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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 March 31, 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.  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 1,516,287 shares of Common Stock outstanding as of May 1,
2004.




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TABLE OF CONTENTS PAGEPART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operation
    
    
    7Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase
Of Equity Securities
    
    
    15Item 3. Defaults Upon Senior Securities
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5. Other Information
    
    
    15Item 6. Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    16CertificationsComputation of Per Share EarningsCertification of C. William LandefeldCertification of Dallas G. SmileySection 906 Certification of C. William LandefeldSection 906 Certification of Dallas G. Smiley
  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 March 31, 2004 and December 31, 2003
 (in thousands except share data)
 March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCash and due from banks
    
    $
    7,360
    
    
    $
    6,692Interest-bearing deposits and federal funds sold
    
    
    24,343
    
    
    
    10,139Cash and cash equivalents
    
    
    31,703
    
    
    
    16,831Available for sale securities
    
    
    19,775
    
    
    
    20,746Mortgage loans held for sale
    
    
    195
    
    
    
    376Loans
    
    
    267,897
    
    
    
    282,477Allowance for loan losses
    
    
    (3,218
    )
    
    
    (3,072
    )Net loans
    
    
    264,679
    
    
    
    279,405Land in real estate joint venture
    
    
    458
    
    
    
    683Premises and equipment
    
    
    5,978
    
    
    
    6,183Federal Home Loan Bank stock
    
    
    15,453
    
    
    
    15,206Foreclosed assets
    
    
    1,599
    
    
    
    2,135Mortgage servicing rights
    
    
    448
    
    
    
    469Cash surrender value of bank owned life insurance
    
    
    4,164
    
    
    
    4,115Other assets
    
    
    2,863
    
    
    
    3,366Total assets
    
    $
    347,315
    
    
    $
    349,515LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDeposits
    
    $
    251,706
    
    
    $
    250,013Long-term debt
    
    
    58,900
    
    
    
    63,975Other liabilities
    
    
    2,784
    
    
    
    2,153Total liabilities
    
    
    313,390
    
    
    
    316,141Minority interest in real estate joint venture
    
    
    254
    
    
    
    382Commitments and Contingent LiabilitiesStockholders EquityPreferred stock, $.01 par value
Authorized 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
    
    
    26,743
    
    
    
    27,910Retained earnings
    
    
    28,542
    
    
    
    26,870Accumulated other comprehensive income
    
    
    39
    
    
    
    (20
    )Less:Treasury shares, 1,307,213 and 1,318,025, respectively
    
    
    (21,681
    )
    
    
    (21,796
    )Total stockholders equity
    
    
    33,671
    
    
    
    32,992Total liabilities and stockholders equity
    
    $
    347,315
    
    
    $
    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 three months
    
    For the three monthsended March 31,
    
    ended March 31,2004
    
    2003(Unaudited and in thousands except share data)Interest incomeInterest on loans
    
    $
    4,175
    
    
    $
    4,576Interest on investments, deposits with banks,
federal funds sold and other
    
    
    494
    
    
    
    405Total interest income
    
    
    4,669
    
    
    
    4,981Interest expenseInterest on deposits
    
    
    1,317
    
    
    
    1,605Interest on borrowings
    
    
    596
    
    
    
    790Total interest expense
    
    
    1,913
    
    
    
    2,395Net interest income
    
    
    2,756
    
    
    
    2,586Provision for loan losses
    
    
    (174
    )
    
    
    85Net interest income after provision for loan losses
    
    
    2,930
    
    
    
    2,501Noninterest incomeService charges on deposit accounts
    
    
    276
    
    
    
    217Net gains on loan sales
    
    
    45
    
    
    
    344Gains on sales of land in joint venture
    
    
    230
    
    
    
    194Other
    
    
    118
    
    
    
    69Total noninterest income
    
    
    669
    
    
    
    824Noninterest expenseSalaries and employee benefits
    
    
    1,015
    
    
    
    1,042Net occupancy and equipment expenses
    
    
    352
    
    
    
    314Net loss (gain) on sale or write-down of foreclosed assets
    
    
    484
    
    
    
    (5
    )Deposit insurance expense
    
    
    9
    
    
    
    10Data processing expense
    
    
    93
    
    
    
    89Minority interest in net income of real estate joint venture
    
    
    97
    
    
    
    97Other
    
    
    458
    
    
    
    566Total noninterest expense
    
    
    2,508
    
    
    
    2,113Income before income tax
    
    
    1,091
    
    
    
    1,212Income tax expense
    
    
    404
    
    
    
    470Net income
    
    
    687
    
    
    
    742Other comprehensive income, net of tax:Unrealized appreciation (depreciation) on available for sale
securities
    
    
    59
    
    
    
    (60
    )Comprehensive income
    
    $
    746
    
    
    $
    682Basic earnings per share
    
    $
    0.46
    
    
    $
    0.51Weighted average shares outstanding
    
    
    1,508,598
    
    
    
    1,456,651Diluted earnings per share
    
    $
    0.43
    
    
    $
    0.46Weighted average shares outstanding
    
    
    1,609,088
    
    
    
    1,599,916
 See notes to condensed consolidated financial statements 2




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Citizens First Financial Corp. and Subsidiary
CITIZENS FIRST FINANCIAL CORP. AND SUBSIDIARY 
 Condensed Consolidated Statements of Cash Flows
 For the three
    
    For the threemonths ended
    
    months endedMarch 31, 2004
    
    March 31, 2003(Unaudited and in thousands)Operating activitiesNet income
    
    $
    687
    
    
    $
    742Adjustments to reconcile net income to net cashProvided (used) by operating activities:Provision for loan losses
    
    
    (174
    )
    
    
    85Increase in cash surrender value of life insurance policies
    
    
    (49
    )
    
    
    Investment securities amortization, net
    
    
    13
    
    
    
    53Minority interest in net income of real estate joint venture
    
    
    97
    
    
    
    97Gain on sale of land in real estate joint venture
    
    
    (230
    )
    
    
    (194
    )Net loss on sale or write-down of foreclosed assets
    
    
    484
    
    
    
    3Net gains on sale of mortgage loans
    
    
    (45
    )
    
    
    (344
    )Amortization of mortgage servicing rights
    
    
    38
    
    
    
    84Depreciation
    
    
    217
    
    
    
    183Mortgage loans originated for sale
    
    
    (1,366
    )
    
    
    (18,275
    )Proceeds from sale of mortgage loans
    
    
    1,575
    
    
    
    21,606Federal Home Loan Bank dividends
    
    
    (247
    )
    
    
    (130
    )Change in:Other assets
    
    
    467
    
    
    
    62Other liabilities
    
    
    385
    
    
    
    208Net cash provided by operating activities
    
    
    1,852
    
    
    
    4,180Investing ActivitiesPurchase of available for sale securities
    
    
    (1,500
    )
    
    
    (3,846
    )Proceeds from maturities and principal paydowns
on available for sale securities
    
    
    2,553
    
    
    
    4,408Net change in loans
    
    
    14,862
    
    
    
    1,528Investment in land in real estate joint venture
    
    
    
    
    
    
    (28
    )Proceeds from sales of land real estate joint venture
    
    
    455
    
    
    
    427Net distribution of minority interest portion of
real estate joint venture
    
    
    (225
    )
    
    
    (192
    )Purchases of premises and equipment
    
    
    (12
    )
    
    
    (4
    )Proceeds from sales of foreclosed assets
    
    
    90
    
    
    
    400Net cash provided by investing activities
    
    
    16,223
    
    
    
    2,693
 3




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For the three
    
    For the threemonths ended
    
    months endedMarch 31, 2004
    
    March 31, 2003(Unaudited and in thousands)Financing ActivitiesNet change in deposits
    
    $
    1,693
    
    
    $
    (3,617
    )Proceeds from borrowings
    
    
    25,000
    
    
    
    Repayment of borrowings
    
    
    (30,075
    )
    
    
    (2,075
    )Purchase of treasury stock shares
    
    
    
    
    
    
    (1,155
    )Cash dividends paid on common stock
    
    
    (153
    )
    
    
    (153
    )Exercise of stock options
    
    
    86
    
    
    
    604Net change in advances by borrowers for taxes and insurance
    
    
    246
    
    
    
    254Net cash used in financing activities
    
    
    (3,203
    )
    
    
    (6,142
    )Net change in cash and cash equivalents
    
    
    14,872
    
    
    
    731Cash and cash equivalents, beginning of period
    
    
    16,831
    
    
    
    33,583Cash and cash equivalents, end of period
    
    $
    31,703
    
    
    $
    34,314Additional cash flows information:Interest paid
    
    $
    1,926
    
    
    $
    2,710Income tax paid
    
    $
    120
    
    
    $
    555Loans transferred to foreclosed assets
    
    $
    38
    
    
    $
    1,861
 See notes to condensed consolidated financial statements 4




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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 March 31, 2004 and December 31, 2003, and the consolidated statements of
income and cash flows for the three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 2004 and 2003.
Diluted earnings per share for the three months ended March 31, 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. 5




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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 Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Net income, as reported
    
    $
    687
    
    
    $
    742Less: Total stock-based
employee compensation
cost determined under the
fair value based method,
net of income taxes
    
    
    (21
    )
    
    
    (24
    )Pro forma net income
    
    $
    666
    
    
    $
    718Earnings per share:Basic  as reported
    
    $
    0.46
    
    
    $
    0.51Basic  pro forma
    
    $
    0.44
    
    
    $
    0.49Diluted  as reported
    
    $
    0.43
    
    
    $
    0.46Diluted  pro forma
    
    $
    0.41
    
    
    $
    0.45
 6




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5.
    
    Recent Accounting Pronouncements In March 2004, the SEC issued Staff Accounting Bulletin No. 105 (SAB 105),
Application of Accounting Principles to Loan Commitments. Current accounting
guidance requires the commitment to originate mortgage loans to be held for
sale be recognized on the balance sheet at fair value from inception through
expiration or funding. SAB 105 requires that the fair-value measurement include
only differences between the guaranteed interest rate in the loan commitment
and a market interest rate, excluding any expected future cash flows related to
the customer relationship or loan servicing. SAB 105 is effective for
commitments to originate mortgage loans to be held for sale that are entered
into after March 31, 2004. Its adoption is not expected to have a material
impact on the consolidated financial position or results of operations of the
Company. In March 2004, the FASBs Emerging Issues Task Force reached a consensus on
EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The guidance prescribes a three-step model
for determining whether an investment is other-than-temporarily impaired and
requires disclosures about unrealized losses on investments. The accounting
guidance is effective for reporting periods beginning after June 15, 2004,
while the disclosure requirements are effective for annual reporting periods
ending after June 15, 2004. The adoption of this EITF is not expected to have a material
effect on the consolidated financial position or results of operations of the Company. 
 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 has invested in Williamsburg LLC
(Williamsburg), a real estate development joint venture. CSL is a 50% owner
of Williamsburg, which has two other investors. The accounts of Williamsburg
are consolidated into the Companys financial statements. The 50% of
Williamsburg not owned by CSL is recorded as a minority interest. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 and DECEMBER 31, 2003 Total assets decreased from $349.5 million at December 31, 2003 to $347.3
million at March 31, 2004. The $2.2 million or 0.6% decrease was primarily due
to the decrease in loans and mortgage loans held for sale, offset by an
increase in interest-bearing deposits and federal funds sold. Cash and cash equivalents increased from $16.8 million at December 31, 2003 to
$31.7 million at March 31, 2004, an increase of $14.9 million or 88.7%. The
increase occurred primarily because of the decrease of loans and mortgage loans
held for sale of $14.8 million. Available for sale securities decreased from $20.7 million at December 31, 2003
to $19.8 million at March 31, 2004, a decrease of $900,000 or 4.3%. The
decrease was primarily due to the principal repayments of investment securities
during the first three months of 2004. 7




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Loans, net of allowance for loan losses and including loans held for sale,
decreased from $279.8 million at December 31, 2003 to $264.9 million at March
31, 2004, a decrease of $14.9 million or 5.3%. The decrease was primarily due
to a decreases of $5.0 million in construction and land development loans,
$4.0 million in loans secured by 1-4 family residential properties, $1.7
million in non-farm/non-residential real estate loans, $1.4 million of
agricultural loans and $1.2 million of multi-family 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 $1.6
million in loans during the first quarter of 2004. The Company serviced $94.2
million and $96.1 million at March 31, 2004 and December 31, 2003,
respectively. The Company has a significant concentration in construction and commercial real
estate loans related to the real estate market in Bloomington-Normal, Illinois.
Management believes that due to the continued strength of this market, this
concentration does not pose a significant risk to the Company. The allowance for loan losses is established through a provision for loan
losses based on managements evaluation of the risks inherent in the loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and can be estimated based on information
available to management at such time. While management believes the allowance
for loan losses is sufficient to cover future loan losses inherent in its loan
portfolio at this time, no assurances can be given that the level of the
allowance for loan losses will be sufficient to cover future loan losses
incurred or that future adjustments to the allowance for loan losses will not
be necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses. The allowance is based upon a number of
factors, including asset classification, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral value,
managements assessments of the credit risk inherent in the portfolio,
historical loan loss experience, and the Companys underwriting policies.
Management will continue to monitor and modify the allowance for loan losses as
conditions dictate. Various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. These
agencies may require additional valuation allowances, based on their judgments
of the information available at the time of the examination. It is the policy of the Company 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. It is
the Companys policy 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
$3,218,000 at March 31, 2004, an increase of $146,000 or 4.8%. The increase was
primarily due to recoveries in the first quarter of 2004 of charged-off loans
in prior years of $401,000. Included in these recoveries was a $389,000 payment
from the bankruptcy trustee for a commercial developer. Due to the large amount
of recoveries 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 $174,000 during the first quarter of 2004. A 1-4 family loan was transferred
to foreclosed assets during the first three months of 2004 that had a specific
reserve in the prior year of approximately $63,000. During the first quarter of
2004, $17,000 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 $8,965,000 at March 31, 2004, an increase of
$537,000 or 6.4%. The increase was primarily attributable to the classification
of potential problem for $339,000 of loans to a single-family home contractor.
The non-performing and potential problem loans were considered impaired as of
March 31, 2004 and December 31, 2003. The Company has established a loss
reserve of $1,779,000 for non-performing and potential problem loans and
believes that it has adequately reserved for any potential loss. 8




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Non-performing loans, which are loans past due 90 days or more and non-accruing
loans, increased from $2,459,000 at December 31, 2003 to $3,243,000 at March
31, 2004. The ratio of the Companys allowance for loan losses to total
non-performing loans was 99.2% and 124.9% at March 31, 2004 and December 31,
2003, respectively. Management believes that the problems with these borrowers
are identified and not indicative of the loan portfolio in total. Non-accruing loans increased from $2,452,000 at December 31, 2003 to $3,125,000
at March 31, 2004, an increase of $673,000 or 27.4%. The increase is primarily
due to the change in classification to non-accrual of a real estate
non-farm/non-residential loan for $747,000 and a 1-4 family loan for $224,000.
These loans had previously been classified as potential problem loans. At March
31, 2004, non-accrual loans consist of three non-farm/non-residential loans
with a balance of $1,300,000, one construction and land development loan with a
balance of $751,000, six 1-4 family residential loans with a balance of
$556,000 and four commercial & industrial loans with a balance of $518,000. The
Company has established a loss reserve of $695,000 for non-accrual loans. Loans delinquent greater than 90 days increased from $7,000 at December 31,
2003 to $118,000 at March 31, 2004, an increase of $111,000. Loans delinquent
greater than 90 days at March 31, 2004 consist of two 1-4 family loans that are
substantially collateralized. The Company has established loss reserves of
$7,000 for the delinquent loans. 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 decreased from $5,969,000 at December 31, 2003 to $5,721,000 at March 31,
2004, a decrease of $248,000 or 4.2%. The Company has established loan loss
reserves of $1,077,000 at March 31, 2004 for potential problem loans. As of
March 31, 2004, $2,888,000 of the total potential problem loans relates to
three borrowers. One borrower with potential problem loans of $1,628,000 is a
manufacturing and sales company, which has experienced recent losses. The
second borrower with potential problem loans of $921,000 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 $339,000 is a
single-family home contractor, which is a concern to the Company because of
delays in loan payments and sales of properties. The remaining potential
problem loans have a balance of $2,833,000 and consist of twenty-one
residential loans with a balance of $2,357,000, five commercial & industrial
loans with a balance of $254,000, one non-farm/non-residential loan with a
balance of $106,000, seven consumer loans with a balance of $95,000 and one
secured agricultural loan with a balance of $21,000. 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 increased from $15,638,000 at
December 31, 2003 to $17,813,000 at March 31, 2004, an increase of $2,175,000
or 13.9%. 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 March 31,
2004, $13,035,000 of this balance relates to loans to two borrowers. The first
borrower with $11,969,000 in loans for a commercial real estate development
that has been classified as OAEM because of the concentration of loans to this
borrower and delays in sales of this development. The second borrower with
$1,066,000 in OAEM loans is a single-family home contractor who is classified
due to concerns regarding his financial condition. This is the same borrower
with $339,000 of potential problem loans. The remaining $4,778,000 of OAEM
loans consists primarily of thirty residential loans with a balance of
$2,582,000, six non-farm/non-residential loans with a balance of $2,116,000,
nine consumer loans with a balance of $45,000 and one commercial and industrial
loan with a balance of $35,000. 9




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Foreclosed assets decreased from $2,135,000 at December 31, 2003 to $1,599,000
at March 31, 2004, a decrease of $536,000 or 25.1%. The decrease was primarily
due to 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.
During the first quarter of 2004, $64,000 in loans were transferred to
foreclosed assets and $92,000 of foreclosed assets were sold with a net gain of
$2,000. In addition, $24,000 was depreciated for certain foreclosed assets held
greater than one year. Included in foreclosed assets at March 31, 2004 is a
$452,000 retail development property. The repossessed property is substantially
leased. Another financial institution, which had a loan on the same
development, foreclosed on their portion in 2002. The remaining foreclosed
assets at March 31, 2004 consist primarily of $512,000 in residential
properties and $635,000 of undeveloped commercial land. Properties being
transferred to foreclosed assets are appraised or evaluated and, if required,
loss reserves are established by management. Other assets decreased from $3.4 million at December 31, 2003 to $2.9 million
at March 31, 2004, a decrease of $500,000 or 14.7%. The decrease was primarily
due to a $477,000 decrease in accrued interest receivable on loans and
investments. Deposits increased from $250.0 million at December 31, 2003 to $251.7 million
at March 31, 2004, an increase of $1.7 million or 0.7%. The increase was
primarily due to an increase of $1.8 million in money market deposit accounts. Long-term debt decreased from $64.0 million at December 31, 2003 to $58.9
million at March 31, 2004, a decrease of $5.1 million or 8.0%, due to
repayments during the first three 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%. Other liabilities increased from $2.2 million at December 31, 2003 to $2.8
million at March 31, 2004, an increase of $600,000 or 27.3%. The increase was
primarily due to a $419,000 increase in accrued income taxes payable and a
$246,000 increase in advances from borrowers for taxes and insurance, offset by
a $67,000 decrease in an accrued employee benefit expense. Total stockholders equity increased by $679,000, from $32,992,000 at December
31, 2003 to $33,671,000 at March 31, 2004. The increase resulted from the
earnings of the Company of $687,000 for the three months ended March 31, 2004,
exercised stock options of $115,000 and an increase in unrealized appreciation
on available-for-sale securities of $59,000, offset by payment of $153,000 in
dividends to stockholders. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 and
MARCH 31, 2003 GENERAL Net income decreased by $55,000 from $742,000 for the three months ended March
31, 2003 to $687,000 for the three months ended March 31, 2004. The decrease
was due primarily to an increase in net loss on sale or write-down of
foreclosed assets and a decrease in the net gains on loan sales, offset by a
net recovery on loan losses and an increase in net interest income. INTEREST INCOME Interest on loans decreased by $401,000 or 8.8%, from $4,576,000 for the three
months ended March 31, 2003 to $4,175,000 for the three months ended March 31,
2004. Interest on loans decreased due to a decrease of 26 basis points in the
average yield on loans outstanding of and a $10.7 million decrease in the
average balance of outstanding loans. 10




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Interest on securities, deposits with banks, federal funds sold and dividends
on FHLB stock increased from $405,000 for the three months ended March 31, 2003
to $494,000 for the three months ended March 31, 2004, an increase of $89,000
or 22.0%. The increase was primarily due to a $5.2 million increase in the
average balance of investment securities, FHLB stock and interest-bearing
deposits and a 34 basis point increase in the average yield of these assets in
2004. INTEREST EXPENSE Interest on deposits decreased by $288,000 or 17.9%, from $1,605,000 for the
three months ended March 31, 2003 to $1,317,000 for the three months ended
March 31, 2004. The decrease was primarily due to a 53 basis point decrease in
the average cost of deposits, offset by a $1.9 million increase in the average
balance of deposits. The interest on borrowings decreased by $194,000 or 24.6%, from $790,000 for
the three months ended March 31, 2003 to $596,000 for the three months ended
March 31, 2004 as a result of a 60 basis point decrease in the average cost of
borrowings and a $9.1 million decrease in the average balance of borrowings. PROVISION FOR LOAN LOSSES There was a negative provision for loan losses of $174,000 for the three months
ended March 31, 2004, compared to a provision for loan losses of $85,000 for
the three months ended March 31, 2003, a change of $259,000. The change was
primarily due to recoveries of prior charged-off loans of $401,000 during the
first quarter of 2004. NONINTEREST INCOME Total noninterest income decreased by $155,000 or 18.8%, from $824,000 for the
three months ended March 31, 2003 to $669,000 for the three months ended March
31, 2004. The decrease was due primarily to a decrease in gains on loan sales
of $299,000, offset by increases in cash surrender value of life insurance of
$54,000, service charges on deposit accounts of $59,000 and gains on sales of
land in a real estate joint venture of $36,000. 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 $70,000
increase in overdraft fees on demand deposits. NONINTEREST EXPENSE Total noninterest expense increased from $2,113,000 for the three months ended
March 31, 2003 to $2,508,000 for the three months ended March 31, 2004, an
increase of $395,000 or 18.7%. Other noninterest expense increased primarily
because of an increase of $489,000 in net loss on sale and write-down of
foreclosed assets, offset by a decrease of $60,000 in other net expenses
related to foreclosed assets and problem loans. The increased write-down was
primarily due to an additional reserves of $246,000 for a retail development
property based on a lower revised offer and $225,000 for land near the retail
development property based on a lack of buyer interest at the previous carrying
value. The decrease in other net expenses related to foreclosed assets was
primarily due to a $48,000 decrease in legal and other fees related to problem
loans. INCOME TAX EXPENSE Total income tax expense was $404,000 for the three months ended March 31,
2004, compared to $470,000 for the three months ended March 31, 2003, a
decrease of $66,000 or 14.0%. The decrease was attributable to the decreased
taxable income for the three months ended March 31, 2004. The effective tax
rates were 37.0% and 38.8% for the three months ended March 31, 2004 and 2003,
respectively. 11




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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 March 31, 2004 and December 31, 2003, mortgage
servicing rights had carrying values of $448,000 and $469,000, respectively. 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. 12




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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
Banks liquidity requirement, which may be varied at the direction of the
Banks regulators depending on economic conditions and deposit flows, is based
upon a percentage of the Banks deposits and short-term borrowings. At March 31, 2004, the Bank exceeded all of its regulatory capital requirements
with Tier 1 capital of $30.5 million, or 8.9% of average total assets, which is
above the required level of $13.8 million or 4.0%; and risk-based capital of
$33.4 million or 14.4% of risk-weighted assets, which is above the required
level of $18.5 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 March 31, 2004, cash and
interest-bearing deposits totaled $31.7 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 March 31, 2004, the Bank had outstanding advances with the FHLB of $56.9
million. The FHLB maintains two limitations on borrowing availability based on
(1) FHLB stock ownership and (2) total assets. The Bank 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 Bank may
increase its borrowings with the FHLB by approximately $63.0 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 March 31, 2004 the Bank had commitments to originate loans and unused lines
of credit totaling $22.8 million. Certificate accounts which are scheduled to
mature in one year or less from March 31, 2004 totaled $84.8 million. The Bank
anticipates that it will have sufficient funds to meet its current commitments
and
maturing deposits. 13




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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 three months ended March 31, 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
March 31, 2004. Our disclosure controls and procedures are the controls and
other procedures that we designed to ensure that we record, process, summarize
and report in a timely manner the information we must disclose in reports that
we file with or submit to the SEC. C. William Landefeld, our President and
Chief Executive Officer, and Dallas G. Smiley, our Senior 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 March 31, 2004. 14




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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. Changes in Securities and Use of Proceeds and Issuer Purchase of
Equity Securities (e) The following provides information about purchases of the
Companys stock by the Company during the quarter ended March 31,
2004. (1) We repurchased no shares of our common stock pursuant to
the repurchase program that we announced on September 6, 2002 (the
2002 Program). There are 8,366 shares remaining in the 2002
Program. (2) We announced on July 28, 2003, that our Board of Directors
approved a repurchase program (the 2003 Program) for the purchase
by us of up to 5% of our outstanding common stock. The 2003 Program
will commence when the 2002 Program is completed. Unless terminated
earlier by resolution of our board of Directors, the 2003 Program
will expire when we have repurchased all 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. Exhibits See Exhibit Index. b. Reports on Form 8-K  Citizens First Financial Corp. filed the following Form 8-K
during the quarter ended March 31, 2004:
Citizens First Financial Corp. filed a Form 8-K on January
27, 2004 related to Citizens Savings Bank entering into a
Memorandum of Understanding with the banks regulatorsCitizens First Financial Corp. filed a Form 8-K on February
5, 2004 regarding the reporting of unaudited results for
2003, a dividend to be paid and the date of the annual
meeting. 15




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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: May 14, 2004
    /s/ C. William LandefeldC. William LandefeldPresident Date: May 14, 2004
    /s/ Dallas G. SmileyDallas G. SmileyChief Financial Officer 16




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Exhibit Index 11.0
    
    Statement re: Computation of Per Share Earnings31.1
    
    Certification of C. William Landefeld Required by Rule 13a-14(a)31.2
    
    Certification of Dallas G. Smiley Required by Rule 13a-14(a)32.1
    

Certification of C. William Landefeld required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 135032.2
    
    Certification of Dallas G. Smiley required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
 17