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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 Commission File No.: 0-27740 CITIZENS FIRST FINANCIAL CORP.  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    37-1351861
(I.R.S. Employer I.D. No.)
 2101 North Veterans Parkway, Bloomington, Illinois 61704
(Address of principal executive offices) Registrants telephone number: (309) 661-8700 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days. Yes X No___ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes___   No X The Registrant had 1,498,570 shares of Common Stock outstanding as of November
1, 2004.




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TABLE OF CONTENTS PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    18Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits
    
    
    18Signatures
    
    
    19CertificationsStatement re: Computation of Per Share EarningsCertification of C. William Landefeld Required by Rule 13a-14(a)Certification of Dallas G. Smiley Required by Rule 13a-14(a)Certification of C. William Landefeld Required by Section 906Certification of Dallas G. Smiley Required by Section 906
  Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is described in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements are generally
identifiable by the use of such words as believes, expects, anticipates,
estimates, projects, intends or similar expressions. Such
forward-looking statements are subject to risk and uncertainties which could
cause actual results to differ materially from those projected. Such risks and
uncertainties include potential changes in interest rates, competitive factors
in the financial services industry, general and local economic conditions, the
effect of new legislation and other risks detailed in documents filed by the
Company with the Securities and Exchange Commission from time to time.




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PART I.  FINANCIAL INFORMATION Citizens First Financial Corp. and Subsidiary 
 Condensed Consolidated Balance Sheets
 As of September 30, 2004 and December 31, 2003
 (in thousands except share data)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCash and due from banks
    
    $
    6,070
    
    
    $
    6,692Interest-bearing deposits and federal funds sold
    
    
    26,405
    
    
    
    10,139Cash and cash equivalents
    
    
    32,475
    
    
    
    16,831Available for sale securities
    
    
    26,998
    
    
    
    20,746Mortgage loans held for sale
    
    
    963
    
    
    
    376Loans
    
    
    240,081
    
    
    
    282,477Allowance for loan losses
    
    
    (3,215
    )
    
    
    (3,072
    )Net loans
    
    
    236,866
    
    
    
    279,405Land in real estate joint venture
    
    
    
    
    
    
    683Premises and equipment
    
    
    5,843
    
    
    
    6,183Federal Home Loan Bank stock
    
    
    15,914
    
    
    
    15,206Foreclosed assets
    
    
    631
    
    
    
    2,135Mortgage servicing rights
    
    
    385
    
    
    
    469Cash surrender value of bank owned life insurance
    
    
    4,252
    
    
    
    4,115Other assets
    
    
    2,776
    
    
    
    3,366Total assets
    
    $
    327,103
    
    
    $
    349,515LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDeposits
    
    $
    231,416
    
    
    $
    250,013Long-term debt
    
    
    58,750
    
    
    
    63,975Other liabilities
    
    
    2,724
    
    
    
    2,153Total liabilities
    
    
    292,890
    
    
    
    316,141Minority interest in real estate joint venture
    
    
    
    
    
    
    382Commitments and Contingent LiabilitiesStockholders EquityPreferred stock, $.01 par valueAuthorized and unissued  1,000,000 shares
    
    
    
    
    
    
    Common stock, $.01 par value; authorized 8,000,000
shares; 2,817,500 shares issued and outstanding
    
    
    28
    
    
    
    28Additional paid-in-capital
    
    
    26,666
    
    
    
    27,910Retained earnings
    
    
    29,566
    
    
    
    26,870Accumulated other comprehensive income (loss)
    
    
    3
    
    
    
    (20
    )Less:Treasury shares, 1,318,930 and 1,318,025, respectively
    
    
    (22,050
    )
    
    
    (21,796
    )Total stockholders equity
    
    
    34,213
    
    
    
    32,992Total liabilities and stockholders equity
    
    $
    327,103
    
    
    $
    349,515
 See notes to condensed consolidated financial statements 1




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Citizens First Financial Corp. and Subsidiary 
 Condensed Consolidated Statements of Income
 For the nine months
    
    For the nine monthsended September 30,
    
    ended September 30,2004
    
    2003(Unaudited and in thousands except share data)Interest incomeInterest on loans
    
    $
    11,643
    
    
    $
    13,460Interest on investments, deposits with banks, federal funds
sold and other
    
    
    1,544
    
    
    
    1,244Total interest income
    
    
    13,187
    
    
    
    14,704Interest expenseInterest on deposits
    
    
    3,682
    
    
    
    4,385Interest on borrowings
    
    
    1,432
    
    
    
    2,339Total interest expense
    
    
    5,114
    
    
    
    6,724Net interest income
    
    
    8,073
    
    
    
    7,980Provision (credit) for loan losses
    
    
    (109
    )
    
    
    867Net interest income after provision for loan losses
    
    
    8,182
    
    
    
    7,113Noninterest incomeService charges on deposit accounts
    
    
    829
    
    
    
    741Net gains on loan sales
    
    
    95
    
    
    
    1,091Gains on sales of land in joint venture
    
    
    230
    
    
    
    400Other
    
    
    251
    
    
    
    241Total noninterest income
    
    
    1,405
    
    
    
    2,596Noninterest expenseSalaries and employee benefits
    
    
    3,178
    
    
    
    2,879Net occupancy and equipment expenses
    
    
    927
    
    
    
    929Net loss on sale or write-down of foreclosed assets
    
    
    417
    
    
    
    770Deposit insurance expense
    
    
    46
    
    
    
    30Data processing expense
    
    
    278
    
    
    
    270Minority interest in net income of real estate joint venture
    
    
    97
    
    
    
    198Other
    
    
    1,434
    
    
    
    1,472Total noninterest expense
    
    
    6,377
    
    
    
    6,548Income before income tax
    
    
    3,210
    
    
    
    3,161Income tax expense
    
    
    1,193
    
    
    
    1,201Net income
    
    
    2,017
    
    
    
    1,960Other
comprehensive loss, net of tax:Unrealized appreciation
(depreciation) on available for sale securities
    
    
    23
    
    
    
    (179
    )Comprehensive income
    
    $
    2,040
    
    
    $
    1,781Basic earnings per share
    
    $
    1.34
    
    
    $
    1.33Weighted average shares outstanding
    
    
    1,506,717
    
    
    
    1,472,457Diluted earnings per share
    
    $
    1.26
    
    
    $
    1.22Weighted average shares outstanding
    
    
    1,601,567
    
    
    
    1,610,261
 See notes to condensed consolidated financial statements 2




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Citizens First Financial Corp. and Subsidiary 
 Condensed Consolidated Statements of Income
 For the three months
    
    For the three monthsended September 30,
    
    ended September 30,2004
    
    2003(Unaudited and in thousands except share data)Interest incomeInterest on loans
    
    $
    3,580
    
    
    $
    4,428Interest on investments, deposits with banks, federal funds
sold and other
    
    
    577
    
    
    
    454Total interest income
    
    
    4,157
    
    
    
    4,882Interest expenseInterest on deposits
    
    
    1,154
    
    
    
    1,369Interest on borrowings
    
    
    421
    
    
    
    768Total interest expense
    
    
    1,575
    
    
    
    2,137Net interest income
    
    
    2,582
    
    
    
    2,745Provision for loan losses
    
    
    141
    
    
    
    476Net interest income after provision for loan losses
    
    
    2,441
    
    
    
    2,269Noninterest incomeService charges on deposit accounts
    
    
    271
    
    
    
    290Net gains on loan sales
    
    
    63
    
    
    
    272Recovery of mortgage servicing rights
    
    
    
    
    
    
    123Gains on sale of land in joint venture
    
    
    
    
    
    
    206Other
    
    
    95
    
    
    
    122Total noninterest income
    
    
    429
    
    
    
    1,013Noninterest expenseSalaries and employee benefits
    
    
    1,153
    
    
    
    835Net occupancy and equipment expenses
    
    
    237
    
    
    
    300Net loss (gain) on sale or write-down of foreclosed assets
    
    
    (55
    )
    
    
    771Deposit insurance expense
    
    
    27
    
    
    
    10Data processing expense
    
    
    94
    
    
    
    95Minority interest in net income of real estate joint venture
    
    
    
    
    
    
    101Other
    
    
    460
    
    
    
    390Total noninterest expense
    
    
    1,916
    
    
    
    2,502Income before income tax
    
    
    954
    
    
    
    780Income tax expense
    
    
    355
    
    
    
    283Net income
    
    
    599
    
    
    
    497Other
comprehensive income, net of tax:Unrealized
appreciation (depreciation) on available for sale securities
    
    
    112
    
    
    
    (150
    )Comprehensive income
    
    $
    711
    
    
    $
    347Basic earnings per share
    
    $
    0.40
    
    
    $
    0.33Weighted average shares outstanding
    
    
    1,498,599
    
    
    
    1,494,322Diluted earnings per share
    
    $
    0.38
    
    
    $
    0.31Weighted average shares outstanding
    
    
    1,590,098
    
    
    
    1,624,766
 See notes to condensed consolidated financial statements 3




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Citizens First Financial Corp. and Subsidiary
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY 
 Condensed Consolidated Statements of Cash Flows
 For the nine
    
    For the ninemonths ended
    
    months endedSeptember 30, 2004
    
    September 30, 2003(Unaudited and in thousands)Operating activitiesNet income
    
    $
    2,017
    
    
    $
    1,960Adjustments to reconcile net income to net cash
Provided (used) by operating activities:Provision (credit) for loan losses
    
    
    (109
    )
    
    
    867Increase in cash surrender value of life insurance policies
    
    
    (137
    )
    
    
    Investment securities amortization, net
    
    
    69
    
    
    
    157Minority interest in net income of real estate joint venture
    
    
    97
    
    
    
    198Net gain on sale of land in real estate joint venture
    
    
    (230
    )
    
    
    (400
    )Net loss on sale or write-down of foreclosed assets
    
    
    535
    
    
    
    770Net gains on sale of mortgage loans
    
    
    (95
    )
    
    
    (1,091
    )Recovery of mortgage servicing rights
    
    
    
    
    
    
    (123
    )Amortization of mortgage servicing rights
    
    
    115
    
    
    
    211Depreciation
    
    
    531
    
    
    
    537Mortgage loans originated for sale
    
    
    (5,560
    )
    
    
    (63,190
    )Proceeds from sale of mortgage loans
    
    
    5,037
    
    
    
    65,859Federal Home Loan Bank dividends
    
    
    (708
    )
    
    
    (286
    )Change in:Other assets
    
    
    602
    
    
    
    87Other liabilities
    
    
    1,060
    
    
    
    115Net cash provided by operating activities
    
    
    3,224
    
    
    
    5,671Investing ActivitiesPurchase of available for sale securities
    
    
    (9,824
    )
    
    
    (11,661
    )Proceeds from maturities and principal paydowns
on available for sale securities
    
    
    3,514
    
    
    
    9,621Purchase of Federal Home Loan bank stock
    
    
    
    
    
    
    10,000Net change in loans
    
    
    41,916
    
    
    
    (789
    )investment in land in real estate joint venture
    
    
    
    
    
    
    (28
    )Proceeds from sales of land real estate joint venture
    
    
    913
    
    
    
    633Net distribution of minority interest portion of real
estate joint venture
    
    
    (479
    )
    
    
    (295
    )Purchases of premises and equipment
    
    
    (191
    )
    
    
    (50
    )Proceeds from sales of foreclosed assets
    
    
    1,701
    
    
    
    2,177Investment in bank-owned life insurance
    
    
    
    
    
    
    (4,000
    )Net cash provided by (used in) investing activities
    
    
    37,550
    
    
    
    (14,392
    )
 4




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For the nine
    
    For the ninemonths ended
    
    months endedSeptember 30, 2004
    
    September 30, 2003(Unaudited and in thousands)Financing ActivitiesNet change in deposits
    
    $
    (18,597
    )
    
    $
    (2,542
    )Proceeds from borrowings
    
    
    25,000
    
    
    
    3,000Repayment of borrowings
    
    
    (30,225
    )
    
    
    (7,025
    )Purchase of treasury stock shares
    
    
    (602
    )
    
    
    (1,155
    )Cash dividends paid on common stock
    
    
    (459
    )
    
    
    (452
    )Exercise of stock options
    
    
    242
    
    
    
    1,092Net change in advances by borrowers for taxes and insurance
    
    
    (489
    )
    
    
    (196
    )Net cash used in financing activities
    
    
    (25,130
    )
    
    
    (7,278
    )Net change in cash and cash equivalents
    
    
    15,644
    
    
    
    (15,999
    )Cash and cash equivalents, beginning of period
    
    
    16,831
    
    
    
    33,583Cash and cash equivalents, end of period
    
    $
    32,475
    
    
    $
    17,584Additional cash flows information:Interest paid
    
    $
    5,175
    
    
    $
    6,677Income tax paid
    
    $
    931
    
    
    $
    1,115Loans transferred to foreclosed assets
    
    $
    732
    
    
    $
    4,614
 See notes to condensed consolidated financial statements 5




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Citizens First Financial Corp. 
 Notes to Condensed Consolidated Financial Statements 1. Background Information Citizens First Financial Corp. (the Company) was incorporated in January 1996
and on May 1, 1996 acquired all of the outstanding shares of common stock of
Citizens Savings Bank (the Bank) upon the Banks conversion from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Company purchased 100% of the outstanding capital stock of the Bank using 50%
of the net proceeds from the Companys initial stock offering which was
completed on May 1, 1996. In April 1999, the Bank was converted from a
federally chartered savings bank to an Illinois state savings bank. The Company sold 2,817,500 shares of common stock in the initial offering at
$10.00 per share, including 225,400 shares purchased by the Banks Employee
Stock Ownership Plan (the ESOP). The ESOP shares were acquired by the Bank
with proceeds from a Company loan totaling $2,254,000. The net proceeds of the
offering totaled $27,012,000; $28,175,000 less $1,163,000 in underwriting
commissions and other expenses. The Companys stock is traded on the NASDAQ
National Market under the symbol CFSB. 2. Statement of Information Furnished The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Form 10-Q instructions and Rule 10-01 of
Regulation S-X, and in the opinion of management reflect all adjustments
necessary to present a fair statement of the consolidated financial position as
of September 30, 2004 and December 31, 2003, and the consolidated statements of
income for the nine and three months ended September 30, 2004 and 2003 and
statement of cash flows for the nine months ended June 30, 2004 and 2003. All
adjustments to the financial statements were of a normal recurring nature.
These results have been determined on the basis of accounting principles
generally accepted in the United States of America. The results of operations
for the nine and three months ended September 30, 2004 are not necessarily
indicative of the results to be expected for the entire fiscal year. The condensed consolidated financial statements are those of the Company and
the Bank. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Companys 2003 Annual Report to Stockholders. 3. Earnings Per Share Basic earnings per share have been computed based upon the weighted average
common shares outstanding for the nine and three months ended September 30,
2004 and 2003. Diluted earnings per share for the nine and three months ended
September 30, 2004 reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. 6




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4. Stock Options The Company has a stock-based employee compensation plan, which is described
more fully in Notes to Financial Statements included in the December 31, 2003
Annual Report to Shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation. Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    599
    
    
    $
    497
    
    
    $
    2,017
    
    
    $
    1,960Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of income
taxes
    
    
    (21
    )
    
    
    (24
    )
    
    
    (63
    )
    
    
    (72
    )Pro forma net income
    
    $
    578
    
    
    $
    473
    
    
    $
    1,954
    
    
    $
    1,888Earnings per share:Basic  as reported
    
    $
    0.40
    
    
    $
    0.33
    
    
    $
    1.34
    
    
    $
    1.33Basic  pro forma
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    1.30
    
    
    $
    1.28Diluted  as reported
    
    $
    0.38
    
    
    $
    0.31
    
    
    $
    1.26
    
    
    $
    1.22Diluted  pro forma
    
    $
    0.36
    
    
    $
    0.29
    
    
    $
    1.22
    
    
    $
    1.17
 7




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5. Recent Accounting Pronouncements SEC Staff Accounting Bulletin (SAB) No. 105, Application of Accounting
Principles to Loan Commitments. SAB 105 summarizes the views of the staff of
the SEC regarding the application of generally accepted accounting principles
to loan commitments accounted for as derivative instruments. SAB 105 provides
that the fair value of recorded loan commitments that are accounted for as
derivatives under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, should not incorporate the expected future cash flows related to
the associated servicing of the future loan. In addition, SAB 105 requires
registrants to disclose their accounting policy for loan commitments. The
provisions of SAB 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. The adoption of this
accounting standard did not have a material impact on the Companys financial
statements. Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
EITF 03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the
investment is less than its cost. Generally, an impairment is considered
other-than-temporary unless: (i) the investor has the ability and intent to
hold an investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to (or beyond) the cost of the
investment; and (ii) evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs evidence to the
contrary. If impairment is determined to be other-than-temporary, then an
impairment loss should be recognized equal to the difference between the
investments cost and its fair value. Certain disclosure requirements of EITF
03-1 were adopted in 2003 and the Company began presenting the new disclosure
requirements in its consolidated financial statements for the year ended
December 31, 2003. The recognition and measurement provisions were initially
effective for other-than-temporary impairment evaluations in reporting periods
beginning after June 15, 2004. However, in September 2004, the effective date
of these provisions was delayed until the finalization of a FASB Staff Position
(FSP) to provide additional implementation guidance. Currently, the FASB
expects to issue the FSP no later than December 2004. American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. SOP 03-3 addresses accounting for differences between
the contractual cash flows of certain loans and debt securities and the cash
flows expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to loans and debt securities acquired
individually, in pools or as part of a business combination and does not apply
to originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts, that may be recognized for
certain loans and debt securities. Additionally, SOP 03-3 does not allow the
excess of contractual cash flows over cash flows expected to be collected to be
recognized as an adjustment of yield, loss accrual or valuation allowance, such
as the allowance for possible loan losses. SOP 03-3 requires that increases in
expected cash flows subsequent to the initial investment be recognized
prospectively through adjustment of the yield on the loan or debt security over
its remaining life. Decreases in expected cash flows should be recognized as
impairment. In the case of loans acquired in a business combination where the
loans show signs of credit deterioration, SOP 03-3 represents a significant
change from current purchase accounting practice whereby the acquirees
allowance for loan losses is typically added to the acquirers allowance for
loan losses. SOP 03-3 is effective for loans and debt securities acquired by
the Company beginning January 1, 2005. The adoption of this new standard is not
expected to have a material impact on the Companys financial statements. 8




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6. Subsequent Event On November 7, 2004, the Company entered into an Agreement and Plan of Merger
with Main Street Trust, Inc. (Main Street), an Illinois corporation. Main
Street Trust, Inc. will acquire all of the Companys issued and outstanding
shares of common stock. Each of the Companys shareholders will have the option
of receiving either 1.1051 shares of Main Streets stock for each share of the
Companys stock or $35.00 of cash for each share of the Companys common stock
or a combination of both. The transaction is subject to approval by state and
federal regulators and by the Companys shareholders and is expected to close
in the second quarter of 2005. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION GENERAL Citizens First Financial Corp. (the Company) is the holding company for
Citizens Savings Bank (the Bank). The Bank was originally chartered in 1888
by the State of Illinois and in 1989 became a federally chartered savings bank.
In April 1999, the Bank was converted from a federally chartered savings bank
to an Illinois state savings bank. The Banks principal business consists of
the acceptance of retail deposits from the general public in the areas
surrounding its main and branch offices and the investment of these deposits,
together with funds generated from operations and borrowings into loans and
investment securities. The Bank originates one-to-four family residential
mortgages, commercial, multi-family, construction and land, commercial real
estate, agricultural, consumer and other loans. The Bank has a wholly-owned
service corporation, CSL Service Corporation (CSL), which is an
Illinois-chartered corporation that had invested in Williamsburg LLC
(Williamsburg), a real estate development joint venture. CSL, who was a 50%
owner of Williamsburg, sold its interest in May 2004. The results of
Williamsburg until May 2004 are consolidated into the Companys financial
statements. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 and DECEMBER 31, 2003 Total assets decreased from $349.5 million at December 31, 2003 to $327.1
million at September 30, 2004. The $22.4 million or 6.4% decrease was
primarily due to the decrease in loans, offset by an increase in
interest-bearing deposits and federal funds sold and available for sale
securities. Cash and cash equivalents increased from $16.8 million at December 31, 2003 to
$32.5 million at September 30, 2004, an increase of $15.7 million or 93.5%.
The increase occurred primarily because of the decrease of loans of $42.4
million, offset by the decreases of $18.6 million in deposits and $5.2 million
in long-term debt. Available for sale securities increased from $20.7 million at December 31, 2003
to $27.0 million at September 30, 2004, an increase of $6.3 million or 30.4%.
The increase was primarily due to the purchase of $9.8 million of investment
securities which was offset by $3.5 million in maturities and principal
paydowns. Loans, net of allowance for loan losses and including mortgage loans held for
sale, decreased from $279.8 million at December 31, 2003 to $237.8 million at
September 30, 2004, a decrease of $42.0 million or 15.0%. The decrease was
primarily due to a decrease of $16.8 million in construction and land
development loans, $12.7 million in loans secured by 1-4 family residential
properties, $5.4 million in non-farm/non-residential real estate loans, $5.2
million of commercial & industrial loans and $1.5 million of farmland real
estate loans. The decreases were due to loan repayments. The Company sells
primarily fixed rate residential loans in the secondary market (primarily to
the Federal Home Loan Mortgage Corporation) as a source of income from gains on
sale and servicing fees and as a means of controlling
interest rate risk. The Company sold $5.1 million in loans during the first
nine months of 2004. The Company serviced $84.5 million and $96.1 million at
September 30, 2004 and December 31, 2003, respectively. 9




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The Company has a significant concentration in construction and commercial real
estate loans related to the real estate market in Bloomington-Normal, Illinois.
Management believes that due to the continued strength of this market, this
concentration does not pose a significant risk to the Company. The allowance for loan losses is established through a provision for loan
losses based on managements evaluation of the risks inherent in the loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and can be estimated based on information
available to management at such time. While management believes the allowance
for loan losses is sufficient to cover future loan losses inherent in its loan
portfolio at this time, no assurances can be given that the level of the
allowance for loan losses will be sufficient to cover future loan losses
incurred or that future adjustments to the allowance for loan losses will not
be necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses. The allowance is based upon a number of
factors, including asset classification, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral value,
managements assessments of the credit risk inherent in the portfolio,
historical loan loss experience, and the Companys underwriting policies.
Management will continue to monitor and modify the allowance for loan losses as
conditions dictate. Various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. These
agencies may require additional valuation allowances, based on their judgments
of the information available at the time of the examination. The Companys policy is to charge off loans when it is determined that they are
no longer collectible. The policy for loans secured by real estate, which
comprises the majority of the loan portfolio, is to establish loss reserves in
accordance with the loan classification process, based on accounting principles
generally accepted in the United States of America. The Companys policy is to
obtain an appraisal or evaluation on all real estate acquired through
foreclosure at the time of foreclosure. The allowance for loan losses increased from $3,072,000 at December 31, 2003 to
$3,215,000 at September 30, 2004, an increase of $143,000 or 4.7%. The increase
was primarily due to recoveries in the first nine months of 2004 of charged-off
loans in prior years of $410,000. Included in these recoveries was a $389,000
payment from the bankruptcy trustee for a commercial developer. Due to the
large amount of recoveries, decrease in the loan portfolio and the Companys
review of the adequacy of its allowance for loan losses, the Company recorded a
credit to the provision for loan losses of $109,000 during the first nine
months of 2004. During the first nine
months of 2004, $57,000 of loans were charged-off to the allowance for loan
losses. The Companys non-performing and potential problem loans increased from
$8,428,000 at December 31, 2003 to $21,910,000 at September 30, 2004, an
increase of $13,482,000. The increase was primarily attributable to the
classification as a potential problem a loan of $10,956,000 for a commercial
real estate development because of the concentration of loans to this borrower
and the slow sales in this development. This loan is contractually current on
all required payments. In addition to the collateralized property, the borrower
has personally guaranteed a portion of the outstanding balance. Management
believes that there is adequate collateral for this loan and anticipates that
there will be no loss on this loan. The non-performing and potential problem
loans were considered impaired as of September 30, 2004 and December 31, 2003.
The Company has established a loss reserve of $2,012,000 for non-performing and
potential problem loans and believes that it has adequately reserved for any
potential loss. Non-performing loans, which are loans past due 90 days or more and non-accruing
loans, decreased from $2,459,000 at December 31, 2003 to $1,822,000 at
September 30, 2004. The ratio of the Companys allowance for loan losses to
total non-performing loans was 176.4% and 124.9% at September 30, 2004
and December 31, 2003, respectively. Management believes that the problems with
these borrowers are identified and not indicative of the loan portfolio in
total. 10




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Non-accruing loans decreased from $2,452,000 at December 31, 2003 to $1,822,000
at September 30, 2004, a decrease of $630,000 or 25.7%. At September 30, 2004,
non-accrual loans consist of five construction and land development loans with
a balance of $930,000, six 1-4 family residential loans with a balance of
$530,000, three commercial & industrial loans with a balance of $357,000 and
two consumer loans with a balance of $5,000. The Company has established a loss
reserve of $457,000 for non-accrual loans. Loans delinquent greater than 90 days decreased from $7,000 at December 31,
2003 to $-0- at September 30, 2004. Potential problem loans are loans that are not classified as non-accrual or 90
days or more delinquent, but due to factors regarding the borrower, the loan or
the economy may represent a possible loss to the Company. Potential problem
loans increased from $5,969,000 at December 31, 2003 to $20,088,000 at
September 30, 2004, an increase of $14,119,000. The reason for the increase was
primarily due to the classification as potential problem of a loan of
$10,956,000 for a commercial real estate development. This loan, which had
previously been classified as an OAEM asset, had been classified as a potential
problem loan because of the concentration of loans to this borrower. This loan
is contractually current on all required payments and no reserve for loss has
been established for this loan. The Company has established loan loss reserves
of $1,555,000 at September 30, 2004 for all potential problem loans. As of
September 30, 2004, $5,406,000 of the other potential problem loans relates to
five borrowers. The first borrower with potential problem loans of $1,609,000
is a manufacturing and sales company, which has experienced recent losses. The
second borrower with potential problem loans of $821,000 is a land development
venture, which is a concern to the Company because of delays in the sale of
properties. The third borrower with potential problem loans of $1,771,000 is a
developer with recent financial difficulties. The fourth borrower is a retail
facility that has been experiencing financial difficulties. The loans to this
borrower of $621,000 are contractually current. The fifth borrower, with
$584,000 in loans, operates a service facility, which is a concern to the
Company because of inadequate capitalization. All loans to this borrower are
contractually current. The remaining potential problem loans have a balance of
$3,726,000 and consist of thirty-four residential loans with a balance of
$3,147,000, four commercial & industrial loans with a balance of $307,000, two
non-farm/non-residential loan with a balance of $171,000, and fourteen consumer
loans with a balance of $101,000. For all of the potential problem loans, the
Company believes that it has adequately reserved for any potential loss. Other assets especially mentioned (OAEM) loans decreased from $15,638,000 at
December 31, 2003 to $2,725,000 at September 30, 2004, a decrease of
$12,913,000. The primary reason for the decrease was the previously discussed
$10,956,000 commercial development loan which had been classified as an OAEM
asset at December 31, 2003. This loan had a balance of $11,437,000 at December
31, 2003. OAEM loans are loans that are not classified as non-accrual,
delinquent or potential problem, but still require monitoring by the Company
due to factors regarding the borrower, the loan or the economy. At September
30, 2004, OAEM loans consists of twenty-nine residential loans with a balance
of $2,337,000, one non-farm/non-residential loan with a balance of $269,000,
three commercial & industrial loans with a balance of $63,000, three consumer
loans with a balance of $6,000, a secured agricultural loan for $21,000 and a
construction and land development loan for $29,000. Foreclosed assets decreased from $2,135,000 at December 31, 2003 to $631,000 at
September 30, 2004, a decrease of $1,504,000 or 70.4%. The decrease was
primarily due to the sale of foreclosed assets and the increase in the loss
reserves for foreclosed assets of $484,000. The additional reserves consisted
of $246,000 additional reserves for a retail development property based on a
lower revised offer price, $225,000 for land near the retail development
property based on a lack of buyer interest at the previous carrying value and
$13,000 for two 1-4 family residential properties. The retail development
property was sold in the second quarter of 2004. During the first nine months
of 2004, $732,000 in loans were transferred to foreclosed assets and $1,701,000
of foreclosed assets were sold with a net gain of $67,000. In addition,
$118,000 was depreciated for certain foreclosed assets held greater than one
year. Foreclosed assets at September 30, 2004 consist of $539,000 of
undeveloped commercial properties and $92,000 in residential properties.
Properties being transferred to foreclosed assets are appraised or evaluated
and, if required, loss reserves are established by management. 11




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Other assets decreased from $3.4 million at December 31, 2003 to $2.8 million
at September 30, 2004, a decrease of $600,000 or 17.6%. The decrease was
primarily due to a $392,000 decrease in accrued interest receivable on loans
and investments. Deposits decreased from $250.0 million at December 31, 2003 to $231.4 million
at September 30, 2004, a decrease of $18.6 million or 7.4%. The decrease was
primarily due to a decrease of $16.0 million in certificate of deposit
accounts. With the increased balances of cash and cash equivalents, the Company
did not aggressively compete for certificate of deposit accounts during the
first nine months of 2004. Long-term debt decreased from $64.0 million at December 31, 2003 to $58.8
million at September 30, 2004, a decrease of $5.2 million or 8.1%, due to
repayments during the first nine months of 2004. During the first quarter of
2004, the Bank repaid $30.0 million of maturing Federal Home Loan Bank (FHLB)
advances with an average interest rate of 4.9% and obtained $25.0 million of
new FHLB advances at an average rate of 1.6%. Minority interest in real estate joint venture decreased from $382,000 at
December 31, 2003 to $-0- at September 30, 2004 due to the sale in May 2004 of
the Companys interest in the real estate joint venture. Other liabilities increased from $2.2 million at December 31, 2004 to $2.7
million at September 30, 2004, an increase of $500,000. The primary reason for
the increase was a $278,000 increase in accrued income taxes payable and a
$126,000 increase in accruals for employee benefit programs. Total stockholders equity increased by $1,221,000, from $32,992,000 at
December 31, 2003 to $34,213,000 at September 30, 2004. The increase resulted
from the earnings of the Company of $2,017,000 for the nine months ended
September 30, 2004, an increase in unrealized appreciation on
available-for-sale securities of $23,000 and exercised stock options of
$242,000, offset by the purchase of treasury shares of $602,000 and payment of
$459,000 in dividends to stockholders. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
and SEPTEMBER 30, 2003 GENERAL Net income increased by $57,000 from $1,960,000 for the nine months ended
September 30, 2003 to $2,017,000 for the nine months ended September 30, 2004.
The increase was due primarily to a negative provision for loan losses and a
decrease in net loss on sale or write-down of foreclosed assets, offset by a
decrease in net gains on loan sales and gains on sale of land in a real estate
joint venture. INTEREST INCOME Interest on loans decreased by $1,817,000 or 13.5%, from $13,460,000 for the
nine months ended September 30, 2003 to $11,643,000 for the nine months ended
September 30, 2004. Interest on loans decreased due to a decrease of 45 basis
points in the average yield on loans outstanding and a $19.3 million decrease
in the average balance of outstanding loans. Interest on investments, deposits with banks, federal funds sold and other
increased from $1,244,000 for the nine months ended September 30, 2003 to
$1,544,000 for the nine months ended September 30, 2004, an increase of
$300,000 or 24.1%. The increase was primarily due to a $12.4 million increase
in the average balance of investment securities, FHLB stock and
interest-bearing deposits. 12




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INTEREST EXPENSE Interest on deposits decreased by $703,000 or 16.0%, from $4,385,000 for the
nine months ended September 30, 2003 to $3,682,000 for the nine months ended
September 30, 2004. The decrease was primarily due to a 44 basis point decrease
in the average cost of deposits, offset by a $1.4 million increase in the
average balance of deposits. The interest on borrowings decreased by $907,000 or 38.8%, from $2,339,000 for
the nine months ended September 30, 2003 to $1,432,000 for the nine months
ended September 30, 2004 as a result of a 125 basis point decrease in the
average cost of borrowings and a $10.3 million decrease in the average balance
of borrowings. PROVISION FOR LOAN LOSSES There was a negative provision for loan losses of $109,000 for the nine months
ended September 30, 2004, compared to a provision for loan losses of $867,000
for the nine months ended September 30, 2003, a change of $976,000. The change
was primarily due to recoveries of prior charged-off loans of $410,000 during
the first nine months of 2004 and the decrease in the size of the loan
portfolio. NONINTEREST INCOME Total noninterest income decreased by $1,191,000 or 45.9%, from $2,596,000 for
the nine months ended September 30, 2003 to $1,405,000 for the nine months
ended September 30, 2004. The decrease was due primarily to a decrease in gains
on loan sales of $996,000 and a decrease in the gains on sales of land in a
real estate joint venture of $170,000, offset by increases in cash surrender
value of life insurance of $82,000 and service charges on deposit accounts of
$88,000. The net gains on loan sales decreased due to decreased loan sales
resulting from the level interest rate environment during 2004. The increase in
service charges was due to a $121,000 increase in overdraft fees on demand
deposits. NONINTEREST EXPENSE Total noninterest expense decreased from $6,548,000 for the nine months ended
September 30, 2003 to $6,377,000 for the nine months ended September 30, 2004,
a decrease of $171,000 or 2.6%. Other noninterest expense decreased primarily
because of a decrease of $353,000 in net loss on sale and write-down of
foreclosed assets. INCOME TAX EXPENSE Total income tax expense was $1,193,000 for the nine months ended September 30,
2004, compared to $1,201,000 for the nine months ended September 30, 2003, a
decrease of $8,000. The decrease was attributable to the decrease in
non-taxable assets. The effective tax rates were 37.2% and 38.0% for the nine
months ended September 30, 2004 and 2003, respectively. 13




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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
and SEPTEMBER 30, 2003 GENERAL Net income increased by $102,000 from $497,000 for the three months ended
September 30, 2003 to $599,000 for the three months ended September 30, 2004.
The increase was due primarily to the write-down of foreclosed assets that was
recorded in 2003 and a decrease in the provision for loan losses, offset by
decreases in net gains on loan sales, gain on sale of land in a real estate
joint venture, and recovery of mortgage servicing rights. INTEREST INCOME Interest on loans decreased by $848,000 or 19.2%, from $4,428,000 for the three
months ended September 30, 2003 to $3,580,000 for the three months ended
September 30, 2004. Interest on loans decreased due to a decrease of 53 basis
points in the average yield on loans outstanding of and a $31.3 million
decrease in the average balance of outstanding loans. Interest on investments, deposits with banks, federal funds sold and other
increased from $454,000 for the three months ended September 30, 2003 to
$577,000 for the three months ended September 30, 2004, an increase of $123,000
or 27.1%. The increase was primarily due to a $21.8 million increase in the
average balance of investment securities, FHLB stock and interest-bearing
deposits, offset by a 43 basis point decrease in the average yield of these
assets in 2004. INTEREST EXPENSE Interest on deposits decreased by $215,000 or 15.7%, from $1,369,000 for the
three months ended September 30, 2003 to $1,154,000 for the three months ended
September 30, 2004. The decrease was primarily due to a 36 basis point decrease
in the average cost of deposits, partially offset by a $3.2 million increase in
the average balance of deposits. The interest on borrowings decreased by $347,000 or 45.2%, from $768,000 for
the three months ended September 30, 2003 to $421,000 for the three months
ended September 30, 2004 as a result of a 160 basis point decrease in the
average cost of borrowings and a $10.2 million decrease in the average balance
of borrowings. PROVISION FOR LOAN LOSSES The provision for loan losses decreased to $141,000 for the three months ended
September 30, 2004 from $476,000 for the three months ended September 30, 2003,
a decrease of $335,000 or 70.4%. The decrease was attributable to additional
loan loss reserves recorded in the third quarter of 2003. NONINTEREST INCOME Total noninterest income decreased by $584,000 or 57.7%, from $1,013,000 for
the three months ended September 30, 2003 to $429,000 for the three months
ended September 30, 2004. The decrease was due primarily to a decrease in gains
on loan sales of $209,000, a recovery in 2003 for $123,000 of mortgage
servicing rights and a gain on sale of land in a real estate joint venture of
$206,000. NONINTEREST EXPENSE Total noninterest expense decreased from $2,502,000 for the three months ended
September 30, 2003 to $1,916,000 for the three months ended September 30, 2004,
a decrease of $586,000 or 23.4%. The decrease was primarily attributable to an
$826,000 decrease in the net loss (gain) on sale or write-down of foreclosed
assets and the recording in 2003 of $101,000 minority interest in a real estate
joint venture, offset by a $318,000 increase in salaries and benefits expense
attributable to a decreased amortization of deferred loan costs and an increase
in the expense of certain employee benefits programs. 14




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INCOME TAX EXPENSE Total income tax expense was $355,000 for the three months ended September 30,
2004, compared to $283,000 for the three months ended September 30, 2003, an
increase of $72,000 or 25.4%. The increase was primarily attributable to the
increase in 2004 of taxable income. The effective tax rates were 37.2% and
36.3% for the three months ended September 30, 2004 and 2003, respectively. SUBSEQUENT EVENTS On November 7, 2004, the Company entered into an Agreement and Plan of Merger
with Main Street Trust, Inc. (Main Street), an Illinois corporation. Main
Street Trust, Inc. will acquire all of the Companys issued and outstanding
shares of common stock. Each of the Companys shareholders will have the option
of receiving either 1.1051 shares of Main Streets stock for each share of the
Companys stock or $35.00 of cash for each share of the Companys common stock
or a combination of both. The transaction is subject to approval by state and
federal regulators and by the Companys shareholders and is expected to close
in the second quarter of 2005. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. Management believes that its critical
accounting policies and significant estimates include determining the allowance
for loan losses, the valuation of loan servicing rights and the valuation of
foreclosed assets. Allowance for Loan Losses The allowance for loan losses is a significant estimate that can and does
change based on managements assumptions about specific borrowers and current
general and economic and business conditions, among other factors. Management
reviews the adequacy of the allowance for loan losses on at least a quarterly
basis. The evaluation by management includes consideration of past loss
experience, changes in the composition of the loan portfolio, the current
economic condition and amount of loans outstanding, identified problem loans
and the probability of collecting all amounts due. The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loss reserves. Mortgage Servicing Rights The Company recognizes the rights to service loans as a separate asset on its
consolidated balance sheet. The total cost of loans when sold is allocated
between loans and loan servicing rights based on the relative fair value of
each. Mortgage servicing rights are subsequently carried at the lower of the
initial carrying value, adjusted for amortization or fair value. Mortgage
servicing rights are evaluated for impairment based on the fair value of those
rights. Factors included in the calculation of fair value of the loan servicing
rights include estimating the present value of future net cash flows, market
loan prepayment speeds for similar loans, discount rates, servicing costs, and
other economic factors. Servicing rights are amortized over the estimated
period of net servicing revenue. It is likely that these economic factors will
change over the life of the mortgage servicing rights, resulting in different
valuations of the mortgage servicing rights. The differing valuations will
affect the carrying value of the mortgage servicing rights on the consolidated
balance sheet as well as the income recorded from mortgage servicing on the
income statement. As of September 30, 2004 and December 31, 2003, mortgage
servicing rights had carrying values of $385,000 and $469,000, respectively. 15




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Foreclosed Assets Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. Management estimates the fair value of the properties based on
current appraisal information. Fair value estimates are particularly
susceptible to significant changes in the economic environment, market
conditions, and the real estate market. A worsening or protracted economic
decline would increase the likelihood of a decline in property values and could
create the need to write down the properties through current operations. OFF BALANCE SHEET ARRANGEMENTS The only material off balance sheet obligations incurred routinely by the
Company are its commitments to extend credit and its standby letters of credit.
At September 30, 2004, the Company had unused loan commitments of $21.9 million
and financial standby letters of credit of $520,000. LIQUIDITY AND CAPITAL RESOURCES The Companys primary sources of funds are deposits, principal and interest
payments on loans and securities, sales of loans and securities and FHLB
advances. While maturing and scheduled amortization of loans are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Companys liquidity requirement, which may be varied at the direction of the
Companys regulators depending on economic conditions and deposit flows, is
based upon a percentage of the Companys deposits and short-term borrowings. At September 30, 2004, the Bank exceeded all of its regulatory capital
requirements with Tier 1 capital of $31.3 million, or 9.6% of average total
assets, which is above the required level of $13.1 million or 4.0%; and
risk-based capital of $33.9 million or 16.1% of risk-weighted assets, which is
above the required level of $16.8 million or 8.0%. The Companys most liquid assets are cash and interest-bearing demand accounts.
The level of these accounts is dependent on the operating, financing, lending
and investing activities during any given period. At September 30, 2004, cash
and interest-bearing deposits totaled $32.5 million. The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances, loan sales, brokered deposits and Fed funds.
At September 30, 2004, the Company had outstanding advances with the FHLB of
$56.8 million. The FHLB maintains two limitations on borrowing availability
based on (1) FHLB stock ownership and (2) total assets. The Company currently
meets the stock limitation; however, this limit may be raised by the purchase
of additional FHLB stock. Based on the total assets limitations, the Company
may increase its borrowings with the FHLB by approximately $56.2 million. The
ability to borrow this amount would require meeting regulatory mandated loan
and collateral limits. Depending upon market conditions and the pricing of
deposit products and FHLB borrowings, the Bank may utilize FHLB advances to
fund loan originations. At September 30, 2004, the Company had commitments to originate loans and
unused letters of credit totaling $22.4 million. Certificate accounts which are
scheduled to mature in one year or less from September 30, 2004 totaled $81.7
million. The Company anticipates that it will have sufficient funds to meet
its current commitments and maturing deposits. 16




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Sources of market risk include interest rate risk, foreign currency exchange
rate risk, commodity price risk and equity price risk. The Company is only
subject to interest rate risk. The Company purchased no financial instruments
for trading purposes during the nine months ended September 30, 2004 and 2003. The principal objective of the Companys interest rate risk management function
is to evaluate the interest rate risk included in balance sheet accounts,
determine the level of risk appropriate given the Companys business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Director approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Companys Board of Directors reviews the Companys interest
rate risk position on a quarterly basis. The Companys Asset/Liability
Committee is comprised of the Companys senior management under the direction
of the Board of Directors, with the Committee responsible for reviewing with
the Board of Directors its activities and strategies, the effect of those
strategies on the Companys net interest margin, the market value of the
portfolio and the effect that changes in the interest rates will have on the
Companys portfolio and its exposure limits. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Company. In recent years, the Company has utilized the following strategies to manage
interest rate risk: (1) originating for investment adjustable-rate residential
mortgage and fixed-rate one-to-four family loans with maturities of 10 years or
less; (2) generally selling fixed-rate one-to-four family loans with maturities
exceeding 10 years in the secondary market without recourse and on a servicing
retained basis; (3) increasing its origination of shorter term and/or
adjustable rate commercial loans; and (4) investing in shorter term investment
securities which may generally bear lower yields as compared to longer term
investments, but which may better position the Company for increases in market
interest rates. The Companys interest rate and market risk profile has not materially changed
from the year ended December 31, 2003. Please refer to the Companys 2003 Form
10-K for further discussion of the Companys market and interest rate risk. 
 ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure controls and procedures. We evaluated the effectiveness
of the design and operation of our disclosure controls and procedures as of
September 30, 2004. Our disclosure controls and procedures are the controls
and other procedures that we designed to ensure that we record, process,
summarize and report in a timely manner the information we must disclose in
reports that we file with or submit to the SEC. C. William Landefeld, our
President and Chief Executive Officer, and Dallas G. Smiley, our Executive Vice
President and Chief Financial Officer, reviewed and participated in this
evaluation. Based on this evaluation, Messrs. Landefeld and Smiley concluded
that, as of the date of their evaluation, our disclosure controls were
effective. (b) Internal controls. There have not been any significant changes in our
internal accounting controls or in other factors that could significantly
affect those controls during the quarter ended September 30, 2004. 17




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PART II.  OTHER INFORMATION 
  Item 1. Legal Proceedings  The Company is not involved in any legal proceedings of a material nature
at this time other than those occurring in the ordinary course of
business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition of the Company. 
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  (c) The following table information about purchases of the
Companys stock by the Company during the quarter ended September
30, 2004.ISSUER PURCHASES OF EQUITY SECURITIES (c) TotalNumber of
    
    (d) MaximumShares
    
    Number of sharesPurchased as
    
    that May(a) Total
    
    (b)
    
    Part of Publicly
    
    Yet BeNumber of
    
    Average
    
    Announced
    
    PurchasedShares
    
    Price Paid
    
    Plans or
    
    Under the PlansPeriod
    
    Purchased
    
    Per Share
    
    Programs
    
    Or Programs07/01/04 
07/31/04
    
    
    -0-
    
    
    
    n/a
    
    
    
    -0-
    
    
    
    59,55508/01/04 -
08/31/04
    
    
    -0-
    
    
    
    n/a
    
    
    
    -0-
    
    
    
    59,55509/01/04 
09/30/04
    
    
    -0-
    
    
    
    n/a
    
    
    
    -0-
    
    
    
    59,555Total
    
    
    -0-
    
    
    
    n/a
    
    
    
    -0-
    
    
    
    59,555
  (1) The Company adopted a repurchase plan on July 28, 2003 (the
2003 Program) pursuant to which it authorized the repurchase of
76,189 shares of the Companys common stock. Unless terminated
earlier by resolution of the board of directors, the 2003 Program
will expire when the Company has repurchased all of the shares
authorized for repurchase under the 2003 Program. 
  Item 3. Defaults Upon Senior Securities  Not applicable. 
  Item 4. Submission of Matters to a Vote of Security Holders  Not applicable. 
  Item 5. Other Information  Not applicable. 
  Item 6. Exhibits and Reports on Form 8-K  a.  ExhibitsSee Exhibit Index. 18




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##### Table of Contents



SIGNATURES Pursuant to the requirements 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 Financial Corp.Date: November 15, 2004
    
    /s/ C. William LandefeldC. William LandefeldPresidentDate: November 15, 2004
    
    /s/ Dallas G. SmileyDallas G. SmileyChief Financial Officer
 19




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##### Table of Contents



Exhibit Index 11.0
    
    Statement re: Computation of Per Share Earnings
    
    
    2131.1
    
    Certification of C. William Landefeld Required by Rule 13a-14(a)
    
    
    2231.2
    
    Certification of Dallas G. Smiley Required by Rule 13a-14(a)
    
    
    2332.1
    
    Certification of C. William Landefeld required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
    
    
    2432.2
    
    Certification of Dallas G. Smiley required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
    
    
    25
 20