CITIZENS FIRST FINANCIAL CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the fiscal year ended DECEMBER 31, 2002
Commission File No.: 0-27740

CITIZENS FIRST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of 37-1351861
incorporation or organization) (I.R.S. Employer I.D. No.)

2101 NORTH VETERANS PARKWAY, BLOOMINGTON, ILLINOIS 61704
(Address of principal executive offices) (Zip Code)

Registrant's telephone number: (309) 661-8700
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days.
Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
YES [ ] NO XX
--

The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than directors and executive officers of
the registrant is $23,516,470 and is based upon the last sales price of $18.73
as quoted on The Nasdaq National Market on June 28, 2002, the last business day
of the registrant's most recently completed second quarter.

The Registrant had 1,475,753 shares of Common Stock outstanding as of
March 20, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 2002, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.

PORTIONS OF THE PROXY STATEMENT FOR THE 2003 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.

INDEX

PAGE

PART I
Item 1 Business .................................................. 1
Item 2 Properties.................................................21
Item 3 Legal Proceedings..........................................22
Item 4 Submission of Matters to a Vote of Security Holders........22
Supplemental Information - Executive Officers of
the Registrant

PART II

Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters........................................23
Item 6 Selected Financial Data....................................23
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................23
Item 7A Quantitative and Qualitative Disclosures about
Market Risk................................................23
Item 8 Financial Statements and Supplementary Data................23
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.....................23

PART III

Item 10 Directors and Executive Officers of the Registrant.........24
Item 11 Executive Compensation.....................................24
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................24
Item 13 Certain Relationships and Related Transactions.............24
Item 14 Controls and Procedures....................................24
Item 15 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................................25

Signatures...................................................................27
Certifications...............................................................28

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PART 1

ITEM 1 BUSINESS

GENERAL

Citizens First Financial Corp. (the "Company") was incorporated under
Delaware law in January 1996. The Company completed an initial public offering
of 2,817,500 shares of common stock on May 1, 1996 in connection with the
conversion of Citizens Savings Bank, (the "Bank") from the mutual to stock form
of ownership (the "Conversion"). The Company is a savings and loan holding
company and is subject to regulation by the Office of Thrift Supervision
("OTS"), and the Securities and Exchange Commission ("SEC"). Currently, the
Company does not transact any material business other than through its
subsidiary, the Bank. At December 31, 2002, the Company had total assets of
$357.1 million, total deposits of $249.2 million and total stockholders' equity
of $31.9 million. The Company's principal business is conducted primarily
through its subsidiary, the Bank. Accordingly, the discussion in this Report
addresses the Company's operations as they are conducted through the Bank.

The Bank was originally chartered in 1888 by the State of Illinois and
in 1989 became a federally chartered savings bank. In April 1999, the Bank was
converted from a federally chartered savings bank to an Illinois state savings
bank. The Bank's principal business consists of the acceptance of retail
deposits from the general public in the area surrounding its branch offices and
the investment of those deposits, together with funds generated from operations
and borrowings, in commercial, agricultural, residential real estate mortgage,
commercial real estate, consumer and other loans. The Bank originates loans for
investment and for sale. Currently, the Bank's policy is to sell, on a servicing
retained basis, most longer-term fixed rate one-to-four family mortgage loans it
originates as a method of controlling its growth, managing its interest rate
risk and increasing its loan servicing fee income. The Bank's revenues are
derived principally from interest on its mortgage, consumer and commercial
loans, loan servicing fees and, to a lesser extent, the interest on its
securities. The Bank's primary source of funds are deposits, principal and
interest payments on loans and securities, borrowings from the Federal Home Loan
Bank of Chicago and, to a lesser extent, proceeds from the sale of loans and
securities. The Bank has a wholly-owned service corporation, CSL Service
Corporation, an Illinois-chartered corporation that is a participant in a joint
venture that has purchased and is developing commercial real estate.

MARKET AREA AND COMPETITION

The Company is a community-oriented savings institution offering a
variety of financial products and services to meet the needs of the communities
it serves. The Company's deposit gathering is concentrated in the communities
surrounding its five offices located in the municipalities of Bloomington,
Normal and Fairbury, Illinois, which are part of McLean and Livingston Counties.
McLean County comprises the greater Bloomington/Normal metropolitan area and
Livingston County is adjacent to the greater Bloomington/Normal metropolitan
area. The economy in McLean and Livingston Counties has historically benefited
from the presence of the national and regional headquarters of State Farm
Insurance Company, the Mitsubishi Motors Corporation, Illinois Farm Bureau,
Illinois State University and Illinois Wesleyan University as well as a variety
of agricultural related businesses. These counties are the primary market area
for the Bank's lending and deposit gathering activities.

The Company faces significant competition both in making loans and in
attracting deposits. The greater Bloomington/Normal metropolitan area is a
highly competitive market. The Company faces direct competition from a
significant number of financial institutions operating in its market area, many
with a state-wide or regional presence and in some cases a national presence.
Many of these financial institutions are significantly larger and have greater
financial resources than the Company. State Farm Insurance Company,
Bloomington-Normal's largest business, has a savings bank, which it operates
through its agents on a national basis. The Company's competition for loans
comes principally from commercial banks, savings and loan associations, mortgage
banking companies, credit unions and insurance companies. Its most direct
competition for deposits has historically come from savings and loan
associations and commercial banks. In addition, the Company faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term

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money market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.

INVESTMENT ACTIVITIES

The investment policy of the Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity and generate a
favorable return on investments without incurring undue interest rate and credit
risk. The Company has invested primarily in U.S. government sponsored agency
issued mortgage-backed securities, U.S. Agency securities, federal funds sold, a
Federal Home Loan Bank demand investment account and eligible mutual funds. SFAS
115 requires the Company to designate its securities as held to maturity,
available for sale or held for trading. The Company does not currently maintain
a portfolio of securities categorized as held to maturity or held for trading.
The Company's investment securities generally consist of U.S. Agency obligations
and mortgage-backed and mortgage-related securities. The Company's
mortgage-backed securities consist of pass through certificates representing
interests in pools of fixed and adjustable rate mortgage loans issued or
guaranteed by GNMA, FHLMC or FNMA. At December 31, 2002, the Company's portfolio
of investment and mortgage-backed securities totaled $20.7 million, all of which
was categorized as available for sale.

In recent periods, the Company has primarily invested in securities in
order to maintain liquid assets for its operations and as a means of utilizing
its excess funding not necessary for loan originations. The Board of Directors
reviews all of the activity in the investment portfolio on a monthly basis.

LENDING ACTIVITIES

ORIGINATION, SALE, SERVICING AND PURCHASE OF LOANS The Company's loan
origination activities are conducted primarily by its loan personnel, operating
at its five offices. All loans originated by the Company are underwritten by the
Company pursuant to the Company's policies and procedures. The Company
originates both adjustable-rate and fixed-rate mortgage loans, commercial loans
and consumer loans. The Company's ability to originate loans is dependent upon
the relative customer demand for the type of loan and demand for fixed-rate or
adjustable-rate loans, which is affected by the current and expected future
level of interest rates.

While the Company has in the past, from time to time, sold
adjustable-rate one-to four-family loans and retained mortgage loans with terms
of 10 years or more, it is currently the general policy of the Company to
originate for sale in the secondary market one-to-four family fixed-rate
mortgage loans with maturities exceeding ten years and to originate for
investment all adjustable-rate one-to-four family mortgage loans and fixed-rate
one-to-four family mortgage loans with maturities of ten years or less.

ONE-TO-FOUR FAMILY MORTGAGE LENDING The Company currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one-to-four family
residences located in the Company's primary market area, with maturities of up
to thirty years. While the Company has originated such loans secured by
properties outside its market area, substantially all of such loans at December
31, 2002 were secured by property located in the Company's primary market area.
One-to-four family mortgage loan originations are generally obtained from the
Company's loan representatives operating in its branch offices and their
contacts with the local real estate industry, existing or past customers, and
members of the local communities.

MULTI-FAMILY LENDING The Company originates fixed and adjustable-rate
multi-family mortgage loans generally secured by 5 to 70 unit apartment and
student housing buildings located in the Company's primary market area. In
deciding on whether to make a multi-family loan, the Company considers the
qualifications and financial condition of the borrower as well as the value and
condition of the underlying property. The factors considered by the Company
include: the net operating income of the mortgaged premises before debt service
and depreciation; the debt coverage ratio (the ratio of net earnings to debt
service); and the ratio of loan amount to appraised value.

COMMERCIAL REAL ESTATE LENDING The Company originates commercial real
estate loans that are generally secured by properties used for business purposes
such as small

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office buildings or a combination of residential and retail facilities located
in the Company's primary market area.

Loans secured by commercial real estate properties, like multi-family
loans, generally involve larger principal amounts and a greater degree of risk
than one-to-four family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. The
Company seeks to minimize these risks through its underwriting standards, which
require such loans to be qualified on the basis of the property's income and
debt coverage ratio.

CONSTRUCTION AND LAND LENDING The Company originates loans for the
acquisition and development of commercial and residential property located in
its primary market area. These loans are offered to local developers and
individuals. The majority of the Company's construction loans are originated
primarily to finance the construction of one-to-four family, owner-occupied
residential properties and multi-family properties located in the Company's
primary market area. Such loans are offered for the construction of properties
that are pre-sold or for which permanent financing has been secured, as well as
for properties that are not pre-sold or for which permanent financing has not
been secured.

Construction and land development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is largely
dependent upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Company may be confronted with a project, when completed, having
a value which is insufficient to assure full repayment.

COMMERCIAL LENDING The Company offers commercial loans to businesses
operating in the Company's primary market area on a selective basis.

Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property the value of which tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. Included in this total are
agricultural loans made within our lending area. These agricultural loans are
generally offered with one year terms in amounts up to $500,000 and are
generally secured by crops, equipment, other assets and personal guarantees.

CONSUMER AND OTHER LENDING The Company's portfolio of consumer and
other loans primarily consists of fixed-rate, fixed-term home equity loans,
adjustable home equity lines of credit, loans secured by automobiles, home
improvement loans, loans secured by deposit accounts and unsecured personal
loans.

LOAN SERVICING The Company generally services all loans it retains for
investment and also services a portfolio of one-to-four family mortgage loans
for others which is primarily generated from its loan sale activity. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.

DEPOSIT ACTIVITIES

DEPOSITS The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposit accounts consist of savings,
NOW accounts, checking accounts, money market accounts, certificate and brokered
deposit accounts. The Company also offers certificate of deposit accounts with
balances in excess of $100,000 at negotiated rates (jumbo certificates) and
Individual Retirement

-3-

Accounts ("IRAs"). For the year ended December 31, 2002, the balance of core
deposits (savings, money market and demand deposit accounts) totaled $89.1
million, or 35.8%, of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Company's deposits are obtained
predominantly from the areas in which its branch offices are located. The
Company relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain deposits. The Company uses
traditional means of advertising its deposit products, including radio and print
media and generally does not solicit deposits from outside its market area.
While certificate accounts in excess of $100,000 are accepted by the Company,
the Company does not actively solicit such deposits. The Company has attempted
to increase its deposit customer base and decrease its dependency on certificate
accounts by offering interest free checking accounts without minimum balance
requirements. The Company has $5.1 million of brokered deposits with a
twenty-four month maturity at an average rate of 2.50%. Brokered deposits are an
alternative source of liquidity that offers the Company the opportunity to
obtain funds at a competitive interest rate.

-4-

STATISTICAL DATA

INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and
approximate market value of the investment securities at the dates indicated
were:

Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
--------- ---------- ---------- -----

Available for sale at December 31, 2002:
Mortgage-backed securities $17,084 $ 343 $ 45 $17,382
Other securities 3,307 23 0 3,330
------- ------- ------- -------
Total available for sale $20,391 $ 366 $ 45 $20,712
======= ======= ======= =======

Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
--------- ---------- ---------- -----

Available for sale at December 31, 2001:
Mortgage-backed securities $12,292 $ 136 $ 41 $12,387
Other securities 3,309 11 21 3,299
------- ------- ------- -------
Total available for sale $15,601 $ 147 $ 62 $15,686
======= ======= ======= =======

The balance of Federal Home Loan Bank of Chicago stock owned at December 31 is
as follows:

Cost
--------------------------------------------------
(Dollars in thousands)

2002 2001
----- ----
$4,697 $4,461
====== ======

Federal Home Loan Bank stock is stated at cost and is a required investment for
institutions that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula. The Federal
Home Loan Bank stock is recognized based on the price at which it may be resold
to the Federal Home Loan Bank.

The yield on the stock is approximately 5.50% at December 31, 2002.

The maturity distribution (dollars in thousands) and average yields for the
securities available for sale portfolio at December 31, 2002 were:

Within 1 Year 1 - 5 Years 5 - 10 Years
------------- ----------- ------------

Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----

Mortgage-backed securities - - - - 708 6.05%
Other securities - - 2,330 4.30% - -
------ ----- ------ ---- --- -----
Total - - $2,330 4.30% 708 6.05%
====== ===== ====== ==== === =====

Due After 10 Years Marketable Equity
------------------ Securities Total
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----

Mortgage-backed securities $16,674 5.86% $ - - $17,382 5.86%
Other securities - - 1,000 2.48% $ 3,330 3.75%
------- ----- ----- ---- ------- ----
$16,674 5.86% $1,000 2.48% $20,712 5.52%
======= ===== ====== ==== ======= ====
Total

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With exception of securities of U.S. government agencies and corporations, the
Company did not hold any securities of a single issuer, payable from and secured
by the same source of revenue or taxing authority, the book value of which
exceeded 10% of stockholders' equity at December 31, 2002.

-6-

LOAN PORTFOLIO
TYPES OF LOANS

(Dollars in thousands)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----

Commercial & agricultural loans $33,438 $27,667 $20,622 $19,622 $12,727
Real estate loans:
Construction and land 37,545 36,908 40,141 31,968 40,946
Commercial 82,008 79,667 71,566 64,336 24,073
Residential 128,692 138,439 150,914 152,444 150,255
Consumer and other loans 9,754 10,783 13,246 12,806 12,072
-------- -------- -------- -------- --------
Total 291,437 293,464 296,489 281,176 240,073
Less:
Undisbursed portion of
loans (1) 8,846 4,200 11,174 15,623 7,189
Allowance for loan losses 3,753 2,421 1,826 1,679 1,256
-------- -------- -------- -------- --------
Loans, net $278,838 $286,843 $283,489 $263,874 $231,628
======== ======== ======== ======== ========

(1) The undisbursed portion of loans represents amounts included in gross loans
above that have been approved, but not disbursed to the borrower.

Loans held for sale at December 31, 2002, 2001, 2000, 1999 and 1998
were $6,098,342, $6,910,101 $1,494,359, $3,007,425, and $5,245,872,
respectively, and were not included in the above totals.

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

Presented in the table below are the maturities of loans (excluding
commercial real estate, residential real estate, consumer and other loans)
outstanding as of December 31, 2002. Also presented are the amounts due after
one year, classified according to the sensitivity to changes in interest rates.

Maturing
-----------------------------------------
Within 1-5 Over 5
1 Year Years Years Total
------ ----- ------ -----
(Dollars in thousands)
Commercial & agricultural loans $17,615 $14,837 $986 $33,438
Real estate loans-
Construction and land 37,545 0 0 37,545
------- ------- ---- -------
Total $55,160 $14,837 $986 $70,983
======= ======= ==== =======

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Maturing
--------
1 - 5 Over
Years 5 Years
----- -------
(Dollars in thousands)
Loans maturing after one year with:
Fixed rates $14,617 $831
Variable rate 220 155
------- ----
Total $14,837 $986
======= ====

RISK ELEMENTS
December
------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccruing loans $4,410 $3,177 $1,493 $435 $129

Loans contractually past
due 90 days or more other
than nonaccruing 1,753 2,613 3,767 134 250

Restructured loans - 3,334 301 314 325

Nonaccruing loans are loans which are reclassified to nonaccruing
status when in management's judgment the collateral value and financial
condition of the borrower do not justify accruing interest. Interest previously
recorded but not deemed collectible is reversed and charged against current
income. Interest income on these loans is then recognized when collected.

Restructured loans are loans for which the contractual interest rate
has been reduced or other concessions are granted to the borrower because of
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.

Interest income of $174,000 for the year ended December 31, 2002, was
recognized on the nonaccruing and restructured loans listed in the table above,
whereas interest income of $455,000 would have been recognized under their
original loan terms.

The Company accounts for impaired loans in accordance with SFAS No. 114
and No. 118, "Accounting by Creditors for an Impairment of a Loan" and
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". These Statements require that impaired loans within the scope of
these Statements be measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the loan's observable market price or fair value of the collateral, if the
loan is collateral dependent. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due, both principal and interest, according to the contractual terms
of the note.

Balance at
December 31, 2002
-----------------
Impaired Loans:
- ---------------
(Dollars in thousands)
Impaired loans with an allowance $ 7,502
Impaired loans for which the discounted cash flows or
collateral value exceeds the carrying value of the loan 16,352
-------
Total impaired loans $23,854
=======

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Year Ended
December 31, 2002
-----------------
Impaired Loans:
(Dollars in thousands)
Average balance of impaired loans $21,074
Interest income recognized on impaired loans $ 1,686
Cash-basis interest included above $ 1,561

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance for losses increased from
$2,421,000 at December 31, 2001 to $3,753,000 at December 31, 2002, an increase
of $1,332,000 or 55.0%. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" on pages 5-11 in the Company's 2002 Annual
Report for a discussion of impaired loans) The allowance is based on ongoing
assessments of the estimated probable losses inherent in the loan portfolio. The
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include a formula allowance, and a specific
allowance for identified problem loans.

The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk grade of such loans. Changes in
risk grades of both performing and non-performing loans affect the amount of the
formula allowance. Loss factors are based on historical loss experience and may
be adjusted for significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
based on (1) historical loss experience over a five-year period, which
management believes approximates a business cycle; (2) individual evaluations of
residential, commercial real estate, construction, agricultural, commercial and
consumer loans; (3) expected charge-offs by loan classification for one-year;
(4) general economic and business conditions affecting the Company's lending
areas; (5) collateral values; (6) loan volumes and concentrations; (7) seasoning
of the loan portfolio; (8) specific industry conditions and (9) recent loss
experience in particular segments of the portfolio.

A specific allowance is established in cases where management has
identified significant conditions or circumstances related to a loan that
management believes indicate the probability that a loss has been incurred.

The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount of actual losses can vary
significantly from the estimated amounts. The methodology includes several
features that are intended to reduce the differences between estimated and
actual losses. The Company closely monitors any difference of actual and
estimated losses and adjusts the methodology accordingly.

The Company generates commercial, mortgage and consumer loans from
customers located primarily in Central Illinois. The Company's loans are
generally secured by specific items of collateral including real property,
consumer assets, and business assets. Although the Company has a diversified
loan portfolio, a substantial portion of their debtors' ability to honor their
contracts is dependent upon economic conditions in Central Illinois. Although
the risk of non-payment for any reason exists with respect to all loans, certain
other more specific risks are associated with each type of loan. The primary
risks associated with commercial loans are quality of the borrower's management
and the impact of national and local economic factors. Currently, the business
atmosphere remains stable for the local economy in the McLean, Livingston and
Tazewell County areas. Risk associated with real estate loans include
concentrations of loans in a loan type, such as residential real estate, decline
in real estate values and a sudden rise in interest rates. Individual loans face
the risk of borrower's unemployment as a result of deteriorating economic
conditions or renewed contract differences between unions and management of
several large companies in the Company's market area. The Company's strategy
with respect to addressing and managing these types of risks is for the Company
to follow its loan policies and underwriting criteria.

The Company has substantially increased its investment in commercial,
commercial real estate and construction and land loans in the last five years.
Because of the

-9-

higher degree of risk associated with these types of loans, the Company has
increased its allowance for loan losses to reflect this increased risk.

A provision for loan losses is charged to income to increase the
allowance to a level deemed to be adequate based on management's evaluation.
When a loan or a part thereof is considered by management to be uncollectible, a
charge is made against the allowance. Recoveries of previously charged-off loans
are credited back to the allowance. The following table summarizes the changes
in the allowance for loan losses for the last five years:

SUMMARY OF LOAN LOSS EXPERIENCE

2002 2001 2000 1999 1998
---- ---- ---- ---- ----

(Dollars in thousands)
Balance at January 1 $ 2,421 $ 1,826 $ 1,679 $ 1,256 $ 840

Loans charged off:
Commercial loans (100) -- -- -- (8)
Real estate loans:
Construction and land (100) (130) (2,800) -- (7)
Commercial (53) -- -- -- --
Residential (123) -- (103) (57) (32)
Consumer and other loans (95) (50) -- -- --
------- ------- ------- ------- -------
Net charge-offs (471) (350) (2,903) (57) (47)
------- ------- ------- ------- -------
Provision for loan losses 1,803 945 3,050 480 463
------- ------- ------- ------- -------
Balance at December 31 $ 3,753 $ 2,421 $ 1,826 $ 1,679 $ 1,256
======= ======= ======= ======= =======
Ratio of net charge-offs
during the period to
average loans outstanding
during the period 0.16% 0.12% 1.03% 0.02% 0.02%
======= ======= ======= ======= =======

For many years, the Company has minimized credit risk by adhering to
sound underwriting and credit review policies. These policies are reviewed at
least annually and changes approved by the board of directors. Senior management
is actively involved in business development efforts and maintenance and
monitoring of credit underwriting approval.

Management believes the allowance for loan losses is adequate to absorb
probable loan losses and that the policies and procedures in place to identify
and monitor loans for potential losses are satisfactory.

-10-

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

Presented below is an analysis of the composition of the allowance for
loan losses (in thousands of dollars) and percent of each category to total
loans:

2002 2001 2000
- -------------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- -------------------------------------------------------------------------------------------

Commercial loans $ 969 25.82% $ 302 12.47% $ 440 25.74%
Real estate loans:
Construction and land 1,917 51.08% 1,077 44.49 325 17.80
Commercial 270 7.19% 580 23.96 400 21.91
Residential 367 9.78% 375 15.49 495 27.11
Consumer and other loans 230 6.13% 87 3.59 136 7.44
------ ------ ------ ------ ------ ------
Total $3,753 100.0% $2,421 100.0% $1,826 100.0%
====== ====== ====== ====== ====== ======

1999 1998
- --------------------------------------------------------------------------
% of % of
Amount Total Amount Total
- --------------------------------------------------------------------------

Commercial loans $ 455 27.10% $ 395 31.45%
Real estate loans
Construction and land 235 14.00 85 6.77
Commercial 320 19.06 150 11.94
Residential 540 32.16 535 42.60
Consumer and other loans 129 7.68 91 7.24
------ ------ ------ -----
Total $1,679 100.0% $1,256 100.0%
====== ====== ====== =====

The percentage of the allocation of the allowance for loan losses among
the various categories have changed for the years 1998 through 2002 to reflect
the changes in the types of loans that the Company was originating, the degree
of risk associated with these loans and the performance of specific loans. Since
1998, the increased investment in the higher risk commercial, commercial real
estate and construction and land loans is reflected in the increased allowance
attributed to these classifications during that period.

-11-

DEPOSITS AND BORROWINGS

DEPOSITS

The following table shows the average amount of deposits and average
rate of interest paid thereon for the years indicated.

2002 2002 2001 2001 2000 2000
---- ---- ---- ---- ---- ----
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Balance at December 31:

Noninterest-bearing deposits $ 20,911 - $ 17,516 - $ 15,116 -
Money market deposit accounts 24,260 2.49% 16,394 3.14% 12,567 3.30%
Savings deposits 17,201 1.38% 15,025 2.12% 16,458 2.25%
NOW accounts 21,332 1.14% 16,173 1.63% 16,862 1.78%
Certificate of deposit and
Other time deposits 159,362 4.17% 168,200 5.97% 156,152 5.88%
------- ----- ------- ----- ------- -----
Total deposits $243,066 3.18% $233,308 4.77% $217,155 4.73%
======== ===== ======== ===== ======== =====

As of December 31, 2002, certificates of deposit and other time deposits
(including brokered deposits) of $100,000 or more mature as follows:

Maturing
---------------------------------------------------
(Dollars in thousands)

3 MONTHS 3-6 6-12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- ------ ------ ------- -----
Certificates of deposit
and other time deposits $11,432 $ 5,722 $ 8,019 $ 9,069 $34,242
======= ======= ======= ======= =======
Percent 33.38% 16.71% 23.42% 26.49% 100.00%
======= ======= ======= ======= =======

RETURN ON EQUITY AND ASSETS

2002 2001 2000
---- ---- ----

Return on assets (net income divided by
Average total assets) 0.55% 0.63% 0.56%
Return on equity (net income divided by
average equity) 6.11% 6.84% 5.24%
Dividend payout ratio (dividends per
share divided by net income per share) 24.06% 16.55% 20.00%
Equity to assets ratio (average equity
divided by average total assets) 8.99% 9.16% 10.76%

-12-

SUBSIDIARY ACTIVITIES

At December 31, 2002, the Bank had a wholly-owned service corporation,
CSL Service Corporation ("CSL"), an Illinois chartered company. CSL is a
participant in a joint venture real estate development (Williamsburg Place LLC),
which has purchased and is developing commercial real estate.

PERSONNEL

As of December 31, 2002, the Company had 82 authorized full-time
employee positions and 31 authorized part-time employee positions. The employees
are not represented by a collective bargaining unit and the Company considers
its relationship with its employees to be good.

REGULATION AND SUPERVISION
GENERAL

The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA").

The Bank is an Illinois state chartered savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the Savings
Association Insurance Fund (the "SAIF"). The Bank is subject to extensive
regulation by the Illinois Office of Banks and Real Estate (the "OBRE"), as its
chartering authority, and by the FDIC, as deposit insurer. The Bank must file
reports with the OBRE and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approval prior to entering into
certain transactions such as establishing branches and mergers with, or
acquisitions of, other depository institutions. There are periodic examinations
by the OBRE and the FDIC to assess the Bank's compliance with various regulatory
requirements and its financial condition. This regulation and supervision
establishes a framework of activities in which a savings bank can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in such regulation, whether by the OBRE, the FDIC or through legislation, could
have a material adverse impact on the Company and the Bank and their operations
and stockholders. The Holding Company will also be required to file certain
reports with and otherwise comply with the rules and regulations, of the OTS,
the OBRE and the Securities and Exchange Commission (the "SEC") under the
federal securities laws. Certain of the regulatory requirements applicable to
the Bank and to the Holding Company are referred to below or elsewhere herein.
However, the description of such requirements is not exhaustive and it does not
purport to be a complete description of the applicable laws and regulations.

-13-

The OBRE has established a schedule for the assessment of "supervisory
fees" upon all Illinois savings banks to fund the operations of the OBRE. These
supervisory fees are computed on the basis of each savings bank's total assets
(including consolidated subsidiaries) and are payable at the end of each
calendar quarter. A schedule of fees has also been established for certain
filings made by Illinois savings banks with the OBRE. The OBRE also assesses
fees for examinations conducted by the OBRE's staff, based upon the number of
hours spent by the OBRE's staff performing the examination. During the year
ended December 31, 2002, the Bank paid approximately $54,000 in supervisory fees
and expenses.

BANK REGULATIONS

CAPITAL REQUIREMENTS. Under the Illinois Savings Bank Act (the "ISBA")
and the regulations of the OBRE, an Illinois savings bank must maintain a
minimum capital at a level not less than that required to maintain insurance of
deposits by the FDIC. The OBRE has the authority to require an Illinois savings
bank to maintain a higher level of capital if deemed necessary based on the
savings bank's financial condition, history, management or earnings prospects.

The FDIC has also adopted risk-based capital guidelines to which the
Bank is subject. The Bank is required to maintain certain levels of regulatory
capital in relation to regulatory risk-weighted assets. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet items
to four risk-weighted categories ranging from 0% to 100%, with higher levels of
capital being required for the categories perceived as representing greater
risk. The guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitation, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.

In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio. These regulations provide for a minimum Tier I leverage
ratio of 3% for banks that meet certain specified criteria, including that they
have the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of at least 4%. The FDIC may, however, set higher leverage and risk-based
capital requirements on individual institutions when particular circumstances
warrant.

The following is a summary of the Bank's regulatory capital at
December 31, 2002:
Total Capital to Risk-Weighted Assets 14.1%
Tier I Leverage Ratio 8.7%
Tier I to Risk-Weighted Assets 12.5%

The FDIC, along with other federal banking agencies, adopted a
regulation providing that the agencies will take account of the exposure of a
bank's capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy.

-14-

STANDARD FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Establishing Standards for Safety and Soundness.
The Guidelines set forth safety and soundness standards in various areas such as
internal controls, audit, systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and quality, earnings and compensation that
the banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the appropriate federal banking
agency determines that an institution fails to meet any standard prescribed by
the Guidelines, the agency may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard.

LENDING RESTRICTION. The Bank is prohibited by the ISBA from making
secured or unsecured loans for business, commercial or agricultural purposes
representing in the aggregate an amount in excess of 15% of its total assets,
unless the OBRE authorizes in writing a higher percentage limit for such loans
upon the request of an institution.

The Bank is also subject to a loans-to-one borrower limitation. Under
the ISBA, the total loans and extensions of credit by the Bank to any person
outstanding at one time must not exceed the greater of $500,000 or 25% of the
Bank's total capital plus general loan loss reserves. In addition, the Bank may
make loans in an amount equal to an additional 10% of the Bank's capital plus
general loan loss reserves if secured by readily marketable collateral.

DIVIDEND LIMITATIONS. Under the ISBA, dividends may only be declared
when the total capital of the Bank is greater than that required by the ISBA.
Dividends may be paid by the Bank out of its net profits. The written approval
of the OBRE must be obtained, however, before a savings bank having total
capital of less than 6% of total assets may declare dividends in any year in an
amount in excess of 50% of its net profits for that year. A savings bank may not
declare dividends in excess of its net profits in any year without the approval
of the OBRE. Finally, the Bank will be unable to pay dividends in an amount
which would reduce its capital below the greater of (i) the amount required by
the FDIC capital regulations or otherwise specified by the FDIC, (ii) the amount
required by the OBRE or (iii) the amount required for the liquidation account
established by the Bank in connection with the Bank's conversion to stock form.
The OBRE and the FDIC also have the authority to prohibit the payment of any
dividends by the Bank if the OBRE or the FDIC determines that the distribution
would constitute an unsafe or unsound practice.

PROMPT CORRECTIVE REGULATORY ACTION. Federal law requires, among other
things, that the federal bank regulatory authorities take "prompt corrective
action" with respect to banks that do not meet minimum capital requirements. For
these purposes, the law establishes various capital categories. The FDIC has
adopted regulations to implement the prompt corrective action legislation. Under
the regulations, an institution is deemed to be "undercapitalized" if it has a
total risk-based capital ratio of less than 8%, a Tier I risk-based capital
ratio of less than 4%, or generally a leverage ratio of less than 4%. An
institution is deemed to be "significantly undercapitalized" if it has a
risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a leverage ratio of less than 3%. An institution is deemed to
be "critically undercapitalized" if it has a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or less than 2%.

"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan must be guaranteed by any
company that controls the undercapitalized institution in an amount equal to the
lesser of 5% of the Bank's total assets when deemed undercapitalized or the
amount necessary to achieve the status of adequately capitalized. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized". "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including
but not limited to an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and cease
receipt of deposits from correspondent banks or dismiss directors or officers.
"Critically undercapitalized" institutions also may not make any payment of
principal or interest on certain subordinated debt or extend credit for a highly
leveraged transaction or enter into any material transactions outside the
ordinary course of business. In addition, subject to a narrow exception, the
appointment of a receiver or

-15-

conservator is required for a "critically undercapitalized" institution within
270 days after it obtains such status.

TRANSACTIONS WITH AFFILIATES. Transactions between depository
institutions and their affiliates are governed by federal law. An affiliate of a
savings bank is any company or entity that controls, is controlled by, or is
under common control with the savings bank, other than a subsidiary. In a
holding company context, at a minimum, the parent holding company of a savings
bank and any companies which are controlled by such parent holding company are
affiliates of the savings bank. Generally, the extent to which the savings bank
or its subsidiaries may engage in "covered transactions", including loans, with
any one affiliate is limited to 10% of such savings bank's capital stock and
surplus, and there is an aggregate limit on all such transactions with all
affiliates of 20% of such capital stock and surplus. Federal law also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees or acceptances on letters of credit issued on behalf of an
affiliate. Covered transactions and a broad list of other specified transactions
also must be on terms substantially the same, or no less favorable, to the
savings bank or its subsidiary as similar transactions with non-affiliates.

Federal law also restricts a savings bank with respect to loans to
directors, executive officers, and principal stockholders. Loans to directors,
executive officers and stockholders who control, directly or indirectly, 10% or
more of voting securities of a savings bank, and certain related interests of
any of the foregoing, may not exceed the savings bank's total capital and
surplus. Loans to directors, executive officers and principal shareholders must
be made on terms substantially the same as offered in comparable transactions to
other persons, except that such insiders may receive preferential loans made
pursuant to a compensation program that is widely available to the Bank's
employees and does not give preference to the insider over other employees.
Federal law also requires that the board of directors approve loans to insiders
exceeding a certain amount. There are additional limitations on loans to
executive officers.

ENFORCEMENT. The OBRE and the FDIC have extensive enforcement authority
over Illinois-chartered savings banks, including the Bank. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.

The OBRE is given authority by the ISBA to appoint a conservator or
receiver for an Illinois savings bank under certain circumstances including, but
not limited to, insolvency, a substantial dissipation of assets due to violation
of law, regulation or order of the OBRE or an unsafe or unsound practice. The
FDIC also has authority under federal law to appoint a conservator or receiver
for an insured savings bank under certain circumstances.

INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are presently
insured by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of the three subcategories based on examination ratings
and other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points of assessable deposits for the healthiest institutions to 27
basis points for the riskiest.

In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. Payments
toward the FICO bonds amounted to $41,000 in 2002.

The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.

-16-

Insurance of deposits may be terminated by the FDIC upon finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. The Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.

FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction
accounts aggregating $6 million or less (subject to adjustment by the Federal
Reserve Board) there is no reserve. For accounts over $6 million and up to $42.1
million the reserve requirement is 3%; and for accounts greater than $42.1
million, the reserve requirement is $1.083 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $42.1 million. The Bank is in
compliance with the foregoing requirement.

FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank (the "FHLB") system, which consists of 12 regional FHLBs. The FHLBs
provides a central credit facility primarily for member institutions. The Bank,
as a member of the FHLB of Chicago, is required to acquire and hold shares of
capital stock in an amount at least equal to 1% of the aggregate principal
amount of its unpaid residential mortgage loans and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. The Bank is in compliance with this requirement with an
investment in FHLB stock at December 31, 2002 of $4,697,000.

The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 2002, 2001 and 2000,
dividends from the FHLB to the Bank amounted to approximately $242,000,
$295,000, $280,000, respectively.

HOLDING COMPANY REGULATION . Federal law allows a state savings bank
that qualifies as a "qualified thrift lender" to elect to be treated as a
savings association for purposes of the savings and loan holding company
provisions of federal law. Such election results in its holding company being
regulated as a savings and loan holding company by the OTS rather than as a bank
holding company by the Federal Reserve Board. The Bank has made such election
and has received approval from the OTS to become a savings and loan holding
company. The Company has registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. Additionally, the Bank is required to notify the
OTS at least 30 days before declaring any dividend to the Company. Because the
Bank is chartered under Illinois law, the Company is also subject to
registration with and regulation by the OBRE.

As a unitary savings and loan company, the Company is generally not
restricted under existing laws as to the types of business activities in which
it may engage. The Gramm-Leach-Bliley Act of 1999 provides that no company may
acquire control of a savings association after May 4, 1999, unless it engages
only in the financial activities permitted for financial holding companies under
the law and for multiple savings and loan holding companies as described below.
Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan
holding companies may only engage in such activities. The Gramm-Leach-Bliley
Act, however, grandfathered the unrestricted authority for activities with
respect to unitary savings and loan holding companies existing prior to May 4,
1999, such as the Company, so long as the Bank continues to comply with the
qualified thrift lender test. Upon any non-supervisory acquisition by the
Company of another savings association as a separate subsidiary, the Company
would become a multiple savings and loan holding company and would be subject to
extensive limitations on the types of business activities in which it could
engage. Federal law

-17-

limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 49(c)(8) of the Bank Holding Company Act,
subject to prior approval of the OTS, and to other activities authorized by OTS
regulation. Multiple savings and loan holding companies are prohibited from
acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary company engaged in activities other than those permitted by
federal law.

Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from merging with or acquiring
more than 5% of the voting stock of another savings institution or holding
company thereof without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.

The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) interstate supervisory acquisitions by
savings and loan holding companies; and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.

In order to elect and continue to be regulated as a savings and loan
holding company by the OTS, the Bank must continue to qualify as a qualified
thrift lender. This requires the Bank to maintain compliance with the test for a
"domestic building and loan association", as defined in the Internal Revenue
Code, or with a Qualified Thrift Lender Test. Under the Test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (including residential
mortgages and related investments, certain mortgage-backed and related
securities, and credit card loans, student loans and small business loans) in at
least 9 months out of each 12 month period. A holding company of a savings
institution that fails to qualify as a qualified thrift lender must either
convert to a bank holding company and thereby become subject to the regulation
and supervision of the Federal Reserve Board or operate under certain
restrictions. As of December 31, 2002, the Bank maintained in excess of 65% of
its portfolio assets in qualified thrift investments. The Bank also met the test
in each of the prior 12 months and, therefore, is a qualified thrift lender.

-18-

FEDERAL AND STATE INCOME TAXATION

FEDERAL TAXATION

GENERAL. The Company and its affiliates file a consolidated federal
income tax return. To the extent a member of the consolidated group incurs a
loss which is utilized to reduce the consolidated group's federal tax liability,
that member will be reimbursed by those members that would have incurred federal
tax liability if not for the member's tax loss.

Amounts provided for income tax expense are based upon income reported
for financial statement purposes and do not necessarily represent amounts
currently payable to federal or other tax authorities. Deferred income taxes,
which principally arise from the temporary differences related to the
recognition of certain income and expense items for financial reporting purposes
and the period in which they affect federal and state taxable income, are
included in the amounts provided for income taxes.

BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Internal Revenue Code of 1986 (the "Code") relating to a
savings institution's use of bad debt reserves for federal income tax purposes
and requires such institutions to recapture (i.e. include in income) certain
portions of their accumulated bad debt reserves. Prior to the enactment of the
1996 Act, the Bank was permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions, within specified formula limits,
were deducted in arriving at the Bank's taxable income. The Bank's deduction
with respect to "qualifying loans", which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. The Bank's deduction with respect to non-qualifying
loans was required to be computed under the Experience Method.

THE 1996 ACT. Under the 1996 Act, for its current and future taxable
years as a "Small Bank", the Bank is permitted to make additions to its bad debt
reserves for Federal income tax purposes under the Experience Method based on
total loans. However, the Bank is required to recapture (i.e. include in income)
over a six-year period the excess of the balance of its bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
of December 31, 1995, the Bank's bad debt reserve exceeded the balance of such
reserve as of December 31, 1987 by $326,713. This excess has been fully
recaptured into taxable income as of December 31, 2002.

DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured bad debt reserves (including the balance
of its reserves as of December 31, 1987) to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. In general, the term
"non-dividend distributions" is defined as distributions in excess of the Bank's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Bank's current or accumulated
earnings and profits will not cause this pre-1988 reserve to be included in the
Bank's income.

The amount of additional taxable income created by a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately 65% of the amount of
such distribution (but not in excess of the amount of such reserves) would be
included in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.

DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case

-19-

of dividends received from unaffiliated corporations with which the Company and
the Bank will not file a consolidated tax return, except that if the Company
owns more than 20% of the stock of a corporation distributing a dividend, then
80% of any dividend received may be excluded.

STATE TAXATION

ILLINOIS STATE TAXATION. The Company and its subsidiaries are required
to file Illinois income tax returns and pay tax at an effective tax rate of
approximately 4.7% on Illinois taxable income, assuming a 35% Federal income tax
rate. For these purposes, Illinois taxable income, generally means federal
taxable income subject to certain modifications, the primary one of which is the
exclusion of interest income from United States Treasury obligations.

The Company and its subsidiaries file one combined corporation return
for State of Illinois income tax purposes.

DELAWARE STATE TAXATION. As a Delaware holding company not earning
income in Delaware, the Company is exempted from Delaware Corporate income tax
but is required to file an annual report with and pay an annual franchise tax to
the State of Delaware.

FORWARD LOOKING STATEMENTS

This annual report on Form 10-K (including certain information
incorporated by reference) contains forward-looking statements, including
certain plans, expectations, goals and projections, which are subject to
numerous assumptions, risks and uncertainties. These forward-looking statements
are identified by the use of terms such as "believes", "anticipates",
"estimates", "expects", "projects" or similar words. Actual results could differ
materially from those contained or implied by such statements for a variety of
factors including, but not limited to: changes in general and/or local economic
conditions; movements in interest rates; competitive pressures on product
pricing and services; success and timing of business strategies, and; the
nature, extent and timing of governmental actions and reforms. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.

-20-

ITEM 2 PROPERTIES

The Bank conducts its business through an executive and full-service
office located in Bloomington and four other full service branch offices. The
Company believes that the Bank's current facilities are adequate to meet the
present and immediately foreseeable needs of the Bank and the Company.

LOCATION ORIGINAL
- -------- YEAR NET BOOK VALUE AT
LEASED LEASED OR DECEMBER 31, DEPOSITS
OR OWNED ACQUIRED 2002 PER OFFICE

(Dollars in thousands)

EXECUTIVE BRANCH OFFICE:
2101 North Veterans Parkway*
Bloomington, Illinois 61704 Owned 1997 $3,878 $61,325

BRANCH OFFICES:
301 Broadway*
Normal, Illinois 61761 Owned 1963 367 53,829

2402 E. Washington*
Bloomington, Illinois 61704 Owned 1980 689 47,141

1722 Hamilton Road*
Bloomington, Illinois 61704 Owned 1995 1,169 21,821

115 N. Third Street*
Fairbury, Illinois 61739 Owned 1981 623 59,974
------ --------
Total $6,726 $244,090
====== ========

* An automated teller machine is located at each office.
None of the properties owned by the Company are subject to any encumbrance.

-21-

ITEM 3 LEGAL PROCEEDINGS

The registrant is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by management to
be immaterial to the registrant's financial condition or results of operations.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of 2002 to a vote of
security holders, through the solicitation of proxies or otherwise.

SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions with the Company and subsidiary bank of all
executive officers of the Company are listed below:

-22-

PART II

ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Information relating to the market for registrant's common equity,
dividends paid and related stockholder matters appears in the registrant's 2002
Annual Report to Stockholders on page 42 and is incorporated herein by
reference.

Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities in
column
(A)

(A) (B) (C)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 357,248 $12.43 7,912
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders - - -
- --------------------------------------------------------------------------------------------------------------------
Total 357,248 $12.43 7,912
- -------------------------------------------------------------------------------------------------------------------

ITEM 6 SELECTED FINANCIAL DATA

Information required under this item is incorporated by reference to page
4 of the Company's 2002 Annual Report to Stockholders under the caption
"Selected Financial Data".

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The above-captioned information appears under Management's Discussion and
Analysis of Results of Operations and Financial Condition in the registrant's
2002 Annual Report to Stockholders on pages 5 through 11 and 14 through 16 and
is incorporated herein by reference.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is incorporated by reference to
pages 12 and 13 of the Company's 2002 Annual Report to Stockholders.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Citizens First Financial Corp.
and its subsidiaries, together with the report thereon by BKD, LLP for the year
ended December 31, 2002 on pages 17 through 41 and the information contained
under the caption "Quarterly Financial Information" on page 42 in the
registrant's 2002 Annual Report to Stockholders are incorporated herein by
reference.

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

-23-

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this item relating to directors is
incorporated by reference to the registrant's 2002 Proxy Statement furnished to
its stockholders in connection with an annual meeting to be held April 21, 2003
(the "2002 Proxy Statement"), under the caption "Election of Directors", which
Proxy Statement has been filed with the Commission. The information required
under this item relating to executive officers is set forth in Part I,
"Supplemental Information - Executive Officers of the Registrant" of this annual
report on Form 10-K.

ITEM 11 EXECUTIVE COMPENSATION

The information relating to directors' and executive compensation is
incorporated herein by reference to the registrant's 2003 Proxy Statement at
pages 15 through 20 and page 8 under the caption "Directors' Compensation".

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under this item is incorporated by reference to
pages 13 and 14 of the registrant's 2003 Proxy Statement, under the captions
"Security Ownership of Directors, Nominees for Directors, Most Highly
Compensated Executive Officers and All Directors and Executive Officers as a
Group" and "Security Ownership of Shareholder Holding 5% or More".

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information relating to certain relationships and related
transactions is incorporated herein by reference to the registrant's 2003 Proxy
Statement at page 20 under the caption "Transactions with Certain Related
Persons".

ITEM 14 CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures. Within 90 days before filing
this report, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. 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. Since the date of the evaluation described
above, there have not been any significant changes in our internal accounting
controls or in other factors that could significantly affect those controls.

-24-

ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(1) The following documents are filed as a part of this report:

(1) Financial Statements

Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages 18 through 41 of the 2002
Annual Report to Stockholders
PAGE

Independent Accountants' Report..............................17

Consolidated Balance Sheets as of
December 31, 2002 and 2001...................................18

Consolidated Statements of Income for the
years ended December 31, 2002, 2001 and 2000.................19

Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000.........20

Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000..............21-22

Notes to Consolidated Financial Statements................23-41

-25-

The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report,
except as expressly provided herein.

(2) Financial Statement Schedules

All schedules are omitted because they are not
required or applicable, or the required information
is shown in the consolidated financial statements or
the notes thereto.

(3) Exhibits

The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Citizens First Financial Corp.*
3.2 Bylaws of Citizens First Financial Corp.**
4.0 Stock Certificate of Citizens First Financial Corp.*
10.1 Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan*
10.2 Form of Employment Agreement between Citizens Savings Bank,
F.S.B. and certain executive officers*
10.3 Form of Employment Agreement between Citizens First Financial
Corp. and certain executive officers*
10.4 Form of Citizens Savings Bank, F.S.B. Supplemental Executive
Retirement Plan*
10.5 Form of Change in Control Agreement between Citizens Savings Bank,
F.S.B. and certain executive officers*
10.6 Form of Citizens Savings Bank, F.S.B. Supplemental Executive
Retirement Plan*
10.7 Form of Citizens Savings Bank, F.S.B. Employee Severance
Compensation Plan*
10.8 Citizens First Financial Corp. 1997 Stock-Based Incentive Plan***
13.0 Portions of 2002 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I, Item 1 -- Subsidiary Activities"
23.0 Consent of BKD, LLP
99.1 Section 906 Certification of Chief Executive Officer
99.2 Section 906 Certification of Chief Financial Officer

- --------
* Incorporated herein by reference to the Exhibits to
Form SB-2, Registration Statement, filed on January
24, 1997 and any amendments thereto, Registration No.
333-556.
** Incorporated by reference to Exhibit 99.1 to Current
Report on Form 8-K filed on September 1, 2000.
*** Incorporated herein by reference to the Proxy
Statement for the Special Meeting of Shareholders
held on November 12, 1997.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed in the fourth quarter of 2002.

-26-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 28th day of
March, 2003.

CITIZENS FIRST FINANCIAL CORP.

By: /s/ C. William Landefeld
-------------------------------------------
C. William Landefeld
President, Chief Executive Officer
and Director

Date: March 28, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.

Name Title Date
- ---- ----- ----

/s/ C. William Landefeld President, Chief Executive March 28, 2003
- ------------------------------- Officer and Director
C. William Landefeld (principal executive officer)

/s/ Dallas G. Smiley Senior Vice President, March 28, 2003
- ------------------------------- Secretary, Treasurer and
Dallas G. Smiley Chief Financial Officer (principal
accounting and financial officer)

/s/ Dr. Lowell M. Thompson Director March 28, 2003
- -------------------------------
Dr. Lowell M. Thompson

/s/ Harold L. Hoeferle Director March 28, 2003
- -------------------------------
Harold L. Hoeferle

/s/ Ronald C. Wells Director March 28, 2003
- -------------------------------
Ronald C. Wells

/s/ L. Carl Borngasser Director March 28, 2003
- -------------------------------
L. Carl Borngasser

/s/ Arthur W. Mier Director March 28, 2003
- -------------------------------
Arthur W. Mier

/s/ Martin L. Hogan Director March 28, 2003
- -------------------------------
Martin L. Hogan

-27-

CERTIFICATIONS

I, C. William Landefeld, Chief Executive Officer, certify that:

(1) I have reviewed this annual report on Form 10-K of Citizens First
Financial Corp.;

(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

(4) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

(6) The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003 /s/ C. William Landefeld
-------------------------------------------
C. William Landefeld
Chief Executive Officer

-28-

I, Dallas G. Smiley, Chief Financial Officer, certify that:

(7) I have reviewed this annual report on Form 10-K of Citizens First
Financial Corp.;

(8) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

(9) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

(10) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

(11) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

(12) The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003 /s/ Dallas G. Smiley
---------------------------------------------
Dallas G. Smiley
Chief Financial Officer

-29-

Exhibit Index

Exhibit No. Description
- ----------- -----------

13.0 PORTIONS OF 2002 ANNUAL REPORT TO STOCKHOLDERS

23.0 INDEPENDENT ACCOUNTANT'S CONSENT

99.1 CHIEF EXECUTIVE OFFICER CERTIFICATION

99.2 CHIEF FINANCIAL OFFICER CERTIFICATION