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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
1934For the fiscal year ended December 31, 2003ORo
    
    TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934For the transition period from
 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.Yes þ    X o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer Yes þ    X o The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $141.6 million, based upon the closing price of $21.10 as
quoted on the Nasdaq National Market on March 8, 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 15, 2004, the registrant had 8,518,902 shares of common stock
outstanding. Documents Incorporated by Reference




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TABLE OF CONTENTS INDEX PagePart IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    31Item 3.
    
    Legal Proceedings
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    33Part IIItem 5.
    
    Market for Registrant's Common Equity and Related Stockholder Matters
    
    
    33Item 6.
    
    Selected Financial Data
    
    
    33Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    34Item 8.
    
    Financial Statements and Supplementary Data
    
    
    34Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    34Item 9A.
    
    Controls and Procedures
    
    
    34Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    34Item 11.
    
    Executive Compensation
    
    
    34Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    35Item 13.
    
    Certain Relationships and Related Transactions
    
    
    35Item 14.
    
    Principal Accountant Fees and Services
    
    
    35Part IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    352003 Annual Report to StockholdersConsent of BDO Seidman LLPConsent of Plante & Moran PLLCRule 13a-14(a) CertificationsRule 13a-14(a) CertificationsSection 1350 CertificationsSection 1350 Certifications




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Part I 
 Item 1. Business General Citizens First Bancorp, Inc. (the Company or Citizens First Bancorp) was
organized in October 2000 as a Delaware business corporation at the direction
of Citizens First Savings Bank (the Bank or Citizens First). 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 Bank and the consolidated subsidiaries of the Company and the Bank,
including Citizens First Mortgage, LLC, which has engaged in the Banks
residential mortgage lending business since its formation in June, 2002. The
Company became the holding company for Citizens First upon completion of the
Banks conversion from the mutual to the stock form of ownership. The
conversion was completed on March 7, 2001. In connection with the conversion,
the Company sold 8,821,075 shares of its common stock, par value $0.01 per
share, at a purchase price of $10 per share to depositors of the Bank in a
subscription offering, which raised approximately $85.1 million in net
conversion proceeds. In addition, the Company issued an additional 705,686
shares, representing 8% of the shares sold in the subscription offering, to
Citizens First Foundation, a charitable foundation established by the Bank. The
Company has no significant assets, other than all of the outstanding shares of
the Bank and the portion of the net proceeds it retained from the subscription
offering, and no significant liabilities. Management of the Company and the
Bank are substantially similar. Except for a parcel of vacant land located in
northern St. Clair County, Michigan, which was purchased by the Company in
November, 2002 and is held by the Company, the Company neither owns nor leases
any property, but instead uses the premises, equipment and furniture of the
Bank. In addition, employees are generally employed by the Bank rather than by
the Company. Accordingly, the information set forth in this Report, including
the Consolidated Financial Statements and related financial data, relates
primarily to the Bank and other consolidated subsidiaries. Citizens First currently operates as a community-oriented financial
institution that accepts deposits from the general public in the communities
surrounding its 16 full-service banking offices. The deposited funds, together
with funds generated from operations and borrowings, are used by Citizens First
to originate loans. Citizens Firsts principal lending activity is the
origination of mortgage loans for the purchase or refinancing of one- to
four-family residential property. Citizens First originates one- to four-family
mortgage loans primarily for sale in the secondary market, although Citizens
First generally retains the servicing rights for these mortgage loans. Citizens
First 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. Citizens First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 Citizens
Firsts investments. Citizens First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 the Federal Home Loan Bank, cash on hand and cash
on deposit. Regulation Citizens First is regulated by the Michigan Office of Financial and
Insurance Services and the Federal Deposit Insurance Corporation. Citizens
Firsts deposits are insured to the maximum allowable amount by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation.
Citizens First has been a member of the Federal Home Loan Bank System since
1938. For more information about the regulation applicable to Citizens First
and the Company, see Regulation and Supervision below. Market Area Citizens Firsts main office is in Port Huron, Michigan, which is in St.
Clair County. Citizens Firsts deposit gathering and lending activities, as
well as its other primary business operations, are principally concentrated in
and around the communities surrounding its 16 full-service offices located in
St. Clair, Sanilac, Huron, Lapeer and northern Macomb counties, Michigan. As of
January 9, 2004 and due to the acquisition of Metrobank, Citizens market area
now includes Oakland County. To a limited extent, however, Citizens First also
makes some loans beyond its primary market area. 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 Countys total land area is rural, and approximately
one-third of the resident labor force commutes to jobs outside of the County.
As of 2001, St. Clair County had a population of approximately 166,541, while
the other four counties in the Banks primary market area had a combined
population of approximately 169,970. The largest employment sectors in St.
Clair County are manufacturing, services, retail and government. Citizens
Firsts primary market area has a higher per capita median household income
when compared to Michigan and the United States. OPERATING STRATEGY Citizens First is a community-oriented financial institution, offering a
wide range of deposit and loan products to its customers. In recent years,
Citizens Firsts strategy has been one of controlled balance sheet growth and
broader diversification of its 3




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loan products and loan portfolio. Beginning in 1995, Citizens First
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, Citizens First 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, Citizens First 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 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.
    
    Increase fee income by broadening non-depository product offerings
and services, including expanding its trust services. Citizens Firsts
five-year-old Asset Management and Trust Group oversaw $201.6 million in
assets at December 31, 2003, compared to $143.3 million in assets at
December 31, 2002, an increase of $58.3 million, or 40.7%.
    
    Upgrade technology and training to ensure high levels of service.
During 2003, the Bank initiated several training programs to enhance the
Banks focus on customer service. In addition, the Bank completed its
planned computer conversion that it believes will improve its
technology. See Computer Conversion below.
    
    Reinvest in its communities.
    
    Continue to increase its emphasis on 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 Citizens 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. For more information about the interest
rate risk to which Citizens First is exposed and about how Citizens
First attempts to manage that risk, see Item 7A, Quantitative and
Qualitative Disclosure About Market Risk. COMPUTER CONVERSION In October, 2002, Citizens First entered into an agreement with Fiserv
Solutions, Inc. (Fiserv) relating to Fiservs ITI software package. The
Fiserv ITI software package offers a fully integrated general ledger system,
customer relationship management capabilities, comprehensive on-line/real time
Internet banking services, improved ATM processing and document imaging, in
addition to various other features. Citizens First believes that the Fiserv ITI
software package should provide it with significant processing improvements
that it believes will allow enhanced customer service and efficiencies within
the Bank. In connection with its conversion to the Fiserv software package, the
Bank also upgraded PCs throughout the Bank, as well as data line connectivity
to its branches, to attempt to improve processing speed. 4




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COMPETITION Citizens First faces intense competition for the attraction of deposits
and origination of loans in its primary market area. Citizens Firsts most
direct competition for deposits has historically come from the several
financial institutions operating in Citizens Firsts primary market area and,
to a lesser extent, from other financial service companies, such as brokerage
firms, credit unions and insurance companies. Citizens Firsts competition for
loans comes primarily from financial institutions operating in its primary
market area, and to a lesser extent, from other financial service providers,
such as mortgage companies and mortgage brokers. Competition for loans may
increase due to the increasing number of non-depository financial service
companies entering the mortgage market, such as insurance companies, securities
companies and specialty finance companies. Citizens First 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 Citizens First
conducts business. Some of the institutions with which Citizens First competes
are significantly larger than Citizens First and, therefore, have significantly
greater resources. Competition for deposits and the origination of loans could
limit Citizens Firsts growth in the future. Lending Activities General.Citizens Firsts loans are subject to federal and state laws and
regulations. Interest rates charged by Citizens First on loans are affected
principally by the following:  
    
    Citizens Firsts current asset/liability strategy, which is to
monitor and control the financial position of Citizens First, 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 under Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations. 5




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Loan Portfolio Analysis.The following table sets forth the composition of
Citizens Firsts loan portfolio in dollar amounts and as a percentage of the
portfolio at the dates indicated. December 31,
    
    March 31,2003
    
    2002
    
    2002Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    PercentAmount
    
    of Total
    
    Amount
    
    of Total
    
    Amount
    
    of Total(Dollars in thousands)Real estate LoansOne- to four-family
    
    $
    386,531
    
    
    
    40.99
    %
    
    $
    414,939
    
    
    
    49.88
    %
    
    $
    385,765
    
    
    
    51.56
    %Commercial and multi-family real estate (1)
    
    
    241,097
    
    
    
    25.56
    %
    
    
    179,387
    
    
    
    21.57
    %
    
    
    144,817
    
    
    
    19.36
    %Residential construction
    
    
    24,996
    
    
    
    2.65
    %
    
    
    21,822
    
    
    
    2.62
    %
    
    
    27,541
    
    
    
    3.68
    %Home equity loans and lines of credit
    
    
    85,371
    
    
    
    9.06
    %
    
    
    72,724
    
    
    
    8.75
    %
    
    
    71,266
    
    
    
    9.52
    %Total real estate loans
    
    
    737,995
    
    
    
    78.26
    %
    
    
    688,872
    
    
    
    82.82
    %
    
    
    629,389
    
    
    
    84.12
    %Consumer loansVehicles (2)
    
    
    59,392
    
    
    
    6.30
    %
    
    
    61,386
    
    
    
    7.38
    %
    
    
    61,661
    
    
    
    8.24
    %Other
    
    
    37,948
    
    
    
    4.02
    %
    
    
    21,221
    
    
    
    2.55
    %
    
    
    15,015
    
    
    
    2.01
    %Total consumer loans
    
    
    97,340
    
    
    
    10.32
    %
    
    
    82,607
    
    
    
    9.93
    %
    
    
    76,676
    
    
    
    10.25
    %Commercial loans
    
    
    107,742
    
    
    
    11.42
    %
    
    
    60,336
    
    
    
    7.25
    %
    
    
    42,137
    
    
    
    5.63
    %Total loans
    
    
    943,077
    
    
    
    100.00
    %
    
    
    831,815
    
    
    
    100.00
    %
    
    
    748,202
    
    
    
    100.00
    %Less:Deferred loan origination fees and discounts
    
    
    2,212
    
    
    
    
    
    
    
    1,597
    
    
    
    
    
    
    
    1,618Allow ance for loan losses
    
    
    11,664
    
    
    
    
    
    
    
    11,082
    
    
    
    
    
    
    
    11,020Total loans, net
    
    $
    929,201
    
    
    
    
    
    
    $
    819,136
    
    
    
    
    
    
    $
    735,564
 [Additional columns below] 6




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[Continued from above table, first column(s) repeated] March 31,2001
    
    2000Percent
    
    
    
    
    
    PercentAmount
    
    of Total
    
    Amount
    
    of Total(Dollars in thousands)Real estate LoansOne- to four-family
    
    $
    395,484
    
    
    
    57.75
    %
    
    $
    341,308
    
    
    
    58.82
    %Commercial and multi-family real estate (1)
    
    
    113,715
    
    
    
    16.60
    %
    
    
    83,536
    
    
    
    14.39
    %Residential construction
    
    
    18,479
    
    
    
    2.70
    %
    
    
    24,750
    
    
    
    4.26
    %Home equity loans and lines of credit
    
    
    66,687
    
    
    
    9.74
    %
    
    
    56,991
    
    
    
    9.82
    %Total real estate loans
    
    
    594,365
    
    
    
    86.79
    %
    
    
    506,585
    
    
    
    87.29
    %Consumer loansVehicles (2)
    
    
    55,490
    
    
    
    8.10
    %
    
    
    41,066
    
    
    
    7.08
    %Other
    
    
    12,344
    
    
    
    1.80
    %
    
    
    13,882
    
    
    
    2.39
    %Total consumer loans
    
    
    67,834
    
    
    
    9.90
    %
    
    
    54,948
    
    
    
    9.47
    %Commercial loans
    
    
    22,676
    
    
    
    3.31
    %
    
    
    18,824
    
    
    
    3.24
    %Total loans
    
    
    684,875
    
    
    
    100.00
    %
    
    
    580,357
    
    
    
    100.00
    %Less:Deferred loan origination fees and discounts
    
    
    1,595
    
    
    
    
    
    
    
    1,393Allow ance for loan losses
    
    
    10,831
    
    
    
    
    
    
    
    10,461Total loans, net
    
    $
    672,449
    
    
    
    
    
    
    $
    568,503
   (1)
    
    Includes commercial construction loans which at December 31, 2003,
December 31, 2002 and March 31, 2002, March 31, 2001 and March 31, 2000
totaled $14.8 million, $12.6 million, $9.9 million, $6.5 million and $9.6
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 Banks loan portfolio comprised of commercial and multi-family real
estate loans and commercial loans and to decrease the percentage of the Banks
loan portfolio comprised of one- to four-family residential mortgage loans
although, at December 31, 2003, residential mortgage loans still constituted
41% of the Banks loan portfolio. Maturity of Loan Portfolio.The following table presents the dollar amount of
loans maturing in Citizens Firsts portfolio at December 31, 2003 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 allowance for loan losses. December 31, 2003CommercialOne- to
    
    and
    
    
    
    
    
    Home EquityFour-
    
    Multi-Family
    
    Residential
    
    Loans and
    
    
    
    
    
    
    
    
    
    TotalFamily
    
    Real Estate
    
    Construction
    
    Lines of Credit
    
    Consumer
    
    Commercial
    
    LoansAmounts due in:One year or less
    
    $
    18,442
    
    
    $
    42,676
    
    
    $
    24,996
    
    
    $
    6,745
    
    
    $
    21,562
    
    
    $
    63,337
    
    
    $
    177,758More than one year to five
    
    
    18,504
    
    
    
    134,506
    
    
    
    
    
    
    
    49,013
    
    
    
    61,274
    
    
    
    40,699
    
    
    
    303,996More than five years
    
    
    349,585
    
    
    
    63,915
    
    
    
    
    
    
    
    29,613
    
    
    
    14,504
    
    
    
    3,706
    
    
    
    461,323Total amount due
    
    $
    386,531
    
    
    $
    241,097
    
    
    $
    24,996
    
    
    $
    85,371
    
    
    $
    97,340
    
    
    $
    107,742
    
    
    $
    943,077
 7




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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 Citizens First 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 lower than rates on
existing mortgage loans in Citizens Firsts portfolio, which suggests that the
average lives of these mortgage loans may be lower than might otherwise have
been expected. The following table sets forth, at December 31, 2003, the dollar amount of
loans contractually due after December 31, 2003, and whether such loans have
fixed interest rates or adjustable interest rates (000s omitted). Due After December 31, 2003Fixed
    
    Adjustable
    
    TotalReal estate loans:One- to four-family
    
    $
    85,040
    
    
    $
    301,491
    
    
    $
    386,531Residential construction
    
    
    18,525
    
    
    
    6,471
    
    
    
    24,996Commercial and multi-family real estate
    
    
    103,672
    
    
    
    137,425
    
    
    
    241,097Home equity
    
    
    56,865
    
    
    
    28,506
    
    
    
    85,371Total real estate loans
    
    
    264,102
    
    
    
    473,893
    
    
    
    737,995Consumer loans
    
    
    92,611
    
    
    
    4,729
    
    
    
    97,340Commercial loans
    
    
    46,351
    
    
    
    61,391
    
    
    
    107,742Total loans
    
    $
    403,064
    
    
    $
    540,013
    
    
    $
    943,077
 TYPES OF LOANS. Currently, Citizens First originates one- to four-family
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 other consumer loans. Set forth below is a
general description of some of Citizens Firsts current policies and practices
with regard to some of these types of loans. Although Citizens First 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. Citizens Firsts primary
lending activity is the origination of loans secured by one- to four-family
residences generally located in its market area. At December 31, 2003, one- to
four-family residential mortgage loans totaled $386.5 million or 41.0% of
Citizens Firsts total loans. Citizens First currently offers various types
of adjustable-rate mortgage loans and fixed-rate mortgage loans. At December
31, 2003, 22% of the dollar amount of loans in Citizens Firsts residential
mortgage loan portfolio had fixed interest rates and 78.0% of the dollar amount
of loans in its residential mortgage loan portfolio had adjustable interest
rates. Citizens First originates fixed-rate, fully-amortizing residential
mortgage loans with maturities of 10, 15, 20 and 30 years. The Bank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. Citizens First offers mortgage loans that
generally conform to Freddie Mac guidelines, as well as jumbo loans, which,
according to these guidelines, presently means loans in amounts over $322,700.
Fixed-rate conforming loans are typically originated for sale in the secondary
market, although Citizens First generally retains the servicing rights.
Citizens First will underwrite one- to four-family owner-occupied residential
mortgage loans in amounts equal to 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, Citizens First
will originate loans that constitute 103% of the appraised value of the
underlying real estate for sale in the secondary market, although Citizens
generally retains the servicing rights. Citizens First also offers a 7 year balloon mortgage loan. A 7 year
balloon mortgage loan requires a fixed monthly payment for the first 7 years,
at which point the entire remaining balance of the loan becomes due. Citizens
First currently also offers adjustable-rate residential mortgage loans with
terms of up to 30 years. The interest rates on adjustable-rate loans are based
on the U.S. Treasury securities index. The interest rates on these loans adjust
annually after a 1, 3, 5 or 7 year initial fixed period. The maximum amount by
which the interest rate may be increased or decreased on such loans is
generally 2% per year and 5% over the life of the loan. Additionally, Citizens
First offers an adjustable-rate residential mortgage loan in which the borrower
has the option to convert the loan to a fixed rate after a predetermined period
of time, without incurring refinancing costs. Adjustable-rate mortgage loans help reduce Citizens Firsts exposure to
changes in interest rates because the interest rate paid by Citizens First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 8




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##### Table of Contents



unquantifiable credit risks. Accordingly, if interest rates rise, and
mortgage payments are repriced at increased amounts, the risk of default on
adjustable-rate mortgage loans increases as well. In addition, although
adjustable-rate mortgage loans increase the responsiveness of Citizens First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 Citizens Firsts cost of funds during periods
of rising interest rates. Citizens First requires properties securing its mortgage loans to be
appraised by an approved independent state-licensed appraiser. Citizens First
also requires fire, casualty, title, hazard and, if appropriate, flood
insurance to be maintained on most properties securing real estate loans
originated by Citizens First. In an effort to provide financing for low- and
moderate-income families, Citizens First 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. RESIDENTIAL CONSTRUCTION LOANS.Citizens First originates construction loans to
individuals for the construction of one- to four-family residences. At December
31, 2003, residential construction loans totaled $25.0 million or 2.65% of
Citizens Firsts total loans. Citizens First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 Citizens Firsts one- to
four-family mortgage loans. Citizens First also originates residential
construction loans to certain builders with which Citizens First has an
established relationship. Before making a commitment to fund a construction loan, Citizens First
requires an appraisal of the property by an independent licensed appraiser.
Citizens First also reviews and inspects each property before disbursing funds.
Loan proceeds are disbursed in pre-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 Bank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,
Citizens First 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. COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. Citizens First also originates
commercial real estate loans. These loans are generally secured by properties
located in Citizens Firsts primary market area and used for business purposes,
such as small office buildings, industrial facilities or retail facilities.
Citizens First also, to a lesser extent, originates multi-family real estate
loans that are typically secured by 5-unit or larger apartment buildings in
Citizens Firsts primary market area. At December 31, 2003, commercial and
multi-family real estate loans totaled $241.1 million or 25.6% of Citizens
Firsts total loans. Most of the commercial and multi-family real estate loans originated by
Citizens First are fully amortizing loans with terms of up to 20 years.
Generally, the maximum loan amount Citizens First 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, Citizens
First 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, Citizens First will also consider the terms of the
applicable leases and the quality of the tenants. Citizens First has generally
required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of
between 1.10x and 1.30x. Citizens First generally requires written appraisals prepared by a
certified independent appraiser of all properties securing commercial or
multi-family real estate loans of greater than $250,000 or if an appraisal is
required by the Financial Institutions Reform, Recovery and Enforcement Act.
Additionally, environmental surveys are usually required before Citizens First
funds certain larger commercial real estate loans in excess of $1.0 million and
may be required on commercial real estate loans of greater than $500,000 or
where a risk of contamination exists. Citizens First 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 Citizens First initially
approves the construction loan. Disbursement of funds is at the sole discretion
of Citizens First and is based on the progress of construction. The maximum
loan- 9




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##### Table of Contents



to-value ratio for these loans permitted by Citizens First 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 Citizens First 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. Citizens First 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. HOME EQUITY LOANS AND LINES OF CREDIT. Citizens First offers home equity
loans and lines of credit secured by owner-occupied one- to four-family
residences. At December 31, 2003, home equity loans and lines of credit totaled
$85.4 million or 9.1% of Citizens Firsts total loans. Additionally, at
December 31, 2003, the unadvanced amounts of home equity lines of credit
totaled $31.7 million. Unadvanced amounts of home equity loans are not shown as
liabilities on the Companys balance sheet. For more information about Citizens
Firsts commitments, including commitments to make advances on home equity
lines of credit, see Note 13 to the Companys Consolidated Financial
Statements. The underwriting standards employed by Citizens First 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. Home equity loans generally will not be made if the
borrowers outstanding monthly debt exceeds 40% of the borrowers gross monthly
income. 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%. Home equity lines of credit are generally made in
amounts of up to $500,000. 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. CONSUMER LOANS. Citizens First offers a variety of consumer loans,
including automobile loans, mobile home loans, other secured loans, collateral
loans, personal loans and unsecured loans. At December 31, 2003, consumer loans
totaled $97.3 million or 10.3% of Citizens Firsts total loans. Citizens First
offers fixed-rate automobile loans with terms of up to 72 months. These loans
are offered on a direct basis, meaning the Bank makes the loan directly to the
consumer purchasing the automobile, and on an indirect basis, which is
described in more detail below. Citizens First 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 Citizens
First offers on these loans depend on the age of the automobile, market
conditions and current market interest rates. In March 1999, Citizens First commenced an indirect consumer lending
program. Under this program, Citizens First originates automobile loans through
approximately 46 automobile dealers in its primary market area. These dealers
provide Citizens First applications made by consumers to finance new (and, to a
lesser extent, used) vehicles sold by their dealerships. Citizens First has the
opportunity to accept or reject each loan. Generally, Citizens First 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 Citizens
First 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. Citizens First also originates consumer loans secured by mobile homes.
Historically, these loans were primarily originated indirectly through dealer
relationships, similar to the arrangements currently in place with automobile
dealers described above. In recent years, however, management has decided to
stop originating these loans on an indirect basis. At December 31, 2003 and
December 31, 2002, outstanding mobile home loans were in the amounts of $9.1
million, or 9.4% of consumer loans, and $8.3 million, or 10.8% of consumer
loans, respectively. Citizens First originates loans on new or used (up to 15
years old) mobile homes, with terms ranging from 7 to 15 years and with fixed
interest rates. Citizens First generally will finance up to a maximum of 90% of
either the purchase price of the mobile home unit or the retail value as stated
in the NADA book, whichever is less. 10




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Citizens First 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. Citizens First 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. Citizens First 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. Citizens First 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 Citizens First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. COMMERCIAL LOANS. Citizens First makes commercial business loans primarily
in its market area to a variety of professionals, sole proprietorships and
small businesses. Citizens First 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, Citizens First originates Small Business
Administration-guaranteed loans. At December 31, 2003, commercial loans totaled
$107.7 million or 11.4% of Citizen Firsts total loans. Citizens First 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.
Citizens First 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 Citizens Firsts
commitments, including unadvanced amounts of commercial loans and commercial
loan commitments, see Note 13 to the Companys Consolidated Financial
Statements. When making commercial business loans, Citizens First considers the
financial statements of the borrower, Citizens First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. Residential mortgage loans generally are made on the basis of the
borrowers ability to make repayment from employment or other income and are
secured by real property for which the value can be easily ascertained.
Commercial loans, on the other hand, 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 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. LOANS TO ONE BORROWER. The maximum amount that Citizens First may lend to
one borrower is limited by regulation. At December 31, 2003, Citizens Firsts
regulatory limit on loans to one borrower was $12.9 million or $21.5 million
for loans approved by two-thirds of the Board of Directors. At that date,
Citizens Firsts largest amount of outstanding loans to one borrower, including
the borrowers related interests, was approximately $20.7 million and consisted
of ten commercial, industrial and retail properties. These loans were
previously approved by the Banks Board of Directors. Additionally, at December
31, 2003, Citizens Firsts largest outstanding commitment to one borrower was
approximately $20.9 million, approximately $20.7 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 11




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terms at December 31, 2003. 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. LOAN APPROVAL PROCEDURES AND AUTHORITY. Citizens Firsts lending
activities follow written, non-discriminatory underwriting standards and loan
origination procedures established by Citizens Firsts Board of Directors and
management. Although subject to change and deviation or exception from time to
time as determined appropriate by management, the current guidelines are
generally as follows:  
    
    Residential real estate loans in amounts of greater than $700,000 but
less than $1.0 million require the approval of the Banks Mortgage Loan
Committee, which consists of the President and Chief Executive Officer
of the Bank, Senior Vice President  Retail Banking, a Vice President
and an Assistant Vice President.
    
    Residential real estate loans in amounts of between $1.0 million and
$2.0 million require approval of the Officers Credit Committee, which
consists of the President and Chief Executive Officer of the Bank, the
Senior Vice President  Commercial Banking, certain commercial officers
and other officers as designated.
    
    Loans in amounts in excess of $2.0 million require approval of the
Directors Loan Committee, which consists of three directors of the
Bank, the President and Chief Executive Officer of the Bank and the
Senior Vice President  Commercial Banking of the Bank.
    
    The President and Chief Executive Officer of the Bank has been
delegated the authority to approve any real estate loan up to $700,000.
    
    Consumer loans in amounts in excess of $1.0 million, but less than
$3.0 million require approval of two outside Directors, and loans of
$3.0 million or more require approval of the entire Board of Directors
of the Bank.
    
    The President and Chief Executive Officer may individually approve
any consumer loan in an amount of up to $700,000.
    
    All commercial and commercial real estate loans in amounts in excess
of $5.0 million require approval of the Board of Directors of the Bank.
    
    Commercial and commercial real estate loans in amounts between $2.0
and $5.0 million require the approval of the Directors Loan Committee.
    
    Commercial and commercial real estate loans in amounts between
$500,000 and $2.0 million require the approval of the Officers Credit
Committee. LOAN ORIGINATIONS, PURCHASES AND SALES. Citizens First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 Citizens Firsts indirect automobile lending,
Citizens First relies on advertising, referrals from realtors and customers and
personal contact by Citizens Firsts staff to originate loans. Other than the
automobile dealerships previously discussed, Citizens First does not use loan
correspondents or other third parties to originate loans. Citizens First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 under Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations. Generally, fixed-rate loans that conform to the underwriting standards
specified by Freddie Mac are originated by Citizens First for sale in the
secondary market to Freddie Mac and, to a lesser extent, private investors.
Additionally, Citizens First may in the future sell loans in the secondary
market to Fannie Mae although, to date, no loans have been sold to Fannie Mae.
Citizens First generally retains the servicing rights on the loans sold in the
secondary market, meaning that Citizens First receives payments and other
collections on these loans and administers these loans in exchange for a
servicing or administrative fee. Citizens First currently has a best efforts
contract with a third party under which Citizens First must use its best
efforts to provide the third party with loans for sale. Citizens First is not
required under this contract to replace loans that fail to close for any
reason. Additionally, Citizens First has entered into forward contracts with
Freddie Mac in the past, under which Freddie Mac commits to purchase certain
loans from the Bank. At December 31, 2003, Citizens First had outstanding
forward contracts, all of which were with Freddie Mac, to sell loans of
approximately $5.8 million. Under these forward contracts, Freddie Mac is
generally required to purchase these loans in the future from Citizens First,
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 Citizens First if the borrower defaults.
Citizens First 12




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##### Table of Contents



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, Citizens Firsts liquidity needs and Citizens
Firsts interest rate risk position. The following table sets forth Citizens Firsts loan originations, sales
and principal repayments for the periods indicated: For the NineFor the Year Ended
    
    Months Ended
    
    For the Year EndedDecember 31,
    
    December 31,
    
    March 31,2003
    
    2002
    
    2002(In thousands)Loans at beginning of period
    
    $
    831,815
    
    
    $
    748,202
    
    
    $
    684,875Originations:Real estate:One- to four-family
    
    
    443,664
    
    
    
    347,097
    
    
    
    187,765Commercial and multi-family real estate
    
    
    114,103
    
    
    
    59,174
    
    
    
    41,078Residential construction
    
    
    31,194
    
    
    
    37,044
    
    
    
    50,045Home equity loans and lines of credit
    
    
    65,820
    
    
    
    16,856
    
    
    
    43,911Total real estate loans
    
    
    654,781
    
    
    
    460,171
    
    
    
    322,799Consumer
    
    
    41,568
    
    
    
    30,985
    
    
    
    35,834Commercial
    
    
    65,571
    
    
    
    43,628
    
    
    
    107,293Total loans originated
    
    
    761,920
    
    
    
    534,784
    
    
    
    465,926Deduct:Principal loan repayments and prepayments
    
    
    325,698
    
    
    
    263,129
    
    
    
    212,816Loan sales
    
    
    324,960
    
    
    
    188,042
    
    
    
    189,783Sub-total
    
    
    650,658
    
    
    
    451,171
    
    
    
    402,599Net loan activity
    
    
    111,262
    
    
    
    83,613
    
    
    
    63,327Loans at end of period(1)
    
    $
    943,077
    
    
    $
    831,815
    
    
    $
    748,202
   (1)
    
    Loans at end of period include loans in process of $1.6 million, $13.7
million and $13.7 million for fiscal years 2003, 2002 and 2001,
respectively. Loan Commitments.Citizens First 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. At December 31, 2003, Citizens First had loan
commitments and unadvanced loans and lines of credit totaling $217.4 million.
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 Citizens Firsts loan commitments and unadvanced loans
and lines of credit, see Note 13 of 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, Citizens First 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 the
Companys Consolidated Financial Statements. Citizens First 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 recognized as charges against
income over the contractual remaining lives of the related loans on a level
yield basis. At December 31, 2003, Citizens First had $2.2 million of net
deferred loan fees. Nonperforming Assets and Delinquencies.When a borrower fails to make a
required loan payment, Citizens First attempts to cure the delinquency by
contacting the borrower and seeking the payment. A late notice is mailed after
16 days of delinquency for residential mortgage loans. In most cases,
deficiencies are cured promptly. If a late notice does not prompt the borrower
to cure the delinquency, Citizens First will attempt to contact the borrower
either by telephone, letter or in person in order to determine the cause 13




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of the delinquency and to arrange for curing of the default. Generally, after
the 90th day of delinquency, Citizens First commences foreclosure proceedings
under the terms of the loan documents and applicable law. 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. Citizens First
supplements the late notice with a separately-mailed letter and a telephone
call to the borrower. Additional contact and correspondence continues until the
90th day of the delinquency, at which point Citizens First may take action to
repossess the property securing the loan or implement other collection efforts.
Management informs the Boards of Directors of the Bank and 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 Citizens First owns. Citizens First ceases accruing interest on loans when principal or interest
payments are delinquent 90 days or more, unless the loan is adequately
collateralized and is in the process of collection. 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 nonaccrual status or charged
against income at an earlier date. The following table provides information at
the dates indicated regarding various non-accruing loans in Citizens Firsts
loan portfolio and regarding real estate owned by the Bank: December 31,
    
    
    
    
    
    March 31,2003
    
    2002
    
    2002
    
    2001
    
    2000(Dollars in thousands)Non-accruing loans:Real estate
    
    $
    3,268
    
    
    $
    1,876
    
    
    $
    1,437
    
    
    $
    1,156
    
    
    $
    954Consumer
    
    
    452
    
    
    
    182
    
    
    
    61
    
    
    
    220
    
    
    
    64Commercial
    
    
    195
    
    
    
    356
    
    
    
    295
    
    
    
    434
    
    
    
    228Total (1)
    
    
    3,915
    
    
    
    2,414
    
    
    
    1,793
    
    
    
    1,810
    
    
    
    1,246Real estate owned (2)
    
    
    443
    
    
    
    353
    
    
    
    953
    
    
    
    282
    
    
    
    80Total nonperforming assets
    
    $
    4,358
    
    
    $
    2,767
    
    
    $
    2,746
    
    
    $
    2,092
    
    
    $
    1,326Total nonperforming loans as a percentage of total loans
    
    
    0.47
    %
    
    
    0.29
    %
    
    
    0.24
    %
    
    
    0.26
    %
    
    
    0.21
    %Total nonperforming loans as a percentage of total assets
    
    
    0.40
    %
    
    
    0.24
    %
    
    
    0.19
    %
    
    
    0.21
    %
    
    
    0.17
    %
   (1)
    
    Total non-accruing loans equals total nonperforming loans.(2)
    
    Real estate owned balances are shown net of related loss allowances and
include repossessed automobiles, which at December 31, 2003, totaled
$63,000. Interest income that would have been recorded for the year ended December
31, 2003 had nonaccruing loans been current according to their original terms
amounted to approximately $100,200. Interest related to these loans was not
included in interest income for the year ended December 31, 2003. 14




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The following table sets forth the delinquencies in Citizens Firsts loan
portfolio as of the dates indicated. December 31, 2003
    
    
    
    
    
    December 31, 200260-89 Days
    
    90 Days or More
    
    60-89 Days
    
    90 Days or MoreNumber
    
    Principal
    
    Number
    
    Principal
    
    Number
    
    Principal
    
    Number
    
    Principalof
    
    Balance of
    
    of
    
    Balance of
    
    of
    
    Balance of
    
    of
    
    Balance ofLoans
    
    Loans
    
    Loans
    
    Loans
    
    Loans
    
    Loans
    
    Loans
    
    LoansReal estate loans:One- to four-family
    
    
    27
    
    
    $
    2,632
    
    
    
    25
    
    
    $
    2,506
    
    
    
    12
    
    
    $
    1,114
    
    
    
    14
    
    
    $
    1,575Commercial real estate
    
    
    2
    
    
    
    290
    
    
    
    2
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    301Consumer loans:Home equity loans and lines of credit
    
    
    2
    
    
    
    97
    
    
    
    8
    
    
    
    84
    
    
    
    29
    
    
    
    385
    
    
    
    7
    
    
    
    116Other Consumer loans
    
    
    39
    
    
    
    303
    
    
    
    27
    
    
    
    328
    
    
    
    31
    
    
    
    270
    
    
    
    8
    
    
    
    66Commercial loans
    
    
    1
    
    
    
    91
    
    
    
    2
    
    
    
    86
    
    
    
    3
    
    
    
    101
    
    
    
    3
    
    
    
    356Total
    
    
    71
    
    
    $
    3,413
    
    
    
    68
    
    
    $
    3,915
    
    
    
    75
    
    
    $
    1,870
    
    
    
    34
    
    
    $
    2,414Delinquent loans to total loans
    
    
    
    
    
    
    0.36
    %
    
    
    
    
    
    
    0.47
    %
    
    
    
    
    
    
    0.25
    %
    
    
    
    
    
    
    0.32
    %
 At March 31, 200260-89 Days
    
    90 Days or MoreNumber
    
    Principal
    
    Number
    
    Principalof
    
    Balance of
    
    of
    
    Balance ofLoans
    
    Loans
    
    Loans
    
    LoansReal estate loans:One- to four-family
    
    
    18
    
    
    $
    2,263
    
    
    
    10
    
    
    $
    1,161Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential construction
    
    
    3
    
    
    
    401
    
    
    
    2
    
    
    
    276Consumer loans:Home equity loans and lines of credit
    
    
    4
    
    
    
    130
    
    
    
    
    
    
    
    Other Consumer loans
    
    
    13
    
    
    
    109
    
    
    
    8
    
    
    
    61Commercial loans
    
    
    2
    
    
    
    888
    
    
    
    2
    
    
    
    295Total
    
    
    40
    
    
    $
    3,791
    
    
    
    22
    
    
    $
    1,793Delinquent loans to total loans
    
    
    
    
    
    
    0.51
    %
    
    
    
    
    
    
    0.24
    %
 Real Estate Owned.Real estate acquired by Citizens First 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 Bank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. This recordation establishes a new
cost basis. Holding costs and declines in fair value after acquisition of the
property may result in charges against Citizens Firsts income. At December 31,
2003, Citizens First had approximately $443,000 in real estate owned, which
consisted of 4 one-to four-family residences, 1 vacant parcel of land and
$63,000 of repossessed automobiles. Asset Classification.Bank regulators have adopted various regulations and
practices regarding problem assets of savings 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. Citizens Firsts Directors Loan Committee, which consists of the
President and Chief Executive Officer of the Bank, two outside directors and
the Senior Vice President  Commercial Banking, classifies assets on a monthly
basis based upon delinquency reports, assets held by Citizens First 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 Citizens as special mention. Citizens First monitors
special mention assets. 15




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##### Table of Contents



The following table sets forth the Banks classified assets at December 31, 2003. Loss
    
    Doubtful
    
    Substandard
    
    Special MentionNumber
    
    
    
    Number
    
    
    
    Number
    
    
    
    Numberof
    
    Principal
    
    of
    
    Principal
    
    of
    
    Principal
    
    of
    
    PrincipalLoans
    
    Balance
    
    Loans
    
    Balance
    
    Loans
    
    Balance
    
    Loans
    
    Balance(Dollars in thousands)Real estate loans:One- to four-family
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    29
    
    
    $
    3,268
    
    
    
    
    
    
    $
    Commercial and multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    195
    
    
    
    3
    
    
    
    1,779Residential construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Home equity
loans and lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vehicles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    120
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    137
    
    
    
    
    
    
    
    Commercial loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    195
    
    
    
    8
    
    
    
    2,802Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    68
    
    
    $
    3,915
    
    
    
    11
    
    
    $
    4,581
 Allowance for Loan Losses.Citizens First 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 Banks loan portfolio, the Bank
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 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 Citizens Firsts allowance for
loan losses and requiring changes in the allowance. Because the estimates and
assumptions underlying Citizens First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 Citizens
First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 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 Banks loan
loss allowance. The Bank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, Citizens First
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 Bank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 16




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##### Table of Contents



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. 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 Citizens First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 Banks loan loss allowance. Recent Adjustments to Loan Loss Allowance. During the year ended December
31, 2003, management reevaluated its loan loss allowance methodology in
recognition of Citizens Firsts strategy of increasing multi-family real
estate, commercial real estate, commercial and consumer (particularly indirect
automobile) loans and the overall increase in the risk inherent in a loan
portfolio with an increased amount of these loans. Management determined that
the loss factors applied to commercial real estate, commercial and consumer
loans should be increased. As a result, management maintained the loan loss
allowance at a level of $11.7 million, or 1.24% of total loans, at December 31,
2003. Possible Future Adjustments to Loan Loss Allowance.No assurances can be
given that Citizens Firsts level of allowance for loan losses will be
sufficient to cover future loan losses incurred by Citizens First 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, Citizens First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
Citizens Firsts loan portfolio, will request that Citizens First increase its
allowance for loan losses. Citizens First believes, however, that it has
established its existing loan loss allowance in conformity with generally
accepted accounting principles. These agencies could, nevertheless, require
Citizens First 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 Citizens Firsts allowance for loan losses can be
found in Note 1 to the Companys Consolidated Financial Statements and in the
section captioned Critical Accounting Policies under Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations. 17




---



##### Table of Contents



The following table presents an analysis of Citizens Firsts allowance for
loan losses (000s omitted). For the NineYear Ended
    
    Months Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    
    
    March 31,2003
    
    2002
    
    2002
    
    2001
    
    2000Allowance for loan losses, beginning of year
    
    $
    11,082
    
    
    $
    11,020
    
    
    $
    10,831
    
    
    $
    10,461
    
    
    $
    11,161Charged-off loans:Real estate
    
    
    (15
    )
    
    
    (56
    )
    
    
    (12
    )
    
    
    (5
    )
    
    
    (5
    )Consumer
    
    
    (755
    )
    
    
    (498
    )
    
    
    (870
    )
    
    
    (342
    )
    
    
    (230
    )Commercial
    
    
    (325
    )
    
    
    (548
    )
    
    
    (291
    )
    
    
    (142
    )
    
    
    Total charged-off loans
    
    
    (1,095
    )
    
    
    (1,102
    )
    
    
    (1,173
    )
    
    
    (489
    )
    
    
    (235
    )Recoveries on loans previously charged off:Real estate
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    6Consumer
    
    
    154
    
    
    
    242
    
    
    
    263
    
    
    
    23
    
    
    
    12Commercial
    
    
    83
    
    
    
    29
    
    
    
    103
    
    
    
    56
    
    
    
    Total recoveries
    
    
    237
    
    
    
    272
    
    
    
    366
    
    
    
    79
    
    
    
    18Net loans charged-off
    
    
    (858
    )
    
    
    (830
    )
    
    
    (807
    )
    
    
    (410
    )
    
    
    (217
    )Provision for loan losses
    
    
    1,440
    
    
    
    892
    
    
    
    996
    
    
    
    780
    
    
    
    (483
    )Allowance for loan losses, end of period
    
    $
    11,664
    
    
    $
    11,082
    
    
    $
    11,020
    
    
    $
    10,831
    
    
    $
    10,461Net loans charged-off to average interest-earning loans
    
    
    0.10
    %
    
    
    0.10
    %
    
    
    0.11
    %
    
    
    0.06
    %
    
    
    0.04
    %Allowance for loan losses to total loans
    
    
    1.24
    %
    
    
    1.33
    %
    
    
    1.47
    %
    
    
    1.58
    %
    
    
    1.80
    %Allowance for loan losses to nonperforming loans
    
    
    309.72
    %
    
    
    459.07
    %
    
    
    614.61
    %
    
    
    598.40
    %
    
    
    839.57
    %Net loans charged-off to allowance for loan losses
    
    
    7.36
    %
    
    
    7.49
    %
    
    
    7.32
    %
    
    
    3.79
    %
    
    
    2.07
    %Recoveries to charge-offs
    
    
    21.64
    %
    
    
    24.68
    %
    
    
    31.20
    %
    
    
    16.16
    %
    
    
    7.66
    %
 18




---



##### Table of Contents



The following table presents the approximate allocation of the allowance
for loan losses by loan category at the dates indicated. Management believes
that the allowance can be allocated by category only on an approximate basis.
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 (000s omitted). December 31,
    
    December 31,2003
    
    2002% of
    
    Percent
    
    
    
    
    
    % of
    
    PercentAllowance
    
    of Loans
    
    
    
    
    
    Allowance
    
    of Loansin each
    
    in Each
    
    
    
    
    
    in each
    
    in EachCategory
    
    Category
    
    
    
    
    
    Category
    
    Categoryto Total
    
    to Total
    
    
    
    
    
    to Total
    
    to TotalAmount
    
    Allowance
    
    Loans
    
    Amount
    
    Allowance
    
    LoansReal estate
    
    $
    5,493
    
    
    
    47.09
    %
    
    
    78.27
    %
    
    $
    5,286
    
    
    
    47.71
    %
    
    
    82.82
    %Consumer
    
    
    3,527
    
    
    
    30.24
    %
    
    
    10.31
    %
    
    
    4,205
    
    
    
    37.94
    %
    
    
    9.93
    %Commercial
    
    
    1,922
    
    
    
    16.48
    %
    
    
    11.42
    %
    
    
    1,020
    
    
    
    9.20
    %
    
    
    7.25
    %Unallocated
    
    
    722
    
    
    
    6.19
    %
    
    
    
    
    
    
    571
    
    
    
    5.15
    %
    
    
    Total allowance for loan losses
    
    $
    11,664
    
    
    
    100.00
    %
    
    
    100.00
    %
    
    $
    11,082
    
    
    
    100.00
    %
    
    
    100.00
    %
 March 31,
    
    March 31,2002
    
    2001% of
    
    Percent
    
    
    
    
    
    % of
    
    PercentAllowance
    
    of Loans
    
    
    
    
    
    Allowance
    
    of Loansin each
    
    in Each
    
    
    
    
    
    in each
    
    in EachCategory
    
    Category
    
    
    
    
    
    Category
    
    Categoryto Total
    
    to Total
    
    
    
    
    
    to Total
    
    to TotalAmount
    
    Allowance
    
    Loans
    
    Amount
    
    Allowance
    
    LoansReal estate
    
    $
    4,980
    
    
    
    45.19
    %
    
    
    84.12
    %
    
    $
    5,425
    
    
    
    50.09
    %
    
    
    86.78
    %Consumer
    
    
    4,130
    
    
    
    37.48
    %
    
    
    10.25
    %
    
    
    4,082
    
    
    
    37.69
    %
    
    
    9.90
    %Commercial
    
    
    1,096
    
    
    
    9.95
    %
    
    
    5.63
    %
    
    
    845
    
    
    
    7.80
    %
    
    
    3.32
    %Unallocated
    
    
    814
    
    
    
    7.38
    %
    
    
    
    
    
    
    479
    
    
    
    4.42
    %
    
    
    Total allowance for loan losses
    
    $
    11,020
    
    
    
    100.00
    %
    
    
    100.00
    %
    
    $
    10,831
    
    
    
    100.00
    %
    
    
    100.00
    %
 March 31,2000% of
    
    PercentAllowance
    
    of Loansin each
    
    in EachCategory
    
    Categoryto Total
    
    to TotalAmount
    
    Allowance
    
    LoansReal estate
    
    $
    5,717
    
    
    
    54.65
    %
    
    
    87.29
    %Consumer
    
    
    3,120
    
    
    
    29.83
    %
    
    
    9.47
    %Commercial
    
    
    784
    
    
    
    7.49
    %
    
    
    3.24
    %Unallocated
    
    
    840
    
    
    
    8.03
    %
    
    
    Total allowance for loan losses
    
    $
    10,461
    
    
    
    100.00
    %
    
    
    100.00
    %
 Investment Securities Activities Under Michigan law and regulation, Citizens First has authority to purchase a
wide range of investment securities. Under federal banking law, however,
financial institutions such as Citizens First generally may not invest in
investment securities that are not permissible for investment by a national
bank. Citizens Firsts Board of Directors has the overall responsibility for Citizens
First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 Citizens Firsts
investment policy and the recommendations of Citizens Firsts Investment
Committee and is primarily responsible for daily investment activities. The primary objectives of Citizens Firsts investment portfolio are to provide
the liquidity necessary to meet Citizens First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 19




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##### Table of Contents



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 Citizens Firsts cash and
borrowed funds position; the quality, maturity, stability and earnings of
loans; the nature and stability of deposits; and Citizens Firsts excess
capital. Under Citizens Firsts current investment policy, its investment portfolio
should be composed of investments in marketable obligations in the form of
bonds, 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. Citizens First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. Citizens Firsts investment policy limits investments in
non-U.S. Treasury securities to no more than five percent of the value of
Citizens First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 Citizens Firsts capital, surplus, and subordinated notes and
debentures. Citizens First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. Citizens First 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. Citizens First
currently classifies all of its securities as available for sale. At December 31, 2003, Citizens First did not own any securities that had an
aggregate book value in excess of 10% of Citizens First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 Citizens Firsts securities at the dates indicated (000s
omitted). December 31,
    
    December 31,
    
    March 31,2003
    
    2002
    
    2002Amortized
    
    Fair
    
    Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    Value
    
    Cost
    
    ValueDebt securities available-for-sale:Obligations of U.S. Treasury and
U.S. government agencies
    
    $
    7,998
    
    
    $
    8,013
    
    
    $
    10,389
    
    
    $
    10,775
    
    
    $
    19,586
    
    
    $
    20,388Obligations of state and political subdivisions
    
    
    17,863
    
    
    
    18,611
    
    
    
    14,149
    
    
    
    15,049
    
    
    
    14,056
    
    
    
    14,568Corporate Securities
    
    
    47,880
    
    
    
    48,263
    
    
    
    65,223
    
    
    
    64,720
    
    
    
    74,126
    
    
    
    73,874Mortgaged-backed Securities
    
    
    
    
    
    
    
    
    
    
    5,131
    
    
    
    5,163
    
    
    
    4,878
    
    
    
    4,932Total
    
    
    73,741
    
    
    
    74,887
    
    
    
    94,892
    
    
    
    95,707
    
    
    
    112,646
    
    
    
    113,762Equity securities available-for-sale:
    
    
    5,002
    
    
    
    4,785
    
    
    
    5,002
    
    
    
    4,675
    
    
    
    5,002
    
    
    
    4,785Total debt and equity securities
    
    $
    78,743
    
    
    $
    79,672
    
    
    $
    99,894
    
    
    $
    100,382
    
    
    $
    117,648
    
    
    $
    118,547
 20




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##### Table of Contents



The following table sets forth Citizens Firsts securities activities for
the periods indicated (000s omitted). For The NineFor the Year Ended
    
    Months Ended
    
    For the Year EndedDecember 31,
    
    December 31,
    
    March 31,2003
    
    2002
    
    2002Securities:Securities, beginning of period
    
    $
    100,382
    
    
    $
    118,547
    
    
    $
    96,053Purchases
    
    
    53,964
    
    
    
    12,070
    
    
    
    128,623Sales
    
    
    (25,990
    )
    
    
    (6,853
    )
    
    
    (35,040
    )Maturities
    
    
    (48,867
    )
    
    
    (22,744
    )
    
    
    (70,290
    )(Amortization) accretion
    
    
    (259
    )
    
    
    (228
    )
    
    
    407Increase (decrease) in unrealized gain
    
    
    442
    
    
    
    (410
    )
    
    
    (1,206
    )Net increase (decrease) in investment securities
    
    
    (20,710
    )
    
    
    (18,165
    )
    
    
    22,494Securities, end of period
    
    $
    79,672
    
    
    $
    100,382
    
    
    $
    118,547
 At December 31, 2003More than One Year
    
    More than Five YearsOne Year or Less
    
    to Five Years
    
    to Ten YearsWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedCarrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    AverageValue
    
    Yield
    
    Value
    
    Yield
    
    Value
    
    YieldAvailable-for-sale securities:Municipal securities (1)
    
    $
    1,833
    
    
    
    4.78
    %
    
    $
    5,364
    
    
    
    4.75
    %
    
    $
    8,952
    
    
    
    4.47
    %Obligations of the U.S.
Treasury and government agencies and corporation
    
    
    8,013
    
    
    
    7.21
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporates
    
    
    13,455
    
    
    
    5.71
    %
    
    
    25,149
    
    
    
    4.30
    %
    
    
    5,025
    
    
    
    4.16Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total securities at fair value
    
    $
    23,301
    
    
    
    5.9.
    %
    
    $
    30,513
    
    
    
    4.42
    %
    
    $
    13,977
    
    
    
    3.64
    %
 At December 31, 2003More than Ten Years
    
    Equity
    
    TotalWeighted
    
    
    
    
    
    
    
    
    
    WeightedCarrying
    
    Average
    
    Carrying
    
    Carrying
    
    AverageValue
    
    Yield
    
    Value
    
    Value
    
    YieldAvailable-for-sale securities:Municipal securities (1)
    
    $
    2,462
    
    
    
    4.17
    %
    
    $
    
    
    
    $
    18,611
    
    
    
    3.13
    %Obligations of the U.S.
Treasury and government agencies and corporation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,013
    
    
    
    5.30
    %Corporates
    
    
    4,634
    
    
    
    6.72
    %
    
    
    
    
    
    
    48,263
    
    
    
    4.51
    %Equity securities
    
    
    
    
    
    
    
    
    
    
    4,785
    
    
    
    4,785
    
    
    
    Total securities at fair value
    
    $
    7,096
    
    
    
    5.83
    %
    
    $
    4,785
    
    
    $
    79,672
    
    
    
    3.98
    %
   (1)
    
    Weighted average yield data for municipal securities is presented on a
tax equivalent basis based on an assumed tax rate of 35%. Deposit Activities and Other Sources of Funds. GENERAL. Deposits are the major external source of funds for Citizens Firsts
lending and other investment activities. In addition, Citizens First 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 flows, loan
prepayments, and mortgage loan originations and sales are greatly influenced by
general interest rates, economic conditions and competition. Citizens First may
use borrowings from the Federal Home Loan Bank of Indianapolis to compensate
for 21




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##### Table of Contents



any reductions in the availability of funds from other sources. Currently,
Citizens First has no other borrowing arrangements aside from the Federal Home
Loan Bank. DEPOSIT ACCOUNTS. Nearly all of Citizens Firsts depositors reside in Michigan.
Citizens First 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 Citizens First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. Citizens First reviews its
deposit mix monthly and its pricing terms weekly.
In October 1999, Citizens First began offering a wide range of commercial
deposit products and checking accounts to cities, towns and municipal school
districts located within Citizens Firsts primary market area. At December 31,
2003, Citizens First had depository arrangements with approximately 46
municipalities. At December 31, 2003, these entities accounted for
approximately $9.1 million, or 4.6%, of Citizens Firsts certificates of
deposit and $85.9 million, or 30.7%, of Citizens First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 Citizens First will be able to
maintain its current levels of municipal accounts in future periods. Citizens First believes it is competitive in the interest rates it offers
on its commercial deposit account products. Citizens First determines the rates
paid based on a number of factors, including rates paid by competitors,
Citizens Firsts need for funds and cost of funds, borrowing costs and
movements of market interest rates. Citizens First does not utilize brokers to
obtain deposits and at December 31, 2003 had no brokered deposits. The following table presents the deposit activity of Citizens First for
the periods indicated (000s omitted): For the Year
    
    For the Nine
    
    For the YearEnded
    
    Months Ended
    
    EndedDecember 31,
    
    December 31,
    
    March 31,2003
    
    2002
    
    2001Beginning balance
    
    $
    671,830
    
    
    $
    634,014
    
    
    $
    581,281Increase before interest credited
    
    
    62,705
    
    
    
    24,644
    
    
    
    30,175Interest credited
    
    
    13,996
    
    
    
    13,172
    
    
    
    22,558Net increase
    
    
    76,701
    
    
    
    37,816
    
    
    
    52,733Ending balance
    
    $
    748,531
    
    
    $
    671,830
    
    
    $
    634,014
 At
December 31, 2003, Citizens First had $71.7 million in
certificate of deposit
accounts in amounts of $100,000 or more maturing as follows (000s omitted): WeightedAverageMaturity Period
    
    Amount
    
    RateThree months or less
    
    $
    14,712
    
    
    
    1.51
    %Over 3 through 6 months
    
    
    7,635
    
    
    
    3.94
    %Over 6 through 12 months
    
    
    6,807
    
    
    
    3.17
    %Over 12 months
    
    
    42,506
    
    
    
    3.91
    %Total
    
    $
    71,660
 The following table presents by various rate categories, the amount of
certificates of deposit outstanding at the dates indicated and the periods to
maturity of the certificates of deposit outstanding at December 31, 2003 (000s
omitted). 22




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##### Table of Contents



Less
    
    One
    
    Two
    
    Over
    
    
    
    
    
    Total atthan One
    
    to Two
    
    to Three
    
    Three
    
    December 31,
    
    December 31,
    
    March 31,Year
    
    Years
    
    Years
    
    Years
    
    2003
    
    2002
    
    2002Certificates
of deposit:0 to 1.00%
    
    $
    37,203
    
    
    $
    105
    
    
    $
    67
    
    
    $
    
    
    
    $
    37,375
    
    
    $
    
    
    
    $
    1.01 to 2.00%
    
    
    40,925
    
    
    
    6,901
    
    
    
    884
    
    
    
    4
    
    
    
    48,714
    
    
    
    74,050
    
    
    
    71,0582.01 to 4.00%
    
    
    14,355
    
    
    
    2,756
    
    
    
    13,941
    
    
    
    10,840
    
    
    
    41,892
    
    
    
    63,833
    
    
    
    62,8104.01 to 5.00%
    
    
    9,860
    
    
    
    5,741
    
    
    
    9,584
    
    
    
    19,296
    
    
    
    44,481
    
    
    
    51,841
    
    
    
    43,5245.01 to 6.00%
    
    
    7,322
    
    
    
    12,279
    
    
    
    3,864
    
    
    
    13,926
    
    
    
    37,391
    
    
    
    43,163
    
    
    
    39,4516.01 to 7.00%
    
    
    14,351
    
    
    
    7,380
    
    
    
    5,780
    
    
    
    10,405
    
    
    
    37,916
    
    
    
    36,291
    
    
    
    64,4917.01 to 8.00%
    
    
    4,187
    
    
    
    2,396
    
    
    
    931
    
    
    
    192
    
    
    
    7,704
    
    
    
    2,674
    
    
    
    7,976Over 8.00%
    
    
    1,921
    
    
    
    294
    
    
    
    127
    
    
    
    
    
    
    
    2,344
    
    
    
    
    
    
    
    Total certificate of deposit
    
    $
    130,124
    
    
    $
    37,852
    
    
    $
    35,178
    
    
    $
    54,663
    
    
    $
    257,817
    
    
    $
    271,852
    
    
    $
    289,310
 Borrowings.Citizens First can use advances from the Federal Home Loan
Bank of Indianapolis to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The Federal Home Loan Bank of Indianapolis
functions as a central reserve bank by providing credit for savings banks and
certain other member financial institutions. As a member of the Federal Home
Loan Bank of Indianapolis, Citizens First is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank of Indianapolis and is
authorized to apply for advances as long as certain creditworthiness standards
have been met. For more information, see the section captioned Federal Home
Loan Bank System under the heading Regulation and Supervision below.
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 Citizens First under
several different credit programs of the Federal Home Loan Bank of
Indianapolis. 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. At December 31, 2003, Citizens First had the
ability to borrow a total of approximately $238.0 million from the Federal Home
Loan Bank of Indianapolis, of which $172.5 million was borrowed at such date. The following table presents certain information regarding Citizens
Firsts borrowed funds at or for the periods ended on the dates indicated (000s
omitted): NineYear Ended
    
    Months Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    March 31,2003
    
    2002
    
    2002
    
    2001Federal Home Loan Bank advances and other borrowings:Average balance outstanding
    
    $
    173,896
    
    
    $
    164,199
    
    
    $
    130,645
    
    
    $
    90,348Maximum amount outstanding at any month-end during the period
    
    
    181,534
    
    
    
    148,568
    
    
    
    155,093
    
    
    
    115,004Balance outstanding at end of period
    
    
    172,534
    
    
    
    173,003
    
    
    
    151,415
    
    
    
    114,931Weighted average interest rate during the period
    
    
    5.35
    %
    
    
    5.65
    %
    
    
    6.23
    %
    
    
    6.34
    %Weighted average interest rate end of period
    
    
    5.24
    %
    
    
    5.36
    %
    
    
    5.79
    %
    
    
    6.35
    %
 Trust Services Citizens First 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 Bank to provide investment opportunities and fiduciary
services to both current and prospective customers. Consistent with Citizens
Firsts operating strategy, Citizens First will continue to emphasize the
growth of its trust service operations in order to grow its assets and to
increase fee-based income. Citizens First 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, 2003, the Trust Department managed 367 accounts with aggregate
assets of $201.6 million, of which the largest relationship totaled $79.9
million, or 39.6% of the Trust Departments total assets. 23




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##### Table of Contents



Personnel As of December 31, 2003, Citizens First had 244 full-time employees and 31
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 First owns 99%, and the Company owns 1%, of the membership
interests of Citizens First Mortgage, LLC, which was established in 2002.
Citizens First 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 First.
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 Citizens First and
Lawyers Title Insurance Agency, a Virginia corporation, to provide title
insurance for customers of Citizens First. 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, the Bank owns
100% of CFS Insurance Agency, Inc., d/b/a CFS Financial Services, Inc., which
offers mutual funds and insurance products such as annuities. ADDITIONAL FINANCIAL INFORMATION Although this description of the business of Citizens First and the
Bancorp 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, 2003 and December 31, 2002. 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. This table 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, 2003 compared to the period
ended December 31, 2002, during the nine months ended December 31, 2002
compared to the nine months ended December 31, 2001 and during the year ended
March 31, 2002 compared to the year ended March 31, 2001. In addition, see Item
6 for Selected Financial Data of the Company. REGULATION AND SUPERVISION General As a savings and loan holding company, Citizens First Bancorp is required
by federal law to file reports with, and otherwise comply with, the rules and
regulations of the Office of Thrift Supervision. Citizens First is a
Michigan-chartered state savings bank and a member of the Federal Home Loan
Bank System and, with respect to deposit insurance, of the Savings Association
Insurance Fund managed by the Federal Deposit Insurance Corporation. The
Commissioner of the Michigan Office of Financial and Insurance Services and/or
the Federal Deposit Insurance Corporation conduct periodic examinations to test
Citizens First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 Federal Deposit Insurance Corporation, the Michigan
Office of Financial and Insurance Services or the U.S. Congress, could have a
material adverse impact on Citizens First Bancorp, Citizens First, Metrobank
and their operations. Certain regulatory requirements applicable to Metrobank,
Citizens First and to Citizens First Bancorp 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 Citizens First and Citizens First Bancorp. 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. 24




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##### Table of Contents



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
Citizens First and Metrobank 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, the Commissioner may appoint a
conservator or seek the appointment of a receiver. As of December 31, 2003,
Citizens First met the asset test for a Michigan savings bank. Under federal
law, Citizens First 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, 2003, Citizens First 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 Federal Deposit Insurance Corporation). 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. The assessments paid by Citizens First for the twelve months
ended December 31, 2003 totaled $67,206. 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 Federal Deposit Insurance Corporation regulations,
federally-insured state-chartered banks that are not members of the Federal
Reserve System (state non-member banks), such as Citizens First, are required
to comply with minimum leverage capital requirements. For an institution
determined by the Federal Deposit Insurance Corporation 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). 25




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##### Table of Contents



Citizens First and Metrobank must also comply with the Federal Deposit
Insurance Corporation 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 Federal Deposit Insurance Corporation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%. 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation 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 Federal
Deposit Insurance Corporation 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 Federal Deposit Insurance
Corporation 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, 2003 and December 31, 2002, the most recent
notification from the Companys and the Banks regulators categorized the Bank
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 Federal Deposit Insurance Corporation may prevent an
insured bank from paying dividends if the bank is in default of payment of any
assessment due to the Federal Deposit Insurance Corporation. In addition, the
Federal Deposit Insurance Corporation 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.Citizens First and Metrobank are both a member
of the Savings Association Insurance Fund. The Federal Deposit Insurance
Corporation 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation 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 Citizens First and Citizens First
Bancorp. Management cannot predict what insurance assessment rates will be in
the future. 26




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##### Table of Contents



Transactions with Related Parties.Citizens Firsts authority to engage in
transactions with an affiliate (generally, any company that controls or is
under common control with an institution, including Citizens First 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. Citizens First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 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 Citizens First Bancorp 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 Bank 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 Federal Deposit Insurance
Corporation Improvement Act, all state-chartered Federal Deposit Insurance
Corporation 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 Federal Deposit
Insurance Corporation Improvement Act and the Federal Deposit Insurance
Corporation permit exceptions to these limitations. For example, the Federal
Deposit Insurance Corporation 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.Citizens First 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. Citizens First received a
satisfactory rating in its most recent Community Reinvestment Act evaluation
by the FDIC. Since the enactment of the Federal Deposit Insurance Corporation
Improvement Act, all state-chartered Federal Deposit Insurance Corporation
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 Federal Deposit
Insurance Corporation Improvement Act and the Federal Deposit Insurance
Corporation permit exceptions to these limitations. For example, the Federal
Deposit Insurance Corporation 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. 27




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##### Table of Contents



Federal Enforcement.The Federal Deposit Insurance Corporation 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 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 Citizens First and Metrobank 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.
Citizens First, as a member of the Federal Home Loan Bank of Indianapolis, is
required to acquire and hold shares of capital stock in that Federal Home Loan
Bank 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 Federal Home Loan
Bank, whichever is greater. Citizens First was in compliance with this
requirement as its investment in Federal Home Loan Bank stock at December 31,
2003 was $9.4 million. 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: for accounts
aggregating $42.1 million or less (subject to adjustment by the Federal Reserve
Board), the reserve requirement is 3%, and for accounts aggregating greater
than $42.1 million, the reserve requirement is $1.083 million plus 10% (subject
to adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $42.1 million. The first
$6.0 million of transaction accounts (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. Citizens First
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. Citizens First has made such
an election, and Citizens First Bancorp is regulated as a savings and loan
holding company within the meaning of the Home Owners Loan Act. As a result,
Citizens First Bancorp 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, Citizens First Bancorp 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. A company such as Citizens First
Bancorp 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 Federal Deposit Insurance
Corporation. 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. 28




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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:  (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. Citizens First and
Metrobank must notify the Office of Thrift Supervision 30 days before declaring
any dividend to Citizens First 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 Citizens First 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), Citizens First and Metrobank
must each 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, 2003, Citizens First met the qualified thrift
lender test. Change in Bank Control Act.The acquisition of 10% or more of the outstanding
common stock of Citizens First Bancorp 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
Federal Deposit Insurance Corporation prior to the acquisition of control of
Citizens First or Metrobank. If the acquirer of an interest in Citizens First
Bancorp or Citizens First 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.Citizens First, Metrobank and Citizens First
Bancorp are extensively regulated and supervised. Regulations, which affect
Citizens First 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 Federal Deposit Insurance Corporation or the U.S. Congress,
could have a material impact on Citizens First Bancorp, Citizens First,
Metrobank or their 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 provides for
changes to the reporting, accounting, corporate governance and business
practices of companies, as well as financial and other professionals who have
involvement with the U.S. public markets. Although the Company anticipates that
it will incur additional expenses in complying with the provisions of the
Sarbanes-Oxley Act and the resulting regulations, management does not expect
that such compliance will have a material impact on the Companys results of
operations or financial condition. FEDERAL AND STATE TAXATION Federal Income Taxation General.Citizens First Bancorp and Citizens First report their income on
a fiscal year basis using the accrual method of accounting. The federal income
tax laws apply to Citizens First Bancorp and Citizens First in the same manner
as to other corporations with some exceptions, including, in particular,
Citizens First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 Citizens First or Citizens First Bancorp. Citizens Firsts
federal income tax returns have been either audited or closed
under the statute of limitations through tax year 1996. For its 2003 tax
year, Citizens Firsts maximum federal income tax rate was 35%. 29




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##### Table of Contents



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. Citizens First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 Citizens Firsts
accumulated bad debt reserves would not be recaptured as taxable income unless
Citizens First makes a non-dividend distribution to Citizens First Bancorp as
described below. Distributions.If Citizens First makes non-dividend distributions to Citizens
First Bancorp, they will be considered to have been made from Citizens First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 Citizens First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 Citizens Firsts taxable
income. Non-dividend distributions include distributions in excess of Citizens
First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 Citizens Firsts current
or accumulated earnings and profits will not be so included in Citizens First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 Citizens
First makes a non-dividend distribution to Citizens First 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. Citizens
First 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 January 1, 1999, the
SBT rate was 2.2% 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. 30




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##### Table of Contents



ITEM 2. PROPERTIES Citizens First currently conducts its business through its main office
located in Port Huron, Michigan, and fifteen other full-service banking offices
located in St. Clair, Sanilac, Huron and Lapeer Counties, Michigan, all of
which it owns. All full-service offices, except for the Sandusky Branch, have
ATM facilities. All full-service offices have drive-through facilities.
Citizens First also owns a drive-up banking center and a separate office for
its trust and financial services operations, which are both located at its main
offices in Port Huron. Citizens First currently leases property in Lapeer,
Michigan for use as its loan production office. The lease on the property
expires in November 2004, at which point Citizens First has the option to renew
for two additional one-year periods. Citizens First 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 facilities
and properties it owns and leases are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company. Certain information
concerning the properties of the Bank is set forth below (000s omitted). 31




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##### Table of Contents



Net Book ValueOriginal
    
    of PropertyYear Leased
    
    or Leaseholdor
    
    Improvements atLocation
    
    Acquired
    
    December 31, 2003Main/Executive
Office:525 Water StreetPort Huron, Michigan 48060
    
    
    1978
    
    
    $
    1,600Branch
Offices:1527 HancockPort Huron, Michigan 48060
    
    
    1971
    
    
    
    1,05248 S. Elk StreetSandusky, Michigan 48471
    
    
    1972
    
    
    
    76123 N. Port CrescentBad Axe, Michigan 48413
    
    
    1973
    
    
    
    118270 Clint on AvenueSt. Clair, Michigan 48079
    
    
    1974
    
    
    
    100301 Summer StreetAlgonac, Michigan 48001
    
    
    1975
    
    
    
    115380 N. Cedar StreetImlay City, Michigan 48444
    
    
    1975
    
    
    
    1862015 Gratiot BoulevardMarysville, Michigan 48040
    
    
    1976
    
    
    
    1,2613136 Lapeer RoadPort Huron, Michigan 48060
    
    
    1976
    
    
    
    29337 N. HowardCroswell, Michigan 48422
    
    
    1980
    
    
    
    142204 S. HuronHarbor Beach, Michigan 48441
    
    
    1980
    
    
    
    46210 S. ParkerMarine City, Michigan 48039
    
    
    1987
    
    
    
    71807 S. Main StreetLapeer, Michigan 48446
    
    
    1993
    
    
    
    764778 24th AvenueFort Gratiot, Michigan 48059
    
    
    1998
    
    
    
    975536 Main StreetLexington, Michigan 48450
    
    
    2002
    
    
    
    3822855 Wadhams RoadKimball, MI 48054
    
    
    2003
    
    
    
    1,651Other
Properties:550 Water StreetPort Huron, Michigan 48060 (1)
    
    
    1986
    
    
    
    45555 Water StreetPort Huron, Michigan 48060 (2)
    
    
    1998
    
    
    
    778500 Water StreetPort Huron, Michigan 48060 (3)
    
    
    2000
    
    
    
    281624 W. Nepessing StreetLapeer, Michigan 48446 (4)
    
    
    2001
    
    
    
    20New Baltimore LandNew Baltimore, MI (5)
    
    
    2003
    
    
    
    1,218Commercial Loan CenterNew Baltimore, MI (6)
    
    
    2003
    
    
    
    17Operations Building LeasePort Huron, MI 48060 (7)
    
    
    2003
    
    
    
    61Imlay City landImlay City, Michigan 48444 (8)
    
    
    2003
    
    
    
    1,102Total
    
    
    
    
    
    $
    10,788
   (1)
    
    The property, which Citizens First owns, consists of a drive-up ATM
facility.(2)
    
    The property, which Citizens First owns, houses Citizens Firsts trust
and financial services operations.(3)
    
    The property, which Citizens First owns, consists of a drive-up banking
and customer call center.(4)
    
    The property, which Citizens First leases, serves as a loan production
office. The lease on the property expires in 2004, at which point Citizens
First has the option to renew for two additional one-year periods.(5)
    
    The property, which Citizens First owns, consists of vacant land for a
future branch site.(6)
    
    The property, which Citizens First leases, serves a commercial and
mortgage loan production office.(7)
    
    The property, which Citizens First leases, serves as an operations
building for checking and savings operations, Human Resources, Marketing
and Accounting.(8)
    
    The property, which Citizens First owns, consists of vacant land for a
future branch site. 32




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##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS Neither Citizens First 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 The information required by this item relating to the market price of and
dividends on the Registrants Common Equity and Related Stockholder Matters
appears under Market For Registrants Common Equity and Related Stockholder
Matters in the Registrants 2003 Report to Stockholders and is incorporated
herein by reference. 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 Bank, or
if the Agreement is terminated by our Board of Directors on or after the date
on which Mr. 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 4,509 deferred
compensation units to Mr. Campbell with regard to the twelve months ended
December 31, 2001. 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 and/or the Bank at various times in 2001, under which these directors
elected to defer fees paid to them by the Company and/or the Bank. On November
15, 2001 with regard to the directors of the Bank 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 and/or the
Bank, each restricted stock unit is to be settled on a one-for-one basis in
shares of the Companys common stock. 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. 
 ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears under Selected Financial
Data in the Registrants 2003 Report to Stockholders and is incorporated
herein by reference. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears under the heading
Managements Discussion and Analysis of Financial Condition and Results of
Operations in the Registrants 2003 Report to Stockholders and is incorporated
herein by reference. 33




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item appears under the heading Quantitative
and Qualitative Disclosures about Market Risk in the Registrants 2003 Report
to Stockholders and is incorporated herein by reference. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Citizens First Bancorp, Inc. and
Subsidiary, together with the reports thereon by BDO Seidman, LLP and Plante &
Moran, PLLC, are incorporated by reference to Citizens Firsts Annual Report
filed herewith as Exhibit 13. The supplementary financial information
specified by Item 302 of Regulation S-K, Selected Unaudited Quarterly Financial
Data, is also incorporated by reference to Citizens Firsts Annual Report filed
as Exhibit 13 herewith. 
 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 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, 2003, 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,
2003, 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. There was no change in the Companys internal control over financial reporting
that occurred during the Companys fiscal quarter ended December 31, 2003 that
has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 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 for the Annual Meeting of Stockholders to be held on May 27, 2004.
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. Citizens First Bancorp 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 http://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 for the Annual Meeting of
Stockholders to be held on May 27, 2004. 34




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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 for the
Annual Meeting of
Stockholders to be held on May 27, 2004. 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 27, 2004. Equity Compensation Plan Information Plan Category
    
    
    
    
    
    
    
    
    
    Number of securitiesremaining availablefor future issuanceNumber of securities
    
    
    
    
    
    under equityto be issued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    related in columnand rights
    
    and rights
    
    (a)(a)
    
    (b)
    
    (c)Equity compensation plans approved by security holders
    
    
    170,800
    
    
    $
    18.95
    
    
    
    1,258,195Total
    
    
    170,800
    
    
    $
    18.95
    
    
    
    1,258,195
 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 for the Annual Meeting of Stockholders to be held on May 27, 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT 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 for the Annual Meeting of Shareholders to be held
on May 27, 2004. 
 PART IV 
 ITEM 15, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements  
    
    Independent Auditors Reports
    
    Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    Consolidated Statements of Income for the Periods Ended December 31, 2003, 2002 and 2001
    
    Consolidated Statements of Changes in Equity for the Periods Ended December 31, 2003, 2002 and 2001
    
    Consolidated Statements of Cash Flows for the Periods Ended December 31, 2003, 2002, and 2001
    
    Notes to Consolidated Financial Statements (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. 35




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(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. Campbell10.5
    
    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)13.0
    
    2003 Annual Report to Stockholders21.0
    
    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) Certifications31.2
    
    Rule 13a-14(a) Certifications32.1
    
    Section 1350 Certifications32.2
    
    Section 1350 Certifications
   (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. (b) Reports on Form 8-K 1. Citizens First Bancorp, Inc. filed a current report on Form 8-K on October 16, 2003
announcing both the resignation of Plante & Moran, PLLC as its independent public accountant, and the engagement of BDO
Seidman, L.L.P. as the Corporations new independent public accountant for the 2003 fiscal year. 2. Citizens First Bancorp, Inc. filed a current report pursuant to Item 12 of Form 8-K
on November 13, 2003, regarding its press release announcing earnings (unaudited) for the three and nine month periods
ended September 30, 2003, and a cash dividend of $0.09 per share. 36




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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 15, 2004
    By:
    /s/ Marshall J. CampbellMarshall J. CampbellChairman of the Board, President
and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated. /s/ Marshall J. Campbell
Marshall J. Campbell
    
    Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
    
    March 15, 2004/s/ Timothy D. Regan
Timothy D. Regan
    
    Secretary, Treasurer
and Director (principal
accounting and financial officer)
    
    March 15, 2004/s/ Ronald W. Cooley
Ronald W. Cooley
    
    Director
    
    March 15, 2004/s/ Walid Demashkieh
Walid Demashkieh
    
    Director
    
    March 15, 2004/s/ Christopher A. Kellerman
Christopher A. Kellerman
    
    Director
    
    March 15, 2004
 41




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Exhibit Index 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. Campbell10.5
    
    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)13.0
    
    2003 Annual Report to Stockholders21.0
    
    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) Certifications31.2
    
    Rule 13a-14(a) Certifications32.1
    
    Section 1350 Certifications32.2
    
    Section 1350 Certifications
 42