UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 (as defined in Rule 12b-2 of the Act).Yes þ X o

     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was $192,431,125 based upon the closing price of $23.52 as quoted on the Nasdaq National Market on June 30, 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 9, 2005, the registrant had 8,486,845 shares of common stock outstanding.

Documents Incorporated by Reference

TABLE OF CONTENTS

INDEX

FORWARD-LOOKING STATEMENTS. The Company may from time to time make written or oral “forward-looking statements.” These forward-looking statements may be contained in the Company’s Form 10-K filed with the Securities and Exchange Commission (the “SEC”), in other filings with the SEC and in other communications by the Company and the Banks, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, including revenue creation, lending origination, operating efficiencies, loan sales, charge-offs, loan loss allowances and provisions, growth opportunities, interest rates, acquisition and divestiture opportunities, capital and other expenditures and synergies, efficiencies, cost savings and funding and other advantages expected to be realized from various activities. The words, “may, “could,” “should,” “would,” “will”, “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “predict,” “continue,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements include statements with respect to the Company’s beliefs, plans, strategies, objectives, goals, expectations, anticipations, estimates or intentions that are subject to significant risks or uncertainties or that are based on certain assumptions. Future results and the actual effect of plans and strategies are inherently uncertain, and actual results could differ materially from those anticipated in the forward-looking statements, depending upon various important factors, risks or uncertainties. The following factors, many of which are subject to change based on various other factors, including factors beyond the Company’s control, and other

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factors, including others discussed in the Company’s Form 10-K, other factors identified in the Company’s other filings with the SEC, as well as other factors identified by management from time to time, could have a material adverse effect on the Company and its subsidiaries and their operations or cause their financial performance to differ materially from the plans, objectives, expectations, estimates or intentions expressed in the Company’s forward-looking statements:

•	The strength of the United States economy in general and the strength of the local economies in which the Company conducts operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.
•	The economic impact of past and any future terrorist attacks, acts of war or threats of war and the response of the United States to any of these threats or attacks.
•	The effects of, and changes in, federal, state and local laws, regulations, rules and policies including laws, regulations, rules and policies affecting taxes, banking, securities, insurance and monetary and financial matters.
•	The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate and other policies of the Federal Reserve Board and policies of the United States Treasury.
•	Inflation, interest rates, market and monetary fluctuations, including the effects of changes in the rate of prepayments of the Company’s assets.
•	The quality or composition of the Company’s loan portfolio.
•	Demand for loan products and services.
•	Deposit flows.
•	The ability of the Company to compete with other financial institutions due to increases in competitive pressures in the financial services sector.
•	The ability of the Company to obtain new customers and to retain existing customers.
•	The timely development of, and acceptance of, products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services.
•	The willingness of users to substitute competitors’ products and services for the Company’s products and services.
•	The Company’s success in gaining regulatory approval of their products and services, when required.
•	The impact of technological changes implemented by the Company and the Banks and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. In this regard, the Company has entered into an agreement with Fiserv Solutions, Inc. (“Fiserv”) to convert the Companys’ newly acquired subsidiary, Metrobank (see Note 2 to the Company’s Consolidated Financial Statements under Item 8 of this Report) from the Jack Henry to the Fiserv software package. There can be no assurance, however, that the planned computer conversion will not be more difficult or expensive than anticipated or have unforeseen consequences.
•	The ability of the Company to develop and maintain secure and reliable electronic systems.
•	The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
•	Consumer spending and saving habits which may change in a manner that adversely affects the Company’s business.
•	Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.
•	Unanticipated litigation or disputes and the costs, effects and outcomes of existing or future litigation or disputes.
•	The effects of, and changes in, accounting principles, guidelines, policies and practices, as may be adopted by state and federal regulatory agencies and various accounting rulemakers.
•	The ability of the Company to manage the risks associated with the foregoing as well as anticipated risks.

This list of important factors is not exclusive. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on these statements. Neither the Company nor the Banks undertake - and each specifically disclaims any obligation - to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Banks or to release publicly the result of any revisions that may be made to any forward-looking statements, including revisions to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Part I

Item 1. Business

General

     Citizens First Bancorp, Inc. (the “Bancorp”) was organized in October 2000 as a Delaware business corporation at the direction of Citizens First Savings Bank (“Citizens”) and is the holding company for Citizens and Metrobank (“Metrobank”, see Note 2 to the Company’s Consolidated Financial Statements under Item 8 of this Report), state-chartered savings banks headquartered in Port Huron and Farmington Hills, Michigan, respectively. The consolidated financial statements include the accounts of the Bancorp and its wholly-owned subsidiaries (the “Company”) Citizens and Metrobank (the “Banks”). Citizens also includes the accounts of its wholly owned subsidiaries, Citizens Financial Services, Inc., and Citizens First Mortgage, LLC. Citizens Financial Services, Inc. includes the accounts of its wholly owned subsidiary, and CFS Insurance Agency. 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 Banks and the consolidated subsidiaries of the Company and the Banks. The Bancorp has no significant assets, other than all of the outstanding shares of the Banks and the portion of the net proceeds it retained from the subscription offering at inception, and no significant liabilities. The Company’s commitment to community oriented banking is reflected in its Certificate of Incorporation, which is posted on the Company’s website (www.cfsbank.com), as well as in its corporate governance. The Company’s Corporate Governance Guidelines are also posted on that website.

     Management of the Company and Citizens are substantially similar. Metrobank has a separate Board of Directors and shares Directors with the Company. As of December 31, 2004, senior management of Metrobank included a different CEO, Commercial Lending Officer and CFO. Subsequently thereafter, the CEO has been employed by the Company and the Commercial Lending Officer and CFO have retired. Employees are generally employed by the Banks rather than by the Company. Accordingly, the information set forth in this Report, including the Consolidated Financial Statements and related financial data under Item 8 of this Report, relates primarily to the Banks and other consolidated subsidiaries.

     The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 20 full-service banking offices. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company’s principal lending activity is the origination of mortgage loans for the purchase or refinancing of one- to four-family residential property. The Company originates one- to four-family mortgage loans primarily for sale in the secondary market, although the Company generally retains the servicing rights for these mortgage loans. The Company 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. The Company’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 the Company’s investments. The Company’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 correspondent banks and the Federal Home Loan Bank, cash on hand and cash on deposit.

Market Area

     The Company’s main office is in Port Huron, Michigan, which is in St. Clair County. The Company’s deposit gathering and lending activities, as well as its other primary business operations, are principally concentrated in and around the communities surrounding its 20 full-service offices located in St. Clair, Sanilac, Huron, Lapeer and northern Macomb counties, Michigan. Additionally due to overall growth and the acquisition of Metrobank with branches in Oakland County, the Company’s provides financial services beyond St. Clair County.

     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 total land area of St. Clair is rural, and approximately one-third of the resident labor force commutes to jobs outside of the County. As of 2003, St. Clair County had a population of approximately 169,000. The largest employment sectors in St. Clair County are manufacturing, services, retail and government. The Company’s market area has a higher per capita median household income when compared to Michigan and the United States.

     The market area for Oakland County consists of 873 square miles and, as of 2003, is home to more than 1.2 million people and 63,000 businesses and agencies that employ more than 720,000 people. The strength of the county’s business sector has helped it grow into an international marketplace. During the last decade, the number of households in the county grew 14 percent while the state of Michigan grew 6.1 percent. Oakland County ranks second in per capita income, ranking the county in the top one percent of all counties in the United States. The education of the population is also strong, as 89 percent of residents with ages over 25 have a

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high school degree and 38 percent have a Bachelor’s degree or higher. Management believes that the characteristics of Oakland county provide a great opportunity for the Company.

OPERATING STRATEGY

     The Company’s strategy, in recent years, has been one of controlled balance sheet growth and broader diversification of its loan products and loan portfolio. Beginning in 1995, the Company 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, the Company 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, the Company 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 excellent 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.
	•	Invest in our employees through a variety of training programs to ensure our customers’ needs are exceeded.
	•	Expand its trust services by cross-selling benefits of the Trust Department.
	•	Continuously review technology requirements and enhancements to provide an excellent level of customer service.
	•	Reinvest in its communities.
	•	Continue to increase its emphasis on origination of quality 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 the Company 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 and deposit products. For more information about the interest rate risk to which the Company is exposed and about how the Company attempts to manage that risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

COMPETITION

     The Company faces intense competition for the attraction of deposits and origination of loans in its market areas. The Company’s most direct competition for deposits and loans have historically come from the several financial institutions operating in the Company’s market areas and, to a lesser extent, from other financial service companies, such as brokerage firms, mortgage brokers, credit unions and insurance companies. The Company 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 the Company conducts business. Some of the institutions with which the Company competes are significantly larger than the Company and, therefore, have significantly greater resources. Competition for deposits and the origination of loans could limit the Company’s growth in the future. Additionally, we expect that entry into the Oakland county market to increase competitive pressures on our sales team. Given the level of competition in the financial institution industry, we continue to adhere to our strategic goals and duty to stockholders, customers and employees of consistent, smart and well managed growth.

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Lending Activities

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

	•	the Company’s current asset/liability strategy, which is to monitor and control the financial position of the Company, 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” located after the table of contents at the beginning of this Report.

Loan Portfolio Analysis. The following table sets forth the composition of the Company’s loan portfolio in dollar amounts (in thousands) 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 Company’s loan portfolio comprised of commercial and multi-family real estate loans and commercial loans and to decrease the percentage of the Company’s loan portfolio comprised of one- to four-family residential mortgage loans although, at December 31, 2004, one-to four family residential mortgage loans still constituted 34% of the Company’s loan portfolio.

     Maturity of Loan Portfolio. The following table presents the dollar amount of loans (in thousands) maturing in the Company’s portfolio 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 the 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 the Company 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 higher than rates on existing mortgage loans in the Company’s portfolio, which suggests that the average lives of our portfolio and serviced mortgage loans may be higher than might otherwise have been expected in previous years.

     The following table sets forth the dollar amount of loans contractually due after December 31, 2004, and whether such loans have fixed interest rates or adjustable interest rates (in thousands):

TYPES OF LOANS. Currently, the Company originates one- to four-family residential mortgage loans, commercial and multi-family real estate loans, residential construction loans, home equity and lines of credit, commercial loans and a variety of consumer loans. Set forth below is a general description of some of the Company’s current policies and practices with regard to some of these types of loans. Although the Company 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. The Company’s primary lending activity is the origination of loans secured by one- to four-family residences generally located in its market area. The Company currently offers various types of adjustable-rate mortgage loans and fixed-rate mortgage loans.

     The Company originates fixed-rate, fully-amortizing residential mortgage loans with maturities of 10, 15, 20 and 30 years. The Company’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. The Company offers mortgage and jumbo loans that generally conform to the various standards of our secondary market vendors to whom we sell conforming loans. Fixed-rate conforming loans are typically originated for sale in the secondary market, although the Company generally retains the servicing rights. The Company will underwrite one- to four-family owner-occupied residential mortgage loans in amounts 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, the Company will originate loans that constitute 103% of the appraised value of the underlying real estate for sale in the secondary market.

     The Company offers a variety of loans to meet our customers needs, including, but not limited to, fixed and variable rate loans, balloon mortgages, construction loans and interest only mortgages.

     Adjustable-rate mortgage loans help reduce the Company’s exposure to changes in interest rates because the interest rate paid by the Company’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 unquantifiable credit risks. Accordingly, if interest rates rise, and mortgage payments are repriced at increased amounts, the risk of

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default on adjustable-rate mortgage loans increases as well. In addition, although adjustable-rate mortgage loans increase the responsiveness of the Company’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 the Company’s cost of funds during periods of rising interest rates.

     The Company requires properties securing its mortgage loans to be appraised by an approved independent state-licensed appraiser. The Company also requires fire, casualty, title, hazard and, if appropriate, flood insurance to be maintained on most properties securing real estate loans originated by the Company. In an effort to provide financing for low- and moderate-income families, the Company 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.

COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. The Company also originates commercial real estate loans. These loans are generally secured by properties located in the Company’s market area and used for business purposes, such as small office buildings, industrial facilities or retail facilities. The Company also, to a lesser extent, originates multi-family real estate loans that are typically secured by 5-unit or larger apartment buildings in the Company’s market area.

     Most of the commercial and multi-family real estate loans originated by the Company are fully amortizing loans with terms of up to 20 years. Generally, the maximum loan amount the Company 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, the Company 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, the Company will also consider the terms of the applicable leases and the quality of the tenants. The Company has stringent underwriting standards that are used to ensure origination of high quality credits. These standards include the review of debt service coverage ratios, borrower credit history, and current financial status, acquiring written appraisals prepared by a certified independent appraiser of all properties securing commercial or multi-family real estate loans greater than $250,000 and environmental surveys for commercial real estate loans in excess of $1.0 million or where a risk of contamination exists.

     The Company 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 the Company initially approves the construction loan. The maximum loan-to-value ratio for these loans permitted by the Company 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 the Company 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. The Company 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.

RESIDENTIAL CONSTRUCTION LOANS. The Company originates construction loans to individuals for the construction of one- to four-family residences. The Company’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 the Company’s one- to four-family mortgage loans.

     Before making a commitment to fund a construction loan, the Company requires an appraisal of the property by an independent licensed appraiser. The Company also reviews and inspects each property before disbursing funds. Loan proceeds are disbursed in pre-

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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 Company’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, the Company 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.

HOME EQUITY AND LINES OF CREDIT. The Company offers home equity loans and lines of credit secured by owner-occupied one- to four-family residences. Unadvanced amounts of home equity loans are not shown as liabilities on the Company’s balance sheet. For more information about the Company’s commitments, including commitments to make advances on home equity lines of credit, see Note 13 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

     The underwriting standards employed by the Company 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. 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%. 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.

COMMERCIAL LOANS. The Company makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships and small businesses. The Company 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, the Company originates Small Business Administration-guaranteed loans.

     The Company 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. The Company 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 the Company’s commitments, including unadvanced amounts of commercial loans and commercial loan commitments, see Note 13 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

     When making commercial business loans, the Company considers the financial statements of the borrower, the Company’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 and 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

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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.

CONSUMER LOANS. The Company offers a variety of consumer loans, including automobile loans, mobile home loans, other secured loans, collateral loans, personal loans and unsecured loans. The Company offers fixed-rate automobile loans with terms of up to 72 months. These loans are offered on a direct basis, meaning the Company makes the loan directly to the consumer purchasing the automobile, and on an indirect basis, which is described in more detail below. The Company 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 the Company offers on these loans depend on the age of the automobile, market conditions and current market interest rates.

     The Company originates automobile loans through various automobile dealers in its market area from its indirect consumer lending program. These dealers provide the Company applications made by consumers to finance new (and, to a lesser extent, used) vehicles sold by their dealerships. The Company has the opportunity to accept or reject each application. Generally, the Company 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 the Company 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.

     The Company also originates loans on new or used mobile homes, with terms ranging from 7 to 15 years and with fixed interest rates. The Company generally will finance up to a maximum of 90% of either the purchase price of the mobile home unit or the retail value, whichever is less.

     The Company 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.

     The Company 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. The Company 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.

     The Company 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 the Company’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 under Item 8 of this Report.

LOANS TO ONE BORROWER. The maximum amount that the Company may lend to one borrower is limited by regulation. At December 31, 2004, the Company’s regulatory limit on loans to one borrower was $17.4 million or $29.0 million for loans approved by two-thirds of the Board of Directors. At that date, the Company’s largest amount of outstanding loans to one borrower, including the borrower’s related interests, was approximately $20.7 million and consisted of commercial, industrial and retail properties. These loans were previously approved by the Company’s Board of Directors. Additionally, at December 31, 2004, the Company’s largest outstanding commitment to one borrower was approximately $20.0 million, approximately $9.8 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 terms at December 31, 2004. 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.

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LOAN APPROVAL PROCEDURES AND AUTHORITY. The Company’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Company’s Board of Directors and senior management. The Company’s Board of Directors reviews the lending approval procedures and authorities of the President and Chief Executive Officer, Senior Vice Presidents of Retail and Commercial Banking and various loan committees on a regular basis to ensure that the appropriate level of approvals exist.

LOAN ORIGINATIONS, PURCHASES AND SALES. The Company’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 the Company’s indirect automobile lending, the Company relies on advertising, referrals from realtors and customers and personal contact by the Company’s staff to originate loans. Other than the automobile dealerships previously discussed, the Company does not use loan correspondents or other third parties to originate loans. The Company’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” located after the table of contents at the beginning of this Report.

     Generally, fixed-rate loans that conform to the underwriting standards specified by various investors are originated by the Company for sale in the secondary market primarily to Fannie Mae and Freddie Mac (“Investors”) and, to a lesser extent, private investors. The Company generally retains the servicing rights on the loans sold in the secondary market, meaning that the Company receives payments and other collections on these loans and administers these loans in exchange for a servicing or administrative fee. The Company currently has a best efforts contract with a third party under which the Company must use its best efforts to provide the third party with loans for sale. The Company is not required under this contract to replace loans that fail to close for any reason. Additionally, the Company enters into forward contracts with investors under which Investors commit to purchase certain loans from the Company. At December 31, 2004, the Company had outstanding forward contracts to sell loans of approximately $6.5 million. Under these forward contracts, Investors are generally required to purchase these loans in the future from the Company, 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 the Company if the borrower defaults. The Company 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, the Company’s liquidity needs and the Company’s interest rate risk position.

Loan Commitments. The Company 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. 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 the Company’s loan commitments and unadvanced loans and lines of credit, see Note 13 to 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, the Company 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 Note 4 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

     The Company 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 amortized over the contractual remaining lives of the related loans on a level yield basis.

Nonperforming Assets and Delinquencies. When a borrower fails to make a required loan payment on a loan secured by real estate, the Company attempts to cure the delinquency by contacting the borrower via telephone. After the 90th day of delinquency, the Company commences foreclosure proceedings under the terms of the loan documents and applicable law.

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     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. Additional contact and correspondence continues until the 90th day of the delinquency, at which point the Company may take action to repossess the property securing the loan or implement other collection efforts. Management informs the Boards of Directors of 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 the Company owns.

     The Company ceases accruing interest on residential and commercial mortgages secured by real estate and consumer loans when principal or interest payments are delinquent 90 days or more. 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 nonperforming status.

     Commercial loans are monitored closely after the loan is 90 days delinquent. Upon analysis of the circumstances of the borrower, a decision is made by the Senior Vice President of Commercial Banking whether or not the loan should be placed on nonperforming status. Therefore, at December 31, 2004 approximately $2.9 million of commercial loans that are 90 days past due are not classified as nonperforming due to various factors which include, but are not limited to, the timing of the maturity of the loan in relation to the ability to collect and analyze customer financial data.

     During the last half of 2004, management decided that nonperforming loans were required to show consistent payments of principal and interest for a period of 90 consecutive days to change the classification of the loan to a performing loan. This change in policy was deemed to provide a more thorough analysis and monitoring method of nonperforming loans and ensured that the borrower provided strong evidence of consistent payment over this period. Consequently, an increase in nonperforming loans occurred at December 31, 2004. Additionally, nonperforming assets of Metrobank in the amount of $3.5 million were added to the total amount of nonperforming assets.

     The following table provides information at the dates indicated regarding various non-performing loans in the Company’s loan portfolio and regarding real estate owned (in thousands):

     Interest income that would have been recorded for the year ended December 31, 2004 had nonperforming loans been current according to their original terms amounted to $1,247,936. Interest income related to these loans included in interest income for the year ended December 31, 2004, was $534,390.

     The following table sets forth loans 90 days past due accruing interest (in thousands):

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The fluctuations between December 31, 2004 and 2003 reflect the change in policy for nonperforming loans to be classified as performing as discussed above.

Real Estate Owned. Real estate acquired by the Company 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 Company’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. The variances, if any, are charged against the allowance for loan losses. This recordation establishes a new cost basis. Holding costs and declines in fair value after acquisition of the property may result in charges against the Company’s income. At December 31, 2004, the Company had approximately $991,000 in real estate owned and $41,000 of repossessed automobiles.

Asset Classification. Bank regulators have adopted various regulations and practices regarding “problem” assets of financial 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. The Company’s Directors’ Loan Committee, which consists of the President and Chief Executive Officer of the Company, two outside directors and the Senior Vice President - Commercial Banking, classifies assets on a monthly basis based upon delinquency reports, assets held by the Company 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 the Company as “special mention.” The Company monitors “special mention” assets.

Allowance for Loan Losses. The Company 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 Company’s loan portfolio, the Company 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

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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 the Company’s allowance for loan losses and requiring changes in the allowance. Because the estimates and assumptions underlying the Company’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 the Company’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 under Item 8 of this Report 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 Company’s loan loss allowance. The Company’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, the Company 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 Company’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 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.

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     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 the Company’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 Company’s loan loss allowance.

     Potential Problem Loans. In addition to those loans reflected in the table above, we have identified some loans through our problem loan identification process which exhibit a higher than normal credit risk. Loans in this category include loans with characteristics such as past maturity more than 90 days, those that have recent adverse operating cash flow or balance sheet trends, or loans that have general risk characteristics that management believes might jeopardize the future timely collection of principal and interest payments. The balance in this category at any reporting period can fluctuate widely based on the timing of cash collections, renegotiations and renewals. The principal amount of loans in this category as of December 31, 2004 was $2.7 million. At December 31, 2004, there were no significant loans which were classified by any bank regulatory agency that are not included above as nonperforming, past due or restructured.

     Possible Future Adjustments to Loan Loss Allowance. No assurances can be given that the Company’s level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company 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, the Company’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 the Company’s loan portfolio, will request that the Company increase its allowance for loan losses. The Company believes, however, that it has established its existing loan loss allowance in conformity with generally accepted accounting principles. These agencies could, nevertheless, require the Company 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 the Company’s allowance for loan losses can be found in Note 1 to the Company’s Consolidated Financial Statements under Item 8 of this Report 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 the Company’s allowance for loan losses (in thousands):

     The following table presents the approximate allocation of the allowance for loan losses (in thousands) by loan category at the dates indicated. 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.

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

Investment Securities Activities

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

     The Company’s Board of Directors has the overall responsibility for the Company’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 the Company’s investment policy and the recommendations of the Company’s Investment Committee and is primarily responsible for daily investment activities.

     The primary objectives of the Company’s investment portfolio are to provide the liquidity necessary to meet the Company’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 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 the Company’s cash and borrowed funds position; the quality, maturity, stability and earnings of loans; the nature and stability of deposits; and the Company’s excess capital.

     Under the Company’s current investment policy, its investment portfolio should be composed of investments in marketable obligations in the form of bonds, equity securities, 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.

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     The Company’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. The Company’s investment policy limits investments in non-U.S. Treasury securities to no more than five percent of the value of the Company’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 the Company’s capital, surplus, and subordinated notes and debentures. The Company’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. The Company 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. The Company currently classifies all of its securities as available for sale.

     At December 31, 2004, the Company did not own any securities that had an aggregate book value in excess of 10% of the Company’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 the Company’s securities at the dates indicated (in thousands):

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     The following table sets forth the maturities and weighted average yields of the Company’s securities at December 31, 2004 (in thousands):

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

Deposit Activities and Other Sources of Funds

General. Deposits are the major external source of funds for the Company’s lending and other investment activities. In addition, the Company generates funds internally from loan repayments, payments of interest on loans, proceeds from the sale of loans originated for sale, maturities and sales of investment securities, cash on hand and cash on deposit. Scheduled loan repayments are a relatively stable source of funds. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit

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flows, loan prepayments, and mortgage loan originations and sales are greatly influenced by general interest rates, economic conditions and competition. The Company may use overnight federal funds purchased from member correspondent banks and borrowings from the Federal Home Loan Bank of Indianapolis (FHLB) to compensate for any reductions in the availability of funds from other sources.

Deposit accounts. Nearly all of the Company’s depositors reside in Michigan. The Company offers a wide variety of deposit accounts with a range of interest rates and terms, including savings accounts, checking and NOW accounts, certificates of deposit, individual retirement accounts and money market accounts. The maturities of the Company’s certificate of deposit accounts range from seven days to six years. Deposit account terms vary primarily based on minimum deposit balance, early withdrawal penalties, limits on the number of transactions and the interest rate. The Company reviews its deposit mix monthly and its pricing terms weekly. The Company offers a wide range of commercial deposit products and checking accounts to cities, townships and municipal school districts located within the Company’s market areas. At December 31, 2004, the Company had depository arrangements with approximately 42 municipalities. At December 31, 2004, these entities accounted for approximately $60.0 million, or 16.6%, of the Company’s certificates of deposit and $42.5 million, or 16.6%, of the Company’s money market accounts. Municipal and governmental depository arrangements generally are more sensitive to interest rate changes than other consumer deposit accounts and are typically subject to competitive bidding processes. Additionally, the balance of these deposit accounts tends to fluctuate more than consumer deposit accounts because of the budgeting and tax collection timing of each particular municipal entity. Accordingly, municipal deposits tend to be more volatile than consumer deposits, and there is no assurance that the Company will be able to maintain its current levels of municipal accounts in future periods.

     The Company believes it is competitive in the interest rates it offers on its commercial deposit account products. The Company determines the rates paid based on a number of factors, including rates paid by competitors, the Company’s need for funds and cost of funds, borrowing costs and movements of market interest rates. The Company has not utilized brokers to obtain deposits and at December 31, 2004 had no brokered deposits, however, based on forecasts of future growth, it is expected that the Company will entertain the possibility of entering the brokered deposit market.

     The following table summarizes the average balances of deposits (in thousands) and the average rates of interest:

     The table below shows the amount of time certificates of deposit issued in amounts of $100,000 or more, by time remaining until maturity, which were outstanding at December 31, 2004 (in thousands):

Borrowings. Federal funds purchased through member correspondent banks, a line of credit obtained from an unrelated bank and FHLB advances are used by the Company to supplement its supply of lendable funds and to meet deposit withdrawal requirements.

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Pleaser refer to Note 8 to the Company’s Consolidated Financial Statements. For more information about the FHLB, see the section captioned “Federal Home Loan Bank System” under the heading “Regulation and Supervision” below.

     The Company had the ability to borrow a total of approximately $452.8 million from its correspondent banks and the FHLB, of which $287.7 million was outstanding at December 31, 2004.

     The following table presents certain information regarding the Company’s FHLB advances at or for the periods ended on the dates indicated (in thousands):

Trust Services

     The Company maintains its Asset Management and Trust Department, established in 1999, which provides trust and investment services to individuals, partnerships, corporations and institutions. The Asset Management and Trust Department also acts as a fiduciary of estates and conservatorships and as a trustee under various wills, trusts and other plans. The Trust Department allows the Company to provide investment opportunities and fiduciary services to both current and prospective customers. Consistent with the Company’s operating strategy, and the possible opportunities that may arise due to our presence in the Oakland County market, the Company will continue to emphasize the growth of its trust service operations in order to grow its assets and to increase fee-based income. The Company has implemented several policies governing the practices and procedures of the Trust Department, including policies relating to maintaining confidentiality of trust records, investment of trust property, handling conflicts of interest and maintaining impartiality. At December 31, 2004, the Trust Department managed 395 accounts with aggregate assets of $235.7 million, of which the largest relationship totaled $82.3 million, or 34.9% of the Trust Department’s total assets.

Personnel

     As of December 31, 2004, the Company had 312 full-time employees and 37 part-time employees, none of whom is represented by a collective bargaining unit. We believe that our relationship with our employees is good.

Subsidiaries

Citizens and the Bancorp each own 99%, and 1%, respectively, of the membership interests of the Citizens First Mortgage, LLC, which was established in 2002. The Company currently conducts its residential mortgage lending activity through Citizens First Mortgage, LLC. Citizens Financial Services, Inc., formerly 525 Riverside Corporation, was established in 1974 as a Michigan-chartered service corporation, and is wholly-owned by Citizens. Citizens Financial Services owns 50% of the membership interests of CFS Title Insurance Agency, LLC. CFS Title Insurance Agency, a Michigan limited liability company, was established in 1998 as a joint venture between the Company and Lawyers Title Insurance Agency, a Virginia corporation, to provide title insurance for customers of the Company. Citizens Financial Services may also in the future offer other personal insurance products through an affiliation arrangement with a third party insurance agency. In addition, Citizens Financial Services owns 100% of CFS Insurance Agency, Inc., d/b/a CFS Financial Services, Inc., which offers mutual funds and insurance products such as annuities. The Company also owns 100% of the stock of Metro Bancorp, Inc. (See Note 2) and its subsidiaries Metrobank, Metrobank Mortgage Company, LLC and Financial Services.

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Additional Financial Information

     Although this description of the business of the Company includes some specific financial information, more detailed financial information can be found elsewhere in this Report. For the Company’s Consolidated Financial Statements, see Item 8. For “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” see Item 7. Among other things, Item 7 also includes a table showing average balance sheets for the Company for the periods ended December 31, 2004 and December 31, 2003. This table shows, for those periods, the average balances of interest-earning assets and interest-bearing liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and the total dollar amount of interest expense from average interest-earning liabilities and the resulting average yields and costs. In addition, Item 7 contains a table captioned “Rate/Volume Analysis” which shows the effect on the Company’s interest income and interest expense of changes in interest rates and changes in the volumes of interest-earning assets and the volumes of interest-bearing liabilities during the period ended December 31, 2004 compared to the period ended December 31, 2003. In addition, see Item 6 for “Selected Financial Data” of the Company.

The Company’s internet address is www.cfsbank.com. We have made available free of charge on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material was electronically filed with, or furnished to the SEC. Materials that the Company files with the SEC may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. This information may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company will provide a copy of any of the foregoing documents to stockholders upon request.

REGULATION AND SUPERVISION

General

     As a savings and loan holding company, the Company is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the Office of Thrift Supervision. The Banks are Michigan-chartered state savings banks and members of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the FDIC. The Commissioner of the Michigan Office of Financial and Insurance Services and/or the FDIC conduct periodic examinations to test the Company’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, which include policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in these regulatory requirements and policies, whether by the Office of Thrift Supervision, the FDIC, the Michigan Office of Financial and Insurance Services or the U.S. Congress, could have a material adverse impact on the Company and its operations. Certain regulatory requirements applicable to the Company are referred to below or elsewhere in this Form 10-K. The description of statutory provisions and regulations applicable to savings institutions and their holding companies included in this Form 10-K does not purport to be a complete description of these statutes and regulations and their effects on the Company.

Michigan Bank Regulation

     Michigan savings banks are regulated and supervised by the Commissioner of the Michigan Office of Financial and Insurance Services. Michigan-chartered savings banks are subject to an examination, not less than once every 18 months, by the Michigan Commissioner either with or without notice. The approval of the Michigan Commissioner is required for certain activities such as for a savings bank to merge with another institution, to reorganize or to undertake other specified activities.

     Certain powers that Michigan-chartered savings banks can exercise under the law are summarized below.

     Business Activities. The activities of state savings banks are governed by state as well as federal law and regulations. These laws and regulations delineate the nature and extent of the investments and activities in which state institutions may engage. To qualify as a Michigan savings bank, both the Banks must meet an asset test, which requires that during 9 of the 12 preceding months, at least 50% of its total assets must have consisted of specified assets, primarily housing loans, mortgage-backed securities, loans for religious, health and nursing home facilities, consumer loans, liquid assets and government obligations. An institution that fails the asset test must notify the Commissioner and may requalify by meeting the test, but it if fails to requalify within the time prescribed by the Commissioner, it must convert to a different charter or liquidate within the time prescribed by the Commissioner. If it does not do so,

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the Commissioner may appoint a conservator or seek the appointment of a receiver. As of December 31, 2004, the Company met the asset test for a Michigan savings bank. Under federal law, the Company must also meet the qualified thrift lender test discussed below.

     Loans to One Borrower. Michigan law provides that a stock savings bank may not provide loans or extensions of credit to a person in excess of 15% of the capital and surplus of the bank. The limit, however, may be increased to 25% of capital and surplus if approval of two-thirds of the bank’s board of directors is granted. If the Michigan Commissioner determines that the interests of a group of more than one person, co-partnership, association or corporation are so interrelated that they should be considered as a unit for the purpose of extending credit, the total loans and extensions of credit to that group are combined. At December 31, 2004, the Company did not have any loans with one borrower that exceeded its regulatory limit. A number of loans are exempted from these limitations. They include, among others, certain loans on commercial paper, loans to financial institutions and loans secured by bonds, notes and certificates of indebtedness of the United States. For more information, see the section captioned “Loans to One Borrower” under the heading “Lending Activities” above.

     Dividends. Dividends may be paid out of a Michigan savings bank’s net income after deducting all bad debts. A Michigan savings bank may only pay dividends on its common stock if the savings bank has a surplus amounting to not less than 20% of its capital after the payment of the dividend. If a bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of net income for the preceding one-half year (in the case of quarterly or semi-annual dividends) or at least 10% of net income of the preceding two consecutive half-year periods (in the case of annual dividends) has been transferred to surplus. With the approval of the Michigan Commissioner and by a vote of shareholders owning two-thirds of the stock entitled to vote, a savings bank may increase its capital stock by declaring a stock dividend on the capital stock. A savings bank may pay dividends on its preferred stock without limitation on the rates. Federal law may also affect the ability of a Michigan savings bank to pay dividends.

     Branching Activities. Michigan savings banks, have the authority under Michigan law to establish branches anywhere in the State of Michigan, as well as in any other U.S. state or foreign country, subject to receipt of all required regulatory approvals (including the approval of the Michigan Commissioner and the FDIC).

     Commissioner Assessments. Michigan savings banks are required to pay supervisory fees to the Michigan Commissioner to fund the operations of the Michigan Commissioner. The amount of supervisory fees paid by a bank is based upon a formula involving the bank’s total assets, as reported to the Michigan Commissioner.

     Enforcement. Under Michigan law, the Michigan Commissioner has broad enforcement authority over state chartered banks and, under certain circumstances, affiliated parties insiders, and agents. If a Michigan savings bank does not operate in accordance with the regulations, policies and directives of the Michigan Commissioner or is engaging, has engaged or is about to engage in an unsafe or unsound practice in conducting the business of the bank, the Michigan Commissioner may issue and serve upon the bank a notice of charges with respect to the practice or violation. The Michigan Commissioner’s enforcement authority includes: cease and desist orders, receivership, conservatorship, removal and suspension of officers and directors, assessment of monetary penalties, emergency closures, liquidation and the power to issue orders and declaratory rulings to enforce the Savings Bank Act provisions.

Federal Regulation

Capital Requirements. Under FDIC regulations, federally-insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as the Company, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC not to be anticipating or experiencing significant growth and to be in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is principally composed of the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships).

     The Company must also comply with the FDIC risk-based capital guidelines. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the FDIC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight, loans fully secured by one-to four-family residential properties generally have a 50% risk weight and commercial loans have a risk weight of 100%.

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     State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, the principal elements of which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net unrealized gain on equity securities and other capital instruments such as subordinated debt.

     The FDIC has adopted a regulation providing that it will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. For more information about interest rate risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal banking authorities take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution that has a total risk-based capital ratio of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating that is not experiencing significant growth) is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the FDIC is required to appoint itself sole receiver or conservator for an institution that is “critically undercapitalized.” A capital restoration plan must be filed with the FDIC within 45 days of the date an institution is on notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

     As of December 31, 2004, the most recent notification from the Banks’ regulators categorized the Banks as “well capitalized” under the regulatory framework for prompt corrective action.

     Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice.

Insurance of Deposit Accounts. The Banks are both members of the Savings Association Insurance Fund. 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 three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for insured institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.

     In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize the predecessor to the Savings Association Insurance Fund. Beginning January 1, 2000, these assessments were shared by the Savings Association Insurance Fund and the Bank Insurance Fund members.

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

     Transactions with Related Parties. The Company’s authority to engage in transactions with an “affiliate” (generally, any company that controls or is under common control with an institution, including the Bancorp and its non-savings institution subsidiaries) is limited by federal law. Federal law places quantitative restrictions on these transactions and imposes specified collateral requirements for certain transactions. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.

     The Company’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is also governed by federal law. Among other restrictions, these loans are generally required to be made on terms

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substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of failure to make required repayment. The Sarbanes-Oxley Act of 2002, however, prohibits the Company from extending or maintaining credit, arranging for the extension of credit, or renewing an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof), except for extensions of credit made, maintained, arranged or renewed by the Company that are subject to the federal law restrictions discussed above.

     Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions. The guidelines address internal controls and information systems, the internal audit system, credit underwriting, loan documentation, interest rate risk exposure, asset growth, asset quality, earnings and compensation, and fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit an acceptable plan to achieve compliance with the standard.

     Investment Activities. Since the enactment of the FDIC Improvement Act, all state-chartered FDIC insured banks, including savings banks, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the FDIC permit exceptions to these limitations. For example, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than direct equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Savings Association Insurance Fund.

     Mergers. The Company may engage in mergers or consolidations with other depository institutions, subject to filing certain notices with officials of the State of Michigan and receiving approval from the appropriate federal banking agency. When reviewing a proposed merger, the federal banking regulators consider numerous factors, including the effect on competition, the financial and managerial resources and future prospects of existing and proposed institutions, the effectiveness of FDIC-insured institutions involved in the merger in addressing money laundering activities and the convenience and needs of the community to be served, including performance under the Community Reinvestment Act.

     Federal Statutory and Regulatory Provisions. All financial institutions are subject to federal statutory and regulatory provisions intended to address money laundering, including international money laundering. Under the Community Reinvestment Act and regulations implementing the Act, every FDIC-insured institution is obligated to help meet the credit needs of its local community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of the institution, and is examined and rated on its performance. An unsatisfactory rating can be the basis for denial of an application for a merger or branch. The Company received a “satisfactory” rating in its most recent Community Reinvestment Act evaluation by the FDIC. Since the enactment of the FDIC Improvement Act, all state-chartered FDIC insured banks, including savings banks, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the FDIC permit exceptions to these limitations. For example, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than direct equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Savings Association Insurance Fund.

     Interstate Branching. Beginning June 1, 1997, federal law permitted the responsible federal banking agencies to approve merger transactions between banks located in different states, regardless of whether the merger would be prohibited under the law of the two states. The law also permitted a state to “opt in” to the provisions of the Interstate Banking Act before June 1, 1997, and permitted a state to “opt out” of the provisions of the Interstate Banking Act by adopting appropriate legislation before that date. Michigan did not “opt out” of the provisions of the Interstate Banking Act. Accordingly, beginning June 1, 1997, a Michigan savings bank, could acquire an institution by merger in a state other than Michigan unless the other state had opted out. The Interstate Banking Act also authorizes de novo branching into another state if the host state enacts a law expressly permitting out of state banks to establish such branches within its borders.

     Federal Enforcement. The FDIC has primary federal enforcement responsibility over state non-member banks and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide

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range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.

Federal Home Loan Bank System

     The Banks are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Company, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB in an amount equal to at least 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Banks were in compliance with this requirement as their investment in FHLB stock at December 31, 2004 was $13.5 million. The FHLB functions as a central reserve bank by providing credit for financial institutions throughout the United States. As a member of the FHLB, the Company is required to acquire and hold shares of capital stock in the FHLB and is authorized to apply for advances as long as certain creditworthiness standards have been met. Advances are generally secured by eligible assets of a member, which include principally mortgage loans and obligations of, or guaranteed by, the U.S. government or its agencies. Advances can be made to the Company under several different credit programs of the FHLB. Each credit program has its own interest rate, range of maturities and limitations on the amount of advances permitted based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.

Federal Reserve System

     The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against net transaction accounts as follows: accounts aggregating less than $7.0 million are exempted from the reserve requirements, for accounts aggregating greater than $7.0 million and less than $47.6 million the reserve requirement is 3%, and for accounts aggregating greater than $47.6 million, the reserve requirement is 10% against that portion of total transaction accounts in excess of $47.6 million. All reserve requirements are subject to adjustments by the Federal Reserve Board. The Company complies with the foregoing requirements.

Holding Company Regulation

     Federal law allows a state savings bank that qualifies as a “Qualified Thrift Lender,” discussed below, to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of the Home Owners’ Loan Act. Such election allows its holding company to be regulated as a savings and loan holding company by the Office of Thrift Supervision rather than as a bank holding company by the Federal Reserve Board. The Company has made such an election, and is regulated as a savings and loan holding company within the meaning of the Home Owners’ Loan Act. As a result, the Company is registered with the Office of Thrift Supervision and has adhered to the Office of Thrift Supervision’s regulations, reporting requirements and examination and enforcement authority. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

     As of January 9, 2004 due to the acquisition of Metrobank, the Company is a multiple savings and loan holding company within the meaning of federal law. A multiple savings and loan holding company is generally limited to activities permissible for financial holding companies and certain additional activities authorized by Office of Thrift Supervision regulations. The Company is not permitted to invest in more than 5% of the voting shares of any company that is engaged in any activity other than specified activities permissible for savings and loan holding companies.

     A savings and loan holding company is also prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and future prospects of the holding company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, competitive factors and the convenience and needs of the community, including performance under the Community Reinvestment Act. An unsatisfactory rating of a savings institution can be the basis for denial of a holding company application.

     The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

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(1)	the approval of interstate supervisory acquisitions by savings and loan holding companies and

(2)	the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

     Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary institutions as previously described. The Company must notify the Office of Thrift Supervision 30 days before declaring any dividend to the Bancorp. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision, and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

     QTL Test. In order for the Bancorp to be regulated as a savings and loan holding company by the Office of Thrift Supervision (rather than as a bank holding company by the Federal Reserve Board), the Company must qualify as a qualified thrift lender. To be a qualified thrift lender, each must either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

     A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2004, the Company met the qualified thrift lender test.

     Change in Bank Control Act. The acquisition of 10% or more of the outstanding common stock of the Company may trigger the provisions of the Change in Bank Control Act. The Change in Bank Control Act generally requires persons (including companies) who at any time intend to acquire control of a savings and loan holding company to provide 60 days prior written notice and certain financial and other information to the Office of Thrift Supervision. The statute and underlying regulations authorize the Office of Thrift Supervision to disapprove a proposed acquisition on certain specified grounds.

     Under certain circumstances, a similar filing may be necessary with the FDIC prior to the acquisition of control of the Company. If the acquirer of an interest in the Company is a bank holding company, the acquisition may be subject to the jurisdiction of the Federal Reserve Board under the Bank Holding Company Act.

     Regulatory and Legislative Change. Regulations, which affect the Company on a daily basis, may be changed at any time, and the interpretation of the relevant law and regulations may also change because of new interpretations by the authorities who interpret those laws and regulations. Any change in the regulatory structure or the applicable statutes or regulations, whether by the State of Michigan, the Office of Thrift Supervision, the FDIC or the U.S. Congress, could have a material impact on the Company or its operations.

Federal Securities Laws

     The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Securities Act and the Exchange Act.

     On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 contains important new requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Company’s chief executive officer and chief financial officer are required. These certifications attest that the Company’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. The Company has also implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act, which includes the identification of significant processes and accounts, documentation of the design of control effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. The Company also requires signed certifications from managers who are responsible for internal controls throughout the Company as to the integrity of the information they prepare. These procedures supplement the Company’s Code of Ethics policies and procedures that have

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previously been in place. See Item 9A “ Controls and Procedures” for the Company’s evaluation of its disclosure controls and procedures.

FEDERAL AND STATE TAXATION

Federal Income Taxation

     General. The Company reports income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to the Company in the same manner as to other corporations with some exceptions, including, in particular, the Company’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax laws, regulations and rules applicable to the Company. The Company’s federal income tax returns have been either audited or closed under the statute of limitations through tax year 1996. For its 2004 tax year, the Company’s maximum federal income tax rate was 35%.

     Bad Debt Reserves. For fiscal years beginning before December 31, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, which were generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The Company’s reserve for nonqualifying loans was computed using the experience method.

     Federal legislation enacted in 1996 prohibited the use of reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995. Under this legislation, savings institutions also were required to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $6.6 million of the Company’s accumulated bad debt reserves would not be recaptured as taxable income unless the Company makes a “non-dividend distribution” to the Bancorp as described below.

     Distributions. If the Company makes “non-dividend distributions” to the Bancorp, they will be considered to have been made from the Company’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1988, to the extent of the “non-dividend distributions,” and then from the Company’s supplemental reserve for losses on loans, to the extent of those reserves. An amount based on the amount distributed, but not more than the amount of those reserves, will be included in the Company’s taxable income. Non-dividend distributions include distributions in excess of the Company’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 Company’s current or accumulated earnings and profits will not be so included in the Company’s taxable income.

     The amount of additional taxable income triggered by a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if the Company makes a non-dividend distribution to the Bancorp, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Company does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

State Taxation

     The State of Michigan imposes a Single Business Tax (the “SBT”), which is an annual value-added tax imposed on the privilege of doing business in the State. Banks with business activity in Michigan are subject to the tax. Most organizations exempt from federal income tax, however, are also exempt from the SBT. The major components of the SBT are compensation, depreciation and federal taxable income, increased by net operating losses, if any, utilized in arriving at federal taxable income. For tax years beginning before 2000, the SBT base is decreased by the cost of depreciable tangible assets acquired during the year. For tax years beginning after 1999, an investment tax credit may be claimed for the acquisition of depreciable tangible assets. Effective December 31, 2002, the SBT rate was 1.9% and will be phased out during a 22-year period by dropping .1% per year.

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

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ITEM 2. PROPERTIES

     The Company currently conducts its business through its main office located in Port Huron, Michigan, and 19 other full-service banking offices located in St. Clair, Sanilac, Huron, Macomb, Oakland and Lapeer Counties, Michigan. All branch bank offices of Citizens and one branch bank office for Metrobank are owned by the Company and three offices of Metrobank are leased. All full-service offices, except for the Sandusky Branch, have ATM facilities. All full-service offices have drive-through facilities. The Company also owns a drive-up banking center and a separate office for its trust and financial services operations, which are both located near its main offices in Port Huron. The Company currently leases property in Lapeer and Northern Macomb Counties for use as loan production offices and other operational office space in downtown Port Huron, both of which expire in June 2005 and August 2005, respectively. The leases on the Metrobank properties expire as early as May of 2007 and as late as 2013. The Company also owns and operates ATM machines at seven other locations located in St. Clair, Sanilac, Macomb, and Lapeer Counties, Michigan. The spaces for the ATM machines are leased from independent unaffiliated third parties on a year to year basis. The Company owns a parcel of vacant land located in northern St. Clair County, Michigan, which was purchased in November 2002. Management believes that the Company will be required to purchase and/or lease additional properties to support the future growth in the near term.

ITEM 3. LEGAL PROCEEDINGS

     Neither the Company nor any of its subsidiaries is a party to, nor is any of their property subject to or the subject of, any material pending legal proceedings other than routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The Company’s common stock is traded on the Nasdaq National Market under the symbol “CTZN”. As of March 3, 2005, the Company had approximately 1,046 holders of record. The following table sets forth, for the quarters indicated, the high and low bid information for the common stock and the dividends paid. The Company is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the current and/or immediately preceding fiscal year.

     On March 28, 2002, Marshall J. Campbell, our Chief Executive Officer, and the Company entered into our Executive Stock Ownership Plan Agreement, pursuant to which Mr. Campbell is entitled to receive deferred compensation units convertible into the Registrant’s common stock. Under this Agreement, as subsequently amended and restated, each vested deferred compensation unit is convertible into one share of common stock of the Company upon Mr. Campbell’s death, retirement, termination of employment with the Company or the Company, or if the Agreement is terminated by our Board of Directors on or after the date on which Mr.

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Campbell’s deferred compensation units become vested, which is January 31, 2007 (or earlier upon Mr. Campbell’s death, disability or certain changes of control). Pursuant to that Agreement, we awarded 2,642, 4,502 and 3,655 deferred compensation units to Mr. Campbell with regard to the twelve months ended December 31, 2001, 2002 and 2003, respectively. These transactions were not registered, but were made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933. The terms of the Agreement are complex and the above is only a summary. The full text of the Agreement has been filed as an Exhibit to this Form 10-K and should be consulted for full information.

     The Company entered into deferred fee agreements with certain directors of the Company at various times in 2001, under which these directors elected to defer fees paid to them by the Company. On November 15, 2001 with regard to the directors of the Company and November 29, 2001 with regard to the directors of the Company, it was agreed that fees previously deferred by these directors under the agreements and earnings on fees previously deferred would be settled in common stock of the Company, as would future fees deferred under these agreements. (Although a director has the right to change or revoke his or her deferral election, the revocation would be effective only for fees deferred for the period beginning with the calendar year after any such revocation. No director has revoked his or her deferral to date.) Dr. Demashkieh entered into a similar agreement with the Company on April 22, 2002 when he joined the Board. Upon a director’s termination of service with the Board of Directors of the Company, each restricted stock unit is to be settled on a one-for-one basis in shares of the Company’s common stock. Pursuant to that Agreement, we awarded 3,323 and 4,246 deferred compensation units totaling $99,100 to various members of the board with regard to the twelve months ended December 31, 2003 and 2004. These transactions were not registered, but were made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933. The terms of the agreements are complex and the above is only a summary. The full text of a representative director’s deferred fee agreement previously was filed as an Exhibit with the Securities and Exchange Commission and is listed as an Exhibit to this Form 10-K and should be consulted for full information.

     On October 1, 2002, the Company announced a share repurchase program authorizing the repurchase of up to 428,701 shares of the Company’s outstanding common stock. All share repurchases under the Company’s share repurchase program are transacted in the open market and are within the scope of Rule 10b-18, which provides a safe harbor for purchases in a given day if an issuer of equity securities satisfies the manner, timing, price and volume conditions of the rule when purchasing its own common shares in the open market. There were no repurchases of the Company’s share for the three months ended December 31, 2004.

ITEM 6. SELECTED FINANCIAL DATA