UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number: 0-32041

CITIZENS FIRST BANCORP, INC.      

(810) 987-8300

Not Applicable

Registrant’s telephone number, including area code: (810) 987-8300
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    X o

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

     Indicate by check mark whether the registrant is an accelerated filer Yes þ    X o

     The aggregate market value of the voting and non-voting common equity held by non-affiliates was $141.6 million, based upon the closing price of $21.10 as quoted on the Nasdaq National Market on March 8, 2004. Solely for purposes of this calculation, the shares held by the directors and executive officers of the registrant are deemed to be held by affiliates.

     As of March 15, 2004, the registrant had 8,518,902 shares of common stock outstanding.

Documents Incorporated by Reference

TABLE OF CONTENTS

INDEX

Part I

Item 1. Business

General

Citizens First Bancorp, Inc. (the “Company” or “Citizens First Bancorp”) was organized in October 2000 as a Delaware business corporation at the direction of Citizens First Savings Bank (the “Bank” or “Citizens First”). As used in this Report, unless otherwise stated or the context otherwise requires, all references to “we,” “our,” or “us” and similar references are to the Company and/or the Bank and the consolidated subsidiaries of the Company and the Bank, including Citizens First Mortgage, LLC, which has engaged in the Bank’s residential mortgage lending business since its formation in June, 2002. The Company became the holding company for Citizens First upon completion of the Bank’s conversion from the mutual to the stock form of ownership. The conversion was completed on March 7, 2001. In connection with the conversion, the Company sold 8,821,075 shares of its common stock, par value $0.01 per share, at a purchase price of $10 per share to depositors of the Bank in a subscription offering, which raised approximately $85.1 million in net conversion proceeds. In addition, the Company issued an additional 705,686 shares, representing 8% of the shares sold in the subscription offering, to Citizens First Foundation, a charitable foundation established by the Bank. The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds it retained from the subscription offering, and no significant liabilities. Management of the Company and the Bank are substantially similar. Except for a parcel of vacant land located in northern St. Clair County, Michigan, which was purchased by the Company in November, 2002 and is held by the Company, the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. In addition, employees are generally employed by the Bank rather than by the Company. Accordingly, the information set forth in this Report, including the Consolidated Financial Statements and related financial data, relates primarily to the Bank and other consolidated subsidiaries.

     Citizens First currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 16 full-service banking offices. The deposited funds, together with funds generated from operations and borrowings, are used by Citizens First to originate loans. Citizens First’s principal lending activity is the origination of mortgage loans for the purchase or refinancing of one- to four-family residential property. Citizens First originates one- to four-family mortgage loans primarily for sale in the secondary market, although Citizens First generally retains the servicing rights for these mortgage loans. Citizens First also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of other consumer loans. Citizens First’s revenues are derived principally from the generation of interest and fees on loans originated and held and, to a lesser extent, from gains and fees related to loans originated for sale and interest and dividends earned on Citizens First’s investments. Citizens First’s primary sources of funds consist of deposits, loan repayments, payments of interest on loans, proceeds from the sale of loans originated for sale, maturities and sales of investment securities, borrowings from the Federal Home Loan Bank, cash on hand and cash on deposit.

Regulation

     Citizens First is regulated by the Michigan Office of Financial and Insurance Services and the Federal Deposit Insurance Corporation. Citizens First’s deposits are insured to the maximum allowable amount by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Citizens First has been a member of the Federal Home Loan Bank System since 1938. For more information about the regulation applicable to Citizens First and the Company, see “Regulation and Supervision” below.

Market Area

     Citizens First’s main office is in Port Huron, Michigan, which is in St. Clair County. Citizens First’s deposit gathering and lending activities, as well as its other primary business operations, are principally concentrated in and around the communities surrounding its 16 full-service offices located in St. Clair, Sanilac, Huron, Lapeer and northern Macomb counties, Michigan. As of January 9, 2004 and due to the acquisition of Metrobank, Citizens market area now includes Oakland County. To a limited extent, however, Citizens First also makes some loans beyond its primary market area. Port Huron, the population center for St. Clair County, is located approximately sixty miles northeast of Detroit and sixty miles east of Flint. St. Clair County is bounded by the counties of Macomb to the south and west, Lapeer to the west and Sanilac to the north. The eastern boundary of the County is the St. Clair River and Canada. Almost half of the County’s total land area is rural, and approximately one-third of the resident labor force commutes to jobs outside of the County. As of 2001, St. Clair County had a population of approximately 166,541, while the other four counties in the Bank’s primary market area had a combined population of approximately 169,970. The largest employment sectors in St. Clair County are manufacturing, services, retail and government. Citizens First’s primary market area has a higher per capita median household income when compared to Michigan and the United States.

OPERATING STRATEGY

     Citizens First is a community-oriented financial institution, offering a wide range of deposit and loan products to its customers. In recent years, Citizens First’s strategy has been one of controlled balance sheet growth and broader diversification of its

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loan products and loan portfolio. Beginning in 1995, Citizens First determined that it would originate its fixed-rate one-to-four-family residential mortgage loans primarily for sale, while generally retaining the servicing rights as to those mortgages. Since that time, Citizens First has emphasized originating residential mortgage loans, commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of consumer loans. It has also emphasized increasing sources of noninterest income. To accomplish these objectives, Citizens First has sought to:

	•		Operate as a community bank, expanding the services and products it offers, particularly its commercial business products and deposit products offered to local municipalities and government organizations.
	•		Provide customer service and products by expanding delivery systems by using new technology and expanding the capability of its customer call center through which customers can receive various services via telephone.
	•		Increase fee income by broadening non-depository product offerings and services, including expanding its trust services. Citizens First’s five-year-old Asset Management and Trust Group oversaw $201.6 million in assets at December 31, 2003, compared to $143.3 million in assets at December 31, 2002, an increase of $58.3 million, or 40.7%.
	•		Upgrade technology and training to ensure high levels of service. During 2003, the Bank initiated several training programs to enhance the Bank’s focus on customer service. In addition, the Bank completed its planned computer conversion that it believes will improve its technology. See “Computer Conversion” below.
	•		Reinvest in its communities.
	•		Continue to increase its emphasis on commercial, commercial real estate and consumer loans to increase the yields earned on its overall loan portfolio, without incurring unacceptable credit risk.
	•		Increase originating automobile loans on a direct and indirect basis, at least in part by increasing the number of vehicle dealers through which Citizens finances automobile purchases by consumers.
	•		Control credit risk by continuing to employ conservative underwriting standards to minimize the level of problem assets.
	•		Manage interest rate risk by continuing to emphasize an appropriate mix of investments and loans. For more information about the interest rate risk to which Citizens First is exposed and about how Citizens First attempts to manage that risk, see Item 7A, “Quantitative and Qualitative Disclosure About Market Risk.”

COMPUTER CONVERSION

     In October, 2002, Citizens First entered into an agreement with Fiserv Solutions, Inc. (“Fiserv”) relating to Fiserv’s ITI software package. The Fiserv ITI software package offers a fully integrated general ledger system, customer relationship management capabilities, comprehensive on-line/real time Internet banking services, improved ATM processing and document imaging, in addition to various other features. Citizens First believes that the Fiserv ITI software package should provide it with significant processing improvements that it believes will allow enhanced customer service and efficiencies within the Bank. In connection with its conversion to the Fiserv software package, the Bank also upgraded PCs throughout the Bank, as well as data line connectivity to its branches, to attempt to improve processing speed.

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COMPETITION

     Citizens First faces intense competition for the attraction of deposits and origination of loans in its primary market area. Citizens First’s most direct competition for deposits has historically come from the several financial institutions operating in Citizens First’s primary market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. Citizens First’s competition for loans comes primarily from financial institutions operating in its primary market area, and to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans may increase due to the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies. Citizens First also expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of institutional consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry, and have allowed banks, mortgage companies, mortgage brokers and other competitors to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act passed in 1999, which permits affiliation among banks, securities firms and insurance companies, also has changed the competitive environment in which Citizens First conducts business. Some of the institutions with which Citizens First competes are significantly larger than Citizens First and, therefore, have significantly greater resources. Competition for deposits and the origination of loans could limit Citizens First’s growth in the future.

Lending Activities

General. Citizens First’s loans are subject to federal and state laws and regulations. Interest rates charged by Citizens First on loans are affected principally by the following:

	•		Citizens First’s current asset/liability strategy, which is to monitor and control the financial position of Citizens First, including monitoring and controlling market risk such as interest rate risk. (For more information, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”);
	•		the demand for various types of loans;
	•		the supply of money available for lending purposes; and
	•		the rates offered by competitors.

These factors are, in turn, affected by general and economic conditions, consumer spending and saving habits, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters and other factors. For a list of some additional factors that may affect these items, see the section captioned “Forward-Looking Statements” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Loan Portfolio Analysis. The following table sets forth the composition of Citizens First’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.

[Additional columns below]

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[Continued from above table, first column(s) repeated]

     As shown in the above table, the trend has been to increase the percentage of the Bank’s loan portfolio comprised of commercial and multi-family real estate loans and commercial loans and to decrease the percentage of the Bank’s loan portfolio comprised of one- to four-family residential mortgage loans although, at December 31, 2003, residential mortgage loans still constituted 41% of the Bank’s loan portfolio.

Maturity of Loan Portfolio. The following table presents the dollar amount of loans maturing in Citizens First’s portfolio at December 31, 2003 based on contractual terms to maturity or scheduled amortization, but does not include potential prepayments. Demand loans, loans lacking a stated schedule of repayments or stated maturity and overdrafts are reported as becoming due in one year or less. Loan balances do not include undisbursed loan proceeds, net deferred loan origination costs or allowance for loan losses.

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     Scheduled contractual principal repayments of loans do not reflect the actual lives of most loans. The average life of a loan generally is substantially less than its contractual term because of prepayments. In addition, due-on-sale clauses on loans usually give Citizens First the right to declare loans immediately due and payable under certain circumstances, including, for example, if the borrower sells the real property with the mortgage and the loan is not repaid. The average life of a mortgage loan tends to increase, however, when current mortgage loan market interest rates are substantially higher than interest rates on existing mortgage loans and, conversely, tends to decrease when interest rates on existing mortgage loans are substantially higher than current mortgage loan market interest rates. Current mortgage loan market interest rates are generally lower than rates on existing mortgage loans in Citizens First’s portfolio, which suggests that the average lives of these mortgage loans may be lower than might otherwise have been expected.

     The following table sets forth, at December 31, 2003, the dollar amount of loans contractually due after December 31, 2003, and whether such loans have fixed interest rates or adjustable interest rates (000s omitted).

TYPES OF LOANS. Currently, Citizens First originates one- to four-family residential mortgage loans, commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of other consumer loans. Set forth below is a general description of some of Citizens First’s current policies and practices with regard to some of these types of loans. Although Citizens First believes that the information set forth below is generally consistent with its current practices, management may make exceptions or deviations from its policies from time to time as it deems appropriate. In addition, lending policies and practices are subject to change from time to time as deemed appropriate by management.

     ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. Citizens First’s primary lending activity is the origination of loans secured by one- to four-family residences generally located in its market area. At December 31, 2003, one- to four-family residential mortgage loans totaled $386.5 million or 41.0% of Citizens First’s total loans. Citizens First currently offers various types of adjustable-rate mortgage loans and fixed-rate mortgage loans. At December 31, 2003, 22% of the dollar amount of loans in Citizens First’s residential mortgage loan portfolio had fixed interest rates and 78.0% of the dollar amount of loans in its residential mortgage loan portfolio had adjustable interest rates.

     Citizens First originates fixed-rate, fully-amortizing residential mortgage loans with maturities of 10, 15, 20 and 30 years. The Bank’s management establishes the loan interest rates based on market conditions, with consideration given to the type of the loan and the quality and liquidity of the collateral securing the loan. Citizens First offers mortgage loans that generally conform to Freddie Mac guidelines, as well as jumbo loans, which, according to these guidelines, presently means loans in amounts over $322,700. Fixed-rate conforming loans are typically originated for sale in the secondary market, although Citizens First generally retains the servicing rights. Citizens First will underwrite one- to four-family owner-occupied residential mortgage loans in amounts equal to up to 97% of the appraised value of the underlying real estate, although private mortgage insurance will generally be required on most loans that exceed 80% of the lower of the appraised value or the purchase price of the real estate. In limited instances, Citizens First will originate loans that constitute 103% of the appraised value of the underlying real estate for sale in the secondary market, although Citizens generally retains the servicing rights.

     Citizens First also offers a 7 year balloon mortgage loan. A 7 year balloon mortgage loan requires a fixed monthly payment for the first 7 years, at which point the entire remaining balance of the loan becomes due. Citizens First currently also offers adjustable-rate residential mortgage loans with terms of up to 30 years. The interest rates on adjustable-rate loans are based on the U.S. Treasury securities index. The interest rates on these loans adjust annually after a 1, 3, 5 or 7 year initial fixed period. The maximum amount by which the interest rate may be increased or decreased on such loans is generally 2% per year and 5% over the life of the loan. Additionally, Citizens First offers an adjustable-rate residential mortgage loan in which the borrower has the option to convert the loan to a fixed rate after a predetermined period of time, without incurring refinancing costs.

     Adjustable-rate mortgage loans help reduce Citizens First’s exposure to changes in interest rates because the interest rate paid by Citizens First’s borrowers changes with changes in market interest rates. Because rate changes could increase payments that borrowers are required to make, regardless of their ability to make the increased payments, adjustable rate mortgage loans involve some

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unquantifiable credit risks. Accordingly, if interest rates rise, and mortgage payments are repriced at increased amounts, the risk of default on adjustable-rate mortgage loans increases as well. In addition, although adjustable-rate mortgage loans increase the responsiveness of Citizens First’s asset base to interest rate changes, the extent of this interest rate sensitivity is limited by the contractual documentation, which often restricts how much the interest rates can increase annually and over the lifetime of the mortgage. As a result, yields on adjustable-rate mortgage loans may not be sufficient to offset increases in Citizens First’s cost of funds during periods of rising interest rates.

     Citizens First requires properties securing its mortgage loans to be appraised by an approved independent state-licensed appraiser. Citizens First also requires fire, casualty, title, hazard and, if appropriate, flood insurance to be maintained on most properties securing real estate loans originated by Citizens First. In an effort to provide financing for low- and moderate-income families, Citizens First offers Federal Housing Authority and Veterans Administration residential mortgage loans to qualified individuals with adjustable- and fixed-rates of interest and terms of up to 30 years. These loans are secured by one- to four-family residential property and are underwritten using modified underwriting guidelines.

RESIDENTIAL CONSTRUCTION LOANS. Citizens First originates construction loans to individuals for the construction of one- to four-family residences. At December 31, 2003, residential construction loans totaled $25.0 million or 2.65% of Citizens First’s total loans. Citizens First’s residential construction loans generally provide for the payment of interest only during the construction phase, which is typically between 6 and 12 months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans can be made in amounts of up to 95% of the appraised value of the underlying real estate, provided that the borrower obtains private mortgage insurance on the loan if the loan balance exceeds 80% of the lesser of either the appraised value or the sales price of the secured property. Construction loans to individuals are generally made on the same terms as Citizens First’s one- to four-family mortgage loans. Citizens First also originates residential construction loans to certain builders with which Citizens First has an established relationship.

     Before making a commitment to fund a construction loan, Citizens First requires an appraisal of the property by an independent licensed appraiser. Citizens First also reviews and inspects each property before disbursing funds. Loan proceeds are disbursed in pre-determined portions (described in the loan documentation) upon completion of each stage of work. The final 10% of the loan proceeds is generally not disbursed until the construction of the residence is completed.

     Construction lending generally involves a higher degree of risk than single-family permanent mortgage lending because of the greater potential for disagreements between borrowers and builders and the failure of builders to pay subcontractors. For example, if a builder fails to pay subcontractors, a lien could be attached against the property by the subcontractors, which could reduce the value of the property as collateral for the Bank’s loan. Additional risk also often exists because of the inherent difficulty in estimating in advance both a property’s value post-construction and the estimated cost of construction. If the estimate of construction costs proves to be inaccurate, Citizens First may be required to advance funds beyond the amount originally committed to protect the value of the collateral for its loan. If the estimate of value upon completion proves to be inaccurate, the property’s value may be insufficient to assure full loan repayment.

COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. Citizens First also originates commercial real estate loans. These loans are generally secured by properties located in Citizens First’s primary market area and used for business purposes, such as small office buildings, industrial facilities or retail facilities. Citizens First also, to a lesser extent, originates multi-family real estate loans that are typically secured by 5-unit or larger apartment buildings in Citizens First’s primary market area. At December 31, 2003, commercial and multi-family real estate loans totaled $241.1 million or 25.6% of Citizens First’s total loans.

     Most of the commercial and multi-family real estate loans originated by Citizens First are fully amortizing loans with terms of up to 20 years. Generally, the maximum loan amount Citizens First permits for such a loan is 80% of the value of the underlying real estate. In reaching its decision on whether to originate a commercial or multi-family real estate loan, Citizens First considers the net operating income of the property that will secure the loan, the borrower’s expertise, credit history and profitability and the value of the underlying property. In addition, with respect to commercial real estate rental properties, Citizens First will also consider the terms of the applicable leases and the quality of the tenants. Citizens First has generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of between 1.10x and 1.30x. Citizens First generally requires written appraisals prepared by a certified independent appraiser of all properties securing commercial or multi-family real estate loans of greater than $250,000 or if an appraisal is required by the Financial Institutions Reform, Recovery and Enforcement Act. Additionally, environmental surveys are usually required before Citizens First funds certain larger commercial real estate loans in excess of $1.0 million and may be required on commercial real estate loans of greater than $500,000 or where a risk of contamination exists.

     Citizens First also makes construction loans for commercial development projects, including multi-family commercial properties, single-family subdivisions and condominiums. These loans generally have an interest-only phase during construction and then convert to permanent financing. The permanent mortgage loan must be approved at the time Citizens First initially approves the construction loan. Disbursement of funds is at the sole discretion of Citizens First and is based on the progress of construction. The maximum loan-

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to-value ratio for these loans permitted by Citizens First depends upon the type of commercial development project being undertaken, but generally the amount of this type of loan will not exceed 80% of the value of the underlying real estate.

     Multi-family and commercial real estate lending affords Citizens First an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. A loan secured by this type of property, however, usually is greater in amount and more difficult to evaluate and monitor than a one- to four-family residential mortgage loan. As a result, multi-family and commercial real estate loans typically involve a greater degree of risk than one- to four-family residential mortgage loans. Repayment of multi-family and commercial real estate loans may be affected by adverse conditions in the real estate market or the economy because these loan payments often depend on the successful operation and management of the underlying properties. Citizens First seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 80% for commercial and multi-family real estate loans and by strictly scrutinizing the financial condition of the borrower, the cash flow of the project, the quality of the collateral and the management of the property securing the loan.

     HOME EQUITY LOANS AND LINES OF CREDIT. Citizens First offers home equity loans and lines of credit secured by owner-occupied one- to four-family residences. At December 31, 2003, home equity loans and lines of credit totaled $85.4 million or 9.1% of Citizens First’s total loans. Additionally, at December 31, 2003, the unadvanced amounts of home equity lines of credit totaled $31.7 million. Unadvanced amounts of home equity loans are not shown as liabilities on the Company’s balance sheet. For more information about Citizens First’s commitments, including commitments to make advances on home equity lines of credit, see Note 13 to the Company’s Consolidated Financial Statements.

     The underwriting standards employed by Citizens First for home equity loans and lines of credit generally include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral that would secure the loan. Home equity loans generally will not be made if the borrower’s outstanding monthly debt exceeds 40% of the borrower’s gross monthly income. Loan-to-value ratios and maximum loan amounts vary depending on the amount of insurance coverage on the underlying property. Generally, home equity loans are made with fixed interest rates and terms of up to 15 years.

     Home equity lines of credit, as opposed to home equity loans, generally have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. Generally, the maximum combined (original mortgage plus home equity line of credit) loan-to-value ratio on home equity lines of credit is 85%. Home equity lines of credit are generally made in amounts of up to $500,000. A home equity line of credit generally may be drawn down by the borrower over an initial period of 5 years from the date of the loan agreement. During this period, the borrower generally has the option of paying, on a monthly basis, either principal and interest together or only the interest. If the equity line is not renewed, the borrower is generally required to repay the amount outstanding under the line of credit over a term not to exceed 15 years, beginning at the end of this initial 5-year period.

     CONSUMER LOANS. Citizens First offers a variety of consumer loans, including automobile loans, mobile home loans, other secured loans, collateral loans, personal loans and unsecured loans. At December 31, 2003, consumer loans totaled $97.3 million or 10.3% of Citizens First’s total loans. Citizens First offers fixed-rate automobile loans with terms of up to 72 months. These loans are offered on a direct basis, meaning the Bank makes the loan directly to the consumer purchasing the automobile, and on an indirect basis, which is described in more detail below. Citizens First will generally make such loans up to 100% of the retail price for new cars and up to 90% of the retail value as stated in the NADA Used Car Guide for used cars. The interest rates Citizens First offers on these loans depend on the age of the automobile, market conditions and current market interest rates.

     In March 1999, Citizens First commenced an indirect consumer lending program. Under this program, Citizens First originates automobile loans through approximately 46 automobile dealers in its primary market area. These dealers provide Citizens First applications made by consumers to finance new (and, to a lesser extent, used) vehicles sold by their dealerships. Citizens First has the opportunity to accept or reject each loan. Generally, Citizens First pays a monthly fee, or “dealer reserve,” to the automobile dealer based on the interest rate on the loan. If a loan is paid off or charged off within a specified time period, the dealer forfeits the dealer reserve, and Citizens First is credited with 100% of the dealer reserve, which it may withhold from the dealer’s account or credit against future payments to the dealer.

     Citizens First also originates consumer loans secured by mobile homes. Historically, these loans were primarily originated indirectly through dealer relationships, similar to the arrangements currently in place with automobile dealers described above. In recent years, however, management has decided to stop originating these loans on an indirect basis. At December 31, 2003 and December 31, 2002, outstanding mobile home loans were in the amounts of $9.1 million, or 9.4% of consumer loans, and $8.3 million, or 10.8% of consumer loans, respectively. Citizens First originates loans on new or used (up to 15 years old) mobile homes, with terms ranging from 7 to 15 years and with fixed interest rates. Citizens First generally will finance up to a maximum of 90% of either the purchase price of the mobile home unit or the retail value as stated in the NADA book, whichever is less.

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     Citizens First also originates consumer loans secured by boats, motorcycles, campers and other recreational vehicles. These loans generally have fixed interest rates and terms ranging from a maximum of 5 years to 15 years depending on the type of collateral securing the loan.

     Citizens First offers collateral loans, personal loans and unsecured loans. Collateral loans are usually secured by a savings account or a certificate of deposit. Personal loans generally have a borrowing limit of $5,000 and a maximum term of four years. Citizens First also makes unsecured personal loans to individuals who have been homeowners for at least four years. These loans typically will be made in amounts of up to $10,000 and with terms of up to 7 years.

     Citizens First believes that it will benefit from the higher yields typically earned on consumer loans, in contrast to the relatively lower yields earned on residential one- to four-family loans, and that the shorter duration of consumer loans will improve Citizens First’s interest rate risk position. Consumer loans, however, entail greater risk of nonpayment than do residential mortgage loans. This is particularly true in the case of loans that are unsecured or that are secured by rapidly depreciating assets such as automobiles. As a result of the greater likelihood of damage, loss or depreciation to the underlying collateral (such as the automobile), consumer loan collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency on the loan often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment because the costs of additional collection efforts may not be justified by the potential amount to be collected. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by such events as job loss, divorce, illness or personal bankruptcy. For information on how the Company determines its provision for loan losses, see the section captioned “Allowance for Loan Losses” below, the section captioned “Critical Accounting Policies” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1 to the Company’s Consolidated Financial Statements.

     COMMERCIAL LOANS. Citizens First makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships and small businesses. Citizens First offers a variety of commercial lending products, including term loans for fixed assets, working capital loans and lines of credit and loans with a single principal payment at maturity. Additionally, Citizens First originates Small Business Administration-guaranteed loans. At December 31, 2003, commercial loans totaled $107.7 million or 11.4% of Citizen First’s total loans.

     Citizens First offers secured commercial term loans generally with terms of up to ten years and the payment of which is dependent on future earnings. Business lines of credit generally have adjustable rates of interest and terms of up to three years. Loans that require a one-time payment of principal at termination will generally be originated on terms of up to 3 years as long as the borrower is paying interest at least semi-annually. Loans generally will be originated on terms of up to one year if the borrower will pay all of the interest due upon maturity. Business loans with variable rates of interest are generally indexed to the prime rate as reported in The Wall Street Journal. Citizens First also makes unsecured commercial loans. Unadvanced amounts of commercial loans and commercial loan commitments are not shown as liabilities on the Company’s balance sheet. For more information about Citizens First’s commitments, including unadvanced amounts of commercial loans and commercial loan commitments, see Note 13 to the Company’s Consolidated Financial Statements.

     When making commercial business loans, Citizens First considers the financial statements of the borrower, Citizens First’s lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial business loans are generally secured by a variety of collateral, which primarily includes accounts receivable, inventory and equipment. Commercial business loans are also typically supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 100% of the value of the collateral securing the loan.

     Commercial loans generally involve higher risk than residential mortgage loans. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment or other income and are secured by real property for which the value can be easily ascertained. Commercial loans, on the other hand, are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself, which may be difficult to predict and may depend on various unknown factors. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

     LOANS TO ONE BORROWER. The maximum amount that Citizens First may lend to one borrower is limited by regulation. At December 31, 2003, Citizens First’s regulatory limit on loans to one borrower was $12.9 million or $21.5 million for loans approved by two-thirds of the Board of Directors. At that date, Citizens First’s largest amount of outstanding loans to one borrower, including the borrower’s related interests, was approximately $20.7 million and consisted of ten commercial, industrial and retail properties. These loans were previously approved by the Bank’s Board of Directors. Additionally, at December 31, 2003, Citizens First’s largest outstanding commitment to one borrower was approximately $20.9 million, approximately $20.7 million of which was outstanding, and consisted of commercial and industrial and retail properties. All of these loans were performing in accordance with required repayment

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terms at December 31, 2003. For more information on the regulations limiting loans to one borrower, see the section captioned “Loans to One Borrower” under the heading “Regulation and Supervision” below.

     LOAN APPROVAL PROCEDURES AND AUTHORITY. Citizens First’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by Citizens First’s Board of Directors and management. Although subject to change and deviation or exception from time to time as determined appropriate by management, the current guidelines are generally as follows:

	•		Residential real estate loans in amounts of greater than $700,000 but less than $1.0 million require the approval of the Bank’s Mortgage Loan Committee, which consists of the President and Chief Executive Officer of the Bank, Senior Vice President — Retail Banking, a Vice President and an Assistant Vice President.
	•		Residential real estate loans in amounts of between $1.0 million and $2.0 million require approval of the Officers’ Credit Committee, which consists of the President and Chief Executive Officer of the Bank, the Senior Vice President — Commercial Banking, certain commercial officers and other officers as designated.
	•		Loans in amounts in excess of $2.0 million require approval of the Directors’ Loan Committee, which consists of three directors of the Bank, the President and Chief Executive Officer of the Bank and the Senior Vice President — Commercial Banking of the Bank.
	•		The President and Chief Executive Officer of the Bank has been delegated the authority to approve any real estate loan up to $700,000.
	•		Consumer loans in amounts in excess of $1.0 million, but less than $3.0 million require approval of two outside Directors, and loans of $3.0 million or more require approval of the entire Board of Directors of the Bank.
	•		The President and Chief Executive Officer may individually approve any consumer loan in an amount of up to $700,000.
	•		All commercial and commercial real estate loans in amounts in excess of $5.0 million require approval of the Board of Directors of the Bank.
	•		Commercial and commercial real estate loans in amounts between $2.0 and $5.0 million require the approval of the Directors’ Loan Committee.
	•		Commercial and commercial real estate loans in amounts between $500,000 and $2.0 million require the approval of the Officers’ Credit Committee.

     LOAN ORIGINATIONS, PURCHASES AND SALES. Citizens First’s lending activities are generally conducted by its salaried and commissioned loan personnel and through its relationship with vehicle dealers, which is described in more detail under the heading “Consumer Loans” above.

     Except in connection with Citizens First’s indirect automobile lending, Citizens First relies on advertising, referrals from realtors and customers and personal contact by Citizens First’s staff to originate loans. Other than the automobile dealerships previously discussed, Citizens First does not use loan correspondents or other third parties to originate loans. Citizens First’s ability to originate adjustable-rate and fixed-rate loans depends upon the relative customer demand for these loans, which is in turn affected by the current and expected future levels of interest rates. Interest rates are in turn affected by a variety of other factors, some of which are mentioned in the section captioned “Forward-Looking Statements” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     Generally, fixed-rate loans that conform to the underwriting standards specified by Freddie Mac are originated by Citizens First for sale in the secondary market to Freddie Mac and, to a lesser extent, private investors. Additionally, Citizens First may in the future sell loans in the secondary market to Fannie Mae although, to date, no loans have been sold to Fannie Mae. Citizens First generally retains the servicing rights on the loans sold in the secondary market, meaning that Citizens First receives payments and other collections on these loans and administers these loans in exchange for a servicing or administrative fee. Citizens First currently has a best efforts contract with a third party under which Citizens First must use its best efforts to provide the third party with loans for sale. Citizens First is not required under this contract to replace loans that fail to close for any reason. Additionally, Citizens First has entered into forward contracts with Freddie Mac in the past, under which Freddie Mac commits to purchase certain loans from the Bank. At December 31, 2003, Citizens First had outstanding forward contracts, all of which were with Freddie Mac, to sell loans of approximately $5.8 million. Under these forward contracts, Freddie Mac is generally required to purchase these loans in the future from Citizens First, notwithstanding any change in the market interest rate, as long as specific underwriting requirements are met in making the loans. Sales of most fixed-rate loans are made without recourse to Citizens First if the borrower defaults. Citizens First

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generally originates adjustable-rate loans for its portfolio, but will, from time to time, sell these loans in the secondary market based on prevailing market interest rate conditions, Citizens First’s liquidity needs and Citizens First’s interest rate risk position.

     The following table sets forth Citizens First’s loan originations, sales and principal repayments for the periods indicated:

     Loan Commitments. Citizens First frequently issues loan commitments to its prospective borrowers, which are made in writing on specified terms and conditions. Commitments are generally honored for up to 30 days from approval for residential real estate loans and for up to 180 days on commercial and multi-family real estate loans. At December 31, 2003, Citizens First had loan commitments and unadvanced loans and lines of credit totaling $217.4 million. These loan commitments and unadvanced loans and lines of credit do not appear as liabilities on the Company’s Consolidated Financial Statements. For more information regarding Citizens First’s loan commitments and unadvanced loans and lines of credit, see Note 13 of the Company’s Consolidated Financial Statements. Although the Company believes that it has sufficient liquidity to meet these commitments and obligations in the future, there can be no assurance regarding whether intervening factors, some of which are beyond the Company’s control, will interfere with the Company’s ability to do so. For more information, see the section captioned “Liquidity and Capital Resources” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Loan Fees. In addition to interest earned on loans, Citizens First receives income from fees in connection with loan originations, loan modifications and late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions. For more information, see the Company’s Consolidated Financial Statements.

Citizens First charges loan origination fees, which are calculated as a percentage of the amount borrowed, subject to a minimum amount. As required by applicable accounting principles, loan origination fees, discount points and certain loan origination costs are deferred and recognized as charges against income over the contractual remaining lives of the related loans on a level yield basis. At December 31, 2003, Citizens First had $2.2 million of net deferred loan fees.

Nonperforming Assets and Delinquencies. When a borrower fails to make a required loan payment, Citizens First attempts to cure the delinquency by contacting the borrower and seeking the payment. A late notice is mailed after 16 days of delinquency for residential mortgage loans. In most cases, deficiencies are cured promptly. If a late notice does not prompt the borrower to cure the delinquency, Citizens First will attempt to contact the borrower either by telephone, letter or in person in order to determine the cause

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of the delinquency and to arrange for curing of the default. Generally, after the 90th day of delinquency, Citizens First commences foreclosure proceedings under the terms of the loan documents and applicable law.

When a borrower on a consumer or commercial loan fails to make a required loan payment, a late notice is mailed after 10 days of delinquency. Citizens First supplements the late notice with a separately-mailed letter and a telephone call to the borrower. Additional contact and correspondence continues until the 90th day of the delinquency, at which point Citizens First may take action to repossess the property securing the loan or implement other collection efforts. Management informs the Boards of Directors of the Bank and the Company monthly of the amounts of loans delinquent more than 60 days, of loans in foreclosure and of all foreclosed and repossessed property that Citizens First owns.

Citizens First ceases accruing interest on loans when principal or interest payments are delinquent 90 days or more, unless the loan is adequately collateralized and is in the process of collection. If management determines that interest is uncollectible, all interest previously accrued is reversed against current period interest income. If collection of principal or interest is considered doubtful, loans are placed on nonaccrual status or charged against income at an earlier date. The following table provides information at the dates indicated regarding various non-accruing loans in Citizens First’s loan portfolio and regarding real estate owned by the Bank:

     Interest income that would have been recorded for the year ended December 31, 2003 had nonaccruing loans been current according to their original terms amounted to approximately $100,200. Interest related to these loans was not included in interest income for the year ended December 31, 2003.

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     The following table sets forth the delinquencies in Citizens First’s loan portfolio as of the dates indicated.

     Real Estate Owned. Real estate acquired by Citizens First as a result of foreclosure and real estate acquired by deed-in-lieu of foreclosure is classified as real estate owned until sold. Under Michigan law, there is generally a six-month redemption period with respect to one- to four-family residential properties during which the borrower has the right to repurchase the property. When property is acquired, the property is recorded on the Bank’s balance sheet at the lower of its cost, which is the unpaid principal balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure less estimated costs to sell. This recordation establishes a new cost basis. Holding costs and declines in fair value after acquisition of the property may result in charges against Citizens First’s income. At December 31, 2003, Citizens First had approximately $443,000 in real estate owned, which consisted of 4 one-to four-family residences, 1 vacant parcel of land and $63,000 of repossessed automobiles.

Asset Classification. Bank regulators have adopted various regulations and practices regarding “problem” assets of savings institutions. Under these regulations, examiners have authority to identify problem assets during examinations and, if appropriate, to require them to be classified as described below.

There are three classifications for “problem” assets: substandard, doubtful and loss. “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the same weaknesses as substandard assets, except that weaknesses of doubtful assets make collection or liquidation in full questionable based on currently existing facts, conditions and values, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion of an asset is classified as “loss,” the insured institution establishes a specific allowance in its allowance for loan losses for the full amount of the portion of the asset that is classified as loss. All or a portion of general loan loss allowances established to cover probable losses related to assets classified substandard or doubtful can be included in determining an institution’s regulatory capital, while specific valuation allowances such as those for assets classified as “loss” generally do not qualify as regulatory capital. Citizens First’s Directors’ Loan Committee, which consists of the President and Chief Executive Officer of the Bank, two outside directors and the Senior Vice President — Commercial Banking, classifies assets on a monthly basis based upon delinquency reports, assets held by Citizens First as real estate owned, asset review summaries and assets brought to the attention of the Director’s Loan Committee by other senior officers. Assets that do not currently expose the insured institution to sufficient risk to warrant classification as substandard, doubtful or loss, but that possess weaknesses, are designated by Citizens as “special mention.” Citizens First monitors “special mention” assets.

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     The following table sets forth the Bank’s classified assets at December 31, 2003.

Allowance for Loan Losses. Citizens First recognizes that losses will be experienced from originating loans and that the risk of loss will vary with, among other factors, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. To reflect the perceived risk associated with the Bank’s loan portfolio, the Bank maintains an allowance for loan losses to absorb potential losses from loans in its loan portfolio. As losses are estimated to have occurred, management establishes a provision for loan losses, which is then charged directly against earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses represents management’s estimate of probable losses based on information available as of the date of the financial statements.

Potential Significant Impact on Financial Statements and Condition. The level of the allowance for loan losses is important to the portrayal of the Company’s financial condition and results of operations. Although management believes that it uses the best information available to establish the allowance for loan losses, the determination of what the loan allowance should be requires management to make difficult and subjective judgments about which estimates and assumptions to use. Actual results may differ materially from these estimates and assumptions, resulting in a direct impact on Citizens First’s allowance for loan losses and requiring changes in the allowance. Because the estimates and assumptions underlying Citizens First’s allowance for loan losses are inherently uncertain, different estimates and assumptions could require a material increase in the allowance for loan losses. Any material increase in the allowance for loan losses could have a material adverse effect on Citizens First’s net income, its financial condition and results of operations. The Company, therefore, views its allowance for loan losses as a “critical accounting policy.” For additional information about the allowance for loan losses, see Note 1 to the Company’s Consolidated Financial Statements and the section captioned “Critical Accounting Policies” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Methodology for Determination of Loan Loss Allowance. Management evaluates the adequacy of the level of its loss allowance at least quarterly as a function of its internal asset review process because of the importance of the Bank’s loan loss allowance. The Bank’s Director Loan Committee meets monthly to review asset classifications and to recommend any changes to the allowance for loan losses.

In order to determine if its loan loss allowance is adequate, Citizens First assesses the expected losses inherent in its loan portfolio. Management’s internal asset review system and loss allowance methodology are intended to identify problem assets and recognize losses in a timely manner. Management considers various factors in determining whether its allowance for loan losses is adequate, including risk characteristics inherent in different types of loans. Management first performs a detailed review of multi-family real estate loans, commercial real estate loans and other loans with significant balances. Multi-family and commercial real estate loans are generally considered to involve a higher degree of risk and to be more vulnerable to adverse conditions in the real estate market and to deteriorating economic conditions, particularly changes in interest rates, than one-to-four family residential mortgage loans. In addition, multi-family and commercial real estate loans typically involve higher loan principal amounts, and the repayment of these loans generally depends on the income produced by the operation or sale of the property being sufficient to cover operating expenses and debt service. Finally, multi-family and commercial real estate loan values tend to be more cyclical, and recessionary conditions of the type that prevail from time to time in the Bank’s lending market area tend to result in higher vacancy and reduced rental rates and net operating incomes from multi-family and commercial real estate properties. As a result, multi-family and commercial real estate loans are assigned higher credit risk ratings upon their origination, as are other loans with significant balances. In addition to a review

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of multi-family and commercial real estate loans and other loans with significant balances, a detailed credit quality review is also performed for other loans that have deteriorated below certain levels of credit risk or that have been classified or identified as “watch list” loans. A specified loss allowance is attributed to these reviewed loans.

An appropriate level of loss allowance is then determined for the remaining balance of the loan portfolio. This allowance relates to assets with no well-defined deficiencies or weaknesses and takes into consideration losses that are inherent within the portfolio but that have not yet been realized. This allowance is determined by applying estimated projected loss factors to each specific type of loan category in the portfolio (e.g., one- to four-family residential mortgage loans, consumer loans). Varying loss factors are applied to specific sub-categories of loans within the broader loan categories (e.g., fixed-rate mortgage loans, automobile loans). Management determines the estimated loss factors based on historical and recent loan loss experience, industry averages and trends in loan delinquencies and nonaccruals for each type of loan. The determination of the estimated loss factors applied to each type of loan is based on information known and projections made by management based on that information. As a result, actual loss ratios experienced in the future could vary from those projected, which could have a material impact on the loan loss allowance.

After the review yields an aggregate amount of loss allowance attributable to specific loans and after management applies various loss factors to the remaining balance of loans by type, management then analyzes the adequacy of the combined amount of loan loss allowance by considering other factors that may have an impact on the performance of the loan portfolio. These factors include trends in real estate and collateral values, trends and forecasts for the national and local economies, the geographic dispersion of borrowers and other risk factors. Based on this analysis, management adjusts the overall loss allowance, which may result in an unallocated portion of the loan loss allowance. Management believes that an unallocated portion of the allowance is generally necessary because other factors affecting whether losses in the loan portfolio are probable may not be captured by applying estimated loss factors. The existence of an unallocated portion of the loan loss allowance reflects management’s view that the allowance should have a margin that recognizes that the process of estimating expected credit losses and determining the loan loss allowance is imprecise. Determination of the probable losses inherent in the portfolio, which losses are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgment and uncertainty. The assessment of general local and national economic conditions and trends inherently involves a higher degree of uncertainty as it requires management to anticipate the impact that economic trends, legislative actions or other unique market and/or portfolio issues have on estimated credit losses. Recent factors which were considered in the evaluation of the adequacy of Citizens First’s unallocated loan loss reserve include increases in commercial real estate, commercial and construction loans and increases in the amount of loans that have been charged off. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the Bank’s loan loss allowance.

     Recent Adjustments to Loan Loss Allowance. During the year ended December 31, 2003, management reevaluated its loan loss allowance methodology in recognition of Citizens First’s strategy of increasing multi-family real estate, commercial real estate, commercial and consumer (particularly indirect automobile) loans and the overall increase in the risk inherent in a loan portfolio with an increased amount of these loans. Management determined that the loss factors applied to commercial real estate, commercial and consumer loans should be increased. As a result, management maintained the loan loss allowance at a level of $11.7 million, or 1.24% of total loans, at December 31, 2003.

     Possible Future Adjustments to Loan Loss Allowance. No assurances can be given that Citizens First’s level of allowance for loan losses will be sufficient to cover future loan losses incurred by Citizens First or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses or if historical trends change. Nevertheless, management believes that, based on information currently available, Citizens First’s allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time. In addition, it is uncertain whether various regulatory agencies, as an integral part of their examination process and in reviewing Citizens First’s loan portfolio, will request that Citizens First increase its allowance for loan losses. Citizens First believes, however, that it has established its existing loan loss allowance in conformity with generally accepted accounting principles. These agencies could, nevertheless, require Citizens First to provide additions to the allowance for loan losses based upon judgments of the agencies that are different from the judgments of management. Additional information about Citizens First’s allowance for loan losses can be found in Note 1 to the Company’s Consolidated Financial Statements and in the section captioned “Critical Accounting Policies” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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     The following table presents an analysis of Citizens First’s allowance for loan losses (000s omitted).

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     The following table presents the approximate allocation of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not indicative of future losses and does not restrict the use of any of the allowance to absorb losses in any category (000s omitted).

Investment Securities Activities

Under Michigan law and regulation, Citizens First has authority to purchase a wide range of investment securities. Under federal banking law, however, financial institutions such as Citizens First generally may not invest in investment securities that are not permissible for investment by a national bank.

Citizens First’s Board of Directors has the overall responsibility for Citizens First’s investment portfolio. The Board of Directors has authorized the Investment Committee of the Board of Directors to execute the investment policy, which is described below, as prescribed by the Board of Directors. The Board of Directors also receives a monthly portfolio report. The Investment Committee is authorized to delegate investment and compliance duties to an investment consultant and/or Investment Manager. The Investment Manager is authorized to make investment decisions consistent with Citizens First’s investment policy and the recommendations of Citizens First’s Investment Committee and is primarily responsible for daily investment activities.

The primary objectives of Citizens First’s investment portfolio are to provide the liquidity necessary to meet Citizens First’s day-to-day, cyclical and long-term requirements for funds, to invest funds not currently needed to fulfill loan demands and to provide a flow

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of dependable earnings with minimum risk associated with potential changes in interest rates or from the concentration of investments in a particular issuer or sector. Investment decisions are based upon Citizens First’s cash and borrowed funds position; the quality, maturity, stability and earnings of loans; the nature and stability of deposits; and Citizens First’s excess capital.

Under Citizens First’s current investment policy, its investment portfolio should be composed of investments in marketable obligations in the form of bonds, notes or debentures, which are generally salable under ordinary circumstances with reasonable promptness at fair value. Debt securities authorized for investment by the investment policy include U.S. Treasury securities, government agency securities, corporate debt securities, municipal securities, certificates of deposit, bankers acceptances, demand obligations, repurchase agreements and commercial paper.

Citizens First’s investment policy generally provides that all bonds, when purchased, must be of investment grade, as determined by at least one nationally recognized securities rating organization, and must generally carry a rating of “A/Mig2” or better or the equivalent or “A1/P1” for commercial paper when purchased. Citizens First’s investment policy limits investments in non-U.S. Treasury securities to no more than five percent of the value of Citizens First’s investment portfolio in any one issue or class and ten percent of the value of the investment portfolio in any one issuer. Also, the total amount of investment securities of any one issuer may not exceed twenty percent of the total of Citizens First’s capital, surplus, and subordinated notes and debentures. Citizens First’s investment policy is subject to change as determined appropriate by its Board of Directors.

Generally accepted accounting principles require that securities be categorized as either “held to maturity,” “trading securities” or “available for sale,” based on management’s intention regarding ultimate disposition of each security. Debt securities may be classified as “held to maturity” and reported in financial statements at amortized cost only if management has the intention and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand or other similar factors cannot be classified as “held to maturity.” Debt and equity securities held for current resale are classified as “trading securities.” These securities are reported at fair value, and unrealized gains and losses on these securities would be included in current earnings. Citizens First does not currently use or maintain a trading securities account. Debt and equity securities not classified as either “held to maturity” or “trading securities” are classified as “available for sale.” These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of stockholders’ equity. Citizens First currently classifies all of its securities as available for sale.

At December 31, 2003, Citizens First did not own any securities that had an aggregate book value in excess of 10% of Citizens First’s stockholders’ equity at that date, other than U.S. Government and Agency securities.

     The following table sets forth certain information regarding the amortized cost and fair value of Citizens First’s securities at the dates indicated (000s omitted).

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     The following table sets forth Citizens First’s securities activities for the periods indicated (000s omitted).