing mortgage loans in the Companys portfolio, which
suggests that the average lives of our portfolio and serviced mortgage loans may be higher than
might otherwise have been expected in previous years. The following table sets forth the dollar amount of loans contractually due after December 31,
2004, and whether such loans have fixed interest rates or adjustable interest rates (in thousands): Due After December 31, 2004Fixed
    
    
    Adjustable
    
    
    TotalReal estate loans:One- to four-family
    
    $
    70,238
    
    
    $
    334,417
    
    
    $
    404,655Commercial and multi-family
    
    
    252,773
    
    
    
    27,475
    
    
    
    280,248Residential construction
    
    
    29,302
    
    
    
    1,615
    
    
    
    30,917Home equity and lines of credit
    
    
    44,168
    
    
    
    69,034
    
    
    
    113,202Total real estate loans
    
    
    396,481
    
    
    
    432,541
    
    
    
    829,022Commercial loans
    
    
    34,670
    
    
    
    218,195
    
    
    
    252,865Consumer loans
    
    
    104,217
    
    
    
    14,567
    
    
    
    118,784Total loans
    
    $
    535,368
    
    
    $
    665,303
    
    
    $
    1,200,671
 TYPES OF LOANS. Currently, the Company originates one- to four-family residential mortgage
loans, commercial and multi-family real estate loans, residential construction loans, home equity
and lines of credit, commercial loans and a variety of consumer loans. Set forth below is a general
description of some of the Companys current policies and practices with regard to some of these
types of loans. Although the Company believes that the information set forth below is generally
consistent with its current practices, management may make exceptions or deviations from its
policies from time to time as it deems appropriate. In addition, lending policies and practices are
subject to change from time to time as deemed appropriate by management. ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. The Companys primary lending activity is the
origination of loans secured by one- to four-family residences generally located in its market
area. The Company currently offers various types of adjustable-rate mortgage loans and fixed-rate
mortgage loans. The Company originates fixed-rate, fully-amortizing residential mortgage loans with maturities
of 10, 15, 20 and 30 years. The Companys management establishes the loan interest rates based on
market conditions, with consideration given to the type of the loan and the quality and liquidity
of the collateral securing the loan. The Company offers mortgage and jumbo loans that generally
conform to the various standards of our secondary market vendors to whom we sell conforming loans.
Fixed-rate conforming loans are typically originated for sale in the secondary market, although the
Company generally retains the servicing rights. The Company will underwrite one- to four-family
owner-occupied residential mortgage loans in amounts up to 97% of the appraised value of
the underlying real estate, although private mortgage insurance will generally be required on most
loans that exceed 80% of the lower of the appraised value or the purchase price of the real estate.
In limited instances, the Company will originate loans that constitute 103% of the appraised value
of the underlying real estate for sale in the secondary market. The Company offers a variety of loans to meet our customers needs, including, but not limited
to, fixed and variable rate loans, balloon mortgages, construction loans and interest only
mortgages. Adjustable-rate mortgage loans help reduce the Companys exposure to changes in interest rates
because the interest rate paid by the Companys borrowers changes with changes in market interest
rates. Because rate changes could increase payments that borrowers are required to make, regardless
of their ability to make the increased payments, adjustable rate mortgage loans involve some
unquantifiable credit risks. Accordingly, if interest rates rise, and mortgage payments are
repriced at increased amounts, the risk of 8




---



##### Table of Contents



default on adjustable-rate mortgage loans increases as
well. In addition, although adjustable-rate mortgage loans increase the responsiveness of the
Companys asset base to interest rate changes, the extent of this interest rate sensitivity is
limited by the contractual documentation, which often restricts how much the interest rates can
increase annually and over the lifetime of the mortgage. As a result, yields on adjustable-rate
mortgage loans may not be sufficient to offset increases in the Companys cost of funds during
periods of rising interest rates. The Company requires properties securing its mortgage loans to be appraised by an approved
independent state-licensed appraiser. The Company also requires fire, casualty, title, hazard and,
if appropriate, flood insurance to be maintained on most properties securing real estate loans
originated by the Company. In an effort to provide financing for low- and moderate-income families,
the Company offers Federal Housing Authority and Veterans Administration residential mortgage loans
to qualified individuals with adjustable- and fixed-rates of interest and terms of up to 30 years.
These loans are secured by one- to four-family residential property and are underwritten using
modified underwriting guidelines. COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. The Company also originates commercial real estate
loans. These loans are generally secured by properties located in the Companys market area and
used for business purposes, such as small office buildings, industrial facilities or retail
facilities. The Company also, to a lesser extent, originates multi-family real estate loans that
are typically secured by 5-unit or larger apartment buildings in the Companys market area. Most of the commercial and multi-family real estate loans originated by the Company are fully
amortizing loans with terms of up to 20 years. Generally, the maximum loan amount the Company
permits for such a loan is 80% of the value of the underlying real estate. In reaching its decision
on whether to originate a commercial or multi-family real estate loan, the Company considers the
net operating income of the property that will secure the loan, the borrowers expertise, credit
history and profitability and the value of the underlying property. In addition, with respect to
commercial real estate rental properties, the Company will also consider the terms of the
applicable leases and the quality of the tenants. The Company has stringent underwriting standards
that are used to ensure origination of high quality credits. These standards include the review of
debt service coverage ratios, borrower credit history, and current financial status, acquiring
written appraisals prepared by a certified independent appraiser of all properties securing
commercial or multi-family real estate loans greater than $250,000 and environmental
surveys for commercial real estate loans in excess of $1.0 million or where a risk of contamination exists. The Company also makes construction loans for commercial development projects, including
multi-family commercial properties, single-family subdivisions and condominiums. These loans
generally have an interest-only phase during construction and then convert to permanent financing.
The permanent mortgage loan must be approved at the time the Company initially approves the
construction loan. The maximum loan-to-value ratio for these loans permitted by the Company depends
upon the type of commercial development project being undertaken, but generally the amount of this
type of loan will not exceed 80% of the value of the underlying real estate. Multi-family and commercial real estate lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to four-family residential
lending. A loan secured by this type of property, however, usually is greater in amount and more

difficult to evaluate and monitor than a one- to four-family residential mortgage loan. As a
result, multi-family and commercial real estate loans typically involve a greater degree of risk
than one- to four-family residential mortgage loans. Repayment of multi-family and commercial real
estate loans may be affected by adverse conditions in the real estate market or the economy because
these loan payments often depend on the successful operation and management of the underlying
properties. The Company seeks to minimize these risks by generally limiting the maximum
loan-to-value ratio to 80% for commercial and multi-family real estate loans and by strictly
scrutinizing the financial condition of the borrower, the cash flow of the project, the quality of
the collateral and the management of the property securing the loan. RESIDENTIAL CONSTRUCTION LOANS.The Company originates construction loans to individuals for the
construction of one- to four-family residences. The Companys residential construction loans
generally provide for the payment of interest only during the construction phase, which is
typically between 6 and 12 months. At the end of the construction phase, the loan converts to a
permanent mortgage loan. Loans can be made in amounts of up to 95% of the appraised value of the
underlying real estate, provided that the borrower obtains private mortgage insurance on the loan
if the loan balance exceeds 80% of the lesser of either the appraised
value or the sales price of the secured property. Construction loans to individuals are generally
made on the same terms as the Companys one- to four-family mortgage loans. Before making a commitment to fund a construction loan, the Company requires an appraisal of
the property by an independent licensed appraiser. The Company also reviews and inspects each
property before disbursing funds. Loan proceeds are disbursed in pre- 9




---



##### Table of Contents



determined portions (described
in the loan documentation) upon completion of each stage of work. The final 10% of the loan
proceeds is generally not disbursed until the construction of the residence is completed. Construction lending generally involves a higher degree of risk than single-family permanent
mortgage lending because of the greater potential for disagreements between borrowers and builders
and the failure of builders to pay subcontractors. For example, if a builder fails to pay
subcontractors, a lien could be attached against the property by the subcontractors, which could
reduce the value of the property as collateral for the Companys loan. Additional risk also often
exists because of the inherent difficulty in estimating in advance both a propertys value
post-construction and the estimated cost of construction. If the estimate of construction costs
proves to be inaccurate, the Company may be required to advance funds beyond the amount originally
committed to protect the value of the collateral for its loan. If the estimate of value upon
completion proves to be inaccurate, the propertys value may be insufficient to assure full loan
repayment. HOME EQUITY AND LINES OF CREDIT. The Company offers home equity loans and lines of credit secured
by owner-occupied one- to four-family residences. Unadvanced amounts of home equity loans are not
shown as liabilities on the Companys balance sheet. For more information about the Companys
commitments, including commitments to make advances on home equity lines of credit, see Note 13 to
the Companys Consolidated Financial Statements under Item 8 of this Report. The underwriting standards employed by the Company for home equity loans and lines of credit
generally include a determination of the applicants credit history, an assessment of the
applicants ability to meet existing obligations and payments on the proposed loan and the value of
the collateral that would secure the loan. Loan-to-value ratios and maximum loan amounts vary
depending on the amount of insurance coverage on the underlying property. Generally, home equity
loans are made with fixed interest rates and terms of up to 15 years. Home equity lines of credit, as opposed to home equity loans, generally have adjustable rates
of interest that are indexed to the prime rate as reported in The Wall Street Journal. Generally,
the maximum combined (original mortgage plus home equity line of credit) loan-to-value ratio on
home equity lines of credit is 85%. A home equity line of credit generally may be drawn down by the
borrower over an initial period of 5 years from the date of the loan agreement. During this period,
the borrower generally has the option of paying, on a monthly basis, either principal and interest
together or only the interest. If the equity line is not renewed, the borrower is generally
required to repay the amount outstanding under the line of credit over a term not to exceed 15
years, beginning at the end of this initial 5-year period. COMMERCIAL LOANS. The Company makes commercial business loans primarily in its market area to a
variety of professionals, sole proprietorships and small businesses. The Company offers a variety
of commercial lending products, including term loans for fixed assets, working capital loans and
lines of credit and loans with a single principal payment at maturity. Additionally, the Company
originates Small Business Administration-guaranteed loans. The Company offers secured commercial term loans generally with terms of up to ten years and
the payment of which is dependent on future earnings. Business lines of credit generally have
adjustable rates of interest and terms of up to three years. Loans that require a one-time payment
of principal at termination will generally be originated on terms of up to 3 years as long as the
borrower is paying interest at least semi-annually. Loans generally will be originated on terms of
up to one year if the borrower will pay all of the interest due upon maturity. Business loans with
variable rates of interest are generally indexed to the prime rate as reported in The Wall Street
Journal. The Company also makes unsecured commercial loans. Unadvanced amounts of commercial loans
and commercial loan commitments are not shown as liabilities on the Companys balance sheet. For
more information about the Companys commitments, including unadvanced amounts of commercial loans
and commercial loan commitments, see Note 13 to the Companys Consolidated Financial Statements under Item 8 of this Report. When making commercial business loans, the Company considers the financial statements of the
borrower, the Companys lending history with the borrower, the debt service capabilities of the
borrower, the projected cash flows of the business and the value of the collateral. Commercial
business loans are generally secured by a variety of collateral, which primarily includes accounts
receivable, inventory and equipment. Commercial business loans are also typically supported by
personal guarantees. Depending on the collateral used to secure the loans, commercial loans are
made in amounts of up to 100% of the value of the collateral securing the loan. Commercial loans generally involve higher risk than residential mortgage loans and are
typically 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 loans
may depend substantially on the success of the business itself, which may be difficult to predict
and 10




---



##### Table of Contents



may depend on various unknown factors. Further, any collateral securing commercial business
loans may depreciate over time, may be difficult to appraise and may fluctuate in value. CONSUMER LOANS. The Company offers a variety of consumer loans, including automobile loans, mobile
home loans, other secured loans, collateral loans, personal loans and unsecured loans. The Company
offers fixed-rate automobile loans with terms of up to 72 months. These loans are offered on a
direct basis, meaning the Company makes the loan directly to the consumer purchasing the
automobile, and on an indirect basis, which is described in more detail below. The Company will
generally make such loans up to 100% of the retail price for new cars and up to 90% of the retail
value as stated in the NADA Used Car Guide for used cars. The interest rates the Company offers on
these loans depend on the age of the automobile, market conditions and current market interest
rates. The Company originates automobile loans through various automobile dealers in its market area
from its indirect consumer lending program. These dealers provide the Company applications made by
consumers to finance new (and, to a lesser extent, used) vehicles sold by their dealerships. The
Company has the opportunity to accept or reject each application. Generally, the Company pays a
monthly fee, or dealer reserve, to the automobile dealer based on the interest rate on the loan.
If a loan is paid off or charged off within a specified time period, the dealer forfeits the dealer
reserve, and the Company is credited with 100% of the dealer reserve, which it may withhold from
the dealers account or credit against future payments to the dealer. The Company also originates loans on new or used mobile homes, with terms ranging from 7 to 15
years and with fixed interest rates. The Company generally will finance up to a maximum of 90% of
either the purchase price of the mobile home unit or the retail value, whichever is less. The Company also originates consumer loans secured by boats, motorcycles, campers and other
recreational vehicles. These loans generally have fixed interest rates and terms ranging from a
maximum of 5 years to 15 years depending on the type of collateral securing the loan. The Company offers collateral loans, personal loans and unsecured loans. Collateral loans are
usually secured by a savings account or a certificate of deposit. Personal loans generally have a
borrowing limit of $5,000 and a maximum term of four years. The Company also makes unsecured
personal loans to individuals who have been homeowners for at least four years. These loans
typically will be made in amounts of up to $10,000 and with terms of up to 7 years. The Company believes that it will benefit from the higher yields typically earned on consumer
loans, in contrast to the relatively lower yields earned on residential one- to four-family loans,
and that the shorter duration of consumer loans will improve the Companys interest rate risk
position. Consumer loans, however, entail greater risk of nonpayment than do residential mortgage
loans. This is particularly true in the case of loans that are unsecured or that are secured by
rapidly depreciating assets such as automobiles. As a result of the greater likelihood of damage,
loss or depreciation to the underlying collateral (such as the automobile), consumer loan
collateral may not provide an adequate source of repayment of the outstanding loan balance. The
remaining deficiency on the loan often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment because the costs of additional
collection efforts may not be justified by the potential amount to be collected. In addition,
consumer loan collections are dependent on the borrowers continuing financial stability, and thus
are more likely to be adversely affected by such events as job loss, divorce, illness or personal
bankruptcy. For information on how the Company determines its provision for loan losses, see the
section captioned Allowance for Loan Losses below, the section captioned Critical Accounting
Policies under Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, and Note 1 to the Companys Consolidated Financial Statements under Item 8 of this Report. LOANS TO ONE BORROWER. The maximum amount that the Company may lend to one borrower is limited by
regulation. At December 31, 2004, the Companys regulatory limit on loans to one borrower was $17.4
million or $29.0 million for loans approved by two-thirds of the Board of Directors. At that date,
the Companys largest amount of outstanding loans to one borrower, including the borrowers related
interests, was approximately $20.7 million and consisted of commercial, industrial and retail
properties. These loans were previously approved by the Companys Board of Directors. Additionally,
at December 31, 2004, the Companys largest outstanding commitment to one borrower was
approximately $20.0 million, approximately $9.8 million of which was outstanding, and consisted of
commercial and industrial and retail properties. All of these loans were performing in accordance
with required
repayment terms at December 31, 2004. For more information on the regulations limiting loans to one
borrower, see the section captioned Loans to One Borrower under the heading Regulation and
Supervision below. 11




---



##### Table of Contents



LOAN APPROVAL PROCEDURES AND AUTHORITY. The Companys lending activities follow written,
non-discriminatory underwriting standards and loan origination procedures established by the
Companys Board of Directors and senior management. The Companys Board of Directors reviews the
lending approval procedures and authorities of the President and Chief Executive Officer, Senior
Vice Presidents of Retail and Commercial Banking and various loan committees on a regular basis to
ensure that the appropriate level of approvals exist. LOAN ORIGINATIONS, PURCHASES AND SALES. The Companys lending activities are generally conducted by
its salaried and commissioned loan personnel and through its relationship with vehicle dealers,
which is described in more detail under the heading Consumer Loans above. Except in connection with the Companys indirect automobile lending, the Company relies on
advertising, referrals from realtors and customers and personal contact by the Companys staff to
originate loans. Other than the automobile dealerships previously discussed, the Company does not
use loan correspondents or other third parties to originate loans. The Companys ability to
originate adjustable-rate and fixed-rate loans depends upon the relative customer demand for these
loans, which is in turn affected by the current and expected future levels of interest rates.
Interest rates are in turn affected by a variety of other factors, some of which are mentioned in
the section captioned Forward-Looking Statements located after the table of contents at the beginning of this Report. Generally, fixed-rate loans that conform to the underwriting standards specified by various
investors are originated by the Company for sale in the secondary market primarily to Fannie Mae
and Freddie Mac (Investors) and, to a lesser extent, private investors. The Company generally
retains the servicing rights on the loans sold in the secondary market, meaning that the Company
receives payments and other collections on these loans and administers these loans in exchange for
a servicing or administrative fee. The Company currently has a best efforts contract with a third
party under which the Company must use its best efforts to provide the third party with loans for
sale. The Company is not required under this contract to replace loans that fail to close for any
reason. Additionally, the Company enters into forward contracts with investors under
which Investors commit to purchase certain loans from the Company. At December 31,
2004, the Company had outstanding forward contracts to sell loans of approximately $6.5 million. Under these forward contracts, Investors are generally required to purchase these loans in
the future from the Company, notwithstanding any change in the market interest rate, as long as
specific underwriting requirements are met in making the loans. Sales of most fixed-rate loans are
made without recourse to the Company if the borrower defaults. The Company generally originates
adjustable-rate loans for its portfolio, but will, from time to time, sell these loans in the
secondary market based on prevailing market interest rate conditions, the Companys liquidity needs
and the Companys interest rate risk position. Loan Commitments.The Company frequently issues loan commitments to its prospective borrowers,
which are made in writing on specified terms and conditions. Commitments are generally honored for
up to 30 days from approval for residential real estate loans and for up to 180 days on commercial
and multi-family real estate loans. These loan commitments and unadvanced loans and lines of credit
do not appear as liabilities on the Companys Consolidated Financial Statements. For more
information regarding the Companys loan commitments and unadvanced loans and lines of credit, see
Note 13 to the Companys Consolidated Financial Statements. Although the Company believes that it
has sufficient liquidity to meet these commitments and obligations in the future, there can be no
assurance regarding whether intervening factors, some of which are beyond the Companys control,
will interfere with the Companys ability to do so. For more information, see the section captioned
Liquidity and Capital Resources under Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations. Loan Fees.In addition to interest earned on loans, the Company receives income from fees in
connection with loan originations, loan modifications and late payments and for miscellaneous
services related to its loans. Income from these activities varies from period to period depending
upon the volume and type of loans made and competitive conditions. For more information, see Note
4 to the Companys Consolidated Financial Statements under Item 8 of this Report. The Company charges loan origination fees, which are calculated as a percentage of the amount
borrowed, subject to a minimum amount. As required by applicable accounting principles, loan
origination fees, discount points and certain loan origination costs are deferred and amortized
over the contractual remaining lives of the related loans on a level yield basis. Nonperforming Assets and Delinquencies.When a borrower fails to make a required loan payment on a
loan secured by real estate, the Company attempts to cure the delinquency by contacting the
borrower via telephone. After the 90th day of delinquency, the Company commences foreclosure
proceedings under the terms of the loan documents and applicable law. 12




---



##### Table of Contents



When a borrower on a consumer or commercial loan fails to make a required loan payment, a late
notice is mailed after 10 days of delinquency. Additional contact and correspondence continues
until the 90th day of the delinquency, at which point the Company may take action to repossess the
property securing the loan or implement other collection efforts. Management informs the Boards of
Directors of the Company monthly of the amounts of loans delinquent more than 60 days, of loans in
foreclosure and of all foreclosed and repossessed property that the Company owns. The Company ceases accruing interest on residential and commercial mortgages secured by real
estate and consumer loans when principal or interest payments are delinquent 90 days or more. If
management determines that interest is uncollectible, all interest previously accrued is reversed
against current period interest income. If collection of principal or interest is considered
doubtful, loans are placed on nonperforming status. Commercial loans are monitored closely after the loan is 90 days delinquent. Upon analysis of
the circumstances of the borrower, a decision is made by the Senior Vice President of Commercial
Banking whether or not the loan should be placed on nonperforming status. Therefore, at December
31, 2004 approximately $2.9 million of commercial loans that are 90 days past due are not
classified as nonperforming due to various factors which include, but are not limited to, the
timing of the maturity of the loan in relation to the ability to collect and analyze customer
financial data. During the last half of 2004, management decided that nonperforming loans were required to
show consistent payments of principal and interest for a period of 90 consecutive days to change
the classification of the loan to a performing loan. This change in policy was deemed to provide a
more thorough analysis and monitoring method of nonperforming loans and ensured that the borrower
provided strong evidence of consistent payment over this period. Consequently, an increase in
nonperforming loans occurred at December 31, 2004. Additionally, nonperforming assets of Metrobank
in the amount of $3.5 million were added to the total amount of nonperforming assets. The following table provides information at the dates indicated regarding various
non-performing loans in the Companys loan portfolio and regarding real estate owned (in
thousands): At December 31,
    
    
    At March 31,2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001Nonperforming loans:Real estate
    
    $
    5,745
    
    
    $
    3,268
    
    
    $
    1,876
    
    
    $
    1,437
    
    
    $
    1,156Commercial
    
    
    3,343
    
    
    
    195
    
    
    
    356
    
    
    
    295
    
    
    
    434Consumer
    
    
    1,543
    
    
    
    452
    
    
    
    182
    
    
    
    61
    
    
    
    220Total (1)
    
    
    10,631
    
    
    
    3,915
    
    
    
    2,414
    
    
    
    1,793
    
    
    
    1,810Real estate and other assets owned
    
    
    1,032
    
    
    
    443
    
    
    
    353
    
    
    
    953
    
    
    
    282Total nonperforming assets
    
    $
    11,663
    
    
    $
    4,358
    
    
    $
    2,767
    
    
    $
    2,746
    
    
    $
    2,092Total nonperforming loans as a
percentage of total loans
    
    
    0.89
    %
    
    
    0.42
    %
    
    
    0.29
    %
    
    
    0.24
    %
    
    
    0.26
    %Total nonperforming loans as a
percentage of total assets
    
    
    0.76
    %
    
    
    0.36
    %
    
    
    0.24
    %
    
    
    0.19
    %
    
    
    0.21
    %
   (1)
    
    The increase at December 31, 2004 from 2003 reflects the change in policy for
nonperforming loans to be classified as performing as discussed above. Interest income that would have been recorded for the year ended December 31, 2004 had
nonperforming loans been current according to their original terms amounted to $1,247,936. Interest
income related to these loans included in interest income for the year ended December 31, 2004, was
$534,390. The following table sets forth loans 90 days past due accruing interest (in thousands): 13




---



##### Table of Contents



At December 31,
    
    
    At March 31,2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001Real estate loans:One- to four-family
    
    $
    265
    
    
    $
    2,506
    
    
    $
    1,575
    
    
    $
    1,161
    
    
    $
    1,156Commercial and multi-family
    
    
    728
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    762
    
    
    
    301
    
    
    
    276
    
    
    
    Home equity and
lines of credit
    
    
    
    
    
    
    84
    
    
    
    116
    
    
    
    
    
    
    
    109Commercial loans
    
    
    2,948
    
    
    
    86
    
    
    
    356
    
    
    
    295
    
    
    
    434Consumer loans
    
    
    
    
    
    
    328
    
    
    
    66
    
    
    
    61Total
    
    
    3,941
    
    
    $
    3,915
    
    
    $
    2,414
    
    
    $
    1,793
    
    
    $
    1,699Accruing loans 90 days
past due to total loans
    
    
    0.33
    %
    
    
    0.42
    %
    
    
    0.29
    %
    
    
    0.24
    %
    
    
    0.25
    %
 The fluctuations between December 31, 2004 and 2003 reflect the change in policy for
nonperforming loans to be classified as performing as discussed above. Real Estate Owned.Real estate acquired by the Company as a result of foreclosure and real estate
acquired by deed-in-lieu of foreclosure is classified as real estate owned until sold. Under
Michigan law, there is generally a six-month redemption period with respect to one- to four-family
residential properties during which the borrower has the right to repurchase the property. When
property is acquired, the property is recorded on the Companys balance sheet at the lower of its
cost, which is the unpaid principal balance of the loan plus foreclosure costs, or fair market
value at the date of foreclosure less estimated costs to sell. The variances, if any, are charged
against the allowance for loan losses. This recordation establishes a new cost basis. Holding costs
and declines in fair value after acquisition of the property may result in charges against the
Companys income. At December 31, 2004, the Company had approximately $991,000 in real estate owned
and $41,000 of repossessed automobiles. Asset Classification.Bank regulators have adopted various regulations and practices regarding
problem assets of financial institutions. Under these regulations, examiners have authority to
identify problem assets during examinations and, if appropriate, to require them to be classified
as described below. There are three classifications for problem assets: substandard, doubtful and loss.
Substandard assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the same weaknesses as substandard assets, except that weaknesses
of doubtful assets make collection or liquidation in full questionable based on currently existing
facts, conditions and values, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion of an asset is classified as loss, the
insured institution establishes a specific allowance in its allowance for loan losses for the full
amount of the portion of the asset that is classified as loss. All or a portion of general loan
loss allowances established to cover probable losses related to assets classified substandard or
doubtful can be included in determining an institutions regulatory capital, while specific
valuation allowances such as those for assets classified as loss generally do not qualify as
regulatory capital. The Companys Directors Loan Committee, which consists of the President and
Chief Executive Officer of the Company, two outside directors and the Senior Vice President -
Commercial Banking, classifies assets on a monthly basis based upon delinquency reports, assets
held by the Company as real estate owned, asset review summaries and assets brought to the
attention of the Directors Loan Committee by other senior officers. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification as substandard,
doubtful or loss, but that possess weaknesses, are designated by the Company as special mention.
The Company monitors special mention assets. Allowance for Loan Losses.The Company recognizes that losses will be experienced from originating
loans and that the risk of loss will vary with, among other factors, the type of loan being made,
the creditworthiness of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. To reflect the perceived risk
associated with the Companys loan portfolio, the Company maintains an allowance for loan losses to
absorb potential losses from loans in its loan portfolio. As losses are estimated to have occurred,
management establishes a provision for loan losses, which is then 14




---



##### Table of Contents



charged directly against
earnings. 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. The allowance for loan losses represents managements estimate of probable losses based
on information available as of the date of the financial statements. Potential Significant Impact on Financial Statements and Condition. The level of the allowance
for loan losses is important to the portrayal of the Companys financial condition and results of
operations. Although management believes that it uses the best information available to establish
the allowance for loan losses, the determination of what the loan allowance should be requires
management to make difficult and subjective judgments about which estimates and assumptions to use.
Actual results may differ materially from these estimates and assumptions, resulting in a direct
impact on the Companys allowance for loan losses and requiring changes in the allowance. Because
the estimates and assumptions underlying the Companys allowance for loan losses are inherently
uncertain, different estimates and assumptions could require a material increase in the allowance
for loan losses. Any material increase in the allowance for loan losses could have a material
adverse effect on the Companys net income, its financial condition and results of operations. The
Company, therefore, views its allowance for loan losses as a critical accounting policy. For
additional information about the allowance for loan losses, see Note 1 to the Companys
Consolidated Financial Statements under Item 8 of this Report and the section captioned Critical Accounting Policies under
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. Methodology for Determination of Loan Loss Allowance. Management evaluates the adequacy of the
level of its loss allowance at least quarterly as a function of its internal asset review process
because of the importance of the Companys loan loss allowance. The Companys Director Loan
Committee meets monthly to review asset classifications and to recommend any changes to the
allowance for loan losses. In order to determine if its loan loss allowance is adequate, the
Company assesses the expected losses inherent in its loan portfolio. Managements internal asset
review system and loss allowance methodology are intended to identify problem assets and recognize
losses in a timely manner. Management considers various factors in determining whether its
allowance for loan losses is adequate, including risk characteristics inherent in different types
of loans. Management first performs a detailed review of multi-family real estate loans, commercial
real estate loans and other loans with significant balances. Multi-family and commercial real
estate loans are generally considered to involve a higher degree of risk and to be more vulnerable
to adverse conditions in the real estate market and to deteriorating economic conditions,
particularly changes in interest rates, than one-to-four family residential mortgage loans. In
addition, multi-family and commercial real estate loans typically involve higher loan principal
amounts, and the repayment of these loans generally depends on the income produced by the operation
or sale of the property being sufficient to cover operating expenses and debt service. Finally,
multi-family and commercial real estate loan values tend to be more cyclical, and recessionary
conditions of the type that prevail from time to time in the Companys lending market area tend to
result in higher vacancy and reduced rental rates and net operating incomes from multi-family and
commercial real estate properties. As a result, multi-family and commercial real estate loans are
assigned higher credit risk ratings upon their origination, as are other loans with significant
balances. In addition to a review of multi-family and commercial real estate loans and other loans
with significant balances, a detailed credit quality review is also performed for other loans that
have deteriorated below certain levels of credit risk or that have been classified or identified as
watch list loans. A specified loss allowance is attributed to these reviewed loans. An appropriate level of loss allowance is then determined for the remaining balance of the
loan portfolio. This allowance relates to assets with no well-defined deficiencies or weaknesses
and takes into consideration losses that are inherent within the portfolio but that have not yet
been realized. This allowance is determined by applying estimated projected loss factors to each
specific type of loan category in the portfolio (e.g., one- to four-family residential mortgage
loans, consumer loans). Varying loss factors are applied to specific sub-categories of loans within
the broader loan categories (e.g., fixed-rate mortgage loans, automobile loans). Management
determines the estimated loss factors based on historical and recent loan loss experience, industry
averages and trends in loan delinquencies and nonaccruals for each type of loan. The determination
of the estimated loss factors applied to each type of loan is based on information known and
projections made by management based on that information. As a result, actual loss ratios
experienced in the future could vary from those projected, which could have a material impact on
the loan loss allowance. 15




---



##### Table of Contents



After the review yields an aggregate amount of loss allowance attributable to specific loans
and after management applies various loss factors to the remaining balance of loans by type,
management then analyzes the adequacy of the combined amount of loan loss allowance by considering
other factors that may have an impact on the performance of the loan portfolio. These factors
include trends in real estate and collateral values, trends and forecasts for the national and
local economies, the geographic dispersion of borrowers and other risk factors. Based on this
analysis, management adjusts the overall loss allowance, which may result in an unallocated portion
of the loan loss allowance. Management believes that an unallocated portion of the allowance is
generally necessary because other factors affecting whether losses in the loan portfolio are
probable may not be captured by applying estimated loss factors. The existence of an unallocated
portion of the loan loss allowance reflects managements view that the allowance should have a
margin that recognizes that the process of estimating expected credit losses and determining the
loan loss allowance is imprecise. Determination of the probable losses inherent in the portfolio,
which losses are not necessarily captured by the allocated methodology discussed above, involves
the exercise of judgment and uncertainty. The assessment of general local and national economic
conditions and trends inherently involves a higher degree of uncertainty as it requires management
to anticipate the impact that economic trends, legislative actions or other unique market and/or
portfolio issues have on estimated credit losses. Recent factors which were considered in the
evaluation of the adequacy of the Companys unallocated loan loss reserve include increases in
commercial real estate, commercial and construction loans and increases in the amount of loans that
have been charged off. Management also considers industry norms and the expectations from rating
agencies and banking regulators in determining the adequacy of the Companys loan loss allowance. Potential Problem Loans.In addition to those loans reflected in the table above, we have
identified some loans through our problem loan identification process which exhibit a higher than
normal credit risk. Loans in this category include loans with characteristics such as past maturity
more than 90 days, those that have recent adverse operating cash flow or balance sheet trends, or
loans that have general risk characteristics that management believes might jeopardize the future
timely collection of principal and interest payments. The balance in this category at any reporting
period can fluctuate widely based on the timing of cash collections, renegotiations and renewals.
The principal amount of loans in this category as of December 31, 2004 was $2.7 million. At
December 31, 2004, there were no significant loans which were classified by any bank regulatory
agency that are not included above as nonperforming, past due or restructured. Possible Future Adjustments to Loan Loss Allowance.No assurances can be given that the
Companys level of allowance for loan losses will be sufficient to cover future loan losses
incurred by the Company 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 or if
historical trends change. Nevertheless, management believes that, based on information currently
available, the Companys allowance for loan losses is sufficient to cover losses inherent in its
loan portfolio at this time. In addition, it is uncertain whether various regulatory agencies, as
an integral part of their examination process and in reviewing the Companys loan portfolio, will
request that the Company increase its allowance for loan losses. The Company believes, however,
that it has established its existing loan loss allowance in conformity with generally accepted
accounting principles. These agencies could, nevertheless, require the Company to provide additions
to the allowance for loan losses based upon judgments of the agencies that are different from the
judgments of management. Additional information about the Companys allowance for loan losses can
be found in Note 1 to the Companys Consolidated Financial
Statements under Item 8 of this Report and in the section captioned
Critical Accounting Policies under Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations. 16




---



##### Table of Contents



The following table presents an analysis of the Companys allowance for loan losses (in
thousands): Year Ended
    
    
    Nine Months
    
    
    Year EndedDecember 31,
    
    
    Ended December 31,
    
    
    March 31,2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001Allowance for loan losses, beginning of period
    
    $
    11,664
    
    
    $
    11,082
    
    
    $
    11,020
    
    
    $
    10,831
    
    
    $
    10,461Acquired in acquisition
    
    
    1,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Charged-off loans:Real estate
    
    
    (132
    )
    
    
    (15
    )
    
    
    (56
    )
    
    
    (12
    )
    
    
    (5
    )Commercial
    
    
    (270
    )
    
    
    (325
    )
    
    
    (548
    )
    
    
    (291
    )
    
    
    (142
    )Consumer
    
    
    (1,057
    )
    
    
    (755
    )
    
    
    (498
    )
    
    
    (870
    )
    
    
    (342
    )Total charged-off loans
    
    
    (1,459
    )
    
    
    (1,095
    )
    
    
    (1,102
    )
    
    
    (1,173
    )
    
    
    (489
    )Recoveries on loans previously charged-off:Real estate
    
    
    138
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Commercial
    
    
    167
    
    
    
    83
    
    
    
    29
    
    
    
    103
    
    
    
    56Consumer
    
    
    272
    
    
    
    154
    
    
    
    242
    
    
    
    263
    
    
    
    23Total recoveries
    
    
    577
    
    
    
    237
    
    
    
    272
    
    
    
    366
    
    
    
    79Net loans charged-off
    
    
    (882
    )
    
    
    (858
    )
    
    
    (830
    )
    
    
    (807
    )
    
    
    (410
    )Provision for loan losses
    
    
    1,555
    
    
    
    1,440
    
    
    
    892
    
    
    
    996
    
    
    
    780Allowance for loan losses, end of
period
    
    $
    13,472
    
    
    $
    11,664
    
    
    $
    11,082
    
    
    $
    11,020
    
    
    $
    10,831Net loans charged-off to average
interest-earning loans
    
    
    0.08
    %
    
    
    0.10
    %
    
    
    0.10
    %
    
    
    0.11
    %
    
    
    0.06
    %Allowance for loan losses to total loans
    
    
    1.12
    %
    
    
    1.24
    %
    
    
    1.33
    %
    
    
    1.47
    %
    
    
    1.58
    %Allowance for loan losses to nonperforming loans (1)
    
    
    126
    %
    
    
    298
    %
    
    
    459
    %
    
    
    615
    %
    
    
    598
    %Net loans charged-off to allowance for loan losses
    
    
    6.55
    %
    
    
    7.36
    %
    
    
    7.49
    %
    
    
    7.32
    %
    
    
    3.79
    %Recoveries to charge-offs
    
    
    39.55
    %
    
    
    21.64
    %
    
    
    24.68
    %
    
    
    31.20
    %
    
    
    16.16
    %
   (1)
    
    See explanation of this variance in the section labeled Nonperforming Assets and
Delinquencies above. The following table presents the approximate allocation of the allowance for loan losses (in
thousands) by loan category at the dates indicated. The allocation of the allowance to each
category is not indicative of future losses and does not restrict the use of any of the allowance
to absorb losses in any category. At December 31,2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAllowance
    
    
    
    
    
    
    Allowance
    
    
    
    
    
    
    Allowancein each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in eachCategory
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to TotalAmount
    
    
    Allowance
    
    
    Amount
    
    
    Allowance
    
    
    Amount
    
    
    AllowanceReal estate
    
    $
    6,270
    
    
    
    46.54
    %
    
    $
    5,493
    
    
    
    47.09
    %
    
    $
    5,286
    
    
    
    47.71
    %Commercial
    
    
    2,983
    
    
    
    22.14
    %
    
    
    1,922
    
    
    
    16.48
    %
    
    
    1,020
    
    
    
    9.20
    %Consumer
    
    
    3,689
    
    
    
    27.38
    %
    
    
    3,527
    
    
    
    30.24
    %
    
    
    4,205
    
    
    
    37.94
    %Unallocated
    
    
    530
    
    
    
    3.93
    %
    
    
    722
    
    
    
    6.19
    %
    
    
    571
    
    
    
    5.15
    %Total allowance
for loan losses
    
    $
    13,472
    
    
    
    100.00
    %
    
    $
    11,664
    
    
    
    100.00
    %
    
    $
    11,082
    
    
    
    100.00
    %
 17




---



##### Table of Contents



Continued from above table, first column(s) repeated] At March 31,2002
    
    
    2001% of
    
    
    
    
    
    
    % ofAllowance
    
    
    
    
    
    
    Allowancein each
    
    
    
    
    
    
    in eachCategory
    
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    
    to TotalAmount
    
    
    Allowance
    
    
    Amount
    
    
    AllowanceReal estate
    
    $
    4,980
    
    
    
    45.19
    %
    
    $
    5,425
    
    
    
    50.09
    %Commercial
    
    
    1,096
    
    
    
    9.95
    %
    
    
    845
    
    
    
    7.80
    %Consumer
    
    
    4,130
    
    
    
    37.48
    %
    
    
    4,082
    
    
    
    37.69
    %Unallocated
    
    
    814
    
    
    
    7.38
    %
    
    
    479
    
    
    
    4.42
    %Total allowance
for loan losses
    
    $
    11,020
    
    
    
    100.00
    %
    
    $
    10,831
    
    
    
    100.00
    %
 Investment Securities Activities Under Michigan law and regulation, the Company has authority to purchase a wide range of
investment securities. Under federal banking law, however, financial institutions such as the
Company generally may not invest in investment securities that are not permissible for investment
by a national bank. The Companys Board of Directors has the overall responsibility for the Companys investment
portfolio. The Board of Directors has authorized the Investment Committee of the Board of Directors
to execute the investment policy, which is described below, as prescribed by the Board of
Directors. The Board of Directors also receives a monthly portfolio report. The Investment
Committee is authorized to delegate investment and compliance duties to an investment consultant
and/or Investment Manager. The Investment Manager is authorized to make investment decisions
consistent with the Companys investment policy and the recommendations of the Companys Investment
Committee and is primarily responsible for daily investment activities. The primary objectives of the Companys investment portfolio are to provide the liquidity
necessary to meet the Companys day-to-day, cyclical and long-term requirements for funds, to
invest funds not currently needed to fulfill loan demands and to provide a flow of dependable
earnings with minimum risk associated with potential changes in interest rates or from the
concentration of investments in a particular issuer or sector. Investment decisions are based upon
the Companys cash and borrowed funds position; the quality, maturity, stability and earnings of
loans; the nature and stability of deposits; and the Companys excess capital. Under the Companys current investment policy, its investment portfolio should be composed of
investments in marketable obligations in the form of bonds, equity securities, notes or debentures,
which are generally salable under ordinary circumstances with reasonable promptness at fair value.
Debt securities authorized for investment by the investment policy include U.S. Treasury
securities, government agency securities, corporate debt securities, municipal securities,
certificates of deposit, bankers acceptances, demand obligations, repurchase agreements and
commercial paper. 18




---



##### Table of Contents



The Companys investment policy generally provides that all bonds, when purchased, must be of
investment grade, as determined by at least one nationally recognized securities rating
organization, and must generally carry a rating of A/Mig2 or better or the equivalent or A1/P1
for commercial paper when purchased. The Companys investment policy limits investments in non-U.S.
Treasury securities to no more than five percent of the value of the Companys investment portfolio
in any one issue or class and ten percent of the value of the investment portfolio in any one
issuer. Also, the total amount of investment securities of any one issuer may not exceed twenty
percent of the total of the Companys capital, surplus, and subordinated notes and debentures. The
Companys investment policy is subject to change as determined appropriate by its Board of
Directors. Generally accepted accounting principles require that securities be categorized as either
held to maturity, trading securities or available for sale, based on managements intention
regarding ultimate disposition of each security. Debt securities may be classified as held to
maturity and reported in financial statements at amortized cost only if management has the
intention and ability to hold those securities to maturity. Securities that might be sold in
response to changes in market interest rates, changes in the securitys prepayment risk, increases
in loan demand or other similar factors cannot be classified as held to maturity. Debt and equity
securities held for current resale are classified as trading securities. These securities are
reported at fair value, and unrealized gains and losses on these securities would be included in
current earnings. The Company does not currently use or maintain a trading securities account. Debt
and equity securities not classified as either held to maturity or trading securities are
classified as available for sale. These securities are reported at fair value, and unrealized
gains and losses on the securities are excluded from earnings and reported, net of deferred taxes,
as a separate component of stockholders equity. The Company currently classifies all of its
securities as available for sale. At December 31, 2004, the Company did not own any securities that had an aggregate book value
in excess of 10% of the Companys stockholders equity at that date, other than U.S. Government and
Agency securities. The following table sets forth certain information regarding the amortized cost and fair value
of the Companys securities at the dates indicated (in thousands): At December 31,2004
    
    
    2003
    
    
    2002Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueDebt securities available for sale:U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    24,099
    
    
    $
    24,079
    
    
    $
    7,998
    
    
    $
    8,013
    
    
    $
    10,389
    
    
    $
    10,775Obligations of state and political subdivisions
    
    
    37,504
    
    
    
    37,889
    
    
    
    17,863
    
    
    
    18,611
    
    
    
    14,149
    
    
    
    15,049Corporate debt securities
    
    
    4,768
    
    
    
    4,696
    
    
    
    47,880
    
    
    
    48,263
    
    
    
    65,223
    
    
    
    64,720Other
    
    
    11,498
    
    
    
    11,498
    
    
    
    
    
    
    
    
    
    
    
    5,131
    
    
    
    5,163Mortgage-backed securities
    
    
    15,897
    
    
    
    15,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    93,766
    
    
    
    93,943
    
    
    
    73,741
    
    
    
    74,887
    
    
    
    94,892
    
    
    
    95,707Equity securities available for sale
    
    
    5,002
    
    
    
    3,885
    
    
    
    5,002
    
    
    
    4,785
    
    
    
    5,002
    
    
    
    4,675Total debt and equity securities
    
    $
    98,768
    
    
    $
    97,828
    
    
    $
    78,743
    
    
    $
    79,672
    
    
    $
    99,894
    
    
    $
    100,382
 19




---



##### Table of Contents



The following table sets forth the maturities and weighted average yields of the
Companys securities at December 31, 2004 (in thousands): At December 31, 2004Due within
    
    
    Due in One Year
    
    
    Due in Five YearsOne Year
    
    
    to Five Years
    
    
    to Ten YearsWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedFair
    
    
    Average
    
    
    Fair
    
    
    Average
    
    
    Fair
    
    
    AverageValue
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    YieldU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    495
    
    
    
    1.88
    %
    
    $
    23,583
    
    
    
    4.48
    %
    
    $
    
    
    
    
    Obligations of state and political subdivisions
    
    
    1,987
    
    
    
    3.94
    %
    
    
    18,034
    
    
    
    4.26
    %
    
    
    15,406
    
    
    
    4.04
    %Corporate debt securities
    
    
    502
    
    
    
    7.75
    %
    
    
    4,194
    
    
    
    6.98
    %
    
    
    Other
    
    
    11,498
    
    
    
    4.75
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt
securities
    
    
    14,482
    
    
    
    4.64
    %
    
    
    45,811
    
    
    
    4.62
    
    
    
    15,406
    
    
    
    4.04
    %Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity
securities
   
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
securities available for sale
at fair value
    
    $
    14,482
    
    
    
    4.64
    %
    
    $
    45,811
    
    
    
    4.62
    %
    
    $
    15,406
    
    
    
    4.04
    %
 [Continued from above table, first column(s) repeated] At December 31, 2004Due in
    
    
    Mortgage-backedMore than Ten Years
    
    

and
Equity
    
    
    TotalWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedFair
    
    
    Average
    
    
    Fair
    
    
    Fair
    
    
    AverageValue
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    YieldU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,079
    
    
    
    4.42
    %Obligations of state and political subdivisions
    
    $
    2,463
    
    
    
    4.34
    %
    
    
    
    
    
    
    37,889
    
    
    
    4.16
    %Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,696
    
    
    
    7.06
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,498
    
    
    
    4.75
    %Total debt
securities
    
    
    2,463
    
    
    
    4.34
    %
    
    
    
    
    
    
    78,162
    
    
    
    0Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    $
    15,781
    
    
    
    15,781
    
    
    
    5.24
    %Equity
securities
    
    
    
    
    
    
    
    
    
    
    3,885
    
    
    
    3,885
    
    
    
    Total securities available for sale
at fair value
    
    $
    2,463
    
    
    
    4.34
    %
    
    $
    19,666
    
    
    $
    97,828
    
    
    
    4.44
    %
   (1)
    
    Weighted average yield data for municipal
securities is not presented on a tax equivalent
basis. Deposit Activities and Other Sources of Funds General. Deposits are the major external source of funds for the Companys lending and other
investment activities. In addition, the Company generates funds internally from loan repayments,
payments of interest on loans, proceeds from the sale of loans originated for sale, maturities and
sales of investment securities, cash on hand and cash on deposit. Scheduled loan repayments are a
relatively stable source of funds. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit 20




---



##### Table of Contents



flows, loan prepayments, and mortgage loan originations and sales are greatly influenced by general interest rates, economic conditions and
competition. The Company may use overnight federal funds purchased from member correspondent banks
and borrowings from the Federal Home Loan Bank of Indianapolis (FHLB) to compensate for any
reductions in the availability of funds from other sources. Deposit accounts. Nearly all of the Companys depositors reside in Michigan. The Company offers a
wide variety of deposit accounts with a range of interest rates and terms, including savings
accounts, checking and NOW accounts, certificates of deposit, individual retirement accounts and
money market accounts. The maturities of the Companys certificate of deposit accounts range from
seven days to six years. Deposit account terms vary primarily based on minimum deposit balance,
early withdrawal penalties, limits on the number of transactions and the interest rate. The Company
reviews its deposit mix monthly and its pricing terms weekly. The Company offers a wide range of
commercial deposit products and checking accounts to cities, townships and municipal school
districts located within the Companys market areas. At December 31, 2004, the Company had
depository arrangements with approximately 42 municipalities. At December 31, 2004, these entities
accounted for approximately $60.0 million, or 16.6%, of the Companys certificates of deposit and
$42.5 million, or 16.6%, of the Companys money market accounts. Municipal and governmental
depository arrangements generally are more sensitive to interest rate changes than other consumer
deposit accounts and are typically subject to competitive bidding processes. Additionally, the
balance of these deposit accounts tends to fluctuate more than consumer deposit accounts because of
the budgeting and tax collection timing of each particular municipal entity. Accordingly, municipal
deposits tend to be more volatile than consumer deposits, and there is no assurance that the
Company will be able to maintain its current levels of municipal accounts in future periods. The Company believes it is competitive in the interest rates it offers on its commercial
deposit account products. The Company determines the rates paid based on a number of factors,
including rates paid by competitors, the Companys need for funds and cost of funds, borrowing
costs and movements of market interest rates. The Company has not utilized brokers to obtain
deposits and at December 31, 2004 had no brokered deposits, however, based on forecasts of future
growth, it is expected that the Company will entertain the possibility of entering the brokered
deposit market. The following table summarizes the average balances of deposits (in thousands) and the average
rates of interest: At December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateNoninterest bearing demand deposits
    
    $
    96,340
    
    
    
    0.00
    %
    
    $
    65,325
    
    
    
    0.00
    %
    
    $
    20,648
    
    
    
    0.00
    %Passbook and savings deposits
    
    
    99,884
    
    
    
    0.57
    
    
    
    73,351
    
    
    
    0.77
    
    
    
    80,219
    
    
    
    0.96Interest bearing demand deposits
    
    
    388,184
    
    
    
    1.02
    
    
    
    326,053
    
    
    
    1.32
    
    
    
    274,849
    
    
    
    1.74Time deposits under $100,000
    
    
    215,769
    
    
    
    3.05
    
    
    
    196,552
    
    
    
    3.50
    
    
    
    199,480
    
    
    
    4.38Time deposits $100,000 and over
    
    
    107,624
    
    
    
    2.96
    
    
    
    68,282
    
    
    
    2.39
    
    
    
    85,491
    
    
    
    3.59Total
    
    $
    907,801
    
    
    
    1.90
    %
    
    $
    729,563
    
    
    
    1.60
    %
    
    $
    660,687
    
    
    
    2.13
    %
 The table below shows the amount of time certificates of deposit issued in amounts of
$100,000 or more, by time remaining until maturity, which were outstanding at December 31, 2004 (in
thousands): Three months or less
    
    $
    57,900Over 3 through 6 months
    
    
    9,865Over 6 through 12 months
    
    
    9,805Over 12 months
    
    
    55,500Total
    
    $
    133,070
 Borrowings.Federal funds purchased through member correspondent banks, a line of credit
obtained from an unrelated bank and FHLB advances are used by the Company to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. 21




---



##### Table of Contents



Pleaser refer to Note 8 to the Companys Consolidated Financial Statements. For more information
about the FHLB, see the section captioned Federal Home Loan Bank System under the heading
Regulation and Supervision below. The Company had the ability to borrow a total of approximately $452.8 million from its
correspondent banks and the FHLB, of which $287.7 million was outstanding at December 31, 2004. The following table presents certain information regarding the Companys FHLB advances at or
for the periods ended on the dates indicated (in thousands): Year endedDecember 31,2004
    
    
    2003
    
    
    2002FHLB advancesAverage balance outstanding
    
    $
    204,223
    
    
    $
    172,596
    
    
    $
    162,209Maximum amount outstanding at any month-end during the period
    
    
    232,209
    
    
    
    181,534
    
    
    
    178,568Balance outstanding at end of period
    
    
    232,209
    
    
    
    172,534
    
    
    
    173,003Weighted average interest rate during the period
    
    
    4.91
    %
    
    
    5.39
    %
    
    
    5.63
    %Weighted average interest rate at end of period
    
    
    4.53
    %
    
    
    5.24
    %
    
    
    5.36
    %
 Trust Services The Company maintains its Asset Management and Trust Department, established in 1999, which
provides trust and investment services to individuals, partnerships, corporations and institutions.
The Asset Management and Trust Department also acts as a fiduciary of estates and conservatorships
and as a trustee under various wills, trusts and other plans. The Trust Department allows the
Company to provide investment opportunities and fiduciary services to both current and prospective
customers. Consistent with the Companys operating strategy, and the possible opportunities that
may arise due to our presence in the Oakland County market, the Company will continue to emphasize
the growth of its trust service operations in order to grow its assets and to increase fee-based
income. The Company has implemented several policies governing the practices and procedures of the
Trust Department, including policies relating to maintaining confidentiality of trust records,
investment of trust property, handling conflicts of interest and maintaining impartiality. At
December 31, 2004, the Trust Department managed 395 accounts with aggregate assets of $235.7
million, of which the largest relationship totaled $82.3 million, or 34.9% of the Trust
Departments total assets. Personnel As of December 31, 2004, the Company had 312 full-time employees and 37 part-time employees,
none of whom is represented by a collective bargaining unit. We believe that our relationship with
our employees is good. Subsidiaries Citizens and the Bancorp each own 99%, and 1%, respectively, of the membership interests of the
Citizens First Mortgage, LLC, which was established in 2002. The Company currently conducts its
residential mortgage lending activity through Citizens First Mortgage, LLC. Citizens Financial
Services, Inc., formerly 525 Riverside Corporation, was established in 1974 as a Michigan-chartered
service corporation, and is wholly-owned by Citizens. Citizens Financial Services owns 50% of the
membership interests of CFS Title Insurance Agency, LLC. CFS Title Insurance Agency, a Michigan
limited liability company, was established in 1998 as a joint venture between the Company and
Lawyers Title Insurance Agency, a Virginia corporation, to provide title insurance for
customers of the Company. Citizens Financial Services may also in the future offer other personal
insurance products through an affiliation arrangement with a third party insurance agency. In
addition, Citizens Financial Services owns 100% of CFS Insurance Agency, Inc., d/b/a CFS
Financial Services, Inc., which offers mutual funds and insurance products such as annuities. The
Company also owns 100% of the stock of Metro Bancorp, Inc. (See Note 2) and its subsidiaries
Metrobank, Metrobank Mortgage Company, LLC and Financial Services. 22




---



##### Table of Contents



Additional Financial Information Although this description of the business of the Company includes some specific financial
information, more detailed financial information can be found elsewhere in this Report. For the
Companys Consolidated Financial Statements, see Item 8. For Managements Discussion and Analysis
of Financial Condition and Results of Operations, see Item 7. Among other things, Item 7 also
includes a table showing average balance sheets for the Company for the periods ended December 31,
2004 and December 31, 2003. This table shows, for those periods, the average balances of
interest-earning assets and interest-bearing liabilities, as well as the total dollar amounts of
interest income from average interest-earning assets and the total dollar amount of interest
expense from average interest-earning liabilities and the resulting average yields and costs. In
addition, Item 7 contains a table captioned Rate/Volume Analysis which shows the effect on the
Companys interest income and interest expense of changes in interest rates and changes in the
volumes of interest-earning assets and the volumes of interest-bearing liabilities during the
period ended December 31, 2004 compared to the period ended December 31, 2003. In addition, see
Item 6 for Selected Financial Data of the Company. The Companys internet address is www.cfsbank.com. We have made available free of charge on or
through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after such material was
electronically filed with, or furnished to the SEC. Materials that the Company files with the SEC
may be read and copied at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, D.C.
20549. This information may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov. The Company
will provide a copy of any of the foregoing documents to stockholders upon request. REGULATION AND SUPERVISION General As a savings and loan holding company, the Company is required by federal law to file reports
with, and otherwise comply with, the rules and regulations of the Office of Thrift Supervision. The
Banks are Michigan-chartered state savings banks and members of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the
FDIC. The Commissioner of the Michigan Office of Financial and Insurance Services and/or the FDIC
conduct periodic examinations to test the Companys safety and soundness and compliance with
various regulatory requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and enforcement activities
and examination policies, which include policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any change in these
regulatory requirements and policies, whether by the Office of Thrift Supervision, the FDIC, the
Michigan Office of Financial and Insurance Services or the U.S. Congress, could have a material
adverse impact on the Company and its operations. Certain regulatory requirements applicable to the
Company are referred to below or elsewhere in this Form 10-K. The description of statutory
provisions and regulations applicable to savings institutions and their holding companies included
in this Form 10-K does not purport to be a complete description of these statutes and regulations
and their effects on the Company. Michigan Bank Regulation Michigan savings banks are regulated and supervised by the Commissioner of the Michigan Office
of Financial and Insurance Services. Michigan-chartered savings banks are subject to an
examination, not less than once every 18 months, by the Michigan Commissioner either with or
without notice. The approval of the Michigan Commissioner is required for certain activities such
as for a savings bank to merge with another institution, to reorganize or to undertake other
specified activities. Certain powers that Michigan-chartered savings banks can exercise under the law are summarized
below. Business Activities.The activities of state savings banks are governed by state as well as
federal law and regulations. These laws and regulations delineate the nature and extent of the
investments and activities in which state institutions may engage. To qualify as a Michigan savings
bank, both the Banks must meet an asset test, which requires that during 9 of the 12 preceding
months, at least 50% of its total assets must have consisted of specified assets, primarily housing
loans, mortgage-backed securities, loans for religious, health and nursing home facilities,
consumer loans, liquid assets and government obligations. An institution that fails the asset test
must notify the Commissioner and may requalify by meeting the test, but it if fails to requalify
within the time prescribed by the Commissioner, it must convert to a different charter or liquidate
within the time prescribed by the Commissioner. If it does not do so, 23




---



##### Table of Contents



the Commissioner may appoint a conservator or seek the appointment of a receiver. As of December 31, 2004, the Company met the
asset test for a Michigan savings bank. Under federal law, the Company must also meet the qualified
thrift lender test discussed below. Loans to One Borrower.Michigan law provides that a stock savings bank may not provide loans
or extensions of credit to a person in excess of 15% of the capital and surplus of the bank. The
limit, however, may be increased to 25% of capital and surplus if approval of two-thirds of the
banks board of directors is granted. If the Michigan Commissioner determines that the interests of
a group of more than one person, co-partnership, association or corporation are so interrelated
that they should be considered as a unit for the purpose of extending credit, the total loans and
extensions of credit to that group are combined. At December 31, 2004, the Company did not have any
loans with one borrower that exceeded its regulatory limit. A number of loans are exempted from
these limitations. They include, among others, certain loans on commercial paper, loans to
financial institutions and loans secured by bonds, notes and certificates of indebtedness of the
United States. For more information, see the section captioned Loans to One Borrower under the
heading Lending Activities above. Dividends.Dividends may be paid out of a Michigan savings banks net income after deducting
all bad debts. A Michigan savings bank may only pay dividends on its common stock if the savings
bank has a surplus amounting to not less than 20% of its capital after the payment of the dividend.
If a bank has a surplus less than the amount of its capital, it may not declare or pay any dividend
until an amount equal to at least 10% of net income for the preceding one-half year (in the case of
quarterly or semi-annual dividends) or at least 10% of net income of the preceding two consecutive
half-year periods (in the case of annual dividends) has been transferred to surplus. With the
approval of the Michigan Commissioner and by a vote of shareholders owning two-thirds of the stock
entitled to vote, a savings bank may increase its capital stock by declaring a stock dividend on
the capital stock. A savings bank may pay dividends on its preferred stock without limitation on
the rates. Federal law may also affect the ability of a Michigan savings bank to pay dividends. Branching Activities.Michigan savings banks, have the authority under Michigan law to
establish branches anywhere in the State of Michigan, as well as in any other U.S. state or foreign
country, subject to receipt of all required regulatory approvals (including the approval of the
Michigan Commissioner and the FDIC). Commissioner Assessments.Michigan savings banks are required to pay supervisory fees to the
Michigan Commissioner to fund the operations of the Michigan Commissioner. The amount of
supervisory fees paid by a bank is based upon a formula involving the banks total assets, as
reported to the Michigan Commissioner. Enforcement.Under Michigan law, the Michigan Commissioner has broad enforcement authority
over state chartered banks and, under certain circumstances, affiliated parties insiders, and
agents. If a Michigan savings bank does not operate in accordance with the regulations, policies
and directives of the Michigan Commissioner or is engaging, has engaged or is about to engage in an
unsafe or unsound practice in conducting the business of the bank, the Michigan Commissioner may
issue and serve upon the bank a notice of charges with respect to the practice or violation. The
Michigan Commissioners enforcement authority includes: cease and desist orders, receivership,
conservatorship, removal and suspension of officers and directors, assessment of monetary
penalties, emergency closures, liquidation and the power to issue orders and declaratory rulings to
enforce the Savings Bank Act provisions. Federal Regulation Capital Requirements.Under FDIC regulations, federally-insured state-chartered banks that are not
members of the Federal Reserve System (state non-member banks), such as the Company, are required
to comply with minimum leverage capital requirements. For an institution determined by the FDIC not
to be anticipating or experiencing significant growth and to be in general a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Ranking System established
by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement
is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the minimum
leverage capital ratio is not less than 4%. Tier 1 capital is principally composed of the sum of
common stockholders equity, noncumulative perpetual preferred stock (including any related
surplus) and minority investments in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships). The Company must also comply with the FDIC risk-based capital guidelines. 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. For example, under the FDICs risk-weighting
system, cash and securities backed by the full faith and credit of the U.S. Government are given a
0% risk weight, loans fully secured by one-to four-family residential properties generally have a
50% risk weight and commercial loans have a risk weight of 100%. 24




---



##### Table of Contents



State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets
of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1
capital plus Tier 2 or supplementary capital items, the principal elements of which include
allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative
preferred stock, a portion of the net unrealized gain on equity securities and other capital
instruments such as subordinated debt. The FDIC has adopted a regulation providing that it will take into account the exposure of a
banks capital and economic value to changes in interest rate risk in assessing a banks capital
adequacy. For more information about interest rate risk, see Item 7A, Quantitative and Qualitative
Disclosures About Market Risk. Prompt Corrective Regulatory Action.Federal law requires, among other things, that federal banking
authorities take certain supervisory actions against undercapitalized institutions, the severity of
which depends upon the institutions degree of undercapitalization. Generally, an institution that
has a total risk-based capital ratio of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3%
or less for institutions with the highest examination rating that is not experiencing significant
growth) is considered to be undercapitalized. An institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3%
is considered to be significantly undercapitalized and an institution that has a tangible capital
to assets ratio equal to or less than 2% is deemed to be critically undercapitalized. Subject to
a narrow exception, the FDIC is required to appoint itself sole receiver or conservator for an
institution that is critically undercapitalized. A capital restoration plan must be filed with
the FDIC within 45 days of the date an institution is on notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. Compliance with the plan must be
guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but not limited to,
increased monitoring by regulators and restrictions on growth, capital distributions and expansion.
The FDIC could also take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers and directors. As of December 31, 2004, the most recent notification from the Banks regulators categorized
the Banks as well capitalized under the regulatory framework for prompt corrective action. Federal law generally prohibits a depository institution from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank
from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by a bank if such payment is determined,
by reason of the financial condition of the bank, to be an unsafe and unsound banking practice. Insurance of Deposit Accounts.The Banks are both members of the Savings Association Insurance
Fund. 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 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 insured institutions are
determined semiannually by the FDIC and currently range from zero basis points for the healthiest
institutions to 27 basis points of assessable deposits 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 to recapitalize the
predecessor to the Savings Association Insurance Fund. Beginning January 1, 2000, these assessments
were shared by the Savings Association Insurance Fund and the Bank Insurance Fund members. The FDIC has authority to increase insurance assessments. A significant increase in Savings
Association Insurance Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Company. Management cannot predict what insurance
assessment rates will be in the future. Transactions with Related Parties.The Companys authority to engage in transactions with an
affiliate (generally, any company that controls or is under common control with an institution,
including the Bancorp and its non-savings institution subsidiaries) is limited by federal law. Federal law places quantitative restrictions on these transactions and
imposes specified collateral requirements for certain transactions. The purchase of low quality
assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and
under circumstances that are at least as favorable to the institution as those prevailing at the
time for comparable transactions with non-affiliated companies. The Companys authority to extend credit to executive officers, directors and 10% shareholders
(insiders), as well as entities such persons control, is also governed by federal law. Among
other restrictions, these loans are generally required to be made on terms 25




---



##### Table of Contents



substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of failure
to make required repayment. The Sarbanes-Oxley Act of 2002, however, prohibits the Company from
extending or maintaining credit, arranging for the extension of credit, or renewing an extension of
credit, in the form of a personal loan to or for any director or executive officer (or equivalent
thereof), except for extensions of credit made, maintained, arranged or renewed by the Company that
are subject to the federal law restrictions discussed above. Standards for Safety and Soundness.The federal banking agencies have adopted Interagency
Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and address problems at
insured depository institutions. The guidelines address internal controls and information systems,
the internal audit system, credit underwriting, loan documentation, interest rate risk exposure,
asset growth, asset quality, earnings and compensation, and fees and benefits. 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 an acceptable plan to achieve
compliance with the standard. Investment Activities.Since the enactment of the FDIC Improvement Act, all state-chartered
FDIC insured banks, including savings banks, have generally been limited to activities as principal
and equity investments of the type and in the amount authorized for national banks, notwithstanding
state law. The FDIC Improvement Act and the FDIC permit exceptions to these limitations. For
example, the FDIC is authorized to permit such institutions to engage in state authorized
activities or investments that do not meet this standard (other than direct equity investments) for
institutions that meet all applicable capital requirements if it is determined that such activities
or investments do not pose a significant risk to the Savings Association Insurance Fund. Mergers.The Company may engage in mergers or consolidations with other depository
institutions, subject to filing certain notices with officials of the State of Michigan and
receiving approval from the appropriate federal banking agency. When reviewing a proposed merger,
the federal banking regulators consider numerous factors, including the effect on competition, the
financial and managerial resources and future prospects of existing and proposed institutions, the
effectiveness of FDIC-insured institutions involved in the merger in addressing money laundering
activities and the convenience and needs of the community to be served, including performance under
the Community Reinvestment Act. Federal Statutory and Regulatory Provisions.All financial institutions are subject to federal
statutory and regulatory provisions intended to address money laundering, including international
money laundering. Under the Community Reinvestment Act and regulations implementing the Act, every
FDIC-insured institution is obligated to help meet the credit needs of its local community,
including low- and moderate-income neighborhoods, consistent with safe and sound operation of the
institution, and is examined and rated on its performance. An unsatisfactory rating can be the
basis for denial of an application for a merger or branch. The Company received a satisfactory
rating in its most recent Community Reinvestment Act evaluation by the FDIC. Since the enactment of
the FDIC Improvement Act, all state-chartered FDIC insured banks, including savings banks, have
generally been limited to activities as principal and equity investments of the type and in the
amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the
FDIC permit exceptions to these limitations. For example, the FDIC is authorized to permit such
institutions to engage in state authorized activities or investments that do not meet this standard
(other than direct equity investments) for institutions that meet all applicable capital
requirements if it is determined that such activities or investments do not pose a significant risk
to the Savings Association Insurance Fund. Interstate Branching.Beginning June 1, 1997, federal law permitted the responsible federal
banking agencies to approve merger transactions between banks located in different states,
regardless of whether the merger would be prohibited under the law of the two states. The law also
permitted a state to opt in to the provisions of the Interstate Banking Act before June 1, 1997,
and permitted a state to opt out of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Michigan did not opt out of the provisions of the
Interstate Banking Act. Accordingly, beginning June 1, 1997, a Michigan savings bank, could acquire
an institution by merger in a state other than Michigan unless the other state had opted out. The
Interstate Banking Act also authorizes de novo branching into another state if the host state
enacts a law expressly permitting out of state banks to establish such branches within its borders. Federal Enforcement.The FDIC has primary federal enforcement responsibility over state
non-member banks and has the authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, and any attorneys, appraisers and
accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or directors to institution
of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide 26




---



##### Table of Contents



range of violations and can amount to $25,000 per day, or even $1 million per day in especially
egregious cases. Federal law also establishes criminal penalties for certain violations. Federal Home Loan Bank System The Banks are members of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily
for member institutions. The Company, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount equal to at least 1.0% 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 Banks were in
compliance with this requirement as their investment in FHLB stock at December 31, 2004 was $13.5
million. The FHLB functions as a central reserve bank by providing credit for financial
institutions throughout the United States. As a member of the FHLB, the Company is required to
acquire and hold shares of capital stock in the FHLB and is authorized to apply for advances as
long as certain creditworthiness standards have been met. Advances are generally secured by
eligible assets of a member, which include principally mortgage loans and obligations of, or
guaranteed by, the U.S. government or its agencies. Advances can be made to the Company under
several different credit programs of the FHLB. Each credit program has its own interest rate, range
of maturities and limitations on the amount of advances permitted based on the financial condition
of the member institution and the adequacy of collateral pledged to secure the credit. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW and regular
checking accounts). The regulations generally provide that reserves be maintained against net
transaction accounts as follows: accounts aggregating less than $7.0 million are exempted from the
reserve requirements, for accounts aggregating greater than $7.0 million and less than $47.6
million the reserve requirement is 3%, and for accounts aggregating greater than $47.6 million, the
reserve requirement is 10% against that portion of total transaction accounts in excess of $47.6
million. All reserve requirements are subject to adjustments by the Federal Reserve Board. The
Company complies with the foregoing requirements. Holding Company Regulation Federal law allows a state savings bank that qualifies as a Qualified Thrift Lender,
discussed below, to elect to be treated as a savings association for purposes of the savings and
loan holding company provisions of the Home Owners Loan Act. Such election allows its holding
company to be regulated as a savings and loan holding company by the Office of Thrift Supervision
rather than as a bank holding company by the Federal Reserve Board. The Company has made such an
election, and is regulated as a savings and loan holding company within the meaning of the Home
Owners Loan Act. As a result, the Company is registered with the Office of Thrift Supervision and
has adhered to the Office of Thrift Supervisions regulations, reporting requirements and
examination and enforcement authority. Among other things, this authority permits the Office of
Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings institution. As of January 9, 2004 due to the acquisition of Metrobank, the Company is a multiple savings
and loan holding company within the meaning of federal law. A multiple savings and loan holding
company is generally limited to activities permissible for financial holding companies and certain
additional activities authorized by Office of Thrift Supervision regulations. The Company is not
permitted to invest in more than 5% of the voting shares of any company that is engaged in any
activity other than specified activities permissible for savings and loan holding companies. A savings and loan holding company is also prohibited from, directly or indirectly, acquiring
more than 5% of the voting stock of another savings institution or savings and loan holding company
without prior written approval of the Office of Thrift Supervision and from acquiring or retaining
control of a depository institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the Office of Thrift Supervision considers the
financial and managerial resources and future prospects of the holding company and institution
involved, the effect of the acquisition on the risk to the deposit insurance funds, competitive factors and the convenience and needs of the community, including performance
under the Community Reinvestment Act. An unsatisfactory rating of a savings institution can be the
basis for denial of a holding company application. The Office of Thrift Supervision may not approve any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in more than one state,
subject to two exceptions: 27




---



##### Table of Contents



(1)
    the approval of interstate supervisory acquisitions by savings and loan holding companies and  (2)
    the acquisition of a savings institution in another state if the laws of the state of the
target savings institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements
or specific restrictions on the payment of dividends or other capital distributions, federal
regulations do prescribe such restrictions on subsidiary institutions as previously described. The
Company must notify the Office of Thrift Supervision 30 days before declaring any dividend to the
Bancorp. In addition, the financial impact of a holding company on its subsidiary institution is a
matter that is evaluated by the Office of Thrift Supervision, and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and
soundness of the institution. QTL Test.In order for the Bancorp to be regulated as a savings and loan holding company by
the Office of Thrift Supervision (rather than as a bank holding company by the Federal Reserve
Board), the Company must qualify as a qualified thrift lender. To be a qualified thrift lender,
each must either qualify as a domestic building and loan association under the Internal Revenue
Code or maintain at least 65% of its portfolio assets (total assets less: (1) specified liquid
assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of
property used to conduct business) in certain qualified thrift investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities) in at least 9
months out of each 12 month period. A savings institution that fails the qualified thrift lender test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of December 31, 2004,
the Company met the qualified thrift lender test. Change in Bank Control Act.The acquisition of 10% or more of the outstanding common stock of
the Company may trigger the provisions of the Change in Bank Control Act. The Change in Bank
Control Act generally requires persons (including companies) who at any time intend to acquire
control of a savings and loan holding company to provide 60 days prior written notice and certain
financial and other information to the Office of Thrift Supervision. The statute and underlying
regulations authorize the Office of Thrift Supervision to disapprove a proposed acquisition on
certain specified grounds. Under certain circumstances, a similar filing may be necessary with the FDIC prior to the
acquisition of control of the Company. If the acquirer of an interest in the Company is a bank
holding company, the acquisition may be subject to the jurisdiction of the Federal Reserve Board
under the Bank Holding Company Act. Regulatory and Legislative Change.Regulations, which affect the Company on a daily basis,
may be changed at any time, and the interpretation of the relevant law and regulations may also
change because of new interpretations by the authorities who interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or regulations, whether by the
State of Michigan, the Office of Thrift Supervision, the FDIC or the U.S. Congress, could have a
material impact on the Company or its operations. Federal Securities Laws The Companys common stock is registered with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934,
as amended (the Exchange Act). Consequently, the Company is subject to the information, proxy
solicitation, insider trading and other restrictions and requirements of the SEC under the
Securities Act and the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley
Act of 2002 contains important new requirements for public companies in the area of financial
disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act,
written certifications by the Companys chief executive officer and chief financial officer are
required. These certifications attest that the Companys quarterly and annual reports filed with
the SEC do not contain any untrue statement of a material fact. The Company has also implemented a program designed to comply with
Section 404 of the Sarbanes-Oxley Act, which includes the identification of significant processes
and accounts, documentation of the design of control effectiveness over process and entity level
controls, and testing of the operating effectiveness of key controls. The Company also requires
signed certifications from managers who are responsible for internal controls throughout the
Company as to the integrity of the information they prepare. These procedures supplement the
Companys Code of Ethics policies and procedures that have 28




---



##### Table of Contents



previously been in place. See Item 9A  Controls and Procedures for the Companys evaluation of its disclosure controls and procedures. FEDERAL AND STATE TAXATION Federal Income Taxation General.The Company reports income on a fiscal year basis using the accrual method of
accounting. The federal income tax laws apply to the Company in the same manner as to other
corporations with some exceptions, including, in particular, the Companys reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax laws, regulations and rules applicable to the
Company. The Companys federal income tax returns have been either audited or closed under the
statute of limitations through tax year 1996. For its 2004 tax year, the Companys maximum federal
income tax rate was 35%. Bad Debt Reserves.For fiscal years beginning before December 31, 1996, thrift institutions
that qualified under certain definitional tests and other conditions of the Internal Revenue Code
were permitted to use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be established for bad debts
on qualifying real property loans, which were generally secured by interests in real property
improved or to be improved, under the percentage of taxable income method or the experience method.
The Companys reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 prohibited the use of reserve method of accounting for bad
debts and the percentage of taxable income method for tax years beginning after 1995. Under this
legislation, savings institutions also were required to recapture or take into income certain
portions of their accumulated bad debt reserves. Approximately $6.6 million of the Companys
accumulated bad debt reserves would not be recaptured as taxable income unless the Company makes a
non-dividend distribution to the Bancorp as described below. Distributions.If the Company makes non-dividend distributions to the Bancorp, they will be
considered to have been made from the Companys unrecaptured tax bad debt reserves, including the
balance of its reserves as of December 31, 1988, to the extent of the non-dividend distributions,
and then from the Companys supplemental reserve for losses on loans, to the extent of those
reserves. An amount based on the amount distributed, but not more than the amount of those
reserves, will be included in the Companys taxable income. Non-dividend distributions include
distributions in excess of the Company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 Companys current or accumulated
earnings and profits will not be so included in the Companys taxable income. The amount of additional taxable income triggered 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. Therefore, if the Company makes a non-dividend distribution to the Bancorp,
approximately one and one-half times the amount of the distribution not in excess of the amount of
the reserves would be includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Company does not intend to pay dividends that would result in a
recapture of any portion of its bad debt reserves. State Taxation The State of Michigan imposes a Single Business Tax (the SBT), which is an annual
value-added tax imposed on the privilege of doing business in the State. Banks with business
activity in Michigan are subject to the tax. Most organizations exempt from federal income tax,
however, are also exempt from the SBT. The major components of the SBT are compensation,
depreciation and federal taxable income, increased by net operating losses, if any, utilized in
arriving at federal taxable income. For tax years beginning before 2000, the SBT base is decreased
by the cost of depreciable tangible assets acquired during the year. For tax years beginning after
1999, an investment tax credit may be claimed for the acquisition of depreciable tangible assets.
Effective December 31, 2002, the SBT rate was 1.9% and will be phased out during a 22-year period
by dropping .1% per year. Delaware State Taxation.As a Delaware holding company not earning income in Delaware, the
Company is exempt from Delaware Corporate income tax, but it is required to file an annual report
with and pay an annual franchise tax to the State of Delaware. 29




---



##### Table of Contents



ITEM 2. PROPERTIES The Company currently conducts its business through its main office located in Port Huron,
Michigan, and 19 other full-service banking offices located in St. Clair, Sanilac, Huron, Macomb,
Oakland and Lapeer Counties, Michigan. All branch bank offices of Citizens and one branch bank
office for Metrobank are owned by the Company and three offices of Metrobank are leased. All
full-service offices, except for the Sandusky Branch, have ATM facilities. All full-service offices
have drive-through facilities. The Company also owns a drive-up banking center and a separate
office for its trust and financial services operations, which are both located near its main
offices in Port Huron. The Company currently leases property in Lapeer and Northern Macomb Counties
for use as loan production offices and other operational office space in downtown Port Huron, both
of which expire in June 2005 and August 2005, respectively. The leases on the Metrobank properties
expire as early as May of 2007 and as late as 2013. The Company also owns and operates ATM
machines at seven other locations located in St. Clair, Sanilac, Macomb, and Lapeer Counties,
Michigan. The spaces for the ATM machines are leased from independent unaffiliated third parties
on a year to year basis. The Company owns a parcel of vacant land located in northern St. Clair
County, Michigan, which was purchased in November 2002. Management believes that the Company will
be required to purchase and/or lease additional properties to support the future growth in the near
term. 
 ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to, nor is any of their property
subject to or the subject of, any material pending legal proceedings other than routine litigation
incidental to their respective businesses, nor are any such proceedings known to be contemplated by
governmental authorities. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES The Companys common stock is traded on the Nasdaq National Market under the symbol CTZN. As of
March 3, 2005, the Company had approximately 1,046 holders of record. The following table sets
forth, for the quarters indicated, the high and low bid information for the common stock and the
dividends paid. The Company is subject to the requirements of Delaware law, which generally limits
dividends to an amount equal to the excess of the net assets of the Company (the amount by which
total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its
net profits for the current and/or immediately preceding fiscal year. Year Ended December 31, 20044th Quarter
    
    
    3rd Quarter
    
    
    2nd Quarter
    
    
    1st QuarterHigh
    
    $
    26.40
    
    
    $
    25.83
    
    
    $
    24.47
    
    
    $
    24.40Low
    
    $
    23.01
    
    
    $
    20.53
    
    
    $
    20.80
    
    
    $
    21.80Dividends Paid
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.09
 Year Ended December 31, 20034th Quarter
    
    
    3rd Quarter
    
    
    2nd Quarter
    
    
    1st QuarterHigh
    
    $
    24.47
    
    
    $
    22.14
    
    
    $
    22.80
    
    
    $
    22.00Low
    
    $
    20.73
    
    
    $
    19.69
    
    
    $
    19.40
    
    
    $
    18.34Dividends Paid
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.08
 On March 28, 2002, Marshall J. Campbell, our Chief Executive Officer, and the Company
entered into our Executive Stock Ownership Plan Agreement, pursuant to which Mr. Campbell is
entitled to receive deferred compensation units convertible into the Registrants common stock.
Under this Agreement, as subsequently amended and restated, each vested deferred compensation unit
is convertible into one share of common stock of the Company upon Mr. Campbells death, retirement,
termination of employment with the Company or the Company, or if the Agreement is terminated by our
Board of Directors on or after the date on which Mr. 30




---



##### Table of Contents



Campbells deferred compensation units become vested, which is January 31, 2007 (or earlier upon Mr. Campbells death, disability or certain
changes of control). Pursuant to that Agreement, we awarded 2,642, 4,502 and 3,655 deferred compensation units to
Mr. Campbell with regard to the twelve months ended December 31, 2001, 2002 and 2003, respectively. These transactions were not
registered, but were made in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act of 1933. The terms of the Agreement are complex and the above is only a
summary. The full text of the Agreement has been filed as an Exhibit to this Form 10-K and should
be consulted for full information. The Company entered into deferred fee agreements with certain directors of the Company at
various times in 2001, under which these directors elected to defer fees paid to them by the
Company. On November 15, 2001 with regard to the directors of the Company and November 29, 2001
with regard to the directors of the Company, it was agreed that fees previously deferred by these
directors under the agreements and earnings on fees previously deferred would be settled in common
stock of the Company, as would future fees deferred under these agreements. (Although a director
has the right to change or revoke his or her deferral election, the revocation would be effective
only for fees deferred for the period beginning with the calendar year after any such revocation.
No director has revoked his or her deferral to date.) Dr. Demashkieh entered into a similar
agreement with the Company on April 22, 2002 when he joined the Board. Upon a directors
termination of service with the Board of Directors of the Company, each restricted stock unit is to
be settled on a one-for-one basis in shares of the Companys
common stock. Pursuant to that Agreement, we awarded 3,323 and 4,246
deferred compensation units totaling $99,100 to various members of
the board with regard to the twelve months ended December 31,
2003 and 2004. These transactions were
not registered, but were made in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act of 1933. The terms of the agreements are complex and the above is only a
summary. The full text of a representative directors deferred fee agreement previously was filed
as an Exhibit with the Securities and Exchange Commission and is listed as an Exhibit to this Form
10-K and should be consulted for full information. On October 1, 2002, the Company announced a share repurchase program authorizing the
repurchase of up to 428,701 shares of the Companys outstanding common stock. All share
repurchases under the Companys share repurchase program are transacted in the open market and are
within the scope of Rule 10b-18, which provides a safe harbor for purchases in a given day if an
issuer of equity securities satisfies the manner, timing, price and volume conditions of the rule
when purchasing its own common shares in the open market. There were no repurchases of the
Companys share for the three months ended December 31, 2004. 
 ITEM 6. SELECTED FINANCIAL DATA DECEMBER 31,
    
    
    MARCH 31,2004 (1)
    
    
    2003
    
    
    2002 (2)
    
    
    2002
    
    
    2001 (3)(Dollars in thousands)SELECTED CONSOLIDATED FINANCIAL DATA:Total assets
    
    $
    1,393,364
    
    
    $
    1,094,260
    
    
    $
    1,000,184
    
    
    $
    946,356
    
    
    $
    855,866Cash and cash equivalents
    
    
    27,937
    
    
    
    33,647
    
    
    
    40,356
    
    
    
    57,926
    
    
    
    53,618Securities available-for-sale
    
    
    97,828
    
    
    
    79,672
    
    
    
    100,382
    
    
    
    118,547
    
    
    
    96,053Loans, net
    
    
    1,184,968
    
    
    
    929,201
    
    
    
    819,136
    
    
    
    735,564
    
    
    
    672,449Deposits
    
    
    933,104
    
    
    
    748,531
    
    
    
    671,830
    
    
    
    634,014
    
    
    
    581,281FHLB borrowings
    
    
    232,209
    
    
    
    172,534
    
    
    
    173,003
    
    
    
    151,415
    
    
    
    114,931Stockholders equity
    
    
    162,894
    
    
    
    158,187
    
    
    
    148,155
    
    
    
    151,440
    
    
    
    149,721Real estate owned, net
    
    
    1,032
    
    
    
    443
    
    
    
    353
    
    
    
    953
    
    
    
    282Total nonperforming assets
    
    
    11,480
    
    
    
    4,358
    
    
    
    2,767
    
    
    
    2,746
    
    
    
    2,029
 YEAR
    
    
    NINE MONTHSENDED
    
    
    ENDED
    
    
    YEAR ENDEDDECEMBER 31,
    
    
    DECEMBER 31,
    
    
    MARCH 31,2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001Total interest income
    
    $
    69,627
    
    
    $
    60,415
    
    
    $
    46,954
    
    
    $
    66,347
    
    
    $
    60,517Total interest expense
    
    
    25,627
    
    
    
    23,307
    
    
    
    20,129
    
    
    
    30,691
    
    
    
    34,112Net interest income
    
    
    44,000
    
    
    
    37,108
    
    
    
    26,825
    
    
    
    35,656
    
    
    
    26,405Provision for loan losses
    
    
    1,555
    
    
    
    1,440
    
    
    
    892
    
    
    
    996
    
    
    
    780Net interest income after provision for loan losses
    
    
    42,445
    
    
    
    35,668
    
    
    
    25,933
    
    
    
    34,660
    
    
    
    25,625Noninterest income
    
    
    8,791
    
    
    
    10,307
    
    
    
    5,763
    
    
    
    4,079
    
    
    
    3,268Noninterest expense
    
    
    38,807
    
    
    
    27,399
    
    
    
    17,670
    
    
    
    22,773
    
    
    
    24,742Income before income taxes
    
    
    12,429
    
    
    
    18,576
    
    
    
    14,026
    
    
    
    15,966
    
    
    
    4,151Income taxes
    
    
    4,200
    
    
    
    6,255
    
    
    
    4,842
    
    
    
    5,418
    
    
    
    965Net income
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184
    
    
    $
    10,548
    
    
    $
    3,186Earnings per share, basic
    
    
    1.04
    
    
    
    1.58
    
    
    
    1.14
    
    
    
    1.23
    
    
    
    N/ADividends per share
    
    
    0.36
    
    
    
    0.34
    
    
    
    0.24
    
    
    
    0.16
    
    
    
    N/A
 YEAR
    
    
    NINE MONTHSENDED
    
    
    ENDED
    
    
    YEAR ENDEDDECEMBER 31,
    
    
    DECEMBER 31,
    
    
    MARCH 31,2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001PERFORMANCE RATIOS:Average yield on interest-earning assets
    
    
    5.56
    %
    
    
    5.96
    %
    
    
    6.52
    %
    
    
    7.49
    %
    
    
    7.78
    %Average rate paid on interest-bearing liabilities
    
    
    2.43
    
    
    
    2.78
    
    
    
    3.35
    
    
    
    4.22
    
    
    
    4.77Average interest rate spread
    
    
    3.12
    
    
    
    3.18
    
    
    
    3.17
    
    
    
    3.27
    
    
    
    3.01Net interest margin
    
    
    3.51
    
    
    
    3.66
    
    
    
    3.72
    
    
    
    4.02
    
    
    
    3.40Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    118.95
    
    
    
    121.04
    
    
    
    119.83
    
    
    
    121.71
    
    
    
    108.68Net interest income after provision
for loan losses to noninterest expense
    
    
    109.38
    
    
    
    130.18
    
    
    
    146.76
    
    
    
    152.20
    
    
    
    103.57Noninterest expense as a percent of average assets
    
    
    2.94
    
    
    
    2.57
    
    
    
    2.44
    
    
    
    2.54
    
    
    
    3.04Return on average assets
    
    
    0.62
    
    
    
    1.15
    
    
    
    1.26
    
    
    
    1.16
    
    
    
    0.39Return on average equity
    
    
    5.12
    
    
    
    8.06
    
    
    
    8.25
    
    
    
    7.00
    
    
    
    4.15Ratio of average equity to average assets
    
    
    12.16
    
    
    
    14.32
    
    
    
    15.24
    
    
    
    16.49
    
    
    
    9.42Dividend payout ratio
    
    
    37.20
    
    
    
    23.20
    
    
    
    23.00
    
    
    
    14.10
    
    
    
    N/A
 AT OR FOR THE YEAR ENDEDDECEMBER 31,
    
    
    DECEMBER 31,
    
    
    DECEMBER 31,
    
    
    MARCH 31,2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001Leverage capital ratio
    
    
    9.70
    %
    
    
    11.80
    %
    
    
    12.10
    %
    
    
    16.40
    %
    
    
    16.70
    %Total risk-based capital ratio
    
    
    12.80
    
    
    
    15.80
    
    
    
    19.50
    
    
    
    22.00
    
    
    
    24.40ASSET QUALITY RATIOS:Nonperforming loans as a percent of total loans
    
    
    0.87
    
    
    
    0.47
    
    
    
    0.29
    
    
    
    0.24
    
    
    
    0.26Nonperforming assets as a percent of total assets
    
    
    0.82
    
    
    
    0.40
    
    
    
    0.28
    
    
    
    0.29
    
    
    
    0.21Allowance for loan losses as a percent
of total loans
    
    
    1.12
    
    
    
    1.24
    
    
    
    1.33
    
    
    
    1.47
    
    
    
    1.58Allowance for loan losses as a percent of
nonperforming loans
    
    
    128.9
    
    
    
    297.9
    
    
    
    459.1
    
    
    
    614.6
    
    
    
    598.4Net loans charged-off to average loans
    
    
    0.08
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.06OTHERFull service offices at end of period
    
    
    20
    
    
    
    16
    
    
    
    15
    
    
    
    15
    
    
    
    14
 (1) The data for the year ended December 31, 2004 includes the Metrobank acquisition.
See Note 2 for further information. (2) Effective December 31, 2002, the Company changed its fiscal year end to December 31, rather
than on March 31. As a result, the tables report the nine month period ended December 31, 2002. (3) In the fiscal year ended March 31, 2001, the Company made a one-time charitable contribution in the amount
of $7.1 million ($4,7 million, net of tax) to the Citizens First Foundation. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Managements discussion and analysis of financial condition and results of operations is
intended to assist in understanding the financial condition and results of operations of the
Company. The information contained in this section should be read in conjunction with the Companys
Consolidated Financial Statements and accompanying Notes under Item 8 of this Report. OVERVIEW The Company is a multi-bank holding company for two community-oriented financial institutions,
Citizens First Savings Bank in Port Huron, Michigan and Metrobank in Farmington Hills, Michigan.
Metrobank was acquired by Citizens First Bancorp in January of 2004 as an opportunity to leverage
capital provided from shareholders in 2001 and to gain access to Wayne, Oakland and northern Macomb
counties. The Banks offer a wide range of deposit and loan products to their customers. In recent
years, the Companys strategy has been one of controlled balance sheet growth and broader
diversification of its loan products and loan portfolio. In recent years, the Company has
emphasized originating residential mortgage loans, commercial and multi-family real estate loans,
construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a
variety of consumer loans. It has also emphasized increasing sources of noninterest income. CRITICAL ACCOUNTING POLICIES Management has established various accounting policies that govern how accounting principles
generally accepted in the United States of America are used to prepare the Companys financial
statements. The Companys significant accounting policies are described in the Notes to the
Consolidated Financial Statements under Item 8 of this Report. Certain accounting policies 31




---



##### Table of Contents



require management to make estimates and assumptions about matters that are highly uncertain and as
to which different estimates and assumptions would have a material impact on the carrying value of
certain of the Companys assets and liabilities, on the Companys net income and on the Companys
overall financial condition and results of operations. The estimates and assumptions management
uses are based on historical experience and other factors, which management believes to be
reasonable under the circumstances. Actual results could differ significantly as a result of these
estimates and assumptions, and different estimates and assumptions could have a material impact on
the carrying value of certain of the Companys assets and liabilities, on the Companys net income
and on the Companys overall financial condition and results of operations for future reporting
periods. Management believes that the Companys critical accounting policies relate to the
Companys allowance for loan losses, its valuation of its mortgage servicing rights and goodwill
and intangibles. These policies are described in more detail below. ALLOWANCE FOR LOAN LOSSES. The Company recognizes that losses will be experienced from originating
loans and that the risk of loss will vary with, among other factors, the type of loan being made,
the creditworthiness of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. To reflect the perceived risk
associated with the Companys loan portfolio, the Company maintains an allowance for loan losses to
absorb potential losses from loans in its loan portfolio. As losses are estimated to have occurred,
management establishes a provision for loan losses, which is charged directly against earnings.
Loan losses are charged against the allowance when management believes the uncollectibility of a
loan balance is assured. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses represents managements estimate of probable losses based on
information as of the date of the financial statements. Management evaluates whether the Companys
loan loss allowance is adequate at least quarterly by assessing the expected losses inherent in its
loan portfolio. Management first reviews perceived higher risk loans, such as commercial and
multi-family real estate loans and loans with significant balances, and establishes an allowance
for those loans. Second, management reviews loans that have deteriorated below certain levels of
credit risk, including impaired, or likely uncollectible loans, and loans that have been classified
as watch list loans, and attributes a specified loan loss allowance to these reviewed loans. For
additional information regarding how management determines whether a loan is impaired, or likely
uncollectible, see Note 1 to the Companys Consolidated Financial Statements. Third, an appropriate
level of loan loss is then determined for the remaining balance of the loan portfolio by applying
varying loan loss factors. Management then analyzes whether the combined loan loss allowance is
adequate by considering other factors that may have an impact on the performance of the loan
portfolio, such as trends in real estate and collateral values, and adjusts the overall loan loss
allowance. No assurances can be given that the Companys level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments to the allowance for
loan losses will be unnecessary 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 or if historical trends change. Nevertheless, management believes that, based on
information currently available, the Companys allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time. In addition, it is uncertain whether various
regulatory agencies, as an integral part of their examination process and in reviewing the
Companys loan portfolio, will request that the Company increase its allowance for loan losses. The
Company believes, however, that it has established its existing loan loss allowance in conformity
with generally accepted accounting principles. These agencies could, nevertheless, require the
Company to provide additions to the allowance for loan losses based upon judgments of the agencies
that are different from the judgments of management. In the last few years, the percentage of the loan loss allowance to total loans has
decreased. The Company reviews the allowance for loan losses on a monthly basis and establishes a provision based
on actual and estimated losses inherent in the portfolio. Because the
estimates and assumptions underlying the Companys allowance for loan losses are inherently
uncertain, different estimates and assumptions could require a material increase in the allowance
for loan losses. Any material increase in the allowance in the allowance for loan losses could have
a material adverse effect on the Companys net income and results of operations. VALUATION OF MORTGAGE SERVICING RIGHTS. The Company routinely sells its originated residential
mortgage loans to investors, mainly Freddie Mac. Although the Company sells the mortgage loans, it
frequently retains the servicing rights, or the rights to collect payments and otherwise service
these loans, for an administrative or servicing fee. The mortgage loans that the Company services
for others are not included as assets in the Companys consolidated balance sheet. Loans serviced
for others were approximately $574.4 million and $478.0 million at December 31, 2004 and December
31, 2003, respectively. The Companys mortgage servicing rights relating to loans serviced for others represent an asset of
the Company. This asset is initially capitalized and included in other assets on the Companys
consolidated balance sheet. The mortgage servicing rights are then amortized against noninterest
income in proportion to, and over the period of, the estimated future net servicing income of the 32




---



##### Table of Contents



underlying mortgage servicing rights. There are a number of factors, however, that can affect the
ultimate value of the mortgage servicing rights to the Company, including the estimated prepayment
speed of the loan and the discount rate used to present value the loan. For example, if the
mortgage loan is prepaid, the Company will receive fewer servicing fees, meaning that the present
value of the mortgage servicing rights is less than the carrying value of those rights on the
Companys balance sheet. Therefore, in an attempt to reflect an accurate expected value to the
Company of the mortgage servicing rights, the Company receives a valuation of its mortgage
servicing rights from an independent third party. The independent third partys valuation of the
mortgage servicing rights is based on relevant characteristics of the Company s loan servicing
portfolio, such as loan terms, interest rates and recent prepayment experience, as well as current
market interest rate levels, market forecasts and other economic conditions. Based upon the
independent third partys valuation of the Company s mortgage servicing rights, management then
establishes a valuation allowance, if necessary, to quantify the likely impairment of the value of
the mortgage servicing rights to the Company. The estimates of prepayment speeds and discount rates
are inherently uncertain, and different estimates could have a material impact on the Companys net
income and results of operations. The valuation allowance is evaluated and adjusted quarterly by
management to reflect changes in the fair value of the underlying mortgage servicing rights based
on market conditions. The balances of the Company s capitalized mortgage servicing rights, net of valuation allowance,
included in the Companys other assets at December 31, 2004 and December 31, 2003 were $3.9 million
and $3.8 million, respectively. The fair value of the Companys mortgage servicing rights exceeds the carrying value at these dates. The fair values of the Company s mortgage servicing rights were
determined using annual constant prepayment speeds of 10.22% and 13.46% and discount rates of 7.50%
and 7.25% at December 31, 2004 and December 31, 2003, respectively. (Constant prepayment speeds are
a statistical measure of the historical or expected prepayment of principal on a mortgage.)
Different estimates of the prepayment speeds and discount rates or different assumptions could have
a material impact on the value of the mortgage servicing rights and, therefore, on the Companys
valuation allowance. For further discussion of the Company s valuation allowance and valuation of
mortgage servicing rights, including a table setting forth the valuation allowances established by
management with regard to the Company s mortgage servicing rights for the previous three periods,
see Note 6 to the Companys Consolidated Financial Statements. As can be seen in that table,
prepayments have decreased and discount rates have increased over the past twelve months. As a
result of the combined effect of these conditions, the estimated fair value of the Company s
mortgage servicing rights has increased. GOODWILL AND INTANGIBLES. Goodwill and intangibles arising from business acquisitions represents
the value attributable to unidentifiable intangible elements in the business acquired. The fair
value of goodwill and intangibles is dependent upon many factors, including the Companys ability
to provide quality, cost effective services in the face of competition from other financial
institutions. A decline in earnings as a result of business or market conditions, a lack of growth
or the Companys inability to deliver cost effective services over sustained periods can lead to
impairment of goodwill and intangibles which could adversely impact earnings in future periods. The Companys goodwill and intangibles relate to the acquisition premium recorded when purchasing
banking businesses. Goodwill and intangibles are reviewed periodically for impairment by comparing
the fair value of the Company to the book value of the Company. If the book value is in excess of
the fair value, impairment is indicated and the goodwill and/or intangibles must be written down to
its fair value. The annual test of goodwill and intangibles impairment was and will be performed during the fourth
quarter of each fiscal year beginning in 2004, in accordance with SFAS No. 142. For a further
discussion of the Companys goodwill and intangibles, refer to Note 2 to the Companys Consolidated
Financial Statements under Item 8 of this Report. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND 2003 TOTAL ASSETS. Total assets increased $299.1 million, or 27.3%, to $1.4 billion at December 31,
2004 from $1.1 billion at December 31, 2003, primarily due to:  
    The acquisition in January 2004 of Metrobank, a bank in Farmington Hills, Michigan with assets of $152.3 million that are included in the  growth discussed below by category.
    a $255.8 million, or 27.5%, increase in loans, which is explained in more detail below,
    an $18.2 million, or 22.8%, increase in securities available for sale consisting primarily of :  o
    a $15.8 million increase in mortgage-backed securities due to the acquisition of Metrobanko
    a $19.3 million increase in obligations of state and political subdivisionso
    a $16.1 million increase in U.S. Treasury securities and obligations of U.S. government corporations and agencies offset by:o
    a $43.6 million decrease in corporate debt securities. The increase in obligations of state and political subdivisions
and U.S. Treasury securities and obligations of U.S. government corporations and agencies and the overall decrease
in corporate debt securities was due to managements desire to align the portfolio to higher yielding state, local and
U.S. government securities
and lower the overall risk inherent in the portfolio by selling many, of its corporate debt securities during the year. 33




---



##### Table of Contents



Additional changes in total assets consisted of:  
    a $10.5 million, or 45.2%, increase in premises and equipment, due to the purchase of land for future branch expansion in the
Companys market area, the remodeling of the Companys main office and additional capital improvements as a result of
remodeling of our other branches,
    a $4.1 million, or 43.8%, increase in Federal Home Loan Bank stock, due to increased borrowings from the Federal Home Loan
Bank of Indianapolis (FHLB), which, in turn, required an increased investment in FHLB stock, and
    a $4.5 million, or 27.3%, increase in accrued interest and other assets. The increases in assets described above were partially offset by the following decreases in assets
at December 31, 2004, as compared to assets at December 31, 2003:  
    a $1.8 million, or 90.3%, decrease in loans held for sale, due to differences in timing of loan sales,
    a $5.7 million, or 16.9%, decrease in cash and cash equivalents primarily due to:  §
    a $1.0 million decrease in interest bearing deposits in other depository institutions,§
    a $2.5 million decrease in cash and due from other depository institutions, and§
    a $2.2 million decrease in Federal Funds sold. The increase in securities available for sale was primarily due to the purchase of Metrobank which
provided approximately $28.4 million in securities available for sale offset by the sale of
securities to fund loan growth. Similarly, the decrease in interest bearing deposits in other
depository institutions was mainly to fund loan growth. The Companys net loans to assets ratio at
December 31, 2004 was 85.0% compared to 84.9% at December 31, 2003, as a result of the $255.8
million increase in loans referred to above. The increase in loans was a result of the Companys
purchase of Metrobank which provided $110.6 million in gross loans and the Companys operating
strategy of controlled balance sheet growth and consisted primarily of:  
    a $18.3 million, or 4.7%, increase in one- to four-family mortgage loans to $404.7 million,
    a $39.2 million, or 16.2%, increase in commercial real estate loans to $280.2 million,
    a $145.1 million, or 134.7%, increase in commercial loans to $252.9 million,
    a $5.9 million, or 23.7%, increase in construction loans to $30.9 million,
    a $27.8 million, or 32.6%, increase in home equity loans and lines of credit to $113.2 million,
    a $7.0 million, or 11.9%, increase in automobile loans to $66.5 million, and
    a $14.4 million, or a 37.9%, increase in other consumer loans to $52.3 million. The increase in commercial and commercial real estate loans was primarily due to the acquisition of
Metrobank along with the development of new business relationships and growth of existing clients.
The increase in consumer loans was a result of ongoing efforts to emphasize growth in shorter term
commercial and consumer loan products. TOTAL LIABILITIES. Total liabilities increased $294.4 million, or 31.5%, from $936.0 million at
December 31, 2003 to $1.2 billion at December 31, 2004. The increase was primarily due to the
following:  
    a $184.6 million, or 24.7%, increase in deposits from $748.5 million at December 31, 2003 to $933.1 million at December 31,
2004,
    a $106.2 million, or 58.5%, increase in borrowed funds to fund loan growth consisted of:  o
    a $59.7 million, or 34.6%, increase in Federal Home Loan Bank advances
from $172.5 million at December 31, 2003 to $232.2 million at December 31, 2004o
    a $10.0 million line of credit advance from our correspondent bank, ando
    a $36.5 million, or 405.9% increase in federal funds purchased  
    and a $3.6 million increase in accrued interest payable and other liabilities. The overall increase in deposits were primarily invested in loans. The increases in deposits were a
result of the Companys acquisition of Metrobank, which provided $127.6 million in deposits and its
operating strategy of controlled balance sheet growth along with a greater emphasis on building
relationships with new and existing customers. The $184.6 million increase in deposits at December
31, 2004 compared to December 31, 2003 was comprised of the following components:  
    an increase in noninterest bearing deposits of $37.9 million, or 73.6%,
    an increase in NOW checking accounts of $145.6 million, or 198.5%,
    an increase in certificates of deposit of $103.1 million, or 40.0%, and 34




---



##### Table of Contents




    an increase in passbook and savings deposits of $11.2 million, or 13.1%. The increases in the certificates of deposit accounts were primarily due to lower overall rates in
short-term accounts. The growth in noninterest bearing deposits was partially due to growth in
business deposit accounts as part of our ongoing effort to attract and retain deposit relationships
with businesses throughout our market area. The increase in deposits at December 31, 2004, as compared to at December 31, 2003, was partially
offset by a decrease in money market deposit accounts of $23.9 million, or 8.6% due to lower market
rates and to customers transferring deposits to higher earning certificates of deposit. QUALITY OF ASSETS. Nonperforming loans were 0.76% of total assets at December 31, 2004, compared
to 0.36% at December 31, 2003. Nonperforming loans increased $6.7 million, or 171.5%, to $10.6 million at December 31, 2004 from $3.9 million at December 31, 2003. This increase in nonperforming
loans was partially due to the acquisition of Metrobank which provided approximately $2.7 million
of the $3.1 million increase in nonperforming commercial loans, a $2.5 million increase in
nonperforming real estate loans and a $1.1 million increase in nonperforming consumer loans as a
result of an extended period of poor general economic conditions and a statewide unemployment rate
that is higher than the national average. Additionally, the increase in nonperforming real estate and consumer loans was partially attributable to a change
in policy in regards to the criteria necessary to classify a loan as performing or nonperforming. See the loans section of Note 1 to the Companys
Consolidated Financial Statements under ITEM 8 OF THIS REPORT FOR MORE INFORMATION. Nonperforming assets, which includes not only
nonperforming loans, but also real estate owned by the Company after foreclosure, increased $7.3 million, or 167.6%, to $11.7 million, or 0.89% of total assets, at December 31, 2004, as compared
to $4.4 million, or 0.36%, of total assets at December 31, 2003. This increase in nonperforming
assets was due to the increase in nonperforming loans described above along with a nominal $589,000
increase in other real estate owned. The allowance for loan losses was $13.5 million at December
31, 2004 and $11.7 million at December 31, 2003, or 1.12% of total loans and 126% of
nonperforming loans at December 31, 2004, as compared to 1.24% of total loans and 298% of
nonperforming loans at December 31, 2003. The Companys allowance for loan losses is a critical
accounting policy that involves estimates and assumptions about matters that are highly uncertain.
Use of a different amount for the allowance could have a material impact on the Companys financial
statements. For more information on how the amount of this allowance is determined, please see the
caption Critical Accounting Policies in this section Managements Discussion and Analysis of
Financial Condition and Results of Operations. STOCKHOLDERS EQUITY. Stockholders equity increased $4.7 million from $158.2 million at December
31, 2003 to $162.9 million, as a result of the addition of net income of $8.2 million, a $1.2
million increase in unearned compensation for ESOP and a $578,000 increase in deferred compensation which
represents deferred fees owed to members of the Board of Directors. These increases were partially
offset by a $1.3 million increase in treasury shares and a $1.2 million, or 201.3%, decrease in
accumulated other comprehensive income from the unrealized gains or losses on securities. AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST The following table presents certain information for the years indicated regarding average balances
of assets and liabilities, as well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing liabilities and the
resulting average yields and costs. The yields and costs are derived by dividing income or expense
by the average balances of assets or liabilities, respectively, for the years presented. Average
balances were derived from monthly balances. 35




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateINTEREST EARNING ASSETS:Loans (1)
    
    $
    1,111,219
    
    
    $
    65,641
    
    
    
    5.91
    %
    
    $
    874,377
    
    
    $
    56,016
    
    
    
    6.41
    %
    
    $
    812,831
    
    
    $
    56,240
    
    
    
    6.92
    %Investment securities (2)
    
    
    104,093
    
    
    
    3,402
    
    
    
    3.27
    
    
    
    97,519
    
    
    
    3,706
    
    
    
    3.80
    
    
    
    104,059
    
    
    
    5,565
    
    
    
    5.35FHLB Stock
    
    
    11,332
    
    
    
    488
    
    
    
    4.31
    
    
    
    9,219
    
    
    
    368
    
    
    
    3.99
    
    
    
    8,305
    
    
    
    495
    
    
    
    5.96Federal funds sold
    
    
    2,843
    
    
    
    41
    
    
    
    1.44
    
    
    
    2,513
    
    
    
    25
    
    
    
    0.99
    
    
    
    
    
    
    
    
    
    
    
    Interest-bearing deposits
    
    
    23,712
    
    
    
    55
    
    
    
    0.23
    
    
    
    30,888
    
    
    
    300
    
    
    
    0.97
    
    
    
    36,119
    
    
    
    348
    
    
    
    .96Total interest-earning assets
    
    
    1,253,199
    
    
    
    69,627
    
    
    
    5.56
    
    
    
    1,014,516
    
    
    
    60,415
    
    
    
    5.96
    
    
    
    961,314
    
    
    
    62,648
    
    
    
    6.52Noninterest-earning assets
    
    
    68,562
    
    
    
    
    
    
    
    
    
    
    
    52,594
    
    
    
    
    
    
    
    
    
    
    
    19,333Total assets
    
    $
    1,321,761
    
    
    
    
    
    
    
    
    
    
    $
    1,067,110
    
    
    
    
    
    
    
    
    
    
    $
    980,647INTEREST-BEARING LIABILITIES:Deposits:Savings
    
    $
    99,884
    
    
    $
    574
    
    
    
    0.57
    %
    
    $
    73,351
    
    
    $
    567
    
    
    
    0.77
    %
    
    $
    80,219
    
    
    $
    767
    
    
    
    0.96
    %NOW
    
    
    123,531
    
    
    
    747
    
    
    
    0.60
    
    
    
    85,368
    
    
    
    904
    
    
    
    1.06
    
    
    
    92,104
    
    
    
    1,206
    
    
    
    1.31Money market
    
    
    264,653
    
    
    
    3,787
    
    
    
    1.43
    
    
    
    240,685
    
    
    
    3,808
    
    
    
    1.58
    
    
    
    182,745
    
    
    
    3,968
    
    
    
    2.17Certificates of deposit
    
    
    323,393
    
    
    
    9,776
    
    
    
    3.02
    
    
    
    264,834
    
    
    
    8,717
    
    
    
    3.29
    
    
    
    284,971
    
    
    
    11,798
    
    
    
    4.14Total interest bearing deposits
    
    
    811,461
    
    
    
    14,884
    
    
    
    1.83
    
    
    
    664,238
    
    
    
    13,996
    
    
    
    2.11
    
    
    
    640,039
    
    
    
    17,739
    
    
    
    2.77Short-term borrowings
    
    
    37,844
    
    
    
    724
    
    
    
    1.91
    
    
    
    1,300
    
    
    
    3
    
    
    
    0.23
    
    
    
    
    
    
    
    
    
    
    
    FHLB advances
    
    
    204,223
    
    
    
    10,019
    
    
    
    4.91
    
    
    
    172,596
    
    
    
    9,308
    
    
    
    5.39
    
    
    
    162,209
    
    
    
    9,130
    
    
    
    5.63Total interest-bearing liabilities
    
    
    1,053,528
    
    
    
    25,627
    
    
    
    2.43
    
    
    
    838,134
    
    
    
    23,307
    
    
    
    2.78
    
    
    
    802,248
    
    
    
    26,869
    
    
    
    3.35Noninterest bearing deposits
    
    
    96,340
    
    
    
    
    
    
    
    
    
    
    
    65,325
    
    
    
    
    
    
    
    
    
    
    
    20,648Other noninterest-bearing
liabilities
    
    
    11,142
    
    
    
    
    
    
    
    
    
    
    
    10,789
    
    
    
    
    
    
    
    
    
    
    
    11,113Total liabilities
    
    
    1,161,010
    
    
    
    
    
    
    
    
    
    
    
    914,248
    
    
    
    
    
    
    
    
    
    
    
    834,009Equity
    
    
    160,751
    
    
    
    
    
    
    
    
    
    
    
    152,862
    
    
    
    
    
    
    
    
    
    
    
    146,638Total liabilities and equity
    
    $
    1,321,761
    
    
    
    
    
    
    
    
    
    
    $
    1,067,110
    
    
    
    
    
    
    
    
    
    
    $
    980,647Net interest-earning assets
    
    $
    199,671
    
    
    
    
    
    
    
    
    
    
    $
    176,382
    
    
    
    
    
    
    
    
    
    
    $
    159,066Net interest income
    
    
    
    
    
    $
    44,000
    
    
    
    
    
    
    
    
    
    
    $
    37,108
    
    
    
    
    
    
    
    
    
    
    $
    35,779Interest rate spread (3)
    
    
    
    
    
    
    
    
    
    
    3.12
    
    
    
    
    
    
    
    
    
    
    
    3.18
    
    
    
    
    
    
    
    
    
    
    
    3.17Net interest margin as a percentage
of interest-earning assets (4)
    
    
    
    
    
    
    
    
    
    
    3.51
    %
    
    
    
    
    
    
    
    
    
    
    3.66
    %
    
    
    
    
    
    
    
    
    
    
    3.72
    %Ratio of interest-earning assets
to interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    118.95
    %
    
    
    
    
    
    
    
    
    
    
    121.04
    %
    
    
    
    
    
    
    
    
    
    
    119.83
    %
   (1)
    
    Balances are net of deferred loan origination fees, undisbursed proceeds of
construction loans in process, and include nonperforming loans.(2)
    
    Securities available for sale are not on a tax equivalent basis.(3)
    
    Net interest rate spread represents the difference between the weighted average yield
on interest-earning assets and the weighted average cost of interest-bearing liabilities.(4)
    
    Net interest margin represents net interest income as a percentage of average
interest-earning assets. 36




---



##### Table of Contents



RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the
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: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) the net change (the sum of the prior columns). The changes attributable
to the combined impact of volume and rate have been allocated on a proportional basis between
changes in rate and volume. (in thousands) Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003Compared to
    
    
    Compared toYear Ended December 31, 2003
    
    
    Year Ended December 31, 2002Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toRate
    
    
    Volume
    
    
    Net
    
    
    Rate
    
    
    Volume
    
    
    NetINTEREST-EARNING ASSETS:Loans
    
    $
    (5,548
    )
    
    $
    15,173
    
    
    $
    9,625
    
    
    $
    (4,482
    )
    
    $
    4,258
    
    
    $
    (224
    )Investment securities
    
    
    (554
    )
    
    
    250
    
    
    
    (304
    )
    
    
    (1,509
    )
    
    
    (350
    )
    
    
    (1,859
    )FHLB stock
    
    
    36
    
    
    
    84
    
    
    
    120
    
    
    
    (181
    )
    
    
    54
    
    
    
    (127)Federal funds sold
    
    
    13
    
    
    
    3
    
    
    
    16
    
    
    
    25
    
    
    
    
    
    
    
    25Interest-earning deposits
    
    
    (175
    )
    
    
    (70
    )
    
    
    (245
    )
    
    
    2
    
    
    
    (50
    )
    
    
    (48
    )Total interest-earning assets
    
    
    (6,228
    )
    
    
    15,440
    
    
    
    9,212
    
    
    
    (6,145
    )
    
    
    3,912
    
    
    
    (2,233
    )INTEREST-BEARING LIABILITIES:Deposits:Savings
    
    
    (198
    )
    
    
    205
    
    
    
    7
    
    
    
    (134
    )
    
    
    (66
    )
    
    
    (200
    )NOW
    
    
    (561
    )
    
    
    404
    
    
    
    (157
    )
    
    
    (214
    )
    
    
    (88
    )
    
    
    (302
    )Money market
    
    
    (400
    )
    
    
    379
    
    
    
    (21
    )
    
    
    (1,418
    )
    
    
    1,258
    
    
    
    (160
    )Certificates of deposit
    
    
    (868
    )
    
    
    1,927
    
    
    
    1,059
    
    
    
    (2,247
    )
    
    
    (834
    )
    
    
    (3,081
    )Total deposits
    
    
    (2,027
    )
    
    
    2,916
    
    
    
    888
    
    
    
    (4,013
    )
    
    
    270
    
    
    
    (3,743
    )Short-term borrowings
    
    
    637
    
    
    
    84
    
    
    
    721
    
    
    
    (407
    )
    
    
    588
    
    
    
    181FHLB advances
    
    
    (995
    )
    
    
    1,706
    
    
    
    711
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    (2,385
    )
    
    
    4,705
    
    
    
    2,320
    
    
    
    (4,420
    )
    
    
    858
    
    
    
    (3,562
    )Increase (decrease) in net interest income
    
    $
    (3,843
    )
    
    $
    10,735
    
    
    $
    6,892
    
    
    $
    (1,725
    )
    
    $
    3,054
    
    
    $
    1,329
 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Effective December 31, 2002, the Company changed its fiscal year end to December 31, rather than on
March 31. As a result, the audited consolidated financial statements include the nine month period
ended December 31, 2002. To facilitate understanding the Companys results of operations, the
following table sets forth the Companys results of operations for the years ended December 31,
2004, 2003 and 2002 (unaudited) along with the relative percentage change from period to period.
Additionally, Metrobank income and expenses are included in the 2004 results of operations. 37




---



##### Table of Contents



PercentIncreaseYear Ended
    
    
    (Decrease)December 31,
    
    
    2004
    
    
    20032004
    
    
    2003
    
    
    2002
    
    
    vs. 2003
    
    
    vs. 2002(unaudited)INTEREST INCOMELoans, including fees
    
    $
    65,641
    
    
    $
    56,016
    
    
    $
    56,240
    
    
    
    17.2
    %
    
    
    -0.4
    %Federal funds sold and interest bearing deposits
    
    
    96
    
    
    
    325
    
    
    
    348
    
    
    
    -70.5
    %
    
    
    -6.6
    %Securities:Tax-exempt
    
    
    783
    
    
    
    485
    
    
    
    495
    
    
    
    61.4
    %
    
    
    -2.0
    %Taxable
    
    
    3,107
    
    
    
    3,589
    
    
    
    5,565
    
    
    
    -13.4
    %
    
    
    -35.5
    %Total interest income
    
    
    69,627
    
    
    
    60,415
    
    
    
    62,648
    
    
    
    15.2
    %
    
    
    -3.6
    %INTEREST EXPENSEDeposits
    
    
    14,884
    
    
    
    13,996
    
    
    
    17,739
    

    
    
    6.3
    %
    
    
    -21.1
    %Short-term borrowings
    
    
    724
    
    
    
    3
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )FHLB advances
    
    
    10,019
    
    
    
    9,308
    
    
    
    9,130
    
    
    
    7.6
    %
    
    
    1.9
    %Total interest expense
    
    
    25,627
    
    
    
    23,307
    
    
    
    26,869
    
    
    
    10.0
    %
    
    
    -13.3
    %NET INTEREST INCOME
    
    
    44,000
    
    
    
    37,108
    
    
    
    35,779
    
    
    
    18.6
    %
    
    
    3.7
    %PROVISION FOR LOAN LOSSES
    
    
    1,555
    
    
    
    1,440
    
    
    
    1,141
    
    
    
    8.0
    %
    
    
    26.2
    %NET INTEREST INCOME, after provision for loan losses
    
    
    42,445
    
    
    
    35,668
    
    
    
    34,638
    
    
    
    19.0
    %
    
    
    3.0
    %NONINTEREST INCOMEService charges and other fees
    
    
    5,837
    
    
    
    3,113
    
    
    
    3,318
    
    
    
    87.5
    %
    
    
    -6.2
    %Loan servicing fees
    
    
    1,435
    
    
    
    1,090
    
    
    
    587
    
    
    
    31.7
    %
    
    
    85.7
    %Mortgage banking activities
    
    
    (35
    )
    
    
    4,961
    
    
    
    2,264
    
    
    
    -100.7
    %
    
    
    119.1
    %Trust fee income
    
    
    801
    
    
    
    631
    
    
    
    413
    
    
    
    26.9
    %
    
    
    52.8
    %Gain (loss) on sale of securities available for sale
    
    
    468
    
    
    
    (46
    )
    
    
    108
    
    
    
    (1
    )
    
    
    -142.6
    %Other
    
    
    285
    
    
    
    558
    
    
    
    308
    
    
    
    -48.9
    %
    
    
    81.2
    %Total noninterest income
    
    
    8,791
    
    
    
    10,307
    
    
    
    6,998
    
    
    
    -14.7
    %
    
    
    47.3
    %NONINTEREST EXPENSECompensation, payroll taxes and employee benefits
    
    
    16,266
    
    
    
    13,322
    
    
    
    11,179
    
    
    
    22.1
    %
    
    
    19.2
    %Office occupancy and equipment
    
    
    5,967
    
    
    
    4,237
    
    
    
    3,372
    
    
    
    40.8
    %
    
    
    25.7
    %Advertising and business promotion
    
    
    1,913
    
    
    
    1,228
    
    
    
    804
    
    
    
    55.8
    %
    
    
    52.7
    %Stationery, printing and supplies
    
    
    1,761
    
    
    
    859
    
    
    
    1,571
    
    
    
    105.0
    %
    
    
    -45.3
    %Data processing
    
    
    1,301
    
    
    
    487
    
    
    
    392
    
    
    
    167.1
    %
    
    
    24.2
    %Deposit statement preparation
    
    
    465
    
    
    
    689
    
    
    
    751
    
    
    
    -32.5
    %
    
    
    -8.3
    %Professional fees
    
    
    3,547
    
    
    
    1,418
    
    
    
    1,213
    
    
    
    150.1
    %
    
    
    16.9
    %Appraisal fees
    
    
    566
    
    
    
    916
    
    
    
    861
    
    
    
    -38.2
    %
    
    
    6.4
    %Core deposit intangible amortization
    
    
    660
    
    
    
    
    
    
    
    
    
    
    
    100.0
    %
    
    
    0.0
    %Other
    
    
    6,361
    
    
    
    4,243
    
    
    
    3,430
    
    
    
    49.9
    %
    
    
    23.7
    %Total noninterest expense
    
    
    38,807
    
    
    
    27,399
    
    
    
    23,573
    
    
    
    41.6
    %
    
    
    16.2
    %INCOME, before federal income tax expense
    
    
    12,429
    
    
    
    18,576
    
    
    
    18,063
    
    
    
    -33.1
    %
    
    
    2.8
    %Federal income tax expense
    
    
    4,200
    
    
    
    6,255
    
    
    
    6,204
    
    
    
    -32.9
    %
    
    
    0.8
    %NET INCOME
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    11,859
    
    
    
    -33.2
    %
    
    
    3.9
    %EARNINGS PER SHARE, BASIC
    
    $
    1.04
    
    
    $
    1.58
    
    
    $
    1.46
    
    
    
    -34.2
    %
    
    
    8.2
    %EARNINGS PER SHARE, DILUTED
    
    $
    1.04
    
    
    $
    1.57
    
    
    $
    1.46
    
    
    
    -33.8
    %
    
    
    7.5
    %
   (1)
    
    Percent change is greater than 1,000% and therefore is not listed for presentation
purposes 38




---



##### Table of Contents



COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NET INCOME. The decrease in net income for the year was primarily due to a $2.3 million, or
10.0% increase in interest expense, a $1.5 million, or 14.7% decrease in noninterest income
combined with a $11.4 million, or 41.6% increase in noninterest expenses, which was primarily due
to a $2.9 million, or 22.1% increase in compensation and employee benefits, a $1.7 million, or
40.8% increase in occupancy expenses and a $2.1 million, or 150.1%, increase in professional fees,
a $902,000, or 105.1%, increase in stationery, printing and supplies, a $814,000 increase in data
processing, a $660,000 charge for core deposit intangible amortization, a $685,000, or 55.8%,
increase in advertising and a $2.1 million, or 49.9%, increase in other noninterest expenses.
Contributing to the decrease in noninterest income was a $5.0 million, or 100.7%, decrease in
income from mortgage banking activities due to the dropoff of refinancing of residential mortgage
loans and a $273,000, or 48.9% decrease in other noninterest income offset by a $2.7 million, or
87.5%, increase in service charges and other fees, a $514,000, or 1,117.4%, increase in gains on
securities available for sale, a $345,000 increase in loan servicing fees and a $170,000, or 26.9%,
increase in trust fee income. These increases and decreases are explained in more detail below. NET INTEREST INCOME. Net interest income, before provision for loan loss, increased by $6.9
million to $44.0 million for the year ended December 31, 2004, from $37.1 million for the year
ended December 31, 2003. The increase consisted primarily of:  -
    a $9.2 million, or 15.2%, increase in total interest income to $69.6
million for the year ended December 31, 2004, from $60.4 million for the twelve
months ended December 31, 2003, which is explained in detail below, offset by,-
    a $2.3 million, or 10.0%, increase in total interest expense to $25.6
million for the year ended December 31, 2004, from $23.3 million for the twelve
months ended December 31, 2003, which is explained in detail below. The $9.2 million increase in total interest income for the year ended December 31, 2004, compared
to the year ended December 31, 2003, was comprised primarily of:  -
    a $9.6 million, or 17.2%, increase in interest income on loans, primarily
due to the addition of $110.6 million of loans from Metrobank that provided $7.9
million in interest income offset by a 50 basis point reduction in average yields on
loans, and-
    a $298,000, or 61.4%, increase in interest income on tax exempt
securities, primarily due to a 53 basis point reduction in the average yield on
securities offset by a $6.6 million increase in the average balance of securities,
offset by-
    a $482,000, or 13.4%, decrease in income from taxable securities due to lower average balances, and-
    a $229,000 decrease in income from federal funds sold and interest bearing deposits, primarily due to lower average balances. Average interest earning assets increased $238.6 million primarily due to the acquisition of
Metrobank and loan growth at Citizens First resulting in a $236.8 million, or 27.1%, increase in
the average balance of loans, which we funded by deposit growth and increased borrowings. The $2.3 million increase in total interest expense for the year ended December 31, 2004, compared
to the year ended December 31, 2003, was comprised primarily of:  -
    a $888,000, or 6.3%, aggregate increase in interest expense on savings,
NOW and Money Market Deposit Accounts, and,-
    a $1.4 million, or 15.4%, increase in interest expense on Federal Home
Loan Bank advances and other borrowings to $10.7 million for the year ended December
31, 2004 from $9.3 million for the year ended December 31, 2003, primarily due to a
$68.1 million increase in the average balance of Federal Home Loan Bank advances and
other borrowings, which was partially offset by a 91 basis point decrease in average
interest rates on those advances. Earning asset yields have declined by approximately 40 basis points over the last year. Net
interest margin continues to compress as existing loans refinance and new loans, mainly commercial
and consumer, that are indexed to Prime are added to the portfolio. We believe that this
compression could continue until such time as these indexes begin to rise. The possibility exists
and has shown some indication in the first two months of 2005 that rates on deposits could rise
sooner than rates on loans further compressing net interest margin. PROVISION FOR LOAN LOSSES. The provision for loan losses increased $115,000, or 8.0%, from $1.4
million for the year ended December 31, 2003 to $1.55 million for the year ended December 31, 2004.
The increased provision for loan losses is the result of a $6.5 million increase in nonperforming
loans due to a change in policy (see note 1) and the $24,000, or 2.8%, increase in net charge-offs
for the year ended December 31,
2004 compared to the year ended December 31, 2003. As a result of the increase in nonperforming
loans and net charge-offs, 39




---



##### Table of Contents



management felt an increased provision was warranted. Despite the
increased provision, the loan loss allowance as a percentage of total loans decreased from 1.24% at
December 31, 2003 to 1.12% at December 31, 2004, and the allowance for loan losses as a percentage
of nonperforming loans decreased from 298% at December 31, 2003 to 129% at December 31, 2004, in
each case primarily as a result of the significant increase in the size of the Company s loan
portfolio. NONINTEREST INCOME. Noninterest income decreased by $1.5 million, or 14.7%, from $10.3 million for
the year ended December 31, 2003 to $8.8 million for the year ended December 31, 2004. Metrobank
provided a total of $614,000, or 7.0% of the total in noninterest income. The overall decrease was
primarily due to the following changes between the year ended December 31, 2003 and the year ended
December 31, 2004:  -
    a $2.7 million, or 87.5%, increase in service charges and other fees,-
    a $514,000, or 1,117.4%, increase in the gain on sales of securities available for sale used to fund loan growth,-
    a $345,000, or 31.7% increase in loan servicing fees, and-
    a $170,000 increase in trust fee income. These increases were offset by:  -
    a $5.0 million, or 100.7%, decrease in mortgage banking activities, due to
decreased sales of fixed rate one- to four-family loans and a one-time charge of
approximately $400,000 in the first quarter to the custodial account for the servicing
of loans sold to Freddie Mac. As discussed in the Form 10-K for the year ended December 31, 2003 and as expected by management, the volume of refinancing of mortgage loans significantly decreased due to the economic conditions experienced during 2004. Mortgage banking activities were effected due to the prime rate increase of 12.5 basis points from December 31, 2003 to December 31,  2004. While noninterest income showed significant decreases during the period, much of the decrease was
due to the large reduction of refinancings and subsequent sales of long term, fixed-rate one- to
four-family residential mortgage loans. We do not expect this downward trend to continue and
cannot speculate as to whether the number of refinancings or possible loan sales would provide
additional income in 2005. NONINTEREST EXPENSE. Noninterest expense increased $11.4 million, or 41.6%, to $38.8 million for
the year ended December 31, 2004, from $27.4 million for the year ended December 31, 2003, of which
Metrobank contributed $6.7 million, or 17.4% of total noninterest expense. The increase in
noninterest expense primarily due to the following:  -
    An increase of $2.9 million, or 22.1%, in compensation, payroll taxes and
employee benefit expenses, due primarily to $3.6 million additional expenses for
staff acquired in the Metrobank transaction offset by decreased compensation
expenses at Citizens,-
    A $1.7 million, or 40.8%, increase in occupancy and equipment expense due
partially to additional branches and $1.3 million in additional expenses for
Metrobank,-
    a $685,000, or 55.8%, increase in advertising and business promotion
expense, due to increased advertising efforts by the Company,-
    a $902,000, or 105.0%, increase in stationery, printing and supplies, $152,000 of which related to Metrobank,-
    a $814,000, or 167.12%, increase due to a full year of using Fiserv for data processing,-
    a $660,000 charge for core deposit intangible amortization for the
deposits acquired in the Metrobank transaction,-
    a $2.1 million, or 150.1%, increase in professional fees, due to the
increased costs associated with being a public company, including compliance costs
associated with the enactment of the Sarbanes-Oxley Act of 2002 including charges
for compliance with Section 404 and,-
    a $2.1 million, or 49.9%, increase in other noninterest expenses, of
which approximately $650,000 related to Metrobank and other general increases in
noninterest expense. These increases were offset by:  -
    a $224,000, or 32.5%, decrease in deposit statement preparation due to, and-
    a $350,000 decrease in appraisal fees due to the reduced number of
one-to-four family residential mortgage loan closings. 40




---



##### Table of Contents



We are continuing to renovate the interiors of a few of the branch offices and we have renovated
three floors of the main office to make them more conducive to sales and service. This investment,
along with other ongoing investments in training and the conversion of Metrobank to the Fiserv ITI
data processing system is expected to increase office occupancy and other expenses in the near
term. INCOME TAXES. Federal income taxes for the year ended December 31, 2004 were $4.2 million, a
decrease of $2.1 million, or 32.9%, from $6.3 million for the year ended December 31, 2003. The
effective tax rates for 2004 and 2003 were 33.8% and 33.7%, respectively. Included in federal income taxes at December 31, 2004 is a reserve for the realization of a portion of the
Companys contribution carry forward for tax purposes, which  expires in fiscal 2006. Realization of this contribution carry forward is based on
the generation of sufficient taxable income prior to the carry forwards expiration. During 2004, management determined, based on
projected taxable income levels through 2006, that the entire amount of the carry forward is not expected to be used. Therefore,
management recorded a $450,000 valuation allowance because it is more likely than not that the full contribution carry forward will
not be utilized prior to its expiration. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NET INCOME. Net income increased $462,000, or 3.9%, for the year ended December 31, 2003 to $12.3
million as compared to $11.9 million for the twelve months ended December 31, 2002, resulting in
net earnings of $1.58 per basic share. The increase in net income for the year was primarily due to a
$1.3 million, or 3.7%, increase in net interest income (discussed below) and to a $3.3 million, or
47.3% increase in noninterest income, partially offset by a $3.8 million, or 16.2%, increase in
noninterest expenses, which was primarily due to a $2.1 million, or 19.2% increase in compensation
and employee benefits, a $865,000, or 25.7% increase in occupancy expenses and a $205,000, or
16.9%, increase in professional fees, a $813,000, or 23.7%, increase in other noninterest expenses
along with a $424,000, or 52.7%, increase in advertising. Contributing to the increase in
noninterest income were a $2.7 million, or 119.1%, increase in income from mortgage banking
activities, a $503,000, or 85.7%, increase in loan servicing fees and a $468,000, or 64.9%,
increase in other noninterest income. These increases are explained in more detail below. NET INTEREST INCOME. Net interest income, before provision for loan loss, increased by $1.3
million to $37.1 million for the year ended December 31, 2003, from $35.8 million for the twelve
months ended December 31, 2002. The increase in net interest income, before provision for loan
loss, consisted primarily of:  -
    a $2.2 million, or 3.6%, decrease in total interest income to $60.4
million for the twelve ended December 31, 2003, from $62.6 million for the twelve
months ended December 31, 2002, which is explained in detail below, offset by,-
    a $3.6 million, or 13.3%, decrease in total interest expense to $23.3
million for the year ended December 31, 2003, from $26.9 million for the twelve
months ended December 31, 2002, which is explained in detail below. The $2.2 million decrease in total interest income for the year ended December 31, 2003, compared
to the twelve months ended December 31, 2002, was comprised primarily of a $2.0 million, or 35.5%,
decrease in interest income on taxable securities, primarily due to a 167 basis point reduction in
the average yield on securities offset by a $15.8 million increase in the average balance. Average interest earning assets increased $53.2 million primarily due to a $61.5 million, or 7.6%,
increase in the average balance of loans, which occurred as a result of the growth in deposits and
the decrease in cash and cash equivalents. The $3.6 million decrease in total interest expense for the year ended December 31, 2003, compared
to the twelve months ended December 31, 2002, was comprised primarily of a $3.7 million, or 21.1%,
aggregate decrease in interest expense on savings, NOW, Money Market Deposit Accounts and
certificate of deposit accounts. Earning asset yields have declined by approximately 56 basis points over the last twelve months.
Net interest margin continues to compress as existing loans refinance and new loans, mainly
commercial and consumer, that are indexed to Prime are added to the portfolio. We believe that
this compression could continue until such time as these indexes begin to rise. The possibility
exists that rates on deposits could rise sooner than rates on loans further compressing net
interest margin. PROVISION FOR LOAN LOSSES. The provision for loan losses increased $299,000, or 26.2%, from $1.1
million for the twelve months ended December 31, 2002 to $1.4 million for the year ended December
31, 2003. The increased provision for loan losses is the result of a $1.4 million increase in
non-performing loans. As a result of the increase in non-performing loans and net charge-offs,
management felt an increased provision was warranted. Despite the increased provision, the loan
loss allowance as a percentage of total loans decreased from 1.33% at December 31, 2002 to 1.24% at
December 31, 2003, and the allowance for loan losses as a percentage of non-performing loans
decreased from 459.1% at December 31, 2002 to 297.9% at December 31, 2003, in each case primarily
as a result of the significant increase in the size of the companys loan portfolio. 41




---



##### Table of Contents



NONINTEREST INCOME. Noninterest income increased by $3.3 million, or 47.3%, from $7.0 million for
the year ended December 31, 2002 to $10.3 million for the year ended December 31, 2003. The
increase was primarily due to the following: a $2.7 million, or 119.1%, increase in mortgage banking activities, due to increased sales of
fixed rate one- to four-family loans, which occurred as a result of an increased volume of
refinancings. (The rights to service these loans and the income associated with those rights
were retained by the Company.) The following factors contributed to the increased sale of
loans during the year ended December 31, 2003: During the year ended December 31, 2003, the Company originated $443.7 million of one- to
four-family residential mortgage loans, an increase of $96.6 million, or 27.8%, from
$347.1 million of one-to four-family residential mortgage loans originated by the Company for the year ended December 31, 2002. At December 31, 2003, the Company had $2.0 million of one- to four-family residential
mortgage loans held for sale, an increase of $427,000, or 27.4%, from $1.6 million of
one-to four-family residential mortgage loans held for sale by the Company at December 31,
2002,  -
    a $503,000, or 85.7%, increase in loan servicing fees due to the increase in loans sold with servicing retained, and-
    a $468,000, or 64.9%, increase in other noninterest income, partially offset by,-
    a $205,000, or 6.2%, decrease in service charges and other fees, and-
    a $154,000, or 142.6%, decrease in gain on sale of securities. As indicated above, much of the increase was due to the large number of refinancings and subsequent
sales of long term, fixed-rate one- to four-family residential mortgage loans. Generally, many of
the customers that could have refinanced their loan during the period have done so. We do not
expect the number of refinancings and gains on sale that are included in line item Mortgage
Banking Activities subsequent to those refinancings to repeat to the same extent in 2004. This
possible reduction in noninterest income could have a significant impact on earnings in future
quarterly periods and in the year ended December 31, 2004. NONINTEREST EXPENSE. Noninterest expense increased $3.8 million, or 16.2%, to $27.4 million for the
year ended December 31, 2003, from $23.6 million for the twelve months ended December 31, 2002,
primarily due to the following:  -
    An increase of $2.1 million, or 19.2%, in compensation, payroll taxes and
employee benefit expenses, due to an increase in commissions to lending personnel as
a result of increased loan production volumes, increased benefit costs and a 13.0%
increase in the number of employees,-
    A $865,000, or 25.7%, increase in occupancy and equipment expense due
partially to additional branches and the disposal of abandoned assets,-
    a $424,000, or 52.7%, increase in advertising and business promotion
expense, due to increased advertising efforts by the Company, and-
    a $813,000, or 23.7%, increase in other noninterest expenses. These increases were offset by a $712,000, or 45.3%, decrease in stationery, printing and supplies. We continue to renovate the interiors of many of the branch offices and we have begun to renovate
the main office to make them more conducive to sales and service. This investment, along with other
ongoing investments in training, is expected to increase office occupancy and other expenses in the
near term. INCOME TAXES. Federal income taxes for the year ended December 31, 2003 were $6.3 million, an
increase of $51,000, or 0.8%, from $6.3 million for the twelve months ended December 31, 2002. The
effective tax rates for 2003 and 2002 were 33.7% and 34.3%, respectively. LIQUIDITY AND CAPITAL RESOURCES GENERAL. Based on the following, the Company considers its liquidity and capital resources
sufficient to meet its outstanding short-term and long-term needs. 42




---



##### Table of Contents



Liquidity is the Companys ability to meet its current and future needs for cash. The Company
further defines liquidity as the ability to have funds available, without incurring excessive cost,
to respond to the needs of depositors and borrowers and to satisfy its financial commitments, as
well as maintaining the flexibility to take advantage of investment opportunities. Many factors
affect a Companys ability to meet its liquidity needs, including variation in the markets served,
the Companys asset-liability mix, its reputation and credit standing in the market and general
economic conditions. The Companys primary sources of funds consist of deposits, loan repayments, payments of interest
on loans, proceeds from the sale of loans originated for sale, maturities and sales of investment
securities and borrowings from the FHLB or correspondent banks, cash on hand and cash on deposit.
While maturities and scheduled amortization of loans and securities are predictable sources of
funds, deposit flows, loan prepayments, and mortgage loan originations and sales are greatly
influenced by general interest rates, economic conditions and competition. Additionally, dividends
from its Banks may be a source of funding for the Company. The Banks are subject to regulatory
requirements regarding these dividends. These regulatory requirements are further discussed in Note
12 to the Companys Consolidated Financial Statements under Item 8 of this Report. The Company primarily uses its funds for
the following:  
    To originate mortgages and other new loans,
    To fund withdrawals of deposits and to pay interest on deposits,
    To fund takedowns on loan commitments and letters of credit,
    To invest in securities, including FHLB stock,
    To pay principal and interest on its borrowings, including interest on FHLB advances,
    To fund any capital expenditures, which, for the upcoming fiscal year, are expected to
include renovation of the interiors of the remaining branch offices that began in 2004,
    To fund any acquisitions if the opportunity arises,
    To pay dividends to its shareholders, and
    To fund repurchases of the Companys stock pursuant to common stock repurchase plans
approved by the Companys Board of Directors from time to time, which repurchase plans are
described in detail below. Liquidity management is both a daily and long-term responsibility of management. The Company
adjusts its investments in liquid assets based upon managements assessment of (1) expected loan
demand, (2) expected deposit flows, (3) yields available on interest-earning assets and costs of
interest-bearing liabilities, and (4) the objectives of its asset/liability management program,
which are to balance and control the risks and financial position of the Company. Excess liquid
assets are invested generally in interest-earning overnight deposits and short-and
intermediate-term U. S. Government and agency obligations. The Companys most liquid assets are cash and due from depository institutions as well as
securities maturing in one year or less. The levels of these assets are dependent on the Companys
operating, financing, lending and investing activities during any given period. At December 31,
2004, cash and deposits in other depository institutions totaled $27.9 million and securities
available for sale totaled $97.8 million. In addition, at December 31, 2004, the Company had the
ability to borrow a total of approximately $452.8 million from the FHLB and other correspondent
banks. On that date, the Company had advances outstanding from the FHLB of $232.2 million and $55.5
million from other correspondent banks. CONTRACTUAL OBLIGATIONS AND COMMITMENTS As disclosed in the Notes to the Consolidated Financial Statements under Item 8 of this Report, the Company has certain
obligations and commitments to make future payments under contracts. At December 31, 2004, the
aggregate contractual obligations and commitments are (in thousands): 43




---



##### Table of Contents



Payments Due by PeriodLess than
    
    
    1 to 3
    
    
    4 to 5
    
    
    After 5Contractual Obligations
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalDeposits without a stated maturity
    
    $
    572,153
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    572,153Time deposits
    
    
    176,658
    
    
    
    118,585
    
    
    
    44,743
    
    
    
    20,965
    
    
    
    360,951FHLB advances
    
    
    36,554
    
    
    
    97,936
    
    
    
    66,521
    
    
    
    31,198
    
    
    
    232,209Short-term borrowings
    
    
    55,527
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    55,527ESOP loan
    
    
    507
    
    

    
    1,148
    
    
    
    1,348
    
    
    
    5,668
    
    
    
    8,671Purchase obligations
    
    
    4,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,300Noncancelable leases
    
    
    522
    
    
    
    886
    
    
    
    296
    
    
    
    326
    
    
    
    2,030Total
    
    $
    844,221
    
    
    $
    218,555
    
    
    $
    112,908
    
    
    $
    58,157
    
    
    $
    1,233,841
 Expiration by PeriodLess than
    
    
    1 to 3
    
    
    4 to 5
    
    
    After 5Other Commitments
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalLetters of credit
    
    $
    6,387
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,387Commitments to
extend credit
    
    
    252,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252,104Total
    
    $
    258,491
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    258,491
 (1)  Purchase obligations include, agreements with the Companys core processor and the Metrobank conversion and
capital expenditures which include renovation of the interiors of the remaining branch offices that began in 2004, completion of the renovation
of the main office, the building of three new branches in the Companys existing market area and
purchases of land for future branch expansion. CASH FLOWS OF THE COMPANY OPERATING ACTIVITIES. The Company originates fixed-rate mortgage loans conforming to Freddie Mac
guidelines generally for sale in the secondary market. The proceeds of these sales provide the
Company with funds for both additional lending and liquidity to meet its current obligations. The
Company sold $126.8 million and $325.0 million of fixed-rate mortgage loans during the periods
ended December 31, 2004 and 2003, respectively. LENDING AND INVESTING ACTIVITIES. The primary investing activities of the Company are the
origination of loans to be held for investment, the purchase and sale of securities and capital
expenditures. The following table shows those activities engaged in by the Company during the
period ended December 31, 2004, the period ended December 31, 2003 and the nine months ended
December 31, 2002 (in thousands): DEPOSIT AND FINANCING ACTIVITIES. Financing activities consist primarily of activity in deposit
accounts, FHLB advances and other borrowings, payment of dividends to the Companys shareholders
and repurchase of the Companys stock pursuant to various common stock repurchase programs approved
by the Companys Board of Directors. The Company experienced a net increase in total deposits of
$50.0 million for the year ended December 31, 2004 compared to a net increase in total deposits of
$76.7 million for the year ended December 31, 2003, $134.6 million of which were acquired with the
purchase of Metrobank. Deposit flows are affected by market interest rates, the interest rates and
products offered by the Company and its competitors and other factors. The Company generally
manages the pricing of its deposits to be competitive with other local banks and to increase core
deposit relationships. Occasionally, the Company offers promotional rates on certain deposit
products in order to attract deposits. During the years ended December 31, 2004 and 2003, FHLB advances increased $59.7 million and
decreased $469,000, respectively. FHLB advances are collateralized by mortgage loans and investment
securities under a blanket collateral agreement. Additionally, the Company obtained a $50 million
line of credit, of which $10 million was outstanding at December 31, 2004, from an unrelated bank
to provide an additional funding source to support loan growth. At inception, a commitment fee of
1/4 percent was payable quarterly on the unused portion of the line of credit. The Agreement was
modified effective September 10, 2004 to reduce the line of credit
availability from $50 million to $10 million due to the Companys review of available borrowings
with other institutions, current and future expected liquidity needs and to reduce interest expense
on borrowings. Under the terms of the Agreement, the Company is required to be categorized as
well capitalized under regulatory guidelines. If the Company falls below this category, the line
of credit would be terminated and become immediately due. 44




---



##### Table of Contents



The line is collateralized by the
common stock of Citizens and expires on January 9, 2006. For additional information about
borrowings, see Note 8 to the Companys Consolidated Financial Statements under Item 8 of this Report. At December 31, 2004, the Company had outstanding unfunded commitments to originate loans or to
refinance existing loans of $258.5 million, $27.8 million of which had fixed interest rates. These
loans are generally to be secured by properties located in its market area. The Company anticipates
that it will have sufficient funds available to meet its current loan commitments. Loan commitments
have, in recent periods, been funded through cash and cash equivalents, sales of loans, sales and
maturities of securities and borrowings. In addition, certificates of deposit that are scheduled to
mature in one year or less from December 31, 2004 total $176.7 million. To the extent that the
Company needs to fund maturing certificates of deposit, they will also be funded through cash and
cash equivalents, increased deposits, sales of loans and sales and maturities of securities, FHLB
borrowings and brokered deposits. Based on past experience, however, management believes that a
significant portion of these certificates of deposit will remain with the Company. During the years ended December 31, 2004 and 2003, dividends were paid to shareholders in the amounts of
$2.8 million and $2.7 million, respectively. The Company intends to continue to pay regular
quarterly dividends. The declaration and payment of dividends, however, are subject to the
discretion of the Board of Directors and to compliance requirements under applicable law. For
additional information, see Note 12 to the Companys Consolidated Financial Statements under Item 8 of this Report. Determination of the timing and amount of future dividends, if any, will depend upon our results of
operations, financial condition, cash requirements, future business prospects, general business
conditions and other factors that the Board of Directors may deem relevant. At this time, the
Company does not believe that there are any restrictions that would currently materially limit the
Companys ability to pay dividends or that the Company believes are likely to limit materially the
future payment of dividends on its common stock. On October 1, 2002, the Companys Board of Directors announced a plan to repurchase up to 428,701,
or 5%, of its outstanding common stock. Under the common stock repurchase plan, the Company may
purchase shares of its common stock in the open market at prevailing prices or in privately
negotiated transactions from time to time depending upon market conditions and other factors.
Through December 31, 2004, the Company had repurchased 165,824 shares of its common stock pursuant
to this repurchase plan at a weighted average price of $20.86 per share. In addition, in July 2002,
the Company announced that it had completed the repurchase of 476,338 shares of its outstanding
common stock, at an average price of $20.72 per share pursuant to another repurchase program. This
repurchase program was in addition to a prior repurchase program completed in December 2001,
pursuant to which the Company repurchased 476,388 shares of its outstanding common stock, at an
average price of $15.66 per share. Repurchased shares are held in treasury and may be used in
connection with employee benefits and other general corporate purposes. Management does not believe
that these past purchases have had, nor are future purchases expected to have, a significant impact
on the Companys liquidity. For more information on the Companys stock repurchase programs, see
Note 15 to the Companys Consolidated Financial Statements under Item 8 of this Report. REGULATORY CAPITAL REQUIREMENTS. The Company is subject to various regulatory capital requirements
administered by the Federal Deposit Insurance Corporation, including a risk-based capital measure.
The risk-based capital guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to
broad risk categories. At December 31, 2004, the Company exceeded all of its regulatory capital
requirements. The Company is considered well capitalized under regulatory guidelines. See Note 12
to the Companys Consolidated Financial Statements under Item 8 of this Report. NEW ACCOUNTING STANDARDS. There were several new accounting standards which were issued or became
effective in 2004, in addition to some which have later effective dates. Those that are applicable
to the Company are listed and discussed in Note 1 to the Companys Consolidated Financial
Statements under Item 8 of this Report. EFFECT OF INFLATION AND CHANGING PRICES. The Companys Consolidated Financial Statements and
related financial data presented have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the measurement of financial
position and operating results in terms of historical dollars, without considering the change in
the relative purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Companys operations and in increased loan amounts and in
increased interest rates (which must include a real rate of return and an additional amount to
reflect expected inflation over the term of the loan). Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a
financial institutions performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of goods and services. 
 45




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MANAGEMENT OF INTEREST RATE
RISK AND MARKET RISK ANALYSIS QUALITATIVE ASPECTS OF MARKET
RISK.

The Companys primary market risk exposure is interest rate risk. Sudden fluctuations in market
interest rates are inherently uncertain and could have a negative impact on the earnings of the
Company to the extent that the interest rates on assets and liabilities do not change at the same
speed, to the same extent or on the same basis. For example, the Companys assets include a large
number of fixed-rate mortgage loans. As a result, during periods of rising interest rates, there is
a risk that the Companys interest expense will increase faster than its interest income. The Companys principal objectives regarding interest rate risk management are to evaluate
regularly the interest rate risk inherent in certain balance sheet accounts, to determine the level
of risk appropriate given the Companys financial condition and outlook, operating environment,
capital and liquidity requirements and performance objectives and to manage interest rate risk
consistent with the Companys Board of Directors approved guidelines. The Company has an Asset/Liability Management Committee that is responsible for accomplishing the
principal objectives of interest rate risk management. The Committee regularly reviews the
Companys guidelines and strategies affecting the Companys asset/liability management related
activities to determine if they are adequate based on estimated market risk sensitivity, policy
limits set by the Companys Board and overall market interest rate levels and trends. The Committee
is composed of members of management and the Companys Board of Directors and regularly meets to
review the Companys asset/liability mix. It also reports trends, interest rate risk position and
results of current interest rate risk management strategies and recommends any changes to
strategies to the Board of Directors quarterly. In recent years, the Company has used the following
strategies to manage interest rate risk: (1) emphasizing the origination of adjustable-rate loans
and the sale of longer-term, fixed-rate loans; (2) emphasizing shorter term consumer loans; (3)
maintaining a high quality portfolio of short to intermediate term securities; (4) maintaining high
levels of liquidity; and (5) using FHLB advances and other borrowings to better structure the
maturities of its interest rate sensitive liabilities. Adverse market interest rate changes between the time that a customer receives a rate-lock
commitment on a mortgage and when the fully funded mortgage loan is sold to an investor can erode
the value of that mortgage. The Company enters into forward sales contracts in order to mitigate
this particular interest rate risk. The Company accepts credit risk in forward sales contracts
should the other party default, in which case the Company would be compelled to sell the mortgages
to another party at the current market price. Therefore, if market interest rates increased from
the date of the forward sales contract and the other party defaulted, the Company would most likely
have to sell the mortgage to another party at a lower price, which would reduce earnings or create
losses on this mortgage. More recently, the Company has used some of its excess liquidity to
increase its loan and securities portfolios. As liquidity is reduced, the Companys sensitivity to
interest rate movements is expected to increase. The notional and estimated fair value of the Company s forward sales contracts used to manage risk
positions associated with residential mortgage loans were as follows: QUANTITATIVE ASPECTS OF MARKET RISK. The Company uses a simulation model based on discounted
cash flows to measure the potential impact on its net interest income of hypothetical changes in
market interest rates. The model forecasts the Companys net interest income for the next year
assuming that there are no changes in interest rates or the mix of assets and liabilities on the
balance sheet from the end of the prior period. After this initial forecast, the model subjects the
balance sheet to instantaneous and sustained rate changes of 100 and 200 basis points to the
treasury yield curve. In order to determine the possible effect of the rate changes, the model uses
various assumptions. Among others, these assumptions relate to the following:  
    the shape of the yield curve;
    the pricing characteristics of and pricing decisions regarding loans based on previous rates charged by the Company;
    changes in deposits and borrowings based on previous rates charged by the Company and other competitive conditions;
    reinvestments of cash flows from assets and liabilities based on current market interest rates; 46




---



##### Table of Contents




    the lack of any changes in the mix of assets and liabilities on the balance sheet;
    the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in
market interest rates based on particular characteristics of those assets and liabilities;
    expected prepayment rates on loans and investments based on industry standards and the current interest rate environment;
    certificates of deposit and other deposit flows based on expected maturity dates; and
    expected growth based on the Companys projections. The table below sets forth, as of December 31, 2004, estimated net interest income and the
estimated changes in the Companys net interest income for the next twelve month period that could
occur as a result of instantaneous changes in market interest rates of 100 and 200 basis points: Estimated Change in Annual Net Interest IncomeIncrease/(Decrease) in Market Interest
    
    At December 31, 2004 (Dollars in thousands)Rates in Basis Points (Rate Shock)
    
    Amount
    
    
    $ Change
    
    
    % Change200
    
    $
    52,277
    
    
    $
    4,078
    
    
    
    8.46
    %100
    
    
    50,675
    
    
    
    2,476
    
    
    
    5.14Static
    
    
    48,199
    
    
    
    
    
    
    
    -100
    
    
    45,292
    
    
    
    (2,907
    )
    
    
    (6.03
    )-200
    
    
    43,189
    
    
    
    (5,010
    )
    
    
    (10.39
    )
 The above table indicates that in the event of a sudden and sustained decline in prevailing
market interest rates, the Companys net interest income would be expected to decrease. As noted above, computation of the prospective effect of hypothetical interest rate changes is
based on a number of assumptions. The calculation of the interest rate sensitivity of the Company
could vary significantly if different assumptions were used, or if the Companys response to
changes in interest rates included changes in the mix of assets and liabilities in its balance
sheet. Other shortcomings also exist in the table. These shortcomings include the following, among
others:  
    Although certain assets may have similar maturities or repricing characteristics, they may react in different degrees to
changes in interest rates.
    The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.
    Certain assets, such as adjustable-rate, residential mortgage loans, have features that restrict changes in interest rates
on a short-term basis and over the life of the asset.
    In the event of a change in interest rates, expected rates of repayments on loans and early withdrawals from time deposits
could deviate significantly from those assumed in calculating the table.
    If interest rates increased, it is also possible that the increased mortgage payments required of certain borrowers could
result in an increase in delinquencies and defaults.
    Changes in interest rates could also affect the volume and profitability of the Companys lending operations. As a result of these and other shortcomings in the model determining the prospective effects of
interest rate changes, the computations in the table should not be relied upon as indicative of
actual results in the event of changes in market interest rates. Further, the computations do not
reflect any actions that management may undertake to respond to changes in interest rates. Forward sales contracts as of December 31, 2004 have settlement dates of less than 90 days. The
weighted average settlement interest rate for these contracts was 5.875%. 47




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors
Citizens First Bancorp, Inc.
Port Huron, Michigan We have audited the accompanying consolidated balance sheets of Citizens First Bancorp, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
changes in stockholders equity and cash flows for the years then ended. 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 referred to above present fairly, in all
material respects, the financial position of Citizens First Bancorp, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of
America. /s/BDO Seidman, LLP
Grand Rapids, Michigan
March 11, 2005 48




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors
Citizens First Bancorp, Inc.
Port Huron, Michigan We have audited the accompanying consolidated statements of income, changes in stockholders equity
and cash flow of Citizens First Bancorp, Inc. and subsidiaries for the nine months ended December
31, 2002. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Citizens First Bancorp, Inc. and
subsidiaries for the nine months ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. /s/Plante & Moran PLLC
Auburn Hills, Michigan
February 13, 2003 49




---



##### Table of Contents



CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) December 31,2004
    
    
    2003ASSETSCash and due from depository institutions
    
    $
    27,937
    
    
    $
    30,426Federal funds sold
    
    
    
    
    
    
    2,165Interest-bearing deposits in other depository institutions
    
    
    
    
    
    
    1,056Total cash and cash equivalents
    
    
    27,937
    
    
    
    33,647Securities available for sale, at fair value (Note 3)
    
    
    97,828
    
    
    
    79,672Federal Home Loan Bank stock, at cost
    
    
    13,536
    
    
    
    9,416Loans held for sale
    
    
    192
    
    
    
    1,984Loans, less allowance for loan losses of $13,472 and $11,664 (Note 4)
    
    
    1,184,968
    
    
    
    929,201Premises and equipment (Note 5)
    
    
    33,780
    
    
    
    23,268Goodwill (Note 2)
    
    
    9,814
    
    
    
    Other intangible assets, net of amortization of $660 (Note 2)
    
    
    3,740
    
    
    
    Accrued interest receivable and other assets (Notes 6 and 9)
    
    
    21,569
    
    
    
    17,072Total assets
    
    $
    1,393,364
    
    
    $
    1,094,260LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESDeposits:Noninterest-bearing
    
    $
    89,416
    
    
    $
    51,498Interest-bearing (Note 7)
    
    
    843,688
    
    
    
    697,033Total deposits
    
    
    933,104
    
    
    
    748,531Federal Home Loan Bank advances (Note 8)
    
    
    232,209
    
    
    
    172,534Bank line of credit (Note 8)
    
    
    10,000
    
    
    
    Federal funds purchased (Note 8)
    
    
    45,527
    
    
    
    9,000Accrued interest payable and other liabilities (Note 10)
    
    
    9,630
    
    
    
    6,008Total liabilities
    
    
    1,230,470
    
    
    
    936,073COMMITMENTS AND CONTINGENCIES (Notes 10 and 13)STOCKHOLDERS EQUITY (Notes 11, 12 and 15)Preferred
stock - $.01 par value; Authorized - 1,000,000 shares;
No shares issued and outstanding
    
    
    
    
    
    
    Common stock
- $.01 par value; Authorized - 20,000,000 shares;
Issued - 9,526,761 shares
    
    
    95
    
    
    
    95Additional paid-in capital
    
    
    93,409
    
    
    
    92,911Retained earnings
    
    
    98,068
    
    
    
    92,684Accumulated other comprehensive income (loss)
    
    
    (621
    )
    
    
    613Treasury stock, at cost (1,263,166 and 1,206,517 shares)
    
    
    (23,004
    )
    
    
    (21,787
    )Deferred compensation obligation (Note 10)
    
    
    2,632
    
    
    
    2,054Unearned compensation, ESOP (Note 10)
    
    
    (7,685
    )
    
    
    (8,383
    )Total stockholders equity
    
    
    162,894
    
    
    
    158,187Total liabilities and stockholders equity
    
    $
    1,393,364
    
    
    $
    1,094,260
 See notes to accompanying consolidated financial statements. 50




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA) NineYear Ended
    
    
    Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002INTEREST INCOMELoans, including fees
    
    $
    65,641
    
    
    $
    56,016
    
    
    $
    42,597Federal funds sold and interest bearing deposits
    
    
    96
    
    
    
    325
    
    
    
    242Securities:Tax-exempt
    
    
    783
    
    
    
    485
    
    
    
    373Taxable
    
    
    3,107
    
    
    
    3,589
    
    
    
    3,742Total interest income
    
    
    69,627
    
    
    
    60,415
    
    
    
    46,954INTEREST EXPENSEDeposits
    
    
    14,884
    
    
    
    13,996
    
    
    
    13,172Short-term borrowings
    
    
    724
    
    
    
    3
    
    
    
    FHLB advances
    
    
    10,019
    
    
    
    9,308
    
    
    
    6,957Total interest expense
    
    
    25,627
    
    
    
    23,307
    
    
    
    20,129NET INTEREST INCOME
    
    
    44,000
    
    
    
    37,108
    
    
    
    26,825PROVISION FOR LOAN LOSSES (Note 4)
    
    
    1,555
    
    
    
    1,440
    
    
    
    892NET INTEREST INCOME, after provision for loan losses
    
    
    42,445
    
    
    
    35,668
    
    
    
    25,933NONINTEREST INCOMEService charges and other fees
    
    
    5,837
    
    
    
    3,113
    
    
    
    2,551Loan servicing fees
    
    
    1,435
    
    
    
    1,090
    
    
    
    440Mortgage banking activities
    
    
    (35
    )
    
    
    4,961
    
    
    
    2,045Trust fee income
    
    
    801
    
    
    
    631
    
    
    
    316Gain (loss) on sale of securities available for sale
    
    
    468
    
    
    
    (46
    )
    
    
    108Other
    
    
    285
    
    
    
    558
    
    
    
    303Total noninterest income
    
    
    8,791
    
    
    
    10,307
    
    
    
    5,763NONINTEREST EXPENSECompensation, payroll taxes and employee benefits (Note 10)
    
    
    16,266
    
    
    
    13,322
    
    
    
    8,284Office occupancy and equipment
    
    
    5,967
    
    
    
    4,237
    
    
    
    2,510Advertising and business promotion
    
    
    1,913
    
    
    
    1,228
    
    
    
    641Stationery, printing and supplies
    
    
    1,761
    
    
    
    859
    
    
    
    1,220Data processing
    
    
    1,301
    
    
    
    487
    
    
    
    272Deposit statement preparation
    
    
    465
    
    
    
    689
    
    
    
    555Professional fees
    
    
    3,547
    
    
    
    1,418
    
    
    
    930Appraisal fees
    
    
    566
    
    
    
    916
    
    
    
    722Core deposit intangible amortization
    
    
    660
    
    
    
    
    
    
    
    Other
    
    
    6,361
    
    
    
    4,243
    
    
    
    2,536Total noninterest expense
    
    
    38,807
    
    
    
    27,399
    
    
    
    17,670INCOME, before federal income tax expense
    
    
    12,429
    
    
    
    18,576
    
    
    
    14,026Federal income tax expense (Note 9)
    
    
    4,200
    
    
    
    6,255
    
    
    
    4,842NET INCOME
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184EARNINGS PER SHARE, BASIC
    
    $
    1.04
    
    
    $
    1.58
    
    
    $
    1.14EARNINGS PER SHARE, DILUTED
    
    $
    1.04
    
    
    $
    1.57
    
    
    $
    1.14
 See notes to accompanying consolidated financial statements. 51




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (IN THOUSANDS EXCEPT PER SHARE DATA) AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Deferred
    
    
    UnearnedCommon
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    Compensation
    
    
    Compensation -Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    Obligation
    
    
    ESOP
    
    
    TotalBALANCE, March 31, 2002
    
    $
    95
    
    
    $
    92,210
    
    
    $
    75,784
    
    
    $
    593
    
    
    $
    (8,616
    )
    
    $
    1,154
    
    
    $
    (9,780
    )
    
    $
    151,440Allocation of ESOP shares
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    698
    
    
    
    1,016Purchase of treasury stock
(546,976 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,726
    )
    
    
    
    
    
    
    
    
    
    
    (11,726
    )Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436
    
    
    
    
    
    
    
    436Dividends paid ($0.24 per share)
    
    
    
    
    
    
    
    
    
    
    (1,924
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,924
    )Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    9,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,184Change in net unrealized gain
on securities available for
sale, net of tax effect of $(140)
and net of reclassification
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (271
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,913BALANCE, December 31, 2002
    
    
    95
    
    
    
    92,528
    
    
    
    83,044
    
    
    
    322
    
    
    
    (20,342
    )
    
    
    1,590
    
    
    
    (9,082
    )
    
    
    148,155Allocation of ESOP shares
    
    
    
    
    
    
    383
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    699
    
    
    
    1,082Purchase of treasury stock
(69,697 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,445
    )
    
    
    
    
    
    
    
    
    
    
    (1,445
    )Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    464Dividends paid ($0.34 per share)
    
    
    
    
    
    
    
    
    
    
    (2,681
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,681
    )Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    12,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,321Change in net unrealized gain
on securities available for
sale, net of tax effect of $150
and net of reclassification
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,612BALANCE, December 31, 2003
    
    
    95
    
    
    
    92,911
    
    
    
    92,684
    
    
    
    613
    
    
    
    (21,787
    )
    
    
    2,054
    
    
    
    (8,383
    )
    
    
    158,187Allocation of ESOP shares
    
    
    
    
    
    
    490
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    698
    
    
    
    1,188Exercise of stock options
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    93Purchase of treasury stock
(56,649 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,302
    )
    
    
    
    
    
    
    
    
    
    
    (1,302
    )Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578
    
    
    
    
    
    
    
    578Dividends paid ($0.36 per share)
    
    
    
    
    
    
    
    
    
    
    (2,845
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,845
    )Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    8,229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,229Change in net unrealized
gain(loss) on securities
available for sale, net of tax
effect of $(636) and net of
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,234
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,234
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,995BALANCE, December 31, 2004
    
    $
    95
    
    
    $
    93,409
    
    
    $
    98,068
    
    
    $
    (621
    )
    
    $
    (23,004
    )
    
    $
    2,632
    
    
    $
    (7,685
    )
    
    $
    162,894
 See notes to accompanying consolidated financial statements. 52




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) NineYear Ended
    
    
    Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIESNet income
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184Adjustments to reconcile net income to net cash from operating activities:Provision for deferred income taxes
    
    
    2,477
    
    
    
    617
    
    
    
    (216
    )Provision for loan losses
    
    
    1,555
    
    
    
    1,440
    
    
    
    892Deferred compensation and ESOP
    
    
    1,766
    
    
    
    1,546
    
    
    
    1,452Depreciation
    
    
    1,955
    
    
    
    1,320
    
    
    
    819Core deposit intangible amortization
    
    
    660
    
    
    
    
    
    
    
    Amortization of securities
    
    
    3,048
    
    
    
    213
    
    
    
    225Proceeds from sale of mortgage loans held for sale
    
    
    126,823
    
    
    
    324,960
    
    
    
    188,042Origination of mortgage loans held for sale
    
    
    (124,832
    )
    
    
    (322,407
    )
    
    
    (187,268
    )Gain on sale of mortgage loans
    
    
    (199
    )
    
    
    (2,980
    )
    
    
    (2,205
    )(Gain) loss on sale of securities available for sale
    
    
    (468
    )
    
    
    46
    
    
    
    (108
    )Loss on sale or disposal of premises and equipment
    
    
    144
    
    
    
    31
    
    
    
    Changes in assets and liabilities, net of acquisition:(Increase) decrease in accrued interest receivable and other assets
    
    
    (3,508
    )
    
    
    (3,255
    )
    
    
    2,460Increase (decrease) in accrued interest payable and other liabilities
    
    
    2,636
    
    
    
    7,812
    
    
    
    (2,291
    )Net cash from operating activities
    
    
    20,286
    
    
    
    21,664
    
    
    
    10,986LENDING AND INVESTING ACTIVITIESProceeds from maturities of securities available for sale
    
    
    20,365
    
    
    
    48,867
    
    
    
    22,744Proceeds from sale of securities available for sale
    
    
    63,289
    
    
    
    25,990
    
    
    
    6,963Purchase of securities available for sale
    
    
    (63,898
    )
    
    
    (53,964
    )
    
    
    (12,070
    )Purchase of Federal Home Loan Bank stock
    
    
    (3,792
    )
    
    
    (236
    )
    
    
    (1,675
    )Acquisition, net of cash acquired (Note 2)
    
    
    (24,398
    )
    
    
    
    
    
    
    Net increase in loans
    
    
    (162,466
    )
    
    
    (111,505
    )
    
    
    (84,464
    )Proceeds from sale of premises and equipment
    
    
    4
    
    
    
    
    
    
    
    Purchases of premises and equipment
    
    
    (7,225
    )
    
    
    (9,631
    )
    
    
    (5,808
    )Net cash used for lending and investing activities
    
    
    (178,121
    )
    
    
    (100,479
    )
    
    
    (74,310
    )DEPOSIT AND FINANCING ACTIVITIESNet increase in deposits
    
    
    49,977
    
    
    
    76,701
    
    
    
    37,816Net increase in federal funds purchased
    
    
    36,527
    
    
    
    
    
    
    
    Proceeds from exercises of stock options
    
    
    93
    
    
    
    
    
    
    
    Proceeds from line of credit
    
    
    10,000
    
    
    
    
    
    
    
    Repayment of FHLB advances
    
    
    (52,325
    )
    
    
    (8,469
    )
    
    
    (23,412
    )Proceeds from FHLB advances
    
    
    112,000
    
    
    
    8,000
    
    
    
    45,000Purchase of treasury stock
    
    
    (1,302
    )
    
    
    (1,445
    )
    
    
    (11,726
    )Payment of dividends
    
    
    (2,845
    )
    
    
    (2,681
    )
    
    
    (1,924
    )Net cash from deposit and financing activities
    
    
    152,125
    
    
    
    72,106
    
    
    
    45,754NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (5,710
    )
    
    
    (6,709
    )
    
    
    (17,570
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    33,647
    
    
    
    40,356
    
    
    
    57,926CASH AND CASH EQUIVALENTS, end of period
    
    $
    27,937
    
    
    $
    33,647
    
    
    $
    40,356SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for:Interest
    
    $
    25,901
    
    
    $
    23,508
    
    
    $
    20,355Federal income taxes
    
    
    4,410
    
    
    
    4,995
    
    
    
    4,410
 See notes to accompanying consolidated financial statements. 53




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - Citizens First Bancorp, Inc. (the
Bancorp), a Delaware company, is the holding company for Citizens First Savings Bank (Citizens)
and Metrobank (Metrobank, see Note 2), both state-chartered savings banks headquartered in Port
Huron and Farmington Hills, Michigan, respectively. The consolidated financial statements include
the accounts of the Bancorp and its wholly owned subsidiaries (the Company) Citizens and
Metrobank (the Banks). Citizens also includes the accounts of its wholly owned subsidiaries,
Citizens Financial Services, Inc. and Citizens First Mortgage, LLC. Citizens Financial Services,
Inc. includes the accounts of its wholly owned subsidiary, CFS Insurance Agency. Citizens Financial
Services, Inc. receives revenue from its subsidiary, which provides insurance services to
individuals and small businesses in the Port Huron area. Citizens First Mortgage, LLC receives
revenue from interest income on loans and the sale of loans. All significant intercompany
transactions and balances have been eliminated in consolidation. NATURE OF OPERATIONS - The Company operates predominately in the mideastern portion of Michigans
lower peninsula. The Companys primary services include accepting deposits, making commercial,
consumer, and mortgage loans, and engaging in mortgage banking activities. The Companys loan
portfolio is concentrated in residential mortgage loans, commercial and multi-family real estate
loans, construction loans, commercial loans, automobile loans, home equity loans and lines of
credit and a variety of consumer loans. The Company is not dependent upon any single industry or
customer. CHANGE IN FISCAL YEAR  The Company changed its fiscal year end from March 31 to December 31,
effective December 31, 2002. USE OF ESTIMATES - In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and 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 in the near term relate to the determination of the allowance for loan losses,
and the valuation of investment securities, mortgage servicing rights, foreclosed real estate,
goodwill and other intangible assets. CASH AND CASH EQUIVALENTS  For the purpose of the consolidated statements of cash flows, cash and
cash equivalents include cash and balances due from depository institutions, federal funds sold,
and interest bearing deposits in other depository institutions, all of which mature within ninety
days. SECURITIES - Debt securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost (none at December 31,
2004 and 2003). Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as available for sale and recorded at fair
value, with unrealized gains and losses excluded from earnings and reported in other comprehensive
income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over
the terms of the securities. Declines in the fair value of held-to-maturity and securities
available for sale below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method. FEDERAL HOME LOAN BANK STOCK - Federal Home Loan Bank (FHLB) stock is considered a restricted
investment security and is carried at cost. Purchases and sales of FHLB stock are made directly
with the FHLB at par value. MORTGAGE BANKING ACTIVITIES - The Company routinely sells to investors its originated long-term
residential fixed rate mortgage loans. Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation
allowance by charges to income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the
Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the
associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized
based on the difference between the selling price and the carrying value of the related mortgage
loans sold. 54




---



##### Table of Contents



The Company enters into commitments to originate loans whereby the interest rate on the loan is
determined prior to funding, also known as rate lock commitments. Rate lock commitments on
residential mortgage loans that are intended to be sold are considered to be derivatives. Fair
value is based on fees currently charged to enter into similar agreements. The fair value of rate
lock commitments was insignificant at December 31, 2004 and 2003. The Company uses forward contracts as part of its mortgage banking activities. Forward contracts
provide for the delivery of financial instruments at a specified future date and at a specified
price or yield. Outstanding forward contracts to sell residential mortgage loans
were approximately $6.5 million and $3.8 million at December 31, 2004 and 2003, respectively. The fair
value of forward contracts was insignificant at December 31, 2004 and 2003. LOANS - The Company grants mortgage, commercial, and consumer loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future or until maturity or
pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield using the interest
method. The accrual of interest on all loans, with the exception of commercial loans, is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in process of
collection. Commercial loans are monitored after the loan is 90 days delinquent. Upon analysis of
the circumstances of the borrower, a decision is made by the Senior Vice President of Commercial
Banking and the loan committee whether or not the loan should be placed on nonperforming status.
In all cases, nonperforming loans are charged off at an earlier date if collection of
principal or interest is considered doubtful. The Company considers the term nonperforming
and nonaccrual as the same. Previous to the middle of 2004, all interest accrued but not collected for loans that are
placed on nonaccrual or charged off is reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured. During the last
half of 2004, management decided that nonperforming loans were required to show consistent payments
of principal and interest for a period of 90 consecutive days to change the classification of the
loan to a performing loan. This change in policy was deemed to provide a more thorough analysis
and monitoring method of nonperforming loans and ensured that the borrower provided strong evidence
of consistent payment over this period. 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 earnings. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is assured.
Subsequent recoveries, if any, are credited to the allowance. 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. The allowance consists of specific, general and unallocated components. The specific component
relates to loans that are classified as doubtful, substandard or special mention. For such loans
that are also classified as impaired, an allowance is established when the discounted cash flows
(or collateral value or observable general market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect managements estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and general losses in the
portfolio. 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 length of the delay, the reasons
for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and
construction loans by either the present value of expected future 55




---



##### Table of Contents



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 homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential loans for impairment
disclosures. LOAN SERVICING - Servicing assets are recognized as separate assets when rights are acquired
through the sale of originated residential mortgage loans. Capitalized servicing rights are
reported in other assets and are amortized against noninterest income in proportion to, and over
the period of, the estimated future net servicing income of the underlying loans. Servicing assets
are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying rights into tranches based on predominant characteristics,
such as interest rate, loan type and investor type. Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or on a valuation model that calculates
the present value of estimated future net servicing income using market based assumptions.
Temporary impairment is recognized through a valuation allowance for an individual stratum to the
extent that fair value is less than the capitalized amount for the stratum. If it is later
determined that all or a portion of the temporary impairment no longer exists, the valuation
allowance is reduced through a recovery of income. An other than temporary impairment results in a
permanent reduction to the carrying value of the servicing asset. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a
contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as
income when earned. The amortization of mortgage servicing rights is netted against loan servicing
fee income. GOODWILL AND INTANGIBLES - Goodwill and intangibles arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. The fair value of goodwill and intangibles is dependent upon
many factors including the Companys ability to provide quality, cost effective services in the face of competition from other financial institutions. A decline in earnings as a result of business or market conditions, a lack of growth or the Companys inability to deliver cost effective services over sustained periods can lead to impairment
of goodwill and intangibles which could adversely impact earnings in future periods. The Companys goodwill and intangibles relate to the acquisition premium recorded when purchasing banking businesses. Goodwill and intangibles are reviewed periodically for impairment by comparing the fair value of the Company to the book value of the Company.
If the book value is in excess of the fair value, impairment is indicated and the goodwill and/or intangibles must be written down to its fair value. PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives of the
related assets. Office buildings are depreciated over 40 years and equipment and furniture over 3
to 7 years. Leasehold improvements are amortized over the terms of their respective leases or the
estimated useful lives of the improvements, whichever is shorter. FORECLOSED ASSETS - Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lower of cost or fair value less the cost to sell at the date of the
foreclosure, establishing a new cost basis. The variances, if any, are charged against the
allowance for loan losses. 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 expenses from foreclosed assets. Foreclosed assets amounted to $1.0 million and $443,000 at
December 31, 2004 and 2003, respectively. INCOME TAXES - Deferred income tax assets and liabilities are recognized for temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized. STOCK BASED COMPENSATION - Under the Companys stock-based incentive plan, which is described more
fully in Note 11, the Company may grant restricted stock awards to its directors, officers, and
employees for up to 476,338 shares of common stock. The Company recognizes compensation expense
related to restricted stock awards over the period the services are performed. Under the stock-based incentive plan, the Company may also grant stock options to its directors,
officers and employees. The Company accounts for stock options 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 related to options is reflected in net
income, as all options granted under the plan had an exercise price equal to the market value of
the underlying common stock on the date of grant. The Company has provided below pro forma
disclosures of net income and earnings per share and other disclosures, as if the Company had
applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based
Compensation, to stock-based employee compensation. Refer to RECENT ACCOUNTING PRONOUNCEMENTS in
this section for discussion regarding FASB Statement No. 123R, Share Based Payment. 56




---



##### Table of Contents



The Companys as reported and pro forma information are presented below (in thousands, except per
share data): Nine monthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184Deduct: Total stock option-based employee compensation
expense determined under fair value-based method,
net of related tax effects
    
    
    (130
    )
    
    
    (85
    )
    
    
    (82
    )Pro forma net income
    
    $
    8,099
    
    
    $
    12,236
    
    
    $
    9,102Earnings per shareBasic - as reported
    
    $
    1.04
    
    
    $
    1.58
    
    
    $
    1.14Basic - pro forma
    
    
    1.03
    
    
    
    1.57
    
    
    
    1.13Diluted - as reported
    
    
    1.04
    
    
    
    1.57
    
    
    
    1.14Diluted - pro forma
    
    
    1.02
    
    
    
    1.56
    
    
    
    1.13
 The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: Nine monthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Dividend yield
    
    
    1.56
    %
    
    
    1.60
    %
    
    
    1.60
    %Expected life
    
    8 years
    
    8 years
    
    8 yearsExpected volatility
    
    
    16.55
    %
    
    
    22.00
    %
    
    
    21.20
    %Risk-free interest rate
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
 OTHER COMPREHENSIVE INCOME - Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain changes in assets and liabilities,
however, such as unrealized gains and losses on securities available for sale, are reported as a
separate component in the equity section of the balance sheet. Such items, along with net income,
are components of comprehensive income. Accumulated other comprehensive income is comprised solely
of unrealized gains and losses on securities available for sale, net of applicable income taxes,
for all periods presented. EARNINGS PER SHARE - Basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been outstanding if dilutive potential common
shares had been issued. Potential common shares that may be issued by the Company relate to
outstanding stock options and restricted stock awards and are determined using the treasury stock
method. Treasury and unallocated ESOP shares are not considered outstanding for purposes of
calculating basic or diluted earnings per share. 57




---



##### Table of Contents



Earnings per common share have been computed based on the following (in thousands except for per
share data): Nine MonthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184Average number of common shares outstanding
used to calculate basic earnings per share
    
    
    7,890,482
    
    
    
    7,810,422
    
    
    
    8,036,885Effect of dilutive securities
    
    
    37,901
    
    
    
    32,743
    
    
    
    173Average number of common shares outstanding
used to calculate diluted earnings per
common share
    
    
    7,928,383
    
    
    
    7,843,165
    
    
    
    8,037,058Number of antidilutive stock options excluded from diluted earnings
per share computation
    
    
    38,754
    
    
    
    
    
    
    
    
 TRUST ASSETS - Trust assets held in a fiduciary or agency capacity are not included in the
accompanying consolidated balance sheet because they are not assets of the Company. ADVERTISING COSTS  Advertising costs are expensed as incurred. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB)
revised SFAS 123, Accounting for Stock-Based Compensationand supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R, Share Based Payment, establishes accounting
requirements for share-based compensation to employees and carries forward prior guidance on
accounting for awards to non-employees. This Statement does not address the accounting for employee
share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting
for Stock Ownership PlansThis Statement requires an entity to recognize the cost of employee
services received in share-based payment transactions and measure the cost on the grant-date fair
value of the award. The provisions of SFAS No. 123R will be effective for the Companys financial
statements issued for periods beginning after June 15, 2005. The adoption of this revised
Statement is not expected to have a material impact on the Companys Consolidated Financial
Statements. In March 2004, the FASBs Emerging Issues Task Force (EITF) released Issue 03-01, Meaning of Other
Than Temporary Impairment, which addressed other-than-temporary impairment for certain debt and
equity investments. The recognition and measurement requirements of Issue 03-01, and other
disclosure requirements not already implemented, were effective for periods beginning after June
15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) EITF 03-1-1, which
delayed the effective date for certain measurement and recognition guidance contained in Issue
03-01. The FSP requires the application of pre-existing other-than-temporary guidance during the
period of delay until a final consensus is reached. Management does not anticipate the issuance of
the final consensus will have a material impact on the Companys Consolidated Financial Statements. On March 9, 2004, the SEC issued Staff Accounting Bulletin 105 (SAB 105), Application of Accounting
Principles to Loan Commitments, stating that the fair value of loan commitments is to be accounted
for as a derivative instrument under SFAS 133. The issuance of this Bulletin did not have a
material impact on the Companys Consolidated Financial Statements. RECLASSIFICATIONS - Certain amounts in the prior years consolidated financial statements have been
reclassified to conform to the current years presentation. NOTE 2  ACQUISITION On January 9, 2004, the Company completed the acquisition of Metro Bancorp, Inc., and its
subsidiary Metrobank, a Michigan savings bank headquartered in Farmington Hills, Michigan
(Metrobank) primarily for the purposes of market expansion into the
metropolitan Detroit area and an opportunity to leverage its capital base. Under the terms of the
transaction, the Company acquired all of the outstanding stock of Metro Bancorp in exchange for
cash of $30,000,000. 58




---



##### Table of Contents



Goodwill Impairment is tested
beginning in 2004 on the first day of the last quarter of the
calendar year and annually thereafter. The process is a five step
process. The first step compares the book value of the Companys
stock to the fair market value of the shares as reported on a widely
recognized internet web site. If the fair market value of the stock is
greater than the calculated book value of the stock, the goodwill is
deemed not to be impaired and no further testing is required. If the
fair market value is less than the calculated book value, four
additional steps of determining fair value of additional assets can
be taken to determine impairment. Step one indicated a fair market
value of the Company stock was in excess of the book value and no
further testing was required. Based on the results of our tests for
impairment, the Company concluded that no impairment of goodwill and
intangibles existed on October 1, 2004. The Company accounted for its acquisition under SFAS No. 141, Business Combinations, which
requires the purchase method of accounting and, accordingly, the purchase price to be allocated to
the assets purchased and the liabilities assumed based upon their estimated fair values at the date
of acquisition. In determining the purchase price allocation, the Company engaged an independent
professional service firm to perform an appraisal of the acquired assets and liabilities. The
tangible assets acquired included cash and equivalents, securities, loans, and premises and
equipment. The tangible liabilities assumed were deposits. The total purchase price allocated to
these tangible assets, net of cash acquired and liabilities assumed was $24.4 million. The estimated fair values of significant assets purchased and liabilities assumed were as follows
as of the acquisition date (in thousands): Cash and equivalents
    
    $
    8,277Securities
    
    
    42,362Loans
    
    
    94,856Premises and equipment
    
    
    5,389Goodwill and core deposit intangibles
    
    
    14,214Deposits
    
    
    134,596Other assets and liabilities, net
    
    
    2,173
 The purchase accounting fair value adjustments are being amortized under various methods and
over the lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition
amounted to $9.8 million and is neither amortized or deductible for tax purposes. Intangible
assets recorded for the acquisition that are subject to amortization consisted of only core deposit
intangibles of $4.4 million, which are being amortized on an accelerated method over a period of
ten years and also is not deductible for tax purposes. Estimated amortization expense for the next
five fiscal years is as follows (in thousands): 2005
    
    $
    5612006
    
    
    4772007
    
    
    4052008
    
    
    3642009
    
    
    405
 The results of operations of Metrobank are included in the Companys consolidated statements of
income from the date of acquisition. The following table presents unaudited pro forma financial
information as if the acquisition of Metrobank had occurred at the
beginning of 2003. (The Pro Forma impact on 2004 is not material) The pro
forma information includes adjustments for the amortization of core deposit intangibles arising
from the transaction, the elimination of acquisition related expenses and the related income tax
effects. The pro forma financial information is not necessarily indicative of the results of
operations as they would have been had the transaction been effected on the assumed date (in
thousands, except per share data). 59




---



##### Table of Contents



Year EndedDecember 31, 2003Pro formaInterest income
    
    $
    67,412Interest expense
    
    
    24,903Net interest income
    
    
    42,509Provision for loan losses
    
    
    2,355Net interest income after provision for loan losses
    
    
    40,154Noninterest income
    
    
    14,142Noninterest expense
    
    
    34,114Income before federal income tax expense
    
    
    20,182Federal income tax expense
    
    
    6,720Net income
    
    $
    13,462Earnings per share, basic
    
    $
    1.72Earnings per share, diluted
    
    $
    1.72
 NOTE 3 - SECURITIES The amortized cost and estimated fair value of securities available for sale with gross unrealized
gains and losses are as follows (in thousands): December 31, 2004Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    24,099
    
    
    $
    103
    
    
    $
    123
    
    
    $
    24,079Obligations of state and political
subdivisions
    
    
    37,504
    
    
    
    537
    
    
    
    152
    
    
    
    37,889Corporate debt securities
    
    
    4,768
    
    
    
    1
    
    
    
    73
    
    
    
    4,696Equity securities
    
    
    5,002
    
    
    
    
    
    
    
    1,117
    
    
    
    3,885Other
    
    
    11,498
    
    
    
    
    
    
    
    
    
    
    
    11,498Mortgage-backed securities
    
    
    15,897
    
    
    
    15
    
    
    
    131
    
    
    
    15,781Total securities available for sale
    
    $
    98,768
    
    
    $
    656
    
    
    $
    1,596
    
    
    $
    97,828
 December 31, 2003Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    7,998
    
    
    $
    15
    
    
    $
    
    
    
    $
    8,013Obligations of state and political
subdivisions
    
    
    17,863
    
    
    
    748
    
    
    
    
    
    
    
    18,611Corporate debt securities
    
    
    47,880
    
    
    
    426
    
    
    
    43
    
    
    
    48,263Equity securities
    
    
    5,002
    
    
    
    
    
    
    
    217
    
    
    
    4,785Total securities available for sale
    
    $
    78,743
    
    
    $
    1,189
    
    
    $
    260
    
    
    $
    79,672
 60




---



##### Table of Contents



At December 31, 2004 and
2003, securities with a carrying value of $6,583,000 and $0 respectively, were pledged to secure borrowing, public deposits and for other purposes required or
permitted by law. The amortized cost and estimated fair value of securities available for sale by contractual
maturity are shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties (in thousands): December 31, 2004Amortized
    
    
    FairCost
    
    
    ValueDue within one year or less
    
    $
    14,575
    
    
    $
    14,482Due after one year through five years
    
    
    45,713
    
    
    
    45,811Due after five years through ten years
    
    
    15,127
    
    
    
    15,406Due after ten years
    
    
    2,454
    
    
    
    2,463Total
    
    
    77,869
    
    
    
    78,162Mortgage-backed securities
    
    
    15,897
    
    
    
    15,781Equity securities
    
    
    5,002
    
    
    
    3,885Total
    
    
    $98,768
    
    
    
    $97,828
 For the years ended December 31, 2004 and 2003, and the nine months ended December 31, 2002,
proceeds from sale of securities available for sale amounted to $63,289,000, $25,990,000, and
$6,963,000, respectively. Gross realized gains amounted to $531,000, $80,000, and $108,000,
respectively. Gross realized losses amounted to $63,000, $126,000, and $0, respectively. The tax
benefit (provision) applicable to these net realized gains and losses amounted to $(164,000),
$16,000, and $(38,000), respectively. Information pertaining to securities available for sale with gross unrealized losses at December
31, 2004, and 2003 aggregated by investment category and length of time that individual securities
have been in a continuous loss position, follows (in thousands): 61




---



##### Table of Contents



December, 31 2004Less than Twelve Months
    
    
    Over Twelve MonthsUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    123
    
    
    $
    10,639
    
    
    
    
    
    
    
    Obligations of state and political
subdivisions
    
    
    132
    
    
    
    7,172
    
    
    $
    20
    
    
    $
    1,848Corporate debt securities
    
    
    73
    
    
    
    4,193
    
    
    
    
    
    
    
    Equity securities
    
    
    
    
    
    
    
    
    
    
    1,117
    
    
    
    3,885Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    127
    
    
    
    6,675
    
    
    
    4
    
    
    
    566Total
    
    $
    455
    
    
    $
    28,679
    
    
    $
    1,141
    
    
    $
    6,299
 December, 31 2003Less than Twelve Months
    
    
    Over Twelve MonthsUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of state and political
subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debt securities
    
    $
    43
    
    
    $
    8,556
    
    
    
    
    
    
    
    Equity securities
    
    
    
    
    
    
    
    
    
    $
    217
    
    
    $
    4,785Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    43
    
    
    $
    8,556
    
    
    $
    217
    
    
    $
    4,785
 Included in the tables above,
at December 31, 2004, the Company had 8 securities in an
unrealized loss position greater than 12 months, and 57 securities in
an unrealized loss position less than 12 months. Management does not
believe any individual unrealized loss as of December 31, 2004
represents an other-than-temporary impairment. The unrealized losses
reported for equity securities related to preferred stock issued by
FHLMC. These unrealized losses are primarily attributable to changes
in interest rates. The Company has both the intent and ability to
hold the securities contained in the previous table for a time
necessary to recover the amortized costs. The other category includes
bonds issued to an entity secured by first mortgages on real estate.
The amortized cost and fair value of these bonds was $11,498,000 at
December 31, 2004. 62




---



##### Table of Contents



NOTE 4 - LOANS Balances of loans are as follows (in thousands): December 31,2004
    
    
    2003Real estate loans:One-to four-family
    
    $
    404,655
    
    
    $
    386,531Commercial and multi-family
    
    
    280,248
    
    
    
    241,097Residential construction
    
    
    30,917
    
    
    
    24,996Home equity and lines of credit
    
    
    113,202
    
    
    
    85,371829,022
    
    
    
    737,995Commercial loans
    
    
    252,865
    
    
    
    107,742Consumer loans:Vehicles
    
    
    66,463
    
    
    
    59,392Other
    
    
    52,321
    
    
    
    37,948118,784
    
    
    
    97,340Total loans
    
    
    1,200,671
    
    
    
    943,077Less:Allowance for loan losses
    
    
    13,472
    
    
    
    11,664Net deferred loan fees
    
    
    2,231
    
    
    
    2,212Net loans
    
    $
    1,184,968
    
    
    $
    929,201
 Loans made in the ordinary course of business to related parties, including senior officers
and directors of the Company, totaled approximately $18,311,000 and $15,859,000 at December 31,
2004 and 2003, respectively. For the year ended December 31,
2004, $6,509,000 of new loans were
made and repayments totaled $4,057,000, respectively. Activity in the allowance for loan losses was as follows (in thousands): NineYear Ended
    
    
    Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2003Balance, beginning of period
    
    $
    11,664
    
    
    $
    11,082
    
    
    $
    11,020Allowance from acquisition
    
    
    1,135
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    1,555
    
    
    
    1,440
    
    
    
    892Charge-offs
    
    
    (1,459
    )
    
    
    (1,095
    )
    
    
    (1,102
    )Recoveries
    
    
    577
    
    
    
    237
    
    
    
    272Balance, end of period
    
    $
    13,472
    
    
    $
    11,664
    
    
    $
    11,082
 The following is a summary of information pertaining to impaired and nonperforming loans (in
thousands): December 31,2004
    
    
    2003Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    2,653
    
    
    
    195Total impaired loans
    
    $
    2,653
    
    
    $
    195Valuation allowance related to impaired loans
    
    $
    420
    
    
    $
    46Total nonperforming loans
    
    $
    10,448
    
    
    $
    3,915
 63




---



##### Table of Contents



Nine MonthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Average investment in impaired loans
    
    $
    3,065
    
    
    $
    257
    
    
    $
    481Interest income recognized on impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    Interest income recognized on a cash basis
on impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    
 NOTE 5  PREMISES AND EQUIPMENT Premises and equipment were as follows (in thousands): December 31,2004
    
    
    2003Land
    
    $
    9,750
    
    
    $
    6,766Office buildings
    
    
    23,276
    
    
    
    13,639Furniture, fixtures, and equipment
    
    
    14,064
    
    
    
    8,911Construction in process
    
    
    3,635
    
    
    
    5,272Total premises and equipment
    
    
    50,725
    
    
    
    34,588Less accumulated depreciation
    
    
    (16,945
    )
    
    
    (11,320
    )Net carrying amount
    
    $
    33,780
    
    
    $
    23,268
 Estimated costs to complete construction contracts in process at December 31, 2004 totaled
$2.3 million. Pursuant to terms of noncancelable lease agreements in effect at December 31, 2004 pertaining to
banking premises and equipment, future minimum rent payments under various operating leases are as
follows (in thousands): 2005
    
    $
    5222006
    
    
    4422007
    
    
    4442008
    
    
    1782009
    
    
    118Thereafter
    
    
    326Total
    
    $
    2,030
 The leases contain options to extend for periods from 5 to 20 years. The cost of such rentals
is not included above. Total rent expense for the years ended December 31, 2004 and 2003, and the
nine months ended December 31, 2002, amounted to $691,000, $99,000, and $18,000, respectively. NOTE 6  LOAN SERVICING The unpaid principal balance
of mortgage loans serviced for others was approximately $575,111,000,
$477,982,000 and $322,000,000 at December 31, 2004, 2003 and
2002 respectively, and are not included in the
accompanying consolidated balance sheets. 64




---



##### Table of Contents



The fair value of mortgage servicing rights included in other assets at December 31, 2004 and 2003
was $3,938,000 and $3,820,000, respectively. The key economic assumptions used in determining the
fair value of the mortgage servicing rights are as follows: December 31,2004
    
    
    2003
    
    
    2002Annual constant prepayment speed
    
    
    10.22
    %
    
    
    13.46
    %
    
    
    33.93
    %Weighted average life (in months)
    
    
    257
    
    
    
    269
    
    
    
    264Discount rate
    
    
    7.50
    %
    
    
    7.25
    %
    
    
    7.02
    %
 The following summarizes mortgage servicing rights capitalized and amortized, along with the
aggregate activity in the related valuation allowance (in thousands): Nine MonthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Balance, beginning of period
    
    $
    3,820
    
    
    $
    1,939
    
    
    $
    1,959Net mortgage servicing rights acquired in acquisition
    
    
    662
    
    
    
    
    
    
    
    Amount capitalized
    
    
    1,118
    
    
    
    3,063
    
    
    
    1,612Amortization
    
    
    1,662
    
    
    
    2,459
    
    
    
    755Change in valuation reserve
    
    
    
    
    
    
    (1,277
    )
    
    
    877Balance, end of period
    
    $
    3,938
    
    
    $
    3,820
    
    
    $
    1,939Valuation allowance:Balance, beginning of period
    
    
    
    
    
    $
    1,277
    
    
    $
    400Additions
    
    
    
    
    
    
    
    
    
    
    877Reductions
    
    
    
    
    
    
    (1,277
    )
    
    
    Balance, end of period
    
    $
    
    
    
    $
    
    
    
    $
    1,277
 NOTE 7  DEPOSITS Interest-bearing deposit balances are summarized as follows (in thousands): December 31,2004
    
    
    2003Passbook and savings deposits
    
    $
    97,448
    
    
    $
    86,202NOW accounts
    
    
    129,573
    
    
    
    73,351Money market variable rate accounts
    
    
    255,716
    
    
    
    279,663Time deposits
    
    
    360,951
    
    
    
    257,817Total
    
    $
    843,688
    
    
    $
    697,033
 65




---



##### Table of Contents



At December 31, 2004,
the scheduled maturities of such time deposits were as follows (in thousands): 2005
    
    $
    176,6582006
    
    
    84,3852007
    
    
    34,2002008
    
    
    28,2162009
    
    
    16,527Thereafter
    
    
    20,965Total
    
    $
    360,951
 Time deposits individually exceeding $100,000 were approximately $133,070,000 and $71,660,000
at December 31, 2004 and 2003, respectively. Deposits from related parties held by the Company at December 31, 2004 and 2003, amounted to
$2,533,000 and $2,847,000, respectively. NOTE 8  BORROWINGS FHLB ADVANCES  FHLB advances (advances) consist of fixed rate advances that bear interest at
rates ranging from 2.13 percent to 7.31 percent payable monthly. The advances are collateralized
by approximately $376,000,000 and $347,000,000 of mortgage loans at December 31, 2004 and 2003,
respectively, under a blanket collateral agreement. At December 31, 2004, the weighted average
interest rate on fixed rate advances was 4.53 percent. The advances are subject to prepayment penalties and the provisions and conditions of the credit
policy of the FHLB. Repayments of the advances are as follows at December 31, 2004 (in
thousands): 2005
    
    $
    36,5542006
    
    
    52,5412007
    
    
    45,3952008
    
    
    44,9192009
    
    
    21,602Thereafter
    
    
    31,198Total
    
    $
    232,209
 SHORT TERM BORROWINGS  Borrowings with original maturities of one year or less are classified
as short-term. Federal funds purchased are excess balances in reserve accounts held at the Federal
Reserve Bank that the Company purchases from other member banks on an
overnight basis. The daily average amount outstanding of funds
purchased during the year ended December 31, 2004, was
$27,844,000 at a weighted daily average interest rate of 1.12%. To provide
additional support for growth the Company obtained a line of credit from an unrelated bank of which
$10 million was available and outstanding at December 31, 2004. The effective interest rate on the
line of credit is based on the three month LIBOR rate plus 1.40 percent, effectively 3.46 percent at December 31, 2004. Under
the terms of the Agreement, the Company is required to be categorized as well capitalized under
regulatory guidelines. If the Company falls below this category, the line of credit would be
terminated and become immediately due . The line is collateralized by the common stock of Citizens
and was amended after December 31, 2004 to expire on January 9, 2006. NOTE 9  FEDERAL INCOME TAXES The consolidated provision for federal income taxes consisted of the following (in thousands): Nine MonthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Current tax expense
    
    $
    1,723
    
    
    $
    5,638
    
    
    $
    5,058Deferred tax expense (benefit)
    
    
    2,477
    
    
    
    617
    
    
    
    (216
    )Total income tax expense
    
    $
    4,200
    
    
    $
    6,255
    
    
    $
    4,842
 66




---



##### Table of Contents



Federal income tax expense differed from the amounts computed by applying the statutory income
tax rate to income before federal income tax expense as a result of the following (in thousands): Nine monthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Income tax at statutory rates (1)
    
    $
    4,350
    
    
    $
    6,502
    
    
    $
    4,909Increase (decrease) resulting from:Change in contribution carry forward reserve
    
    
    450
    
    
    
    
    
    
    
    Tax-exempt interest expense
    
    
    (432
    )
    
    
    (218
    )
    
    
    (152
    )Other
    
    
    (168
    )
    
    
    (29
    )
    
    
    85Total income tax expense
    
    $
    4,200
    
    
    $
    6,255
    
    
    $
    4,842
 (1) 35% in 2004 and 2003 and nine months ended December 31, 2002 The net deferred income tax asset was comprised of the tax effects of the following temporary
differences (in thousands): December 31,2004
    
    
    2003Deferred income tax assets:Allowance for loan losses
    
    $
    3,859
    
    
    $
    3,151Contribution carry forward
    
    
    1,461
    
    
    
    1,911Deferred loan fees
    
    
    17
    
    
    
    61Employee benefit obligations
    
    
    2,025
    
    
    
    1,657Net unrealized loss on securities available for sale
    
    
    320
    
    
    
    Other
    
    
    322
    
    
    
    451Total deferred income tax assets
    
    
    8,004
    
    
    
    7,231Deferred income tax liabilities:Original issue discount
    
    
    275
    
    
    
    144Investment in subsidiary
    
    
    341
    
    
    
    380Accumulated depreciation
    
    
    618
    
    
    
    352Net unrealized gain on securities available for sale
    
    
    
    
    
    
    316Accumulated accretion
    
    
    
    
    
    
    149Acquisition of Metrobank
    
    
    518
    
    
    
    Core deposit intangible
    
    
    1,309
    
    
    
    Other
    
    
    313
    
    
    
    Total deferred income tax liabilities
    
    
    3,374
    
    
    
    1,341Deferred income tax asset
    
    
    4,630
    
    
    
    5,890Valuation allowance
    
    
    (450
    )
    
    
    Net deferred income tax asset
    
    $
    4,180
    
    
    $
    5,890
 At December 31, 2004 the Companys has a contribution carry forward for tax purposes of
$4,176,000, which expires in fiscal 2006, Realization of the deferred income tax asset related to
the contribution carry forward is dependent on generation of sufficient taxable income before the
carry forward expires. During 2004, it became evident to the Company that realization of the
entire contribution carry forward, based on projected taxable income amounts through fiscal 2006,
was in doubt. During 2004, the Company recorded a $450,000 valuation allowance against a portion
of the contribution carry forward because management believes it is more likely than not that a
portion of the benefit associated with their deferred tax asset will not be realized. In addition,
the Company has not recognized a deferred tax liability for tax bad debt reserves of approximately
$6,600,000 that existed at December 31, 1987, because it is not expected that this temporary
difference will reverse in the foreseeable future. NOTE 10  EMPLOYEE BENEFITS DEFINED BENEFIT PENSION PLAN
 The Company is a participant in the multiple-employer Financial
Institutions Retirement Fund (FIRF ), which covers substantially all of its officers and
employees. The FIRF, for all full-time employees with one year of 67




---



##### Table of Contents



service, provides benefits based
on basic compensation and years of service. The Companys contributions are determined by FIRF and
generally represent the normal cost of the FIRF. Specific plan assets and accumulated benefit
information for the Companys portion of the FIRF are not available. Under the Employee Retirement
Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in
the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. The
expense of the FIRF allocated to the Company for the years ended December 31, 2004 and 2003, and
the nine months ended December 31, 2002 amounted to $0, $250,000 and $0, respectively. As of February 1, 2004, the Company chose to freeze the current accrual of benefits under the FIRF
plan and ceased accruing future benefits for employees participating in the FIRF, although vesting
service will continue. In addition, the Company is also considering withdrawing from the FIRF, but
any withdrawal liability has not yet been quantified. DEFINED CONTRIBUTION PLANS  The Company sponsors qualified savings plans (Plans) under Section
401(k) of the Internal Revenue Code. The Plans cover all employees who have completed at least one
year of service. Eligible employees may contribute up to 15 percent of their annual compensation,
subject to certain maximums established by the Internal Revenue
Service. Citizens and Metrobank will match up
to 50 percent of the first 4 percent and 100 percent of the
first 3 percent of the employees
compensation deferred each year, respectively. The Company
made matching contributions for the years ended December 31, 2004 and 2003, and the nine months
ended December 31, 2002 of approximately $215,000, $86,000 and $83,000, respectively. DEFERRED COMPENSATION ARRANGEMENTS  The Company has entered into deferred compensation and fee
arrangements with certain of its directors and senior officers. The amounts deferred under the
arrangements are invested in Company common stock and are maintained in a rabbi trust. The Company
has 214,383 and 198,658 treasury shares reserved for the various plans with a related obligation of
$2,632,000 and $2,054,000 established within stockholders equity as of December 31, 2004 and 2003,
respectively. The arrangements are accounted for in accordance with EITF Issue No. 97-14,
Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust
and Invested. Assets of the rabbi trusts are consolidated with the Company, and the value of the
Companys stock held in rabbi trusts is classified in stockholders equity and generally accounted
for in a manner similar to treasury stock. The Company recognizes the original amount of deferred
compensation (fair value of the restricted stock award at the date of grant) as the basis for
recognition in the rabbi trust. Changes in fair value owed to employees are not recognized as the
arrangements do not permit diversification and must be settled by the delivery of a fixed number of
shares of the Companys common stock. Shares repurchased for the rabbi trusts
totaled 17,927, 198,658 and 183,461 for the years ended December 31, 2004, 2003 and 2002, respectively. The
total shares repurchased have a weighted average price of $18.33 per share. EMPLOYEE STOCK OWNERSHIP PLAN  The Company sponsors a leveraged employee stock ownership plan
(ESOP). The ESOP covers all employees with more than one year of service who have completed at
least 1,000 hours of service and who have attained the age of 21. The Company provided a loan to
the ESOP, which was used to purchase 762,140 shares of the Companys outstanding stock in the open
market. The loan bears interest equal to the prime rate at the time of conversion and provides for
the repayment of principal over the 15-year term of the loan. The scheduled maturities of the loan
are as follows (in thousands): Year EndingDecember 31,
    
    Amount2005
    
    $
    5072006
    
    
    5512007
    
    
    5972008
    
    
    6462009
    
    
    702Thereafter
    
    
    5,668Total
    
    $
    8,671
 The Company makes annual contributions to the ESOP sufficient to support the debt service of
the loan. The loan is secured by the shares purchased, which are held in a suspense account for
allocation among the participants as the loan is paid. Dividends paid on unallocated shares are not
considered dividends for financial reporting purposes and are used to pay principal and interest on
the ESOP loan. Dividends on allocated shares are charged to retained earnings. Compensation
expense is recognized for the ESOP equal to the average

fair value of shares committed to be
released for allocation to participant accounts. Any difference between the average 68




---



##### Table of Contents



fair value of
shares committed to be released for allocation and the ESOPs original acquisition cost is charged
or credited to stockholders equity (additional paid-in capital). Total compensation expense for
the ESOP amounted to $1,188,000, $1,082,000 and $1,016,000 for the years ended December 31, 2004
and 2003, and nine months ended December 31, 2002, respectively. Shares held by the ESOP include the following: December 31,2004
    
    
    2003Allocated
    
    
    203,237
    
    
    
    152,428Unallocated
    
    
    558,903
    
    
    
    609,712Total
    
    
    762,140
    
    
    
    762,140
 The cost of unallocated ESOP shares (shares not yet released for allocation) is reflected as a
reduction of stockholders equity. The fair value of the unallocated shares was approximately
$13,514,000 and $13,901,000 at December 31, 2004 and 2003, respectively. NOTE 11  STOCK BASED COMPENSATION RESTRICTED STOCK AWARDS  On December 16, 2002, the Company granted 69,367 restricted stock awards
to employees under the Companys stock-based incentive plan. During 2003, 1,700 shares were
forfeited and 1,150 shares granted. During 2004, 2,500 shares were forfeited and 6,245 shares
granted. All awards cliff vest after five years from the date of the award. Compensation expense
for the awards was approximately $264,000, $251,000 and $22,000 for the years ended December 31,
2004 and 2003, and the nine months ended December 31, 2002, respectively. Restricted stock awarded is subject to restrictions on sale, transfer, or assignment for the
duration of the employees life. Holders of restricted stock generally may forfeit ownership of all
or a portion of their award if employment is terminated before the end of the vesting period. STOCK OPTIONS  Under the Companys stock-based incentive plan, the Company may grant options to
its directors, officers, and employees for up to 1,429,014 shares of common stock. Both incentive
stock options and non-qualified stock options may be granted under the Plan. The exercise price of
each option equals the market price of the Companys stock on the date of grant. The options vest
twenty percent per year for five years and are exercisable over a 10-year period. On May 9, 2002, the Company granted 23,100 stock options with an exercise price of $19.85 per
share. The options were fully vested at the grant date and are
exercisable over a 10-year period. Subsequent stock options granted
vest 20% each year for 5 years and are exercisable over a 10-year
period. On March 11, 2003, the Company granted 147,700 stock options with an exercise price of $18.81 per
share. On February 26, 2004, the Company granted 42,113 stock options with an exercise price of
$23.90 per share. At December 31, 2004, 1,238,270 shares were available for future granting of
options. 69




---



##### Table of Contents



A summary of the status and activity for options granted under the plan is presented below: Year Ended December 31,
    
    
    Nine Months Ended2004
    
    
    2003
    
    
    December 31, 2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of period
    
    
    170,800
    
    
    $
    18.95
    
    
    
    23,100
    
    
    $
    19.85
    
    
    
    
    
    
    
    Options granted during the period
    
    
    42,113
    
    
    
    23.90
    
    
    
    147,700
    
    
    
    18.81
    
    
    
    23,100
    
    
    $
    19.85Options forfeited
    
    
    22,169
    
    
    
    19.58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    4,480
    
    
    
    18.81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of period
    
    
    186,264
    
    
    $
    20.00
    
    
    
    170,800
    
    
    $
    18.95
    
    
    
    23,100
    
    
    $
    19.85Options exercisable, end of year
    
    
    46,790
    
    
    
    
    
    
    
    23,100
    
    
    
    
    
    
    
    23,100Weighted-average fair value of options granted
during the period
    
    $
    5.70
    
    
    
    
    
    
    $
    5.29
    
    
    
    
    
    
    $
    5.46
 Information pertaining to options outstanding at December 31, 2004 is as follows: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$23.00 - $24.00
    
    
    38,754
    
    
    9.2 years
    
    $
    23.90
    
    
    
    
    
    
    
    $19.00 - $20.00
    
    
    23,100
    
    
    7.4 years
    
    
    19.85
    
    
    
    23,100
    
    
    $
    19.85$18.00 - $19.00
    
    
    124,410
    
    
    8.2 years
    
    
    18.81
    
    
    
    23,690
    
    
    
    18.81Outstanding, end of year
    
    
    186,264
    
    
    
    
    
    
    $
    20.00
    
    
    
    46,790
    
    
    $
    19.32
 NOTE 12  REGULATORY MATTERS The Banks are subject to regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the consolidated financial
statements. Quantitative measures established by regulation to ensure capital adequacy require the Banks to
maintain minimum amounts and ratios, which are shown in the table below. As of December 31, 2004, the most recent notification from the Banks regulators categorized
Citizens and Metrobank as well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized, minimum capital amounts and ratios must be
maintained as shown in the following table. There are no conditions or events since that
notification that management believes have changed the Banks capital category. 70




---



##### Table of Contents



At December 31, 2004 and 2003, actual capital levels and minimum required for Citizens were as
follows (in thousands): For CapitalActual
    
    
    Adequacy Purposes
    
    
    To Be Well CapitalizedRatio
    
    
    
    
    
    
    Ratio
    
    
    
    
    
    RatioAmount
    
    
    (Percent)
    
    
    Amount
    
    
    (Percent)
    
    
    Amount
    
    
    (Percent)December 31, 2004Total Capital to Risk
Weighted Assets:Citizens First Savings Bank
    
    $
    125,475
    
    
    
    12.8
    %
    
    $
    78,700
    3
    
    
    8.0
    %
    
    $
    98,400
    3
    
    
    10.0
    %Tier 1 Capital to Risk
Weighted Assets:Citizens First Savings Bank
    
    
    113,539
    
    
    
    11.5
    %
    
    
    39,400
    3
    
    
    4.0
    %
    
    
    59,000
    3
    
    
    6.0
    %Tier 1 Capital to
Average Assets:Citizens First Savings Bank
    
    
    113,539
    
    
    
    9.7
    %
    
    
    35,200
    3
    
    
    3.0
    %
    
    
    58,600
    3
    
    
    5.0
    %December 31, 2003:Total Capital to Risk
Weighted Assets:Citizens First Savings Bank
    
    
    135,883
    
    
    
    15.8
    %
    
    
    68,700
    3
    
    
    8.0
    %
    
    
    85,900
    3
    
    
    10.0
    %Tier 1 Capital to Risk
Weighted Assets:Citizens First Savings Bank
    
    
    125,140
    
    
    
    14.6
    %
    
    
    34,300
    3
    
    
    4.0
    %
    
    
    51,500
    3
    
    
    6.0
    %Tier 1 Capital to
Average Assets:Citizens First Savings Bank
    
    
    125,140
    
    
    
    11.8
    %
    
    
    31,800
    3
    
    
    3.0
    %
    
    
    53,000
    3
    
    
    5.0
    %
 The Banks are required to maintain average cash balances on hand or with the Federal Reserve
Bank. At December 31, 2004 and 2003, the reserve balance amounted to $4,397,000 and $12,259,000. Federal and state banking regulations place certain restrictions on dividends paid by the Banks to
the Company. The total amount of dividends that may be paid at any date is generally limited to the
retained earnings of the Banks. Accordingly, $130,861,000 of the Companys equity in the net assets
of the Banks was restricted at December 31, 2004. At December 31, 2004, the Banks retained
earnings available for the payment of dividends was $13,472,000. In addition, dividends paid by the Banks to the Company would be prohibited if the effect thereof
would cause the Banks capital to be reduced below applicable minimum capital requirements. NOTE 13  COMMITMENTS AND CONTINGENCIES CREDIT-RELATED FINANCIAL
INSTRUMENTS - The Company is a party to credit-related financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit, standby
letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The Companys exposure to credit loss is represented by the contractual amount of these
commitments. The Company follows the same credit policies in making commitments as it does for
on-balance-sheet instruments. 71




---



##### Table of Contents



A summary of the notional or contractual amounts of financial instruments with off-balance-sheet
risk at December 31, 2004 and 2003 is as follows (in thousands): December 31,2004
    
    
    2003Commercial and stand-by letters of credit
    
    $
    6,387
    
    
    $
    5,397Unused lines of credit
    
    
    168,162
    
    
    
    93,787Commitments to originate loans or to refinance
existing loans:Real estate
    
    
    50,142
    
    
    
    53,236Commercial
    
    
    28,881
    
    
    
    59,056Consumer
    
    
    4,919
    
    
    
    5,945Total commitments to extend credit
    
    $
    258,491
    
    
    $
    217,421
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The commitments for equity
lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed
necessary by the Company, is based on managements credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft
protection agreements are commitments for possible future extensions of credit to existing
customers. These lines of credit are collateralized and usually do not contain a specified maturity
date and may not be drawn upon to the total extent to which the Company is committed. Commercial and standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those letters of credit are primarily
used to support public and private borrowing arrangements. Essentially all letters of credit issued
have expiration dates within one year. To reduce credit risk related to the use of credit-related financial instruments, the Company
generally holds collateral supporting those commitments if deemed necessary. The amount and nature
of the collateral obtained is based on the Companys credit evaluation of the customer. Collateral
held varies, but may include cash, securities, accounts receivable, inventory, property, plant,
equipment, and real estate. If the counterparty does not have the right and ability to redeem the collateral or the Company is
permitted to sell or repledge the collateral on short notice, the Company records the collateral in
its balance sheet at fair value with a corresponding obligation to return it. LEGAL CONTINGENCIES  At December 31, 2004, there were no material pending legal proceedings to
which the Company is a party or to which any of its property was subject, except for proceedings
which arise in the ordinary course of business. In the opinion of management, pending legal
proceedings will not have a material effect on the consolidated financial position or results of
operation of the Company. NOTE 14  FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of the Companys financial instruments are presented
below. Certain items, the most significant being premises and equipment, pension and deferred
compensation arrangements, and the customer relationship intangibles do not meet the definition of
a financial instrument and are excluded from this disclosure. Accordingly, this fair value
information is not intended to, and does not, represent the Companys underlying value. Many of the
assets and liabilities subject to the disclosure requirements are not actively traded, requiring
fair values to be estimated by management. These estimates inherently involve the use of judgment
about a wide variety of factors, including, but not limited to, relevancy of market prices of
comparable instruments, expected future cash flows, and appropriate discount rates. 72




---



##### Table of Contents



The carrying values and estimated fair values of financial instruments were as follows (in
thousands): December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedValue
    
    
    Fair Value
    
    
    Value
    
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $

    27,937
    
    
    $
    27,937
    
    
    $
    33,647
    
    
    $
    33,647Securities available for sale
    
    
    97,828
    
    
    
    97,828
    
    
    
    79,672
    
    
    
    79,672Federal Home Loan Bank stock
    
    
    13,536
    
    
    
    13,536
    
    
    
    9,416
    
    
    
    9,416Loans held for sale
    
    
    192
    
    
    
    192
    
    
    
    1,984
    
    
    
    1,984Loans
    
    
    1,184,968
    
    
    
    1,193,719
    
    
    
    929,201
    
    
    
    931,061Accrued interest receivable
    
    
    4,777
    
    
    
    4,777
    
    
    
    4,103
    
    
    
    4,103Financial liabilities:Deposits
    
    
    933,104
    
    
    
    934,343
    
    
    
    748,531
    
    
    
    758,174Federal Home Loan Bank advances
    
    
    232,209
    
    
    
    237,039
    
    
    
    172,534
    
    
    
    178,120Bank line of credit
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    Federal funds purchased
    
    
    45,527
    
    
    
    45,527
    
    
    
    9,000
    
    
    
    9,000Accrued interest payable
    
    
    853
    
    
    
    853
    
    
    
    467
    
    
    
    467
 The following methods and assumptions were used by the Company in estimating fair value
disclosures for financial instruments: CASH AND CASH EQUIVALENTS  Due to their short-term nature, the carrying value of cash and
short-term instruments approximate fair values. SECURITIES AND FHLB STOCK
 Fair values for securities available for sale are based on quoted
market prices. The carrying value of FHLB stock approximates fair value based on the redemption
provisions of the FHLB. LOANS HELD FOR SALE  Fair values of mortgage loans held for sale are based on commitments on hand
from investors or prevailing market prices. LOANS  For variable-rate loans that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values, as adjusted by estimated credit losses. Fair values
for other mortgage, commercial, and consumer loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for nonperforming loans are estimated using discounted cash
flow analyses or underlying collateral values, where applicable. DEPOSITS  Fair values for demand deposits (e.g., interest and non-interest checking, passbook
savings, and certain types of money market accounts) are equal to the amount payable on demand at
the reporting date (i.e., their carrying values). The carrying values of variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits. FHLB ADVANCES - Fair values of FHLB advances are estimated using discounted cash flow analyses
based on the Companys current incremental borrowing rates for similar types of borrowing
arrangements. SHORT-TERM BORROWINGS- The carrying values of short-term borrowings approximate fair values. ACCRUED INTEREST - The carrying values of accrued interest approximate fair values. OFF-BALANCE-SHEET INSTRUMENTS
- Fair values for off-balance-sheet, credit-related financial
instruments are based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties credit standing. The fair
value of loan commitments and standby letters of credit, valued on the basis of fees currently
charged for commitments for similar loan terms to new borrowers with similar credit profiles, is
not considered material. The fair value of off-balance-sheet financial instruments used for risk management purposes, which
consists solely of forward contracts extending up to 30 days to sell mortgage loans, is not
material. 73




---



##### Table of Contents



NOTE 15 - STOCK REPURCHASE PROGRAM On September 24, 2001, the Board of Directors of Citizens First Bancorp, Inc. adopted the Companys
Stock Repurchase Program. The program allowed management to repurchase 476,388 shares of the
Companys common stock, of which all of the shares were repurchased as of March 31, 2002. On March
28, 2002, the Board of Directors adopted an additional repurchase program. The program allowed
management to repurchase an additional 476,338 shares of the Companys common stock, of which all
of the shares have been repurchased as December 31, 2002. On September 26, 2002, the Board of
Directors adopted a new repurchase program. The program allows management to repurchase up to an
additional 428,701 shares of the Companys common stock, of
which 40,924, 54,500 and 70,400 shares were
repurchased during the years ended December 31, 2004 and 2003, and the nine months ended December
31, 2002, respectively. The repurchased shares are reserved for reissuance in connection with
future employee benefit plans and other general corporate purposes. NOTE 16  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT COMPANY The following represents the condensed financial statements of Citizens First Bancorp, Inc.
(Parent) only, which should be read in conjunction with the Companys consolidated financial
statements. BALANCE SHEETS (IN THOUSANDS): December 31,2004
    
    
    2003ASSETSCash at subsidiary bank
    
    $
    877
    
    
    $
    8,852Securities available for sale
    
    
    15,383
    
    
    
    11,119Commercial real estate loans
    
    
    4,675
    
    
    
    5,263Land
    
    
    3,223
    
    
    
    3,223Investment in subsidiaries
    
    
    144,333
    
    
    
    126,240Deferred taxes and other assets
    
    
    5,525
    
    
    
    3,625Total assets
    
    $
    174,016
    
    
    $
    158,322LIABILITIESBank line of credit
    
    $
    10,000
    
    
    $
    Accrued expenses and other liabilities
    
    
    977
    
    
    
    Total liabilities
    
    
    10,977
    
    
    
    STOCKHOLDERS EQUITY
    
    
    163,039
    
    
    
    158,322TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    174,016
    
    
    $
    158,322
 74




---



##### Table of Contents



STATEMENTS OF INCOME (IN THOUSANDS): Nine MonthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Income:Interest on loans
    
    $
    207
    
    
    $
    571
    
    
    $
    Interest on investments
    
    
    382
    
    
    
    213
    
    
    
    Dividends from subsidiaries
    
    
    20,500
    
    
    
    5,450
    
    
    
    8,270Other
    
    
    166
    
    
    
    14
    
    
    
    358Total income
    
    
    21,255
    
    
    
    6,248
    
    
    
    8,628Expense:Interest on short term borrowings
    
    
    (361
    )
    
    
    
    
    
    
    Other
    
    
    (1,152
    )
    
    
    (861
    )
    
    
    (446
    )Income, before income taxes and equity in
undistributed net income of subsidiaries
    
    
    19,742
    
    
    
    5,387
    
    
    
    8,182Income tax benefit
    
    
    256
    
    
    
    139
    
    
    
    30Income, before equity in undistributed net income
of subsidiaries
    
    
    19,998
    
    
    
    5,526
    
    
    
    8,212Equity in undistributed net income of subsidiaries
    
    
    (11,769
    )
    
    
    6,795
    
    
    
    972Net income
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184
 75




---



##### Table of Contents



STATEMENTS OF CASH FLOWS (IN THOUSANDS): NineMonthsYear Ended
    
    
    EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIESNet income
    
    $
    8,229
    
    
    $
    12,321
    
    
    $
    9,184Adjustments to reconcile net income to net cash
from operating activities:(Gain) loss on sale of investments
    
    
    (109
    )
    
    
    80
    
    
    
    (108
    )Amortization(accretion) of securities
    
    
    (868
    )
    
    
    3
    
    
    
    2Equity in undistributed net income of subsidiaries
    
    
    11,769
    
    
    
    (6,795
    )
    
    
    (972
    )Deferred compensation and ESOP
    
    
    1,766
    
    
    
    1,546
    
    
    
    1,452(Increase) in accrued interest receivable and other assets
    
    
    (1,451
    )
    
    
    
    
    
    
    Increase in accrued interest payable and other liabilities
    
    
    358
    
    
    
    171
    
    
    
    3,252Net cash from (used for) operating activities
    
    
    19,694
    
    
    
    7,326
    
    
    
    12,810INVESTING ACTIVITIESPurchase of Metrobank
    
    
    (30,000
    )
    
    
    
    
    
    
    Proceeds from sale or maturity of investments
    
    
    4,572
    
    
    
    4,631
    
    
    
    6,964Purchase of investments
    
    
    (8,775
    )
    
    
    
    
    
    
    Investment in mortgage company subsidiary
    
    
    
    
    
    
    
    
    
    
    (4,272
    )Net (increase) decrease in loans
    
    
    588
    
    
    
    (2,288
    )
    
    
    (4,675
    )Purchase of land
    
    
    
    
    
    
    (123
    )
    
    
    (3,100
    )Net cash from (used for) investing activities
    
    
    (33,615
    )
    
    
    2,220
    
    
    
    (5,083
    )FINANCING ACTIVITIESProceeds from exercises of stock options
    
    
    93Proceeds from line of credit
    
    
    10,000
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (1,302
    )
    
    
    (1,445
    )
    
    
    (11,726
    )Payment of dividends
    
    
    (2,845
    )
    
    
    (2,681
    )
    
    
    (1,924
    )Net cash from (used for) financing activities
    
    
    5,946
    
    
    
    (4,126
    )
    
    
    (13,650
    )NET CHANGE IN CASH AT SUBSIDIARY BANK
    
    
    (7,975
    )
    
    
    5,420
    
    
    
    (5,923
    )CASH, beginning of period
    
    
    8,852
    
    
    
    3,432
    
    
    
    9,355CASH, end of period
    
    $
    877
    
    
    $
    8,852
    
    
    $
    3,432
 76




---



##### Table of Contents



NOTE 17  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Companys quarterly results for the years ended December 31,
2004 and 2003 (in thousands): For the Three-month Periods EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    TotalInterest income
    
    $
    16,585
    
    
    $
    17,093
    
    
    $
    17,644
    
    
    $
    18,305
    
    
    $
    69,627Interest expense
    
    
    6,148
    
    
    
    6,255
    
    
    
    6,369
    
    
    
    6,855
    
    
    
    25,627Net interest income
    
    
    10,437
    
    
    
    10,838
    
    
    
    11,275
    
    
    
    11,450
    
    
    
    44,000Provision for loan losses
    
    
    90
    
    
    
    198
    
    
    
    470
    
    
    
    797
    
    
    
    1,555Noninterest income
    
    
    1,995
    
    
    
    2,490
    
    
    
    1,839
    
    
    
    2,467
    
    
    
    8,791Noninterest expense
    
    
    9,459
    
    
    
    10,212
    
    
    
    9,297
    
    
    
    9,839
    
    
    
    38,807Income, before federal
income tax expense
    
    
    2,883
    
    
    
    2,918
    
    
    
    3,347
    
    
    
    3,281
    
    
    
    12,429Federal income tax expense
    
    
    999
    
    
    
    972
    
    
    
    1,142
    
    
    
    1,087
    
    
    
    4,200Net income
    
    $
    1,884
    
    
    $
    1,946
    
    
    $
    2,205
    
    
    $
    2,194
    
    
    $
    8,229Earnings per share, basic
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    1.04Earnings per share, diluted
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    1.04
 For the Three-month Periods EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2003
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    TotalInterest income
    
    $
    15,497
    
    
    $
    14,918
    
    
    $
    15,032
    
    
    $
    14,968
    
    
    $
    60,415Interest expense
    
    
    6,201
    
    
    
    5,795
    
    
    
    5,762
    
    
    
    5,549
    
    
    
    23,307Net interest income
    
    
    9,296
    
    
    
    9,123
    
    
    
    9,270
    
    
    
    9,419
    
    
    
    37,108Provision for loan losses
    
    
    360
    
    
    
    360
    
    
    
    360
    
    
    
    360
    
    
    
    1,440Noninterest income
    
    
    2,953
    
    
    
    2,937
    
    
    
    2,875
    
    
    
    1,542
    
    
    
    10,307Noninterest expense
    
    
    6,797
    
    
    
    6,907
    
    
    
    7,081
    
    
    
    6,614
    
    
    
    27,399Income, before federal
income tax expense
    
    
    5,092
    
    
    
    4,793
    
    
    
    4,704
    
    
    
    3,987
    
    
    
    18,576Federal income tax expense
    
    
    1,891
    
    
    
    1,517
    
    
    
    1,718
    
    
    
    1,129
    
    
    
    6,255Net income
    
    $
    3,201
    
    
    $
    3,276
    
    
    $
    2,986
    
    
    $
    2,858
    
    
    $
    12,321Earnings per share, basic
    
    $
    0.40
    
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    1.58Earnings per share, diluted
    
    $
    0.40
    
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    0.37
    
    
    $
    1.57
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 15, 2003, Plante & Moran, PLLC resigned as the independent public accountant for
the Company. On October 15, 2003, the Audit Committee of the Companys Board of Directors, upon
authority delegated to it by the Board of Directors, engaged the firm of BDO Seidman, LLP as the
Corporations new independent public accountant. Further discussion regarding this matter can be
found in the Companys current report on Form 8-K filed with the Commission on October 16, 2003. 
 ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures The Company, under the supervision, and with the participation, of its management, including
the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Companys disclosure controls and procedures as of December 31,
2004, pursuant to the requirements of Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of December 31, 2004, in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries) required to be
included in the Companys periodic SEC filings. 77




---



##### Table of Contents



Managements Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). The Company, under
the supervision, and with the participation of our management, including the Companys Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of December 31, 2004, under the
framework in Internal Control- Integrated Frameworkand pursuant to the requirements of Exchange
Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were effective as of
December 31, 2004, in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the Companys periodic SEC
filings. Managements Annual Report on Internal Control Over Financial Reporting and the related
Attestation Report of BDO Seidman, LLP, the Companys independent registered public accounting
firm, are not provided as part of this annual report on Form 10-K. In reliance upon a 45 day
extension granted pursuant to an exemptive order issued by the Securities and Exchange Commission
on November 30, 2004, management of the Company intends to submit these items as an amendment to
this report on Form 10-K by no later than April 29, 2005. There was no change in the Companys internal control over financial reporting that occurred
during the Companys fiscal quarter ended December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. 
 ITEM 9B. OTHER ITEMS 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Section
captioned Proposal 1 - Election of
Directors in the Registrants Proxy Statement, to be filed within 120 days after December 31,
2004, for the Annual Meeting of Stockholders to be held on May 26, 2005. Reference is made to the
cover page of this Form 10-K and to the section captioned Section 16(a) Beneficial Ownership
Reporting Compliance for information regarding compliance with Section 16(a) of the Exchange Act. The Board of Directors has determined that Christopher A. Kellerman is an audit committee
financial expert and is independent, as each such term is defined under applicable SEC and
NASDAQ rules. The Company has adopted a code of ethics that applies to its principal executive,
financial and accounting officers. A copy of the code of ethics is posted on the Companys website
at www.cfsbank.com. In the event we make any amendment to, or grant any waiver of, a provision of
the code of ethics that applies to the principal executive, financial or accounting officer, or any
person performing similar functions, that requires disclosure under applicable SEC rules, we intend
to disclose such amendment or waiver, the nature of and reasons for it, along with the name of the
person to whom it was granted and the date, on our internet website. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item relating to executive compensation is incorporated
herein by reference to the sections captioned Executive Compensation in the Registrants Proxy
Statement, to be filed within 120 days after December 31, 2004, for the Annual Meeting of
Stockholders to be held on May 26, 2005. 
 78




---



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS  
 The information required by this item relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the section captioned Stock
Ownership in the Registrants Proxy Statement, to be filed within 120 days after December 31,
2004, for the Annual Meeting of Stockholders to be held on May 26, 2005. The information required
by this item relating to securities authorized for issuance under equity compensation plans is
incorporated herein by reference to the section captioned
Executive Compensation - Equity
Compensation Plan Information in the Registrants Proxy Statement for the Annual Meeting of
Stockholders to be held on May 26, 2005. Equity Compensation Plan Information Number of securitiesremaining availableNumber of securities
    
    
    
    
    
    for future issuanceto be issued upon
    
    Weighted-average
    
    under equityexercise of outstanding
    
    exercise price of
    
    compensation plansoptions, warrants,
    
    outstanding options,
    
    (excluding securitiesand rights
    
    warrants and rights
    
    in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    186,264
    
    
    
    $20.00
    
    
    
    1,238,270Total
    
    
    186,264
    
    
    
    $20.00
    
    
    
    1,238,270
 The Company does not maintain any equity compensation plans that have not been approved
by security holders. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item relating to certain relationships and related
transactions is incorporated herein by reference to the section captioned Transactions with
Related Parties in the Registrants Proxy Statement, to be filed within 120 days after December
31, 2004, for the Annual Meeting of Stockholders to be held on May 26, 2005. 
 ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES The information required by this item relating to accountant fees and services is incorporated
by reference to the section captioned Proposal II - Ratification of Independent Auditors in the
Registrants Proxy Statement, to be filed within 120 days after December 31, 2004, for the Annual
Meeting of Shareholders to be held on May 26, 2005. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements Pages in Form 10-KREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRMS
    
    page 48CONSOLIDATED FINANCIAL STATEMENTSBalance Sheets
    
    page 50Statements of Income
    
    page 51Statements of Changes in Stockholders Equity
    
    page 52Statements of Cash Flows
    
    page 53Notes to Consolidated Financial Statements
    
    page 54-77
  79




---



##### Table of Contents



(2) Financial Statement Schedules All financial statement 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. The following exhibits required by Item 601 of Regulation S-K are filed as part of this report: (3) Exhibits 3.1
    
    Certificate of Incorporation of Citizens First Bancorp, Inc. (1)3.2
    
    Bylaws of Citizens First Bancorp, Inc. (1)4.0
    
    Draft Stock Certificate of Citizens First Bancorp, Inc. (1)10.1
    
    Form of Citizens First Savings Bank Employee Severance Compensation
Plan (1)10.2
    
    Form of Citizens First Savings Bank Supplemental Executive Retirement
Plan (1)10.3
    
    Form of Citizens First Savings Bank Directors Deferred Fee Agreement
(1)10.4
    
    Employment Agreement between Citizens First Bancorp, Inc. and
Marshall J. Campbell (5)10.5
    
    Change in Control Agreement between Citizens First Savings Bank and
Randy J. Cutler (2)10.6
    
    Change in Control Agreement between Citizens First Savings Bank and
Timothy D. Regan (2)10.7
    
    Change in Control Agreement between Citizens First Savings Bank and
Stephen J. Armstrong (2)10.8
    
    Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (3)10.9
    
    Amended and Restated Management Restricted Stock Purchase Plan (4)10.10
    
    Amended and Restated Executive Stock Ownership Plan (4)21.0
    
    Subsidiary Information is incorporated herein by reference to Part I,
Item 1, Business - Subsidiary Activities23.1
    
    Consent of BDO Seidman, LLP23.2
    
    Consent of Plante & Moran, PLLC31.1
    
    Rule 13a-14(a) Certifications of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certifications of Chief Financial Officer32.1
    
    Section 1350 Certifications of Chief Executive Officer32.2
    
    Section 1350 Certifications of Chief Financial Officer
   (1)
    
    Incorporated by reference into this document from the Exhibits to the Form S-1, Registration
Statement and amendments thereto, initially filed with the Securities and Exchange Commission
on November 3, 2000, Registration No. 333-49234.(2)
    
    Incorporated by reference into this document from the Exhibits to the Form 10-Q as filed with
the Securities and Exchange Commission on August 14, 2001 (Registration No. 0-32041).(3)
    
    Incorporated by reference into this document from the Appendix to the Proxy Statement as
filed with the Securities and Exchange Commission on September 30, 2001.(4)
    
    Incorporated by reference into this document from the Appendix to the Proxy Statement as
filed with the Securities and Exchange Commission on April 21, 2003.(5)
    
    Incorporated by reference into this document from
the Exhibits to Registrants Form 10-K filed with the Securities
and Exchange Commission on July 1, 2001 (Registration No. 0-32041). 80




---



##### 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. Citizens First Bancorp, Inc.Date:
March 16, 2005
    
    By:
    
    /s/ Marshall J. CampbellMarshall J. CampbellChairman of the Board,President and ChiefExecutive Officer
 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 and in the capacities and on the dates
indicated. /s/ Marshall J. Campbell
    
    Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
    
    March 16, 2005Marshall J. Campbell/s/ Timothy D. Regan
    
    Secretary, Treasurer
and Director (principal
accounting and financial
officer)
    
    March 16, 2005Timothy D. Regan/s/ Ronald W. Cooley
    
    Director
    
    March 16, 2005Ronald W. Cooley/s/ Walid Demashkieh
    
    Director

    
    March 16, 2005Walid Demashkieh/s/ Christopher A. Kellerman
    
    Director
    
    March 16, 2005Christopher A. Kellerman
 81




---



##### Table of Contents



Exhibit Index 3.1
    
    Certificate of Incorporation of the Citizens First Bancorp, Inc. (1)3.2
    
    Bylaws of the Citizens First Bancorp, Inc. (1)4.0
    
    Draft Stock Certificate of the Citizens First Bancorp, Inc. (1)10.1
    
    Form of the Citizens First Savings Bank Employee Severance Compensation Plan (1)10.2
    
    Form of the Citizens First Savings Bank Supplemental Executive Retirement Plan (1)10.3
    
    Form of the Citizens First Savings Bank Directors Deferred Fee Agreement (1)10.4
    
    Employment Agreement between the Citizens First Bancorp, Inc. and Marshall J. Campbell (5)10.5
    
    Change in Control Agreement between the Citizens First Savings Bank and
Randy J. Cutler (2)10.6
    
    Change in Control Agreement between the Citizens First Savings Bank and
Timothy D. Regan (2)10.7
    
    Change in Control Agreement between the Citizens First Savings Bank and
Stephen J. Armstrong (2)10.8
    
    Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (3)10.9
    
    Amended and Restated Management Restricted Stock Purchase Plan (4)10.10
    
    Amended and Restated Executive Stock Ownership Plan (4)21.0
    
    Subsidiary Information is incorporated herein by reference to Part I,
Item 1, Business - Subsidiary Activities23.1
    
    Consent of BDO Seidman, LLP23.2
    
    Consent of Plante & Moran, PLLC31.1
    
    Rule 13a-14(a) Certifications of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certifications of Chief Financial Officer32.1
    
    Section 1350 Certifications of Chief Executive Officer32.2
    
    Section 1350 Certifications of Chief Financial Officer
   (1)
    
    Incorporated by reference into this document from the Exhibits to the Form S-1, Registration
Statement and amendments thereto, initially filed with the Securities and Exchange Commission
on November 3, 2000, Registration No. 333-49234.(2)
    
    Incorporated by reference into this document from the Exhibits to the Form 10-Q as filed with
the Securities and Exchange Commission on August 14, 2001 (Registration No. 0-32041).(3)
    
    Incorporated by reference into this document from the Appendix to the Proxy Statement as
filed with the Securities and Exchange Commission on September 30, 2001.(4)
    
    Incorporated by reference into this document from the Appendix to the Proxy Statement as
filed with the Securities and Exchange Commission on April 21, 2003.(5)
    
    Incorporated by reference into this document from
the Exhibits to Registrants Form 10-K filed with the Securities
and Exchange Commission on July 1, 2001 (Registration No. 0-32041). 82