10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     

Commission File Number: 0-32041

CITIZENS FIRST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	38-3573582
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
525 Water Street, Port Huron, Michigan	48060
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (810) 987-8300

Securities registered pursuant to Section 12 (b) of the Act:

	Name of Each Exchange on
Title of Each Class	Which Registered
Common Stock, par value $0.01 per share	NASDAQ Global Select Market

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes o No þ

     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   No 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer o      Accelerated filer: þ      Non-accelerated filer: o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was $214,969,866, based upon the closing price of $26.71 as quoted on the NASDAQ National Market on June 30, 2006. 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 2, 2007, the registrant had 8,423,414 shares of common stock outstanding.

Documents Incorporated by Reference

     Part III of this Annual Report on Form 10-K incorporates portions of the Registrant’s Definitive Proxy Statement for the 2007 Annual Meeting of Shareholders.

TABLE OF CONTENTS

INDEX

		Page
	Part I
Item 1.	Business		1
Item 1A.	Risk Factors		18
Item 1B.	Unresolved Staff Comments		21
Item 2.	Properties		21
Item 3.	Legal Proceedings		21
Item 4.	Submission of Matters to a Vote of Security Holders		21
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		21
Item 6.	Selected Financial Data		24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		41
Item 8.	Financial Statements and Supplementary Data		43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		73
Item 9A.	Controls and Procedures		73
Item 9B.	Other Information		74
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance		74
Item 11.	Executive Compensation		74
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		75
Item 13.	Certain Relationships and Related Transactions, and Director Independence		75
Item 14.	Principal Accountant Fees and Services		75
	Part IV
Item 15	Exhibits and Financial Statement Schedules		75
	Signatures		77
	Certifications of Chief Executive Officer and Chief Financial Officer
Consent of BDO Seidman, LLP
Rule 13a-14(a) Certifications of Chief Executive Officer
Rule 13a-14(a) Certifications of Chief Financial Officer
Section 1350 Certifications of Chief Executive Officer
Section 1350 Certifications of Chief Financial Officer

     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 this 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 Bank, 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, deposit gathering 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 as discussed in, but not limited to, Item 1A.

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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 (the “Bank”) and is the holding company for the Bank, a state-chartered savings bank headquartered in Port Huron, Michigan. The consolidated financial statements include the accounts of the Bancorp and its wholly-owned subsidiary, the Bank (collectively referred to as the “Company”). The Bank also includes the accounts of its wholly owned subsidiaries, Citizens Financial Services, Inc., Citizens First Mobile Services, LLC, established in 2006 and Citizens First Mortgage, LLC. Citizens Financial Services, Inc. includes the accounts of its wholly owned subsidiary, CFS Insurance Agency. The Bancorp owns 100% of Coastal Equity Partners, L.L.C., established in 2006, whose primary purpose is to own and operate real estate activities. As used in this Report, unless otherwise stated or the context otherwise requires, all references to “we,” “our,” or “us” and similar references are to the Company and/or the Bank and the consolidated subsidiaries of the Company and the Bank. The Bancorp has no significant assets, other than investments, all of the outstanding shares of the Bank 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.

     The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 24 full-service banking centers and 1 loan production office. Deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate a variety of different types of loan products. 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. Interest rates charged by the Company on loans are affected principally by competitive pressures in the Company’s market, which in turn are affected by general economic conditions, including demand for various types of loans, 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. The Company’s current asset/liability strategy, which includes monitoring and controlling the Company’s exposure to interest rate risk, also impacts loan pricing.

     Management of the Company and the Bank is substantially similar. Employees are generally employed by the Bank rather than by the Company. Accordingly, the information set forth in this Report, including the Consolidated Financial Statements and related financial data under Item 8 of this Report, relates primarily to the Bank and other consolidated subsidiaries. Effective December 31, 2002, the Company changed its fiscal year end to December 31, rather than on March 31. As a result, various tables, as required, throughout this Form 10-K report the nine month period ended December 31, 2002.

GENERAL DEVELOPMENTS DURING MOST RECENT FISCAL YEAR

     During 2006, the Company opened one additional branch office in Sanilac County replacing its existing facility with a more modern and more customer friendly office, expanded its Shelby office in Macomb County into a full service office and opened a lending production office in Ft. Myers, Florida expanding its service footprint. Additionally, the Company successfully integrated and brought in-house its core data processing and item processing. These customer service processes, which were previously outsourced to a third-party provider, afford the Company greater flexibility and control in an area vital to the Company’s reputation and provide the ability to serve its customers in an efficient and courteous manner.

     Management and employees successfully consolidated the Metrobank brand (the Company purchased Metro Bancorp, Inc. on January 9, 2004) into Citizens First during the last half of 2006. Resources were allocated to ensure a smooth transition with the impact to customers that only enhanced service, product availability and convenience.

     Citizens First Mobile Services, LLC, established in 2006, is an in-house armored car department which provides our clients with a service that allows them to make deposits, receive cash and other correspondence without leaving their place of work. Prior to 2006, this function was outsourced. The Company believes that this is a service that adds value to our clients and allows us to expand our service market more economically. We also use this as an opportunity to reach out to customers where we do not currently have retail banking centers near their place of business.

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MARKET AREA AND COMPETITION

     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 24 locations in St. Clair, Sanilac, Huron, Lapeer, Macomb and Oakland counties, Michigan. More recently, an opportunity arose and we are now servicing the Ft. Myers, Florida area via a loan production office.

     Port Huron, the population center for St. Clair County, is located approximately 60 miles northeast of Detroit and 60 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 the most recent census data, St. Clair County had a population of approximately 171,500. The largest employment sectors in St. Clair County are manufacturing, services, retail and government. The market area for Oakland County consists of 910 square miles and 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% while the State of Michigan grew 6.1%. Oakland County is rated the fourth wealthiest in the United States amongst counties with a population of one million or more. The education of the population is also strong, as over 89% of residents with ages over 25 have a high school degree and 46% have a Bachelor’s degree or higher.

     The Company’s ability to achieve strong financial performance and a satisfactory return on investment to shareholders depends in part on our ability to expand our available financial services. Specifically, 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, more recently to a larger extent, from other financial service companies, such as brokerage firms, mortgage brokers, credit unions, finance companies, investment advisors and insurance companies. According to the most recent market data, there are approximately 55 other deposit financial institutions competing within the Company’s markets. The Company ranks 1^st with respect to market share in St. Clair County with 36.1% of the market, 2^nd in Sanilac County with 18.0% and 3^rd in Lapeer County with 10.1% of the market. The Company has less than 10% of the market share for deposits in our other markets.

     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.

     To remain competitive, we will continue to adhere to our strategic goals of consistent, well managed and controlled balance sheet growth and the broader diversification of our loan products and loan portfolio. To accomplish this objective, 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 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’ expectations are exceeded;

• Expand our trust services, specifically in Macomb and Oakland counties market, by cross-selling benefits of the Asset Management and Trust Department;

• Continuously review technology requirements and enhancements to provide an excellent level of customer service;

• Reinvest in our communities and

• Continue to increase our emphasis on origination of quality commercial, commercial real estate and consumer loans to increase the yields earned on our overall loan portfolio, without incurring unacceptable credit risk.

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LENDING ACTIVITIES

General. 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 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. 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.

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 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 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. 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 fixed rate loans that generally conform to the various standards of our secondary market vendors to whom we sell conforming loans. 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. In these circumstances private mortgage insurance is required and provides loss coverage on those loans for the difference between the actual LTV and a 65% LTV.

     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 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 non-conventional 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 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, typically acquiring written appraisals prepared by a certified independent appraiser of properties securing

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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 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 acquisition 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 and an endorsement from a title company insuring the disbursement amount. The Company also reviews and inspects each property before disbursing funds. Loan proceeds are disbursed in conjunction with the completion of each stage of work. The final 10% of the loan proceeds (i.e. the “holdback”) 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 collateralize 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. Investment property is considered on a case by case basis. 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 20 years. Amortizations of 30 years are available, however, the term must not exceed 20 years on a balloon.

     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%. Loan to value ratios up to 125% are available. Loan-to-value ratios

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over 85% are insured with Insured Credit Services (ICS). 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 20 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, corporations 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 10 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 3 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 1 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 to borrowers who evidence high degree of financial strength and liquidity. 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 position 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 generally made in amounts of up to 90% 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 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. Dealer adds such as credit life and warranties may be added to this calculation. The interest rates the Company offers on these loans depend on the age of the automobile, the customer’s credit score, 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 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 20 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, 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 20 years depending on the type of collateral securing the loan.

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     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 4 years. The Company also makes unsecured personal loans to individuals who have been homeowners for at least 4 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.

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 Item 1A. 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, 2006 and December 31, 2005, the Company had outstanding forward contracts to sell fixed rate loans of approximately $3.9 million and $3.5 million respectively. 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 with 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 under Item 8 of this Report. 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” of this Report.

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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.

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. For more information, see Note 4 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

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 6 month redemption period (four month period in the State of Florida) with respect to one- to four-family residential properties during which the borrower has the right to repurchase the property. When property is acquired, it is recorded on the Company’s balance sheet at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the allowance for loans losses. Holding costs and declines in fair value after acquisition of the property result in charges against the Company’s income statement. At December 31, 2006, the Company had approximately $2.8 million in real estate owned and $477,000 of repossessed automobiles and other assets.

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:

	At December 31,
	2006					2005					2004
			Percent					Percent					Percent
	Amount		of Total			Amount		of Total			Amount		of Total
Real estate loans:
One- to four-family	$	513,139		32.13	%	$	427,714		29.71	%	$	404,655		33.50	%
Commercial and multi-family (1)		432,009		27.05	%		418,314		29.05	%		345,936		28.64	%
Residential construction		127,777		8.00	%		82,328		5.72	%		30,917		2.56	%
Home equity and lines of credit		137,112		8.58	%		131,378		9.12	%		113,202		9.37	%
Total real estate loans		1,210,037		75.76	%		1,059,734		73.60	%		894,710		74.08	%
Commercial loans		280,005		17.53	%		271,436		18.85	%		222,403		18.41	%
Consumer loans:
Vehicles (2)		83,435		5.22	%		84,189		5.85	%		66,463		5.50	%
Other		23,820		1.49	%		24,421		1.70	%		24,184		2.00	%
Total consumer loans		107,255		6.71	%		108,610		7.54	%		90,647		7.51	%
Total loans		1,597,297		100.00	%		1,439,780		100.00	%		1,207,760		100.00	%
Less:
Allowance for loan losses		14,304					13,546					13,472
Net deferred loan fees		582					1,198					2,231
Net loans	$	1,582,411				$	1,425,036				$	1,192,057

[Additional columns below]

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

	At December 31,
	2003					2002
			Percent					Percent
	Amount		of Total			Amount		of Total
Real estate loans:
One- to four-family	$	386,531		40.99	%	$	414,939		49.88	%
Commercial and multi-family (1)		241,097		25.56	%		179,387		21.57	%
Residential construction		24,996		2.65	%		21,822		2.62	%
Home equity and lines of credit		85,371		9.05	%		72,724		8.74	%
Total real estate loans		737,995		78.25	%		688,872		82.82	%
Commercial loans		127,686		13.54	%		68,974		8.29	%
Consumer loans:
Vehicles (2)		59,392		6.30	%		61,386		7.38	%
Other		18,004		1.91	%		12,583		1.51	%
Total consumer loans		77,396		8.21	%		73,969		8.89	%
Total loans		943,077		100.00	%		831,815		100.00	%
Less:
Allowance for loan losses		11,664					11,082
Net deferred loan fees		2,212					1,597
Net loans	$	929,201				$	819,136

(1)	Includes commercial construction loans which at December 31, 2006, December 31, 2005, December 31, 2004, December 31, 2003, and December 31, 2002 totaled $ 56.6 million, $57.2 million, $33.1 million, $14.8 million, and $12.6 million, respectively.
(2)	Includes loans secured by automobiles, motorcycles, campers and other recreational vehicles.

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

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securities, government agency securities, corporate debt securities, municipal securities, certificates of deposit, bankers acceptances, demand obligations, repurchase agreements and commercial paper.

     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 “Baa” or “BBB” or better when purchased. The Company’s investment policy limits authorized investments up to $10 million before prior approval is required from the President and CEO, his designee or a majority of the ALCO membership. 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”.

     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 Obligations of the State of Michigan and its political subdivisions, of which the aggregate book and market value was $25.3 million and $25.2 million, respectively, at December 31, 2006.

     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):

	At December 31,
	2006				2005				2004
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	18,318	$	18,129	$	23,379	$	22,980	$	26,124	$	26,077
Obligations of state and political subdivisions		32,158		32,026		35,506		35,418		37,504		37,889
Corporate debt securities		4,001		3,948		20,584		20,476		19,366		19,294
Mortgage-backed securities		3,323		3,271		4,400		4,323		6,783		6,694
Total		57,800		57,374		83,869		83,197		89,777		89,954
Equity securities		5,000		4,775		5,000		4,313		5,002		3,885
Total securities available for sale	$	62,800	$	62,149	$	88,869	$	87,510	$	94,779	$	93,839

DEPOSIT AND OTHER ACTIVITIES

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 6 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 counties, cities, townships and school districts

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(municipalities) located within the Company’s market areas. At December 31, 2006, the Company had depository arrangements with approximately 65 municipalities. At December 31, 2006, these entities accounted for approximately $106.6 million, or 16.8%, of the Company’s certificates of deposit and $119.8 million, or 35.1%, of the Company’s interest bearing checking 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 with other financial institutions. 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 elasticity of deposit balances in comparison to the rates, the Company’s need for funds and cost of funds, borrowing costs and movements of market interest rates. At the beginning of 2005, the Company began to utilize brokers as a supplemental source of funding our loan growth. The Company utilizes brokered deposits and overnight borrowings as sources of daily funding depending on what funding source is most economical. At December 31, 2006 and December 31, 2005 brokered deposits accounted for approximately $87.0 million, or 13.7%, and $41.5 million or 8.3%, respectively, of total certificates of deposits.

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

	At December 31,
	2006					2005					2004
			Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate
Noninterest bearing demand deposits	$	95,121		0.00	%	$	116,835		0.00	%	$	100,154		0.00	%
Passbook and savings deposits		111,027		1.54			96,198		0.62			99,781		0.58
Interest bearing demand deposits		364,637		3.01			366,746		2.02			385,282		1.02
Time deposits under $100,000		277,042		4.28			233,870		3.66			215,769		3.05
Time deposits $100,000 and over		292,970		4.67			201,708		3.37			106,833		2.98
Total	$	1,140,797		3.35	%	$	1,015,357		2.30	%	$	907,819		1.53	%

TRUST SERVICES

     The Company maintains its Asset Management and Trust Department (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, 2006, the Trust Department managed 437 accounts with aggregate assets of $284.6 million, of which the largest relationship totaled $43.0 million, or 15.1%,of the Trust Department’s total assets. Included in these totals are 3 accounts with approximately $37.7 million in assets related to the Company.

PERSONNEL

     As of December 31, 2006, the Company had 411 full-time employees and 31 part-time employees, none of whom is represented by a collective bargaining unit. We believe that our relationship with our employees is good.

SUBSIDIARIES

     The Bank and the Bancorp each own 99%, and 1%, respectively, of the membership interests of the Citizens First Mortgage, LLC, established in 2002. The Company currently conducts its residential mortgage lending activity through Citizens First Mortgage, LLC.

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Citizens Financial Services, Inc., formerly 525 Riverside Corporation, established in 1974 as a Michigan-chartered service corporation, and is wholly-owned by the Bank. 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. Citizens First Mobile Services, LLC is 100% owned by the Bank. The Bancorp owns 100% of Coastal Equity Partners, L.L.C., established in 2006, whose primary purpose is to own and operate real estate activities.

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 Bank is a Michigan-chartered state savings bank and member 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 Report. 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.

Gramm-Leach-Bliley, USA Patriot and Bank Secrecy Acts

     The Gramm-Leach-Bliley Act expanded the activities in which a bank holding company registered as a financial holding company can engage. The conditions to be a financial holding company include, among others, the requirement that each depository institution subsidiary of the holding company be well capitalized and well managed.

     The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. The Company has developed policies and procedures designed to ensure compliance.

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, the Bank 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 if it fails to requalify within the time prescribed by the

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Commissioner, it must convert to a different charter or liquidate within the time prescribed by the Commissioner. If it does not do so, the Commissioner may appoint a conservator or seek the appointment of a receiver. As of December 31, 2006, 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. At December 31, 2006, the Company’s regulatory limit on loans to one borrower was $17.5 million or $29.1 million for loans approved by two-thirds of the Board of Directors. 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. 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. At December 31, 2006, the Company did not have any loans with one borrower that exceeded its regulatory limit.

     At December 31, 2006, loans with high LTV ratios were quantified by management and represented less than 10% of total outstanding loans as of the balance sheet date. Additionally, management quantified all loans (mortgage, consumer and commercial) that required interest only payments as of the balance sheet date and determined that these types of loans were also less than 10% of total loans outstanding at December 31, 2006. Based on these facts, management concluded no concentrations of credit risk existed at December 31, 2006 in accordance with FSP SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk.

     Dividends. The Company’s ability to pay dividends on its common stock depends on its receipt of dividends from the Bank. The Bank is subject to restrictions and limitations in the amount and timing of the dividends it may pay to the Company. 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

12

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 Bank 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%.

     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” in this Report.

     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% is considered to be “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, 2006, the most recent notification from the Bank’s regulators categorized the Bank 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 Bank is a member of both the Bank Insurance and the Savings Association Insurance Funds of the FDIC. 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

13

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 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 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.

     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

14

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 Bank is a member 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 Bank, 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 Bank was in compliance with this requirement as their investment in FHLB stock at December 31, 2006 was $19.4 million. The FHLB functions as a central reserve bank by providing credit for financial institutions throughout the United States. 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 Bank 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 net transaction accounts, nonpersonal time deposits and Eurocurrency liabilities (collectively referred to as reservable liabilities). The regulations generally provide that reserves be maintained against reservable liabilities as follows: accounts aggregating less than $8.5 million are exempted from the reserve requirements, for accounts aggregating greater than $8.5 million and less than $45.8 million the reserve requirement is 3%, and for accounts aggregating greater than $45.8 million, the reserve requirement is 10% against that portion of total transaction accounts in excess of $45.8 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.

     The Company is a nondiversified unitary savings and loan holding company within the meaning of federal law. Unitary savings and loan holding companies not existing or applied for before May 4, 1999, such as Citizens First Bancorp, are restricted to activities permissible for financial holding companies under the law or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. 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 regulation.

     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.

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     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:

(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 from the Bank 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 Bank must qualify as a qualified thrift lender. To be a qualified thrift lender, it 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. As of December 31, 2006, the Bank 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.

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.

FEDERAL AND STATE TAXATION

     General. 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 2004. For its 2006 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

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debt reserves would not be recaptured as taxable income unless the Bank makes a “non-dividend distribution” to the Bancorp as described below.

     Distributions. If the Bank 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 Bank 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. 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 and decreased by the cost of depreciable tangible assets acquired during the year. An investment tax credit may be claimed for the acquisition of depreciable tangible assets. Effective December 31, 2006, the SBT rate was 1.9%.

     Michigan State Taxation. The state income tax structure in Michigan or states could change significantly causing a reduction in our profitability. All significant portions of our business are conducted in Michigan and we are likely to continue to have significant portions of our business in Michigan. During 2006, the Michigan legislature repealed the SBT that served as a significant source of revenue for the State. It is currently unknown as to what type of taxing structure will replace Michigan’s SBT. As such, the replacement to the SBT may be less favorable to companies like ours and our profitability could be adversely impacted. Similarly, the taxing structure or the interpretation of other State regulation concerning tax could change in a manner that would be less favorable to us and therefore adversely impact our profitability.

     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.

FINANCIAL STATEMENTS

     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. See Item 6 for “Selected Financial Data” for the Company. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is included under Item 7. Among other things, Item 7 also includes a table showing average balance sheets for the Company for the periods ended December 31, 2006 and two prior years. 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, 2006 compared to the period ended December 31, 2005. For the Company’s Consolidated Financial Statements, see Item 8.

ADDITIONAL INFORMATION

     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, if applicable, 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

17

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.

ITEM 1A. RISK FACTORS

Significant Competition from an Array of Financial Service Providers

     For information regarding the risks the Company faces with respect to competition, see the discussion in Part I, Item 1 captioned “Market Area and Competition”.

Economic Downturn

     A general economic slowdown in the geographic region where the Company operates could negatively impact our business. Unlike larger institutions that are more geographically diversified, the Company’s profitability is primarily dependent on the economic conditions of the Southeastern portion of the State of Michigan and the Southwestern portion of the State of Florida. In addition to adverse changes in general economic conditions in the United States, unfavorable changes in economic conditions affecting the geographic region in which the Company operates, such as adverse effects of weather or changes in the automotive industry, may have a significant adverse impact on operations of the Company. More recently, we have experienced slowing economy conditions in the State of Michigan. Our loan portfolio, the ability of borrowers to repay loans and the value of the collateral securing these loans may be impacted by local economic conditions. An economic slowdown could have the following consequences:

• Loan delinquencies may increase;

• Problem assets and foreclosures may increase;

• Demand for the products and services of the Company may decline; and

• Collateral (including real estate) for loans made by the Company may decline in value, in turn reducing customers’ borrowing power, and making existing loans less secure.

     In particular during the past two years our level of nonperforming assets, net loan charge-offs and loan delinquencies all increased primarily due to the above.

General Credit Risk and Nonperforming Loans

     The risk of nonpayment of loans is inherent in banking. Such nonpayment could have an adverse effect on the Company’s earnings and our overall financial condition as well as the value of our common stock. Management attempts to reduce the Company’s credit exposure by carefully monitoring the concentration of its loans within specific industries and by following 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. However, there can be no assurance that such monitoring and procedures will reduce such lending risks. Credit losses can cause insolvency and failure of a financial institution and, in such event, its shareholders could lose their entire investment.

     Potential Problem Loans. In addition to those loans reflected in the tables in Part II, Item 7 captioned “Quality of Assets”, we identified one loan through our problem loan identification process which exhibits a higher than normal credit risk at December 31, 2006. Loans in this category include loans with characteristics such as past due 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 the loan in this category as of December 31, 2006 was $4.3 million. There were no loans identified through our process that would be considered a problem loan at December 31, 2005. There were no other significant loans not included above or in Part II, Item 7 captioned “Quality of Assets” which were not classified as nonperforming, nonaccrual or past due at December 31, 2006 and December 31, 2005.

     Allowance for Loan Losses. The allowance for loan losses indicated on the Company’s balance sheet represents management’s estimate of probable losses based on information available as of the date of the Company’s financial statements. For information on the calculation of this amount, see the discussion in Part II, Item 7 captioned “Critical Accounting Policies”.

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Environmental Risks

     In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Susceptibility to Changes in Regulation

     Any changes to state and federal banking laws and regulations may negatively impact our ability to expand services and to increase the value of our business. We are subject to extensive state and federal regulation, supervision, and legislation that govern almost all aspects of our operations. These laws may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. Recent changes in the method of evaluating how much each member of the FDIC pays for deposit insurance may affect the Company’s earnings beginning in 2007. In addition, the Company’s earnings are affected by the monetary policies of the Board of Governors of the Federal Reserve. These policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve influences the size and distribution of bank reserves through its open market operations and changes in cash reserve requirements against member bank deposits. The Gramm-Leach-Bliley Act regarding financial modernization that became effective in November, 1999 removed many of the barriers to the integration of the banking, securities and insurance industries and is likely to increase the competitive pressures upon the Company. We cannot predict what effect such Act and any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, but such changes could be materially adverse to our financial performance. For more information on this subject, see the section under Part I, Item 1 of this Report captioned “Regulation and Supervision.”

Interest Rate Risk

     For information regarding interest rate risk, see the discussion in Part II, Item 7A captioned “Quantitative and Qualitative Disclosures about Market Risk”.

Critical Accounting Policies

     For information regarding the risks the Company faces with respect to its critical accounting policies, see the discussion in Part II, Item 7 captioned “ Critical Accounting Policies ”.

Attraction and Retention of Key Personnel

     Our success depends upon the continued service of our senior management team and upon our ability to attract and retain qualified financial services personnel. Competition for qualified employees is intense. In our experience, it can take a significant period of time to identify and hire personnel with the combination of skills and attributes required in executing our strategy. If we lose the services of our key personnel, or are unable to attract additional qualified personnel, our business, financial condition, results of operations and cash flows could be adversely affected.

Dividend Payout Restrictions

     Dividends are subject to determination and declaration by our board of directors, which takes into account many factors including, but not limited to, applicable state and federal regulatory limitations. The Company currently pays a quarterly dividend on its common shares, but there is no assurance that we will continue to do so in the future. For more information regarding regulatory dividend payout restrictions, see the discussion in Part I, Item 1 captioned “Dividends”.

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Anti-Takeover Provisions

     Provisions of our Articles of Incorporation and Delaware law could have the effect of discouraging takeover attempts which certain stockholders might deem to be in their interest. These anti-takeover provisions may make us a less attractive target for a takeover bid or merger, potentially depriving shareholders of an opportunity to sell their shares of common stock at a premium over prevailing market prices as a result of a takeover bid or merger.

Operational Risks

     We are subject to certain operations risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.

Information Systems

     We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Technological Advances

     The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have an adverse impact on our business and, in turn, our financial condition and results of operations.

Severe Weather, Natural Disasters, Acts of War or Terrorism and Other External Events

     Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Trading Volume Risks

     Although our common stock is listed for trading on the NASDAQ Global Select Market, the trading volume in our common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

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Our Common Stock Is Not An Insured Deposit

     Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.

     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 Bank undertakes — 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 Bank 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     The Company currently conducts its business through its retail banking center at its main office and headquarters located in Port Huron, Michigan, in addition to 23 other full-service banking offices located in St. Clair, Sanilac, Huron, Macomb, Oakland and Lapeer Counties, Michigan and 1 loan production office (LPO) in Ft. Myers, Florida. Twenty and five of the offices are owned and leased, respectively. All full-service offices have ATM facilities and all but two 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 headquarters. The Company leases two additional operational office spaces near its headquarters, which expire in September 2007 and currently operate on a month to month basis. The leases in Oakland County expire as early as December of 2013 and as late as 2014. The Company also owns and operates ATM machines at 9 other locations located in its market area. The spaces for the ATM machines are leased from independent unaffiliated third parties on a year to year basis. Management expects that the Company will purchase and/or lease additional properties to support the future growth and execute its strategic plan 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “CTZN”. As of February 16, 2007, the Company had approximately 973 holders of record. The following table sets forth, for the quarters indicated, the high and low sales price information for the common stock and the dividends paid. In addition to the regulatory limitations on the payment of dividends discussed under Part I, Item 1, above, the Company is also 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.

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	Year Ended December 31, 2006
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
High	$	31.64	$	28.75	$	32.43	$	29.70
Low	$	25.04	$	22.58	$	26.71	$	23.03
Dividends Paid	$	0.09	$	0.09	$	0.09	$	0.09

	Year Ended December 31, 2005
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
High	$	24.39	$	23.08	$	23.05	$	25.48
Low	$	20.50	$	19.90	$	19.50	$	21.80
Dividends Paid	$	0.09	$	0.09	$	0.09	$	0.09

     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 if the Agreement is terminated by our Board of Directors on or after the date on which Mr. Campbell’s deferred compensation units become vested, which is January 31, 2012 (or earlier upon Mr. Campbell’s death, disability or certain changes of control). Pursuant to that Agreement, during the twelve month period ended December 31, 2006, the Company awarded 1,903 deferred compensation units totaling $51,000 to Mr. Campbell with regard to the twelve months ended December 31, 2006. 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 Report and should be consulted for full information.

     The Company has entered into deferred fee agreements with certain directors of the Company, under which these directors elected to defer fees paid to them by the Company. 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. 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 these agreements, the Company awarded 3,648 deferred compensation restricted stock units totaling $102,400 to various members of the Board during the twelve month period ended December 31, 2006. 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 Report and should be consulted for full information.

     On October 1, 2002, the Company’s Board of Directors announced a plan to repurchase up to 428,701 shares, or 5%, of its outstanding common stock. Under the common stock repurchase plan, the Company may purchase shares of its common stock in the open market at prevailing prices or in privately negotiated transactions from time to time depending upon market conditions and other factors. All share repurchases transacted in the open market are executed within the scope of Rule 10b-18 under the Securities Exchange Act of 1934 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 shares on the open market. Through December 31, 2006, the Company had repurchased 229,255 shares of its common stock pursuant to this repurchase plan at a weighted average price of $21.86 per share. Repurchased shares are held in treasury and may be used in connection with employee benefits and other general corporate purposes. No shares were repurchased during the three month period ended December 31, 2006.

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PERFORMANCE GRAPH

Comparison of Five Year Cumulative Total Return Among Citizens First Bancorp, Inc., NASDAQ Composite, SNL Midwest
Thrift Index and the Russell 2000 indices:
(Assumes $100 invested on 12/31/01 and reinvestment of dividends)

Total Return Performance

     The performance graph shown above the graph above is not necessarily indicative of future performance.

23

ITEM 6. SELECTED FINANCIAL DATA

	DECEMBER 31,
	2006		2005		2004 (1)		2003		2002 (2)
SELECTED CONSOLIDATED FINANCIAL DATA:	(Dollars in thousands)
Total assets	$	1,775,142	$	1,654,223	$	1,393,364	$	1,094,260	$	1,000,184
Cash and cash equivalents		24,823		47,591		27,937		33,647		40,356
Securities available for sale		62,149		87,510		93,839		79,672		100,382
Loans, net		1,582,411		1,425,036		1,192,057		929,201		819,136
Deposits		1,186,658		1,072,195		933,104		748,531		671,830
FHLB advances		348,914		346,500		232,209		172,534		173,003
Stockholders’ equity		177,314		168,570		162,894		158,187		148,155
Real estate and other assets owned		3,253		1,471		1,032		443		353
Total nonperforming assets		28,920		22,845		11,663		4,358		2,767

			YEAR						NINE MONTHS
			ENDED						ENDED
			DECEMBER 31,						DECEMBER 31,
	2006		2005		2004		2003		2002
Total interest income	$	113,271	$	89,089	$	69,443	$	60,304	$	46,954
Total interest expense		58,440		38,092		25,627		23,307		20,129
Net interest income		54,831		50,997		43,816		36,997		26,825
Provision for loan losses		2,805		2,390		1,555		1,440		892
Net interest income after provision for loan losses		52,026		48,607		42,261		35,557		25,933
Noninterest income		6,010		6,378		5,425		10,429		5,763
Noninterest expense		44,430		41,673		35,257		27,410		17,670
Income before income taxes		13,606		13,312		12,429		18,576		14,026
Income taxes		4,504		4,278		4,200		6,255		4,842
Net income	$	9,102	$	9,034	$	8,229	$	12,321	$	9,184
Earnings per share, basic		1.14		1.14		1.04		1.58		1.14
Dividends per share		0.36		0.36		0.36		0.34		0.24

				YEAR									NINE MONTHS
				ENDED									ENDED
				DECEMBER 31,									DECEMBER 31,
PERFORMANCE RATIOS:	2006			2005			2004			2003			2002
Average yield on interest-earning assets		6.89	%		6.15	%		5.64	%		6.08	%		6.52	%
Average rate paid on interest-bearing liabilities		4.03			3.09			2.46			2.78			3.35
Average interest rate spread		2.86			3.06			3.18			3.30			3.17
Net interest margin		3.34			3.52			3.56			3.73			3.72
Ratio of interest-earning assets to interest-bearing liabilities		113.42			117.45			118.31			118.32			119.83
Net interest income after provision for loan losses to noninterest expense		117.10			116.64			119.87			129.72			146.76
Noninterest expense as a percent of average assets		2.57			2.73			2.67			2.57			2.44
Return on average assets		0.53			0.59			0.62			1.16			1.26
Return on average equity		5.30			5.44			5.13			8.06			8.25
Ratio of average equity to average assets		9.93			10.87			12.15			14.35			15.24
Dividend payout ratio		33.32			33.75			37.24			23.17			22.95

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	AT OR FOR THE YEAR ENDED
	DECEMBER 31,
	2006			2005			2004			2003			2002
Leverage capital ratio		8.4	%		8.4	%		9.7	%		11.8	%		12.1	%
Total risk-based capital ratio		10.6			10.6			12.8			15.8			19.5
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of total loans		1.61			1.48			0.88			0.42			0.29
Nonperforming assets as a percent of total assets		1.63			1.38			0.84			0.40			0.28
Allowance for loan losses as a percent of total loans		0.90			0.94			1.12			1.24			1.33
Allowance for loan losses as a percent of nonperforming loans		55.7			63.4			126.7			297.9			459.1
Net loans charged-off to average loans		0.13			0.18			0.08			0.10			0.10
OTHER
Full service banking centers and loan production offices at end of period		25			25			20			16			15

(1)	The data for the years ended December 31, 2004 and thereafter includes the Metrobank acquisition.
(2)	Effective December 31, 2002, the Company changed its fiscal year end to December 31, rather than on March 31. As a result, the tables report the nine month period ended December 31, 2002.

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

GENERAL. Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Company’s Consolidated Financial Statements and accompanying Notes under Item 8 of this Report.

OVERVIEW

     The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 24 full-service banking centers and 1 loan production office. 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 properties. 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.

     This was again a year of significant investment by the Company in its core infrastructure. During 2006, the Company opened one additional branch office in Sanilac County replacing its existing facility with a more modern and more customer friendly office, expanded its Shelby office in Macomb County into a full service office and opened a loan production office in Ft. Myers, Florida expanding its service footprint. Additionally, the Company successfully integrated and brought in-house its core data processing and item processing. These customer service processes, which were previously outsourced to a third-party service provider, afford the company greater flexibility and control in an area vital to the Company’s reputation and provide the ability to serve its customers in an efficient and courteous manner.

     Management and employees successfully consolidated the Metrobank brand into Citizens First during the last half of 2006. Resources were allocated to ensure a smooth transition with the impact to customers that only enhanced service, product availability and convenience.

     Citizens First Mobile Services, LLC, established in 2006, is an in-house armored car department which provides our clients with a service that allows them to make deposits, receive cash and other correspondence without leaving their place of work. Prior to 2006, this function was outsourced.

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CRITICAL ACCOUNTING POLICIES

     Management has established various accounting policies that govern how accounting principles generally accepted in the United States of America are used to prepare the Company’s financial statements. The Company’s significant accounting policies are described in the Notes to the Consolidated Financial Statements under Item 8 of this Report. Certain accounting policies require management to make estimates and assumptions about matters that are highly uncertain and as to which different estimates and assumptions would have a material impact on the carrying value of certain of the Company’s assets and liabilities, on the Company’s net income and on the Company’s overall financial condition and results of operations. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly as a result of these estimates and assumptions, and different estimates and assumptions could have a material impact on the carrying value of certain of the Company’s assets and liabilities, on the Company’s net income and on the Company’s overall financial condition and results of operations for future reporting periods. Management believes that the Company’s “critical accounting policies” relate to the Company’s securities, allowance for loan losses, its valuation of its mortgage servicing rights and goodwill and intangibles. These policies are described in more detail below.

SECURITIES. Securities are evaluated to determine whether a decline in their value below amortized cost is other-than-temporary. Management and the Asset/Liability Committee systematically evaluate securities for other-than-temporary declines in market value on a quarterly basis. Management utilizes criteria such as the magnitude and duration of the decline, trends of the respective indices, historical rate patterns and their relation to the expected rates, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable. Once a decline in value below amortized cost is determined to be other-than-temporary, the value of the security is reduced to its fair value, forming a new cost basis for the investment, and a corresponding charge to earnings is recognized. For additional information about the securities, see Note 1 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

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 charged directly against earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is assured. Subsequent recoveries, if any, are credited to the allowance. In general the Company reviews the allowance for loan losses on a monthly basis and establishes a provision based on actual and estimated losses inherent in the portfolio.

     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, and 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. 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. 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. However, 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. 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.

VALUATION OF MORTGAGE SERVICING RIGHTS. The Company routinely sells its originated residential mortgage loans to investors, mainly Freddie Mac and Fannie Mae. Although the Company sells the mortgage loans, it frequently retains the servicing rights, or the rights to collect payments and otherwise service these loans, for an administrative or servicing fee. The mortgage loans that the Company services for others are not included as assets in the Company’s consolidated balance sheet. Loans serviced for others were approximately $673.4 million and $648.9 million at December 31, 2006 and December 31, 2005, respectively.

     The Company’s mortgage servicing rights relating to loans serviced for others represent an asset of the Company. This asset is initially capitalized and included in other assets on the Company’s consolidated balance sheet. The mortgage servicing rights are then

26

amortized against noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage servicing rights. There are a number of factors, however, that can affect the ultimate value of the mortgage servicing rights to the Company, including the estimated prepayment speed of the loan and the discount rate used to present value the servicing right. For example, if the mortgage loan is prepaid, the Company will receive fewer servicing fees, meaning that the present value of the mortgage servicing rights is less than the carrying value of those rights on the Company’s balance sheet. Therefore, in an attempt to reflect an accurate expected value to the Company of the mortgage servicing rights, the Company receives a valuation of its mortgage servicing rights from an independent third party. The independent third party’s valuation of the mortgage servicing rights is based on relevant characteristics of the Company ‘s loan servicing portfolio, such as loan terms, interest rates and recent prepayment experience, as well as current market interest rate levels, market forecasts and other economic conditions. Based upon the independent third party’s valuation of the Company ‘s mortgage servicing rights, management then establishes a valuation allowance by each strata, if necessary, to quantify the likely impairment of the value of the mortgage servicing rights to the Company. The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Company’s net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying mortgage servicing rights based on market conditions.

     The balances of the Company ‘s capitalized mortgage servicing rights, net of valuation allowance, included in the Company’s other assets at December 31, 2006 and December 31, 2005 were $4.3 million and $4.1 million, respectively. The fair values of the Company’s mortgage servicing rights were determined using annual constant prepayment speeds of 10.98% and 7.87%, respectively, and discount rates of 8.50% at December 31, 2006 and December 31, 2005. (Constant prepayment speeds are a statistical measure of the historical or expected prepayment of principal on a mortgage.) Different estimates of the prepayment speeds and discount rates or different assumptions could have a material impact on the value of the mortgage servicing rights and, therefore, on the Company’s valuation allowance. For further discussion of the Company’s valuation allowance and valuation of mortgage servicing rights, including a table setting forth the valuation allowances established by management with regard to the Company ‘s mortgage servicing rights for the previous three periods, see Note 6 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

GOODWILL AND INTANGIBLES. Goodwill and intangible assets arising from business acquisitions represent the value attributable to identifiable (core deposits) and unidentifiable (goodwill) intangible elements in the business acquired. The fair value of goodwill and intangibles is dependent upon many factors, including the Company’s ability to provide quality, cost effective services in the face of competition from other financial institutions. A decline in earnings as a result of business or market conditions, a lack of growth or the Company’s inability to deliver cost effective services over sustained periods can lead to impairment of goodwill and intangibles which could adversely impact earnings in future periods.

     The annual test of goodwill impairment is performed during the fourth quarter of each fiscal year by comparing the fair value of the Company to the book value of the Company. If the book value is in excess of the fair value, impairment is indicated and the goodwill must be written down to its fair value. For a further discussion of the Company’s goodwill and intangibles, please refer to Note 1 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2006 AND 2005

TOTAL ASSETS. Total assets increased $120.9 million, or 7.3%, to $1.775 billion at December 31, 2006 from $1.654 billion at December 31, 2005, primarily due to:

• a $157.4 million, or 11.0%, increase in loans, which is explained in more detail below,

• a $7.0 million, or 19.4%, increase in premises and equipment due to the purchase of land for future branch expansion in the Company’s market area, the remodeling of the Company’s main office and additional capital improvements as a result of remodeling of other branches, the construction of 2 additional banking centers to take the place of an existing loan center and our existing full service branch in Sanilac County and

• a $1.7 million, or 9.4%, increase in Federal Home Loan Bank (FHLB) stock, due to increased borrowings from the FHLB which, in turn, required an increased investment in FHLB stock.

     The increases in assets at December 31, 2006, as compared to assets at December 31, 2005, described above were partially offset by a decrease in securities available for sale of approximately $25.4 million, or 29.0%, due to maturities of investments and using the cash flow of these maturities to pay off short term borrowings.

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     The Company’s net loans to assets ratio at December 31, 2006 was 89.1% compared to 86.1% at December 31, 2005, as a result of the $157.4 million increase in net loans. The increase in loans was a result of the Company’s operating strategy of controlled balance sheet growth and consisted primarily of:

• a $85.4 million, or 20.0%, increase in one-to four-family loans to $513.1 million and

• a $45.5 million, or 55.2%, increase in construction loans to $127.8 million.

     The increase in one-to four-family and construction loans was primarily due to the development of new business relationships in Macomb and Oakland county markets where we have concentrated our growth efforts and growth of existing clients. We expect the activity in these types of loans to remain flat or increase slightly during 2007 as a result of the current rate environment and the general economic conditions in the State of Michigan.

TOTAL LIABILITIES. Total liabilities increased $112.2 million, or 7.6%, from $1.486 billion at December 31, 2005 to $1.598 billion at December 31, 2006. The increase was primarily due to the following:

• a $114.5 million, or 10.7%, increase in deposits from $1.1 billion at December 31, 2005 to $1.2 billion at December 31, 2006 and

• partially offset by a net decrease of $2.5 million, or 0.6%, in total net borrowings.

     The overall increase in deposits was primarily invested in loans. The increase in deposits was a result of the Company’s greater emphasis on building additional relationships with new and existing customers which had a positive impact on market share in four of the seven counties we serve. While our deposits have grown during 2006, we expect continued intense competition for deposit share in our Macomb and Oakland county markets. As part of our strategic plan, we believe we have a tremendous amount of opportunity to increase the number of products per household.

     The $114.5 million increase in deposits at December 31, 2006 compared to December 31, 2005 was primarily due to the following:

• a $16.2 million, or 16.3%, increase in savings accounts and

• a $135.6 million, or 27.2%, increase in certificates of deposit

     The increases in the certificates of deposit accounts were primarily due to lower overall rates in short-term accounts. The growth in savings accounts was partially due to growth in business deposit accounts as part of our ongoing effort to attract and retain deposit relationships with businesses throughout our market areas.

     The increase in deposits at December 31, 2006, as compared to at December 31, 2005, was partially offset by a decrease in non-interest bearing checking accounts of $16.4 million, or 14.6%, primarily due to customers transferring deposits to higher earning certificates of deposits.

QUALITY OF ASSETS. The Company ceases accruing interest on residential mortgages secured by real estate and consumer loans when principal or interest payments are delinquent 90 days or more. Commercial loans that are 90 days or more past due are reviewed by the Senior Vice President of Commercial Banking, the loan officer and the special asset team to determine whether they will be classified as nonperforming. These officers review various factors which include, but are not limited to, the timing of the maturity of the loan in relation to the ability to collect, whether the loan is deemed to be well secured, whether the loan is in the process of collection, and the favorable results of the analysis of customer financial data. A nonperforming loan will only be re-classified as a performing loan once the loan becomes current.

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The following table provides information at the dates indicated regarding nonperforming loans in the Company’s loan portfolio and real estate and other assets owned (in thousands):

	At December 31,
	2006			2005 (2)			2004 (1)			2003			2002
Nonperforming loans:
Real estate	$	13,400		$	8,467		$	5,745		$	3,268		$	1,876
Commercial		10,974			12,094			3,343			195			356
Consumer		1,293			813			1,543			452			182
Total		25,667			21,374			10,631			3,915			2,414
Real estate and other assets owned		3,253			1,471			1,032			443			353
Total nonperforming assets	$	28,920		$	22,845		$	11,663		$	4,358		$	2,767
Total nonperforming loans as a percentage of total loans		1.61	%		1.48	%		0.88	%		0.42	%		0.29	%
Total nonperforming loans as a percentage of total assets		1.45	%		1.29	%		0.76	%		0.36	%		0.24	%

(1)

The increase at December 31, 2004 from 2003 reflects the change in policy for nonperforming loans to be classified as performing as discussed in our Form 10-K filing for the fiscal year ended December 31, 2004.

(2)

The increase at December 31, 2005 in the Commercial Loan Portfolio reflects certain commercial loan relationships that were previously classified as “watch” credits by management at December 31, 2004. These loan relationships have either deteriorated or have been placed under forbearance agreements by management. The Company believes that the collateral attached to these relationships is adequate or that specific reserves have been allocated to cover any potential impairment.

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

	At December 31,
	2006			2005			2004			2003			2002
Real estate loans:
One- to four-family		—			—		$	265		$	2,506		$	1,575
Commercial and multi-family		—			—			728			149			—
Residential construction		—			—			—			762			301
Home equity and lines of credit		—			—			—			84			116
Commercial loans	$	1,473		$	1,455			2,948			86			356
Consumer loans		27			4			—			328			66
Total	$	1,500		$	1,459		$	3,941		$	3,915		$	2,414
Accruing loans 90 days past due to total loans		0.09	%		0.10	%		0.33	%		0.42	%		0.29	%

     Interest income that would have been recorded for the year ended December 31, 2006, had nonperforming loans performed according to their original terms amounted to approximately $2,830,000. Interest income related to these loans included in interest income for the year ended December 31, 2006, was approximately $1,025,000.

     Nonperforming loans were 1.61% of total loans at December 31, 2006, compared to 1.48% at December 31, 2005. Nonperforming loans increased $4.3 million, or 20.1%, to $25.7 million at December 31, 2006 from $21.4 million at December 31, 2005. The increases in the real estate, consumer and nonperforming assets categories at December 31, 2006 are primarily due to an overall weakening of economic conditions experienced in the State of Michigan. The Company believes that it has adequate collateral, along with procedures to mitigate the risk of a declining market. Based on managements analysis of its nonperforming loan portfolio, there are no large loan relationships with any one borrower that would lead management to assess nonperforming loans differently. See the LOANS section of Note 1 to the Company’s Consolidated Financial Statements under Item 8 of this Report for more information.

29

     Nonperforming assets, which includes nonperforming loans and real estate and other assets owned by the Company after foreclosure, increased $6.1 million, or 26.6%, to $28.9 million, or 1.6%, of total assets, at December 31, 2006, as compared to $22.9 million, or 1.38%, of total assets at December 31, 2005. This increase in nonperforming assets was due to the increase in nonperforming loans as described above along with an increase of $1.8 million in real estate and other assets owned. The allowance for loan losses increased to $14.3 million at December 31, 2006, or 0.90%, of total loans and 55.7% of nonperforming loans at December 31, 2006, as compared to $13.5 million, or 0.94% of total loans and 63.4% of nonperforming loans at December 31, 2005. The downward trend in the allowance for loan losses to total loans and the allowance for loan losses to nonpeforming loans is a result of strong loan growth and an increase in nonperforming loans, respectively, relative to increase in the allowance for loan losses. Net charge-offs decreased from $2.3 million to $2 million for the years ended December 31, 2005 and December 31, 2006, respectively. These assets are regularly monitored, have been under the management of our experienced special asset team and workout plans are in place to mitigate any potential losses.

     The Company’s allowance for loan losses is a critical accounting policy that involves estimates and assumptions about matters that are highly uncertain. Use of a different amount or assumptions for the allowance could have a material impact on the Company’s financial statements. For more information on how the amount of this allowance is determined, please see the caption “Critical Accounting Policies” in this section.

     The following table presents an analysis of the Company’s allowance for loan losses (in thousands):

	Year Ended												Nine Months
	December 31,												Ended December 31,
	2006			2005			2004			2003			2002
Allowance for loan losses, beginning of period	$	13,546		$	13,472		$	11,664		$	11,082		$	11,020
Acquired in acquisition		—			—			1,135			—			—
Charged-off loans:
Real estate		(187	)		(367	)		(132	)		(15	)		(56	)
Commercial		(687	)		(369	)		(270	)		(325	)		(548	)
Consumer		(1,478	)		(1,873	)		(1,057	)		(755	)		(498	)
Total charged-off loans		(2,352	)		(2,609	)		(1,459	)		(1,095	)		(1,102	)
Recoveries on loans previously charged-off:
Real estate		32			20			138			—			1
Commercial		4			—			167			83			29
Consumer		269			273			272			154			242
Total recoveries		305			293			577			237			272
Net loans charged-off		(2,047	)		(2,316	)		(882	)		(858	)		(830	)
Provision for loan losses		2,805			2,390			1,555			1,440			892
Allowance for loan losses, end of period	$	14,304		$	13,546		$	13,472		$	11,664		$	11,082
Net loans charged-off to average interest-earning loans		0.13	%		0.18	%		0.08	%		0.10	%		0.10	%
Allowance for loan losses to total loans		0.90	%		0.94	%		1.12	%		1.24	%		1.33	%
Allowance for loan losses to nonperforming loans		56	%		63	%		127	%		298	%		459	%
Net loans charged-off to allowance for loan losses		14.31	%		17.10	%		6.55	%		7.36	%		7.49	%
Recoveries to charged-off loans		12.97	%		11.23	%		39.55	%		21.64	%		24.68	%

     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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	At December 31,
	2006								2005								2004
			% of								% of								% of
			Allowance								Allowance								Allowance
			in each								in each								in each
			Category			Percent					Category			Percent					Category			Percent
			to Total			of Total					to Total			of Total					to Total			of Total
	Amount		Loans			Loans			Amount		Loans			Loans			Amount		Loans			Loans
Real estate	$	6,697		0.42	%		75.76	%	$	5,952		0.41	%		73.60	%	$	6,270		0.52	%		74.08	%
Commercial		2,955		0.19	%		17.53	%		2,855		0.20	%		18.85	%		2,983		0.25	%		18.41	%
Consumer		4,396		0.28	%		6.71	%		4,536		0.32	%		7.54	%		3,689		0.31	%		7.51	%
Unallocated		256		0.02	%		0.00	%		203		0.01	%		0.00	%		530		0.04	%		0.00	%
Total allowance for loan losses	$	14,304		0.90	%		100.00	%	$	13,546		0.94	%		100.00	%	$	13,472		1.12	%		100.00	%

	At December 31,
	2003								2002
			% of								% of
			Allowance								Allowance
			in each								in each
			Category			Percent					Category			Percent
			to Total			of Total					to Total			of Total
	Amount		Loans			Loans			Amount		Loans			Loans
Real estate	$	5,493		0.58	%		78.25	%	$	5,286		0.64	%		82.82	%
Commercial		1,922		0.20	%		13.54	%		1,020		0.12	%		8.29	%
Consumer		3,527		0.37	%		8.21	%		4,205		0.51	%		8.89	%
Unallocated		722		0.08	%		0.00	%		571		0.07	%		0.00	%
Total allowance for loan losses	$	11,664		1.24	%		100.00	%	$	11,082		1.33	%		100.00	%

STOCKHOLDERS’ EQUITY. Stockholders’ equity increased $8.7 million from $168.6 million at December 31, 2005 to $177.3 million at December 31, 2006, as a result of net income of $9.1 million, a $698,000 increase in unearned compensation for ESOP and a $472,000 increase in deferred compensation which represents deferred fees owed to members of the Board of Directors and a $476,000, or 53.0%, increase in accumulated other comprehensive loss from the net unrealized gains or losses on securities.

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST

     The following table presents certain information for the years indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the years presented. Average balances were derived from monthly balances (in thousands).

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	Year Ended December 31,
	2006							2005							2004
					Average							Average							Average
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
INTEREST EARNING ASSETS:
Loans (1)	$	1,542,079	$	108,833		7.06	%	$	1,317,897	$	83,895		6.37	%	$	1,115,618	$	65,457		5.87	%
Certificates of Deposits		20		2		5.00			—		—		—			—		—		—
Investment securities (2)		79,644		3,420		4.29			93,144		4,287		4.60			97,104		3,402		3.50
FHLB Stock		19,241		892		4.64			16,640		662		3.98			11,325		488		4.31
Federal funds sold		1,952		91		4.66			1,727		60		3.47			3,718		41		1.10
Interest earning deposits		1,025		33		3.22			18,125		185		1.02			4,400		55		1.25
Total interest earning assets		1,643,961		113,271		6.89			1,447,533		89,089		6.15			1,232,165		69,443		5.64
Noninterest earning assets		87,805							79,282							88,034
Total assets	$	1,731,766						$	1,526,815						$	1,320,199
INTEREST BEARING LIABILITIES:
Deposits:
Savings	$	111,027	$	1,708		1.54	%	$	96,198	$	597		0.62	%	$	99,781	$	574		0.58	%
NOW		88,101		604		0.69			94,693		896		0.95			119,940		747		0.62
Money market		276,536		10,352		3.74			272,053		6,503		2.39			265,342		3,787		1.43
Certificates of deposit		570,012		25,900		4.54			435,578		15,186		3.49			322,602		9,776		3.03
Total interest bearing deposits		1,045,676		38,564		3.69			898,522		23,182		2.58			807,665		14,884		1.84
Short-term borrowings		64,404		3,447		5.35			49,474		2,007		4.06			30,663		724		2.36
FHLB advances		339,320		16,429		4.84			284,449		12,903		4.54			203,122		10,019		4.93
Total interest bearing liabilities		1,449,400		58,440		4.03			1,232,445		38,092		3.09			1,041,450		25,627		2.46
Noninterest bearing deposits		95,121							116,835							100,154
Other noninterest bearing liabilities		15,353							11,536							18,225
Total liabilities		1,559,874							1,360,816							1,159,829
Equity		171,892							165,999							160,370
Total liabilities and equity	$	1,731,766						$	1,526,815						$	1,320,199
Net interest-earning assets	$	194,561						$	215,088						$	190,715
Net interest income			$	54,831						$	50,997						$	43,816
Interest rate spread (3)						2.86	%						3.06	%						3.18	%
Net interest margin as a percentage of interest-earning assets (4)						3.34	%						3.52	%						3.56	%
Ratio of interest-earning assets to interest-bearing liabilities						113.42	%						117.45	%						118.31	%

(1)	Balances are net of deferred loan origination fees, undisbursed proceeds of construction loans in process, and include nonperforming loans.
(2)	Securities available for sale are not on a tax equivalent basis.
(3)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

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RATE/VOLUME ANALYSIS

     The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by current year volume); and (iii) the net change (the sum of the prior columns). The changes attributable to the combined impact of volume and rate have been allocated on a proportional basis between changes in rate and volume. (in thousands)

	Year Ended December 31, 2006									Year Ended December 31, 2005
	Compared to									Compared to
	Year Ended December 31, 2005									Year Ended December 31, 2004
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
INTEREST EARNING ASSETS:
Loans	$	14,280		$	10,658		$	24,938		$	11,874		$	6,564		$	18,438
Certificates of Deposits		2			—			2			—			—			—
Investment securities		(621	)		(246	)		(867	)		(139	)		1,024			885
FHLB stock		103			127			230			229			(55	)		174
Federal funds sold		8			23			31			(22	)		41			19
Interest earning deposits		(175	)		23			(152	)		172			(42	)		130
Total interest earning assets		13,598			10,584			24,182			12,114			7,532			19,646
INTEREST BEARING LIABILITIES:
Deposits:
Savings	$	92		$	1,019		$	1,111		$	(21	)	$	44		$	23
NOW		(62	)		(230	)		(292	)		(157	)		306			149
Money market		107			3,742			3,849			96			2,620			2,716
Certificates of deposit		4,687			6,027			10,714			3,424			1,986			5,410
Total interest bearing deposits		4,824			10,558			15,382			3,341			4,957			8,298
Short-term borrowings		606			834			1,440			444			839			1,283
FHLB advances		2,489			1,037			3,526			4,011			(1,127	)		2,884
Total interest bearing liabilities		7,918			12,430			20,348			7,797			4,668			12,465
Increase (decrease) in net interest income	$	5,679		$	(1,845	)	$	3,834		$	4,317		$	2,864		$	7,181

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED 2006 AND 2005

NET INCOME. The increase in net income for 2006 was primarily due to a $3.4 million, or 7.0%,increase in net interest income, after provision for loan losses. The increase in net income was offset by an increase of $2.8 million, or 6.6%, increase in noninterest expenses, which was primarily due to a $3.5 million, or 18.2%, increase in compensation and employee benefits. These increases and decreases are explained in more detail below.

NET INTEREST INCOME. Net interest income, before provision for loan loss, increased by $3.8 million to $54.8 million for the year ended December 31, 2006, from $51.0 million for the year ended December 31, 2005. The increase was primarily due to 4 prime rate increases, or 100 basis points, between December 31, 2005 and December 31, 2006. As such, total interest income increased $24.2 million, or 27.1%, to $113.3 million for the year ended December 31, 2006, from $89.1 million for the year ended December 31, 2005. The current rising interest rate environment generated higher yields in both loans and investments. However our growth in loans, primarily mortgage loans, contributed to the rise in interest income.

     The increase in interest income was offset by a $20.4 million, or 53.4%, increase in interest expense, primarily due to our increased offering rates on interest bearing deposit accounts. Similarly to 2005, our loan growth surpassed our growth in deposits during 2006 and therefore, as anticipated, our borrowings increased to fund this loan growth. We expect this trend to continue throughout 2007 based on our expectations of growth and the competitive markets in which the Company operates or anticipates to operate. Interest

33

expense on deposits increased $15.4 million, or 66.4%, from $23.2 million to $38.6 million for the years ended December 31, 2005 and December 31, 2006, respectively. A majority of this increase was in savings deposits and certificate of deposit accounts, as previously discussed above.

     As we continue to move into new markets to expand our market share, we expect interest expense on deposits to increase during 2007, as experienced during the year ended December 31, 2006. The Company is entering highly competitive markets, however, based on management’s analysis, we believe that these markets provide greater and more lucrative opportunities within which to execute our strategic plan. We believe the Macomb, Lapeer and Oakland County markets are experiencing positive economic growth based on census data. Our net interest margin fell by 18 basis points from 3.52% to 3.34% from December 31, 2005 to December 31, 2006, respectively, primarily due to the increase in the yield paid for interest bearing liabilities outpacing the increase in yield earned for interest earning assets.

PROVISION FOR LOAN LOSSES. The provision for loan losses increased $415,000, or 17.4%, from $2.4 million for the year ended December 31, 2005 to $2.8 million for the year ended December 31, 2006. The increased provision for loan losses is a result of our analysis of the allowance for loan losses, loan growth and the increase in nonperforming loans during 2006. Despite the increased provision, the loan loss allowance as a percentage of total loans decreased from 0.94% at December 31, 2005 to 0.90% at December 31, 2006. See the QUALITY OF ASSETS section above for additional discussion relating to the provision for loan losses. Management expects, based on our strategic plan, that the provision for loan losses during 2007 will increase by approximately, if not more than, the increase experienced during 2006.

NONINTEREST INCOME. As discussed in previous SEC quarterly and annual reports, the Company’s noninterest income is an area that continues to be on the forefront of management discussion and efforts to improve are constantly reviewed. This is an area that, compared to our peers, provides a tremendous opportunity for growth. However, it is recognized by management that exemplary execution is vital to our success. More recently, management has completed an analysis of our noninterest income sources and expects to implement the results thereof during the first quarter of 2007.

     Service charges and other fees remained relatively flat, however, mortgage banking activities decreased by 673,000, or 23.9%, from $2.8 million to $2.1 million during the years ended December 31, 2005 and December 31, 2006, respectively, primarily due to a recognition of approximately $936,000 of gains related to a $62 million loan sale during 2005. The increase in mortgage banking activities without the $62 million loan sale in 2005 was $263,000, or 14.0%, for the twelve months ended December 31, 2006. Trust fee income increased by $73,000, or 5.9%, from $1.2 million to $1.3 million for the years ended December 31, 2005 and December 31, 2006, respectively.

NONINTEREST EXPENSE. Noninterest expense increased $2.8 million, or 6.6%, to $44.4 million for the year ended December 31, 2006, from $41.7 million for the year ended December 31, 2005. The increase in noninterest expense was primarily due to an increase of $3.5 million, or 18.2%, in compensation, payroll taxes and employee benefit expenses, due primarily to 36 full and part time employees added during 2006 to increase the level of customer service and to accommodate the expansion of our branch and loan production office network. Given the rise in health care costs, growth expected to be achieved in the future, and the costs of securing experienced personnel, we expect these expenses to continue to increase in the future. We have invested significantly in experienced personnel to generate various efficiencies and to obtain the overall growth that we experienced in 2006. We expect these investments in personnel to continue to add value to our business model.

     In addition to the increase in compensation, payroll taxes and employee benefit expenses, office occupancy and equipment increased $1.4 million, or 21.9%, to $8.0 million for the year ended December 31, 2006 from $6.6 million for the year ended December 31, 2005 primarily due to a loan production office which was converted to a full service branch and a new loan production office in Florida, as rent expense increased 16.6% during 2006. The Company also renovated the retail branch located in the main office to enhance its aesthetic appearance and service environment. Increases in noninterest expense are expected to increase slightly over the next year, primarily due to increases in the costs of health care benefits for our employees.

INCOME TAXES. Federal income taxes for the year ended December 31, 2006 were $4.5 million, an increase of $226,000, or 5.3%, from $4.3 million for the year ended December 31, 2005. The effective tax rates for 2006 and 2005 were 33.1% and 32.1%, respectively. Included in federal income taxes at December, 31, 2005 was a reserve for the realization of the Company’s contribution carryforward for tax purposes, which expired in fiscal 2006. As noted in 2005, management determined, based on projected taxable income levels through 2006, that the entire amount of the contribution carryforward would not be utilized.

34

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED 2005 AND 2004

NET INCOME. The increase in net income for 2005 was primarily due to a $6.4 million, or 15.0%,increase in net interest income, after provision for loan losses and a $953,000, or 17.6%, increase in noninterest income. The increase in net income was offset by an increase of $6.4 million, or 18.2%, increase in noninterest expenses, which was primarily due to a $3.2 million, or 19.9%, increase in compensation and employee benefits. These increases and decreases are explained in more detail below.

NET INTEREST INCOME. Net interest income, before provision for loan loss, increased by $7.2 million to $51.0 million for the year ended December 31, 2005, from $43.8 million for the year ended December 31, 2004. The increase was primarily due to 8 prime rate increases, or 200 basis points, between December 31, 2004 and December 31, 2005. As such, total interest income increased $19.7 million, or 28.3%, to $89.1 million for the year ended December 31, 2005, from $69.4 million for the year ended December 31, 2004. The current rising interest rate environment generated higher yields in both loans and investments. However our growth in loans, primarily commercial loans, contributed to the rise in interest income.

     The increase in interest income was offset by a $12.5 million, or 48.6%, increase in interest expense, primarily due to our increased reliance on the FHLB and our correspondent banks’ federal fund borrowing lines. Similarly to 2004, our loan growth surpassed our growth in deposits during 2005 and therefore, as anticipated, our borrowings increased to fund this loan growth. Interest expense on deposits increased $8.3 million, or 55.8%, from $14.9 million to $23.2 million for the years ended December 31, 2004 and December 31, 2005, respectively. A majority of this increase was in money market deposits and certificate of deposit.

     Our net interest margin fell by 4 basis points from 3.56% to 3.52% from December 31, 2004 to December 31, 2005, respectively.

PROVISION FOR LOAN LOSSES. The provision for loan losses increased $835,000, or 53.7%, from $1.6 million for the year ended December 31, 2004 to $2.4 million for the year ended December 31, 2005. The increased provision for loan losses is a result of our analysis of the allowance for loan losses, loan growth experienced during 2005 and the increase in nonperforming loans during 2005. Despite the increased provision, the loan loss allowance as a percentage of total loans decreased from 1.12% at December 31, 2004 to 0.94% at December 31, 2005, and the allowance for loan losses as a percentage of nonperforming loans decreased from 127% at December 31, 2004 to 63% at December 31, 2005, in each case primarily as a result of the significant increase in the size and growth of the Company’s loan portfolio. See Item 1 under the QUALITY OF ASSETS section for additional discussion relating to the provision for loan losses.

NONINTEREST INCOME. Service charges and other fees remained relatively flat, however, mortgage banking activities increased $1.4 million, or 101.1%, from $1.4 million to $2.8 million during the years ended December 31, 2004 and December 31, 2005, respectively. Included in this increase was the sale of approximately $62 million of mortgage loans which resulted in a gain before taxes of approximately $936,000. Trust fee income increased by $438,000, or 54.7%, from $801,000 to $1.2 million for the years ended December 31, 2004 and December 31, 2005, respectively.

     The increase in noninterest income was offset by reduced gains on sale of securities compared to 2004 as the Company sold only one security at par during the first quarter of 2005.

NONINTEREST EXPENSE. Noninterest expense increased $6.4 million, or 18.2%, to $41.7 million for the year ended December 31, 2005, from $35.3 million for the year ended December 31, 2004. The increase in noninterest expense was primarily due to an increase of $3.2 million, or 19.9%, in compensation, payroll taxes and employee benefit expenses, due primarily to 41 full and part time employees added during 2005 to significantly increase the level of customer service and to accommodate the expansion of our branch and loan production office network. Given the rise in health care costs, growth expected to be achieved in the future, and the costs of securing experienced personnel, we expect these expenses to continue to increase in the future. We have invested significantly in experienced personnel to generate various efficiencies and to obtain our overall growth that we experienced in 2005.

     In addition to the increase in compensation, payroll taxes and employee benefit expenses, office occupancy and equipment increased $909,000, or 16.1%, to $6.6 million for the year ended December 31, 2005 from $5.7 million for the year ended December 31, 2004 primarily due to 3 additional branches and 2 additional loan production offices, as rent expense increased 22.1% during 2005. The Company also renovated three floors of the main office to make them more conducive to a sales and service environment.

     Contributing to the increase in noninterest expense was an increase of $685,000, or 19.3%, in professional fees primarily due to compliance with the various requirements of the Sarbanes-Oxley Act, an increase of $586,000, or 45.0%, in data processing expense primarily related to our successful conversion of the core systems of Metrobank, and an increase of $1.6 million, or 37.6%, in other

35

noninterest expenses, of which approximately $410,000 related to conversion of Metrobank. The increase in noninterest expense was partially offset by a decrease of $361,000, or 18.9%, in advertising expenses.

INCOME TAXES. Federal income taxes for the year ended December 31, 2005 were $4.3 million, an increase of $78,000, or 1.9%, from $4.2 million for the year ended December 31, 2004. The effective tax rates for 2005 and 2004 were 32.1% and 33.8%, respectively. The contribution carryforward period expired in 2006 and the Company recorded an adjustment of $300,000 to revise its prior estimate of the amount of carryforward that would not be utilized in fiscal 2006.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL. Liquidity is the Company’s ability to meet its current and future needs for cash. The Company further defines liquidity as the ability to have funds available, without incurring excessive cost, to respond to the needs of depositors and borrowers and to satisfy its financial commitments, as well as continued flexibility to take advantage of investment opportunities. Many factors affect a Company’s ability to meet its liquidity needs, including variation in the markets served, the Company’s asset/liability mix, its reputation and credit standing in the market and general economic conditions. Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning assets and costs of interest-bearing liabilities, and (4) the objectives of its asset/liability management program, which are to balance and control the risks and financial position of the Company. Excess liquid assets are invested generally in interest-earning overnight deposits and short-and intermediate-term U. S. Government and agency obligations. The Company’s investment portfolio is evaluated on a monthly basis at its Asset/Liability Management Committee (ALCO) meetings. Based on the following, the Company considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs.

USES OF FUNDS. The primary investing activities of the Company are the origination of loans to be held for investment, the purchase and sale of securities and capital expenditures. Investment security purchases during the year ended December 31, 2006 subsided as the Company invested the cash flow from operations into the loan portfolio which are generally higher yielding assets. Purchase of premises and equipment increased during 2006 as the Company continues to execute our growth strategy into new markets and continued renovation of our branches and main office. The Company primarily uses its funds for the following:

• To originate mortgages and other new loans,

• To fund withdrawals of deposits and to pay interest on deposits,

• To fund takedowns on loan commitments and letters of credit,

• To invest in securities, including FHLB stock,

• To pay principal and interest on its borrowings,

• To fund any capital expenditures which, for the upcoming fiscal year, are expected to include renovation of the interiors of the certain branch offices and enhancements to out information technology systems,

• To fund any acquisitions if the opportunity arises,

• To pay dividends to its shareholders and

• To fund repurchases of the Company’s stock pursuant to common stock repurchase plans approved by the Company’s Board of Directors.

     At December 31, 2006, the Company had outstanding unfunded commitments to originate loans or to refinance existing loans of $352.1 million, $96.6 million of which had fixed interest rates. These loans are generally to be secured by properties located in its market area. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. Loan commitments have, in recent periods, been funded through cash and cash equivalents, sales of loans, sales and maturities of securities and borrowings. In addition, certificates of deposit that are scheduled to mature in one year or less from December 31, 2006 total $483.2 million. To the extent that the Company needs to fund maturing certificates of deposit, they will also be funded through cash and cash equivalents, increased deposits, sales of loans and sales and maturities of securities, FHLB borrowings and brokered deposits. Based on past experience, however, management believes that a significant portion of these certificates of deposit will remain with the Company. The following table indicates the Company’s aggregate contractual obligations and commitments (in thousands) as of December 31, 2006.

36

	Payments Due by Period
	Less than		1 to 3		4 to 5		After 5
Contractual Obligations	1 Year		Years		Years		Years		Total
Deposits without a stated maturity (1)	$	553,031		—		—		—	$	553,031
Time deposits (2)		489,379	$	81,462	$	71,474	$	17,089		659,404
FHLB advances (3)		43,956		271,325		37,932		38,277		391,490
Short-term borrowings		51,095		—		—		—		51,095
ESOP loan		551		1,245		1,466		4,900		8,162
Purchase obligations (4)		809		—		—		—		809
Noncancelable leases		1,061		2,106		1,557		1,613		6,337
Total	$	1,139,882	$	356,138	$	112,429	$	61,879	$	1,670,328

	Expiration by Period
	Less than		1 to 3		4 to 5		After 5
Other Commitments	1 Year		Years		Years		Years		Total
Letters of credit	$	8,620	$	209	$	—	$	—	$	8,829
Commitments to extend credit		343,286		—		—		—		343,286
Total	$	351,906	$	209	$	—	$	—	$	352,115

(1)	Excludes interest.
(2)	Includes interest on both fixed and variable-rate obligations. Interest was calculated using a weighted average yield based on the type of time deposit at December 31, 2006. The contractual amounts to be paid on variable-rate obligations are affected by changes in market interest rates. Future changes in market interest rates could have a material impact on the contractual amounts to be paid.
(3)	Includes interest on both fixed and variable-rate FHLB advances. The interest associated with variable-rate obligations is based upon interest rates in effect at December 31, 2006. The contractual amounts to be paid on variable-rate obligations are affected by changes in market interest rates. Future changes in market interest rates could have a material impact on the contractual amounts to be paid.
(4)	Purchase obligations include capital expenditures for renovations of the interiors of branch offices and estimated costs for upgrades to our information technology systems expected to occur during 2007 as we continue to enhance our network to accommodate expansion and growth.

     In addition to the financial commitments discussed above, the Company also currently pays, and intends to continue paying, regular quarterly dividends out of its net earnings. However, any determination regarding the timing and amount of future dividends, if any, is at the discretion of the Company’s board and depends upon the Company’s results of operations, financial condition, cash requirements, future business prospects, general business conditions and other factors that the Board of Directors may deem relevant. At this time, the Company does not believe that the continued payment of its regular quarterly dividend will negatively impact the Company’s liquidity in any material respect. For information regarding certain regulatory restrictions on the payment of dividends, see Note 12 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

     The Company also has implemented a share repurchase program, the operation of which is not expected to have any significant impact on the Company’s liquidity. For more information on the Company’s stock repurchase programs, see Note 15 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

     SOURCES OF FUNDS. 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 and borrowings from the FHLB or correspondent banks, cash on hand and cash on deposit. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, and mortgage loan originations and sales are greatly influenced by general interest rates, economic conditions and competition. The Company’s most liquid assets are cash and due from depository institutions as well as securities maturing in one year or less. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. At December 31, 2006, cash and deposits in other depository institutions totaled $24.8 million and securities available for sale totaled $62.2 million.

37

Loan and Investment Maturities. 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 fees or the allowance for loan losses.

	At December 31, 2006
			Commercial
	One- to		and				Home Equity
	Four-Family		Multi-Family		Residential		and Lines						Total
	Real estate		Real estate		Construction		of Credit		Commercial		Consumer		Loans
Amounts due in:
One year or less	$	1,907	$	106,217	$	62,307	$	4,898	$	137,634	$	2,462	$	315,425
One year to five years		8,943		232,379		8,635		75,168		124,318		35,207		484,650
More than five years		502,289		93,413		56,835		57,046		18,053		69,586		797,222
Total amount due	$	513,139	$	432,009	$	127,777	$	137,112	$	280,005	$	107,255	$	1,597,297

     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 Company also originates fixed-rate mortgage loans conforming to Freddie Mac guidelines generally for sale in the secondary market. The proceeds of these sales provide the Company with funds for both additional lending and liquidity to meet its current obligations. The Company sold $115.7 million and $175.1 million of fixed-rate mortgage loans during the periods ended December 31, 2006 and 2005, respectively. The following table sets forth the dollar amount of loans contractually due after December 31, 2006, and whether such loans have fixed interest rates or adjustable interest rates (in thousands):

	Due After December 31, 2006
	Fixed		Adjustable		Total
Real estate loans:
One- to four-family	$	100,780	$	412,359	$	513,139
Commercial and multi-family		323,774		108,235		432,009
Residential construction		68,968		58,809		127,777
Home equity and lines of credit		76,141		60,971		137,112
Total real estate loans		569,663		640,374		1,210,037
Commercial loans		149,319		130,686		280,005
Consumer loans		107,155		100		107,255
Total loans	$	826,137	$	771,160	$	1,597,297

38

     The following table sets forth the maturities and weighted average yields of the Company’s securities at December 31, 2006 (in thousands):

	At December 31, 2006
	Due within					Due in One Year					Due in Five Years
	One Year					to Five Years					to Ten Years
			Weighted					Weighted					Weighted
	Fair		Average			Fair		Average			Fair		Average
	Value		Yield			Value		Yield			Value		Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	6,982		4.21	%	$	10,010		4.69	%	$	1,139		4.77	%
Obligations of state and political subdivisions		2,116		3.81	%		20,469		4.09	%		7,456		4.11	%
Corporate debt securities		3,948		6.76	%		—		—			—		—
Total debt securities		13,046		4.92	%		30,479		4.29	%		8,595		4.20	%
Mortgage-backed securities		—		—			—		—			—		—
Equity securities		—		—			—		—			—		—
Total securities available for sale at fair value	$	13,046		4.92	%	$	30,479		4.29	%	$	8,595		4.20	%

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

	At December 31, 2006
	Due in					Mortgage-backed
	More than Ten Years					and Equity		Total
			Weighted							Weighted
	Fair		Average			Fair		Fair		Average
	Value		Yield			Value		Value		Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies		—		—			—	$	18,129		4.54	%
Obligations of state and political subdivisions	$	1,983		4.61	%		—		32,026		4.15	%
Corporate debt securities		—		—			—		3,948		6.76	%
Total debt securities		1,983		4.61	%		—		54,103		4.64	%
Mortgage-backed securities		—		—		$	3,271		3,271		6.61	%
Equity securities		—		—			4,775		4,775		—
Total securities available for sale at fair value	$	1,983		4.61	%	$	8,046	$	62,149		4.39	%

Weighted average yield data for municipal securities is not presented on a tax equivalent basis.

39

     Based on recommendations from ALCO, the Company did not sell investments during 2006 due to the interest rate environment. As such, no gains or losses were recognized for the year ended December 31, 2006.

Deposit and Financing Activities. Financing activities consist primarily of activity in deposit accounts, FHLB advances and other borrowings, payment of dividends to the Company’s shareholders and repurchase of the Company’s stock pursuant to various common stock repurchase programs approved by the Company’s Board of Directors. Deposits are the major external source of funds for the Company’s lending and other investment activities. The Company experienced a net increase in total deposits of $114.5 million for the year ended December 31, 2006 compared to a net increase in total deposits of $139.1 million for the year ended December 31, 2005. Deposit flows are affected by market interest rates, the interest rates and products offered by the Company and its competitors and other factors. The Company generally manages the pricing of its deposits to be competitive with other local banks and to increase core deposit relationships. Occasionally, the Company offers promotional rates on certain deposit products in order to attract deposits.

     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, 2006 (in thousands):

Three months or less	$	141,187
Over 3 through 6 months		61,077
Over 6 through 12 months		44,432
Over 12 months		94,738
Total	$	341,434

     The Company may use overnight federal funds purchased from member correspondent banks, brokered deposits and borrowings from the Federal Home Loan Bank of Indianapolis (FHLB) to compensate for any reductions in the availability of funds from other sources and to supplement its supply of lendable funds and to meet deposit withdrawal requirements. FHLB advances are collateralized by mortgage loans and investment securities under a blanket collateral agreement. The Company has the ability to borrow a total of approximately $598.8 million, $144.1 million from its correspondent banks and $454.7 million from the FHLB, of which $51.1 million and $348.9 million were outstanding at December 31, 2006, respectively. Included in the total amount of available borrowings from its correspondent banks is a bank line-of-credit in the amount of $25.0 million, of which $0 was outstanding at December 31, 2006. Under the terms of the line-of-credit agreement, the Company is required to be categorized as “well capitalized” under regulatory guidelines. If the Company falls below this category, the line-of-credit would be terminated and become immediately due. The line is collateralized by the common stock of the Bank and expires on January 9, 2008. For additional information about borrowings, see Note 8 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

40

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

	Year ended
	December 31,
	2006			2005			2004
FHLB advances
Average balance outstanding	$	339,320		$	284,449		$	203,122
Maximum amount outstanding at any month-end during the period		358,299			346,500			232,209
Balance outstanding at end of period		348,914			346,500			232,209
Weighted average interest rate during the period		4.84	%		4.54	%		4.93	%
Weighted average interest rate at end of period		4.82	%		4.50	%		4.53	%
Federal Funds Purchased
Average balance outstanding	$	63,439		$	39,574		$	20,985
Maximum amount outstanding at any month-end during the period		107,531			73,955			45,527
Balance outstanding at end of period		51,095			52,013			45,527
Weighted average interest rate during the period		5.43	%		3.61	%		1.48	%
Weighted average interest rate at end of period		5.04	%		4.32	%		2.50	%

For more information regarding FHLB advances, please see Note 8 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

REGULATORY CAPITAL REQUIREMENTS. The Company is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2006, the Company exceeded all of its regulatory capital requirements. The Company is considered “well capitalized” under regulatory guidelines. See Note 12 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

NEW ACCOUNTING STANDARDS. There were several new accounting standards which were issued or became effective in 2006, in addition to some which have later effective dates. Those that are applicable to the Company are discussed in Note 1 to the Company’s Consolidated Financial Statements under Item 8 of this Report.

EFFECT OF INFLATION AND CHANGING PRICES. The Company’s Consolidated Financial Statements and related financial data presented have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations, increased loan amounts and increased interest rates (which must include a real rate of return and an additional amount to reflect expected inflation over the term of the loan). Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS QUALITATIVE ASPECTS OF MARKET RISK.

     The Company’s primary market risk exposure is interest rate risk. Changes in interest rates affect our operating performance and financial condition in diverse ways. Our profitability depends in substantial part on our “net interest spread,” which is the difference between the rates we receive on loans and investments and the rates we pay for deposits and other sources of funds. Sudden fluctuations in market interest rates are inherently uncertain and could have a negative impact on the earnings of the Company to the extent that the interest rates on assets and liabilities do not change at the same speed, to the same extent or on the same basis. For example, the Company’s assets include a large number of fixed-rate mortgage loans. As a result, during periods of rising interest rates, there is a risk that the Company’s interest expense will increase faster than its interest income. Over the last few years, the Company,

41

along with most other financial institutions, has experienced a “margin squeeze” as lower interest rates have made it difficult to maintain a more favorable net interest spread.

     The Company manages interest rate risk within an overall asset/liability framework. The Company’s principal objectives regarding interest rate risk management are to evaluate regularly the interest rate risk inherent in certain balance sheet accounts, to determine the level of risk appropriate given the Company’s financial condition and outlook, operating environment, capital and liquidity requirements and performance objectives and to manage interest rate risk consistent with the Company’s Board of Directors’ approved guidelines. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. In the event that our asset/liability management strategies are unsuccessful, our profitability may be adversely affected.

     The Company has an Asset/Liability Management Committee that is responsible for accomplishing the principal objectives of interest rate risk management. The Committee regularly reviews the Company’s guidelines and strategies affecting the Company’s asset/liability management related activities to determine if they are adequate based on estimated market risk sensitivity, policy limits set by the Company’s Board and overall market interest rate levels and trends. The Committee is composed of members of management and the Company’s Board of Directors and regularly meets to review the Company’s asset/liability mix. It also reports trends, interest rate risk position and results of current interest rate risk management strategies and recommends any changes to strategies to the Board of Directors quarterly. In recent years, the Company has used the following strategies to manage interest rate risk: (1) emphasizing the origination of adjustable-rate loans and the sale of longer-term, fixed-rate loans; (2) emphasizing shorter term consumer loans; (3) maintaining a high quality portfolio of short-to intermediate-term securities and (4) using FHLB advances and other borrowings to better structure the maturities of its interest rate sensitive liabilities.

     Adverse market interest rate changes between the time that a customer receives a rate-lock commitment on a mortgage and when the fully funded mortgage loan is sold to an investor can erode the value of that mortgage. The Company enters into forward sales contracts in order to mitigate this particular interest rate risk. The Company accepts credit risk in forward sales contracts should the other party default, in which case the Company would be compelled to sell the mortgages to another party at the current market price. Therefore, if market interest rates increased from the date of the forward sales contract and the other party defaulted, the Company would most likely have to sell the mortgage to another party at a lower price, which would reduce earnings or create losses on this mortgage. More recently, the Company has used some of its excess liquidity to increase its loan portfolios. As liquidity is reduced, the Company’s sensitivity to interest rate movements is expected to increase.

QUANTITATIVE ASPECTS OF MARKET RISK. The Company uses a simulation model based on discounted cash flows to measure the potential impact on its net interest income of hypothetical changes in market interest rates. The model forecasts the Company’s net interest income for the next year assuming that there are no changes in interest rates or the mix of assets and liabilities on the balance sheet from the end of the prior period. After this initial forecast, the model subjects the balance sheet to instantaneous and sustained rate changes of 100 and 200 basis points to the treasury yield curve. In order to determine the possible effect of the rate changes, the model uses various assumptions. Among others, these assumptions relate to the following:

• The shape of the yield curve;

• The pricing characteristics of and pricing decisions regarding loans based on previous rates charged by the Company;

• Changes in deposits and borrowings based on previous rates charged by the Company and other competitive conditions;

• Reinvestments of cash flows from assets and liabilities based on current market interest rates;

• The lack of any changes in the mix of assets and liabilities on the balance sheet;

• The degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates based on particular characteristics of those assets and liabilities;

• Expected prepayment rates on loans and investments based on industry standards and the current interest rate environment;

• Certificates of deposit and other deposit flows based on expected maturity dates; and

• Expected growth based on the Company’s projections.

42

     The table below sets forth, as of December 31, 2006, estimated net interest income and the estimated changes in the Company’s net interest income for the next twelve month period that could occur as a result of instantaneous changes in market interest rates of 100 and 200 basis points:

	Estimated Change in Annual Net Interest Income
Increase/(Decrease) in Market Interest	At December 31, 2006 (Dollars in thousands)
Rates in Basis Points (Rate Shock)	Amount		$ Change			% Change
200	$	60,522	$	(376	)		-(0.62	)%
100		60,768		(130	)		(0.21	)
Static		60,898		—			—
-100		60,626		(272	)		(0.45	)
-200		59,387		(1,511	)		(2.48	)

     The above table indicates that in the event of a sudden and sustained decline in prevailing market interest rates, the Company’s net interest income would be expected to decrease.

     As noted above, computation of the prospective effect of hypothetical interest rate changes is based on a number of assumptions. The calculation of the interest rate sensitivity of the Company could vary significantly if different assumptions were used, or if the Company’s response to changes in interest rates included changes in the mix of assets and liabilities in its balance sheet. Other shortcomings also exist in the table. These shortcomings include the following, among others:

• Although certain assets may have similar maturities or repricing characteristics, they may react in different degrees to changes in interest rates.

• The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.

• Certain assets, such as adjustable-rate and residential mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.

• In the event of a change in interest rates, expected rates of repayments on loans and early withdrawals from time deposits could deviate significantly from those assumed in calculating the table.

• If interest rates increased, it is also possible that the increased mortgage payments required of certain borrowers could result in an increase in delinquencies and defaults.

• Changes in interest rates could also affect the volume and profitability of the Company’s lending operations.

     As a result of these and other shortcomings in the model determining the prospective effects of interest rate changes, the computations in the table should not be relied upon as indicative of actual results in the event of changes in market interest rates. Further, the computations do not reflect any actions that management may undertake to respond to changes in interest rates.

     Forward sales contracts as of December 31, 2006 have settlement dates of less than 30 days. The weighted average settlement interest rate for these contracts was 6.1%.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Citizens First Bancorp, Inc.
Port Huron, Michigan

We have audited the accompanying consolidated balance sheets of Citizens First Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens First Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Citizens First Bancorp, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2007 expressed an unqualified opinion thereon.

Grand Rapids, Michigan
March 15, 2007

43

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Citizens First Bancorp, Inc.
Port Huron, Michigan

We have audited management’s assessment, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting, that Citizens First Bancorp, Inc. (Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s consolidated financial statements as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006, and our report dated March 15, 2007 expressed an unqualified opinion on those consolidated financial statements.

Grand Rapids, Michigan
March 15, 2007

44

CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

	December 31,
	2006			2005
ASSETS
Cash and due from depository institutions	$	24,722		$	38,217
Federal funds sold		—			2,029
Interest-bearing deposits in other depository institutions		101			7,345
Total cash and cash equivalents		24,823			47,591
Certificates of Deposit		320			—
Securities available for sale, at fair value (Note 3)		62,149			87,510
Federal Home Loan Bank stock, at cost		19,360			17,700
Loans held for sale		2,097			2,126
Loans, less allowance for loan losses of $14,304 and $13,546 (Note 4)		1,582,411			1,425,036
Premises and equipment, net (Note 5)		43,265			36,228
Goodwill (Note 2)		9,814			9,814
Other intangible assets, net of amortization of $1,698 and $1,221 (Note 2)		2,702			3,179
Accrued interest receivable and other assets (Notes 6 and 9)		28,201			25,039
Total assets	$	1,775,142		$	1,654,223
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	96,193		$	112,609
Interest-bearing (Note 7)		1,090,465			959,586
Total deposits		1,186,658			1,072,195
Federal Home Loan Bank advances (Note 8)		348,914			346,500
Bank line of credit (Note 8)		—			3,950
Federal funds purchased (Note 8)		51,095			52,013
Accrued interest payable and other liabilities (Note 10)		11,161			10,995
Total liabilities		1,597,828			1,485,653
COMMITMENTS AND CONTINGENCIES (Notes 10 and 13)
STOCKHOLDERS’ EQUITY (Notes 11, 12 and 15)
Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.01 par value; 20,000,000 shares authorized, 9,526,761 issued		95			95
Additional paid-in capital		94,818			93,848
Retained earnings		110,289			104,054
Accumulated other comprehensive loss		(422	)		(898	)
Treasury stock, at cost (1,373,424 and 1,364,561 shares)		(24,760	)		(24,653	)
Deferred compensation obligation (Note 10)		3,583			3,111
Unearned compensation — ESOP (Note 10)		(6,289	)		(6,987	)
Total stockholders’ equity		177,314			168,570
Total liabilities and stockholders’ equity	$	1,775,142		$	1,654,223

See notes to accompanying consolidated financial statements.

45

CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA)

	Year Ended
	December 31,
	2006			2005			2004
INTEREST INCOME
Loans, including fees	$	108,833		$	83,895		$	65,457
Federal funds sold and interest bearing deposits		124			245			96
Certificates of Deposit		2			—			—
Securities:
Tax-exempt		992			1,304			917
Taxable		3,320			3,645			2,973
Total interest income		113,271			89,089			69,443
INTEREST EXPENSE
Deposits		38,564			23,182			14,884
Short-term borrowings		3,447			2,007			724
FHLB advances		16,429			12,903			10,019
Total interest expense		58,440			38,092			25,627
NET INTEREST INCOME		54,831			50,997			43,816
PROVISION FOR LOAN LOSSES (Note 4)		2,805			2,390			1,555
NET INTEREST INCOME, after provision for loan losses		52,026			48,607			42,261
NONINTEREST INCOME
Service charges and other fees		2,566			2,512			2,484
Mortgage banking activities		2,143			2,816			1,400
Trust fee income		1,312			1,239			801
Gain on sale of securities available for sale		—			—			468
Other		(11	)		(189	)		272
Total noninterest income		6,010			6,378			5,425
NONINTEREST EXPENSE
Compensation, payroll taxes and employee benefits (Note 10)		23,041			19,502			16,266
Office occupancy and equipment		7,998			6,561			5,652
Advertising and business promotion		1,402			1,552			1,913
Stationery, printing and supplies		1,968			2,037			1,761
Data processing		708			1,887			1,301
Professional fees		3,779			4,232			3,547
Core deposit intangible amortization		477			561			660
Other		5,057			5,341			4,157
Total noninterest expense		44,430			41,673			35,257
INCOME, before federal income tax expense		13,606			13,312			12,429
Federal income tax expense (Note 9)		4,504			4,278			4,200
NET INCOME	$	9,102		$	9,034		$	8,229
EARNINGS PER SHARE, BASIC	$	1.14		$	1.14		$	1.04
EARNINGS PER SHARE, DILUTED	$	1.14		$	1.14		$	1.04

See notes to accompanying consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (IN THOUSANDS EXCEPT SHARE DATA)

								Accumulated
			Additional					Other						Deferred		Unearned
	Common		Paid-in		Retained			Comprehensive			Treasury			Compensation		Compensation -
	Stock		Capital		Earnings			Income (Loss)			Stock			Obligation		ESOP			Total
BALANCE, December 31, 2003	$	95	$	92,911	$	92,684		$	613		$	(21,787	)	$	2,054	$	(8,383	)	$	158,187
Allocation of ESOP shares		—		490		—			—			—			—		698			1,188
Exercise of stock options		—		8		—			—			85			—		—			93
Purchase of treasury stock (56,649 shares)		—		—		—			—			(1,302	)		—		—			(1,302	)
Deferred compensation		—		—		—			—			—			578		—			578
Dividends paid ($0.36 per share)		—		—		(2,845	)		—			—			—		—			(2,845	)
Comprehensive income:
Net income		—		—		8,229			—			—			—		—			8,229
Change in net unrealized loss on securities available for sale, net of tax effect of $(636)		—		—		—			(1,234	)		—			—		—			(1,234	)
Total comprehensive income		—		—		—			—			—			—		—			6,995
BALANCE, December 31, 2004		95		93,409		98,068			(621	)		(23,004	)		2,632		(7,685	)		162,894
Allocation of ESOP shares		—		430		—			—			—			—		698			1,128
Exercise of stock options		—		9		—			—			121			—		—			130
Deferred compensation and stock awards earned		—		—		—			—			113			—		—			113
Purchase of treasury stock (85,670 shares)		—		—		—			—			(1,883	)		—		—			(1,883	)
Deferred compensation		—		—		—			—			—			479		—			479
Dividends paid ($0.36 per share)		—		—		(3,048	)		—			—			—		—			(3,048	)
Comprehensive income:
Net income		—		—		9,034			—			—			—		—			9,034
Change in net unrealized loss on securities available for sale, net of tax effect of $(143)		—		—		—			(277	)		—			—		—			(277	)
Total comprehensive income		—		—		—			—			—			—		—			8,757
BALANCE, December 31, 2005		95		93,848		104,054			(898	)		(24,653	)		3,111		(6,987	)		168,570
Allocation of ESOP shares		—		696		—			—			—			—		698			1,394
Exercise of stock options		—		274		—			—			1,298			—		—			1,572
Deferred compensation and stock awards earned		—		—		—			—			162			—		—			162
Purchase of treasury stock (53,779 shares)		—		—		—			—			(1,567	)		—		—			(1,567	)
Deferred compensation		—		—		—			—			—			472		—			472
Dividends paid ($0.36 per share)		—		—		(2,867	)		—			—			—		—			(2,867	)
Comprehensive income:
Net income		—		—		9,102			—			—			—		—			9,102
Change in net unrealized loss on securities available for sale, net of tax effect of $256		—		—		—			476			—			—		—			476
Total comprehensive income		—		—		—			—			—			—		—			9,578
BALANCE, December 31, 2006	$	95	$	94,818	$	110,289		$	(422	)	$	(24,760	)	$	3,583	$	(6,289	)	$	177,314

See notes to accompanying consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

	Year Ended
	December 31,
	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	9,102		$	9,034		$	8,229
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes		270			1,392			2,477
Provision for loan losses		2,805			2,390			1,555
Deferred compensation and ESOP		2,028			1,720			1,766
Depreciation		2,859			2,355			1,955
Core deposit intangible amortization		477			561			660
Amortization of discounts on securities		452			691			3,048
Proceeds from sale of mortgage loans held for sale		115,686			175,126			126,823
Origination of mortgage loans held for sale		(115,342	)		(176,484	)		(124,832	)
Gain on sale of mortgage loans		(315	)		(576	)		(199	)
Gain on sale of securities available for sale		—			—			(468	)
(Gain) loss on sale or disposal of premises and equipment		106			(59	)		144
Changes in assets and liabilities, net of acquisition:
Increase in accrued interest receivable and other assets		(10,023	)		(6,039	)		(5,384	)
Increase in accrued interest payable and other liabilities		166			1,365			2,636
Net cash provided by operating activities		8,271			11,476			18,410
LENDING AND INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale		28,148			15,493			20,365
Proceeds from sale of securities available for sale		—			95			63,289
Purchase of securities available for sale		(2,508	)		(10,370	)		(63,898	)
Purchase of certificates of deposits		(319	)		—			—
Purchase of Federal Home Loan Bank stock		(2,354	)		(4,164	)		(3,792	)
Proceeds from sale of Federal Home Loan Bank stock		694			—			—
Acquisition, net of cash acquired (Note 2)		—			—			(24,398	)
Net increase in loans		(155,969	)		(234,335	)		(161,454	)
Proceeds from sale of other real estate owned, held for sale		2,124			286			864
Proceeds from sale of premises and equipment		23			282			4
Purchases of premises and equipment		(10,025	)		(8,126	)		(7,225	)
Net cash used in lending and investing activities		(140,186	)		(240,839	)		(176,245	)
DEPOSIT AND FINANCING ACTIVITIES
Net increase in deposits		114,463			139,091			49,977
Net increase/(decreases) in federal funds purchased		(918	)		6,486			36,527
Proceeds from exercises of stock options		1,572			130			93
Proceeds from line of credit		—			1,000			10,000
Repayment of line of credit		(3,950	)		(7,050	)		—
Repayment of FLAB advances		(698,906	)		(153,854	)		(52,325	)
Proceeds from FLAB advances		701,320			268,145			112,000
Purchase of treasury stock		(1,567	)		(1,883	)		(1,302	)
Payment of dividends		(2,867	)		(3,048	)		(2,845	)
Net cash provided by deposit and financing activities		109,147			249,017			152,125
NET CHANGE IN CASH AND CASH EQUIVALENTS		(22,768	)		19,654			(5,710	)
CASH AND CASH EQUIVALENTS, beginning of period		47,591			27,937			33,647
CASH AND CASH EQUIVALENTS, end of period	$	24,823		$	47,591		$	27,937
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest	$	56,984		$	36,691		$	25,901
Federal income taxes		3,620			3,600			4,410
Transfers of loans to other real estate owned		4,211			1,034			1,012

See notes to accompanying consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION — Citizens First Bancorp, Inc. (the “Bancorp”), a Delaware company, is the holding company for Citizens First Savings Bank (the “Bank”), a state-chartered savings bank headquartered in Port Huron, Michigan. The consolidated financial statements include the accounts of the Bancorp and its wholly owned subsidiary, the Bank (collectively referred to as the “Company”). The Bank also includes the accounts of its wholly owned subsidiaries, Citizens Financial Services, Inc., Citizens First Mobile Services, LLC and Citizens First Mortgage, LLC. Citizens Financial Services, Inc. includes the accounts of its wholly owned subsidiary, CFS Insurance Agency. Citizens Financial Services, Inc. receives revenue from its subsidiary, CFS Insurance Agency, which provides insurance services to individuals and small businesses in the Port Huron area. Citizens First Mortgage, LLC receives revenue from interest income on loans and the sale of loans. The Bancorp owns 100% of Coastal Equity Partners, L.L.C., established in 2006, whose primary purpose is to own and operate real estate activities. All significant intercompany transactions and balances have been eliminated in consolidation.

NATURE OF OPERATIONS — The Company operates predominately in the mideastern portion of Michigan’s lower peninsula and Ft. Myers, Florida. The Company’s primary services include accepting deposits, making commercial, consumer, and mortgage loans, and engaging in mortgage banking activities. The Company’s loan portfolio primarily consists of 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. The Company is not dependent upon any single industry or customer.

USE OF ESTIMATES — In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of investment securities, mortgage servicing rights, foreclosed real estate, goodwill and other intangible assets.

CASH AND CASH EQUIVALENTS – For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions and federal funds sold and interest bearing deposits in other depository institutions which mature within ninety days when purchased.

SECURITIES — Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost (none at December 31, 2006 and 2005). Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes.

     Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and securities available for sale below their amortized cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

FEDERAL HOME LOAN BANK STOCK — Federal Home Loan Bank (FHLB) stock is considered a restricted investment security and is carried at cost. Purchases and sales of FHLB stock are made directly with the FHLB at par value.

MORTGAGE BANKING ACTIVITIES — The Company routinely sells to investors its originated long-term residential fixed-rate mortgage loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

     Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

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     The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2006 and 2005.

     The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. Outstanding forward contracts to sell residential mortgage loans were approximately $3.9 million and $3.5 million at December 31, 2006 and 2005, respectively. The fair value of forward contracts was insignificant at December 31, 2006 and 2005.

     LOANS — The Company grants mortgage, commercial, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

     The accrual of interest on all loans, with the exception of commercial loans, is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Commercial loans are monitored 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, the special loans asset team and the loan committee whether or not the loan should be placed on nonperforming status. In all cases, nonperforming loans are charged off at an earlier date if collection of principal or interest is considered doubtful

ALLOWANCE FOR LOAN LOSSES — The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is assured. Subsequent recoveries, if any, are credited to the allowance.

     The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

     A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures.

     The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to impaired loans that are classified “doubtful,” “substandard” or “watch”. Classification involves a detailed review of all multi-family real estate loans, commercial loans and other loans with significant balances, as well as a detailed credit quality review for any other loan that has deteriorated below certain levels of credit risk or previously classified or identified as “watch” loan. “Watch” assets do not currently expose the Company to a sufficient degree to warrant an adverse classification but do possess credit deficiencies or potential weakness that deserve management’s close attention. “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. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable general market price) of the impaired loan is lower than the carrying value of that loan.

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     The general component of the allowance covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. 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). Management determines the estimated loss factors based on historical and recent loan loss experience, industry averages and trends in loan delinquencies for each type of loan. The determination of the estimated loss factors applied to each type of loan is based on information known and projections made by management based on that information. As a result, actual loss ratios experienced in the future could vary from those projected, which could have a material impact on the loan loss allowance.

     After the review yields an aggregate amount of loss allowance attributable to specific loans and after management applies various loss factors to the remaining balance of loans by type, management then analyzes the adequacy of the combined amount of loan loss allowance by considering other factors that may have an impact on the performance of the loan portfolio. This unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Factors considered 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.

LOAN SERVICING — Servicing assets are recognized as separate assets when rights are acquired through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income using market based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the capitalized amount for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other-than-temporary impairment results in a permanent reduction to the carrying value of the servicing asset.

     Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

GOODWILL AND INTANGIBLES. Goodwill and intangibles arising from business acquisitions represent the value attributable to the identifiable (core deposits) and unidentifiable (goodwill) intangible elements in the business acquired. The fair value of goodwill and intangibles is dependent upon many factors, including the Company’s ability to provide quality, cost effective services in the face of competition from other financial institutions. A decline in earnings as a result of business or market conditions, a lack of growth or the Company’s inability to deliver cost effective services over sustained periods can lead to impairment of goodwill and intangibles which could adversely impact earnings in future periods.

     The annual test of goodwill impairment is performed during the fourth quarter of each fiscal year. This is a five step process. The first step compares the book value of the Company’s stock to the fair market value of the shares as reported on NASDAQ. If the fair market value of the stock is greater than the calculated book value of the stock, the goodwill is deemed not to be impaired and no further testing is required. If the fair market value is less than the calculated book value, four additional steps of determining fair value of additional assets can be taken to determine impairment. Step one indicated the fair market value of the Company stock was

51

in excess of the book value and no further testing was required. Based on the results of our tests for impairment, the Company concluded that no impairment of goodwill existed on October 1, 2006.

PREMISES AND EQUIPMENT — Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives are generally 10-39 years for premises that the Company owns and three to seven years for furniture and equipment. Leasehold improvements are amortized over the terms of their respective leases or the estimated useful lives of the improvements, whichever is shorter.

FORECLOSED ASSETS — Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded on the Company’s balance sheet at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the allowance for loans losses. establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Foreclosed assets amounted to $3.3 million and $1.5 million at December 31, 2006 and 2005, respectively.

INCOME TAXES — Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

STOCK BASED COMPENSATION — Under the Company’s stock-based incentive plan, the Company may grant restricted stock awards and options to its directors, officers, and employees for up to 476,338 and 1,429,014 shares of common stock, respectively. Prior to January 1, 2006, the Company accounted for stock awards and options under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company adopted the fair value recognition provisions of Statement of Financial Standards (SFAS) No. 123 (R), Share Based Payment effective January 1, 2006 using the modified-prospective transition method. SFAS No. 123 (R) established a fair value method of accounting for stock options whereby compensation expense would be recognized based on the computed fair value of the options on the grant date. The Company recognizes compensation expense related to restricted stock awards over the period the services are performed. No options were granted during 2006. Implementation of SFAS No. 123(R) did not have a material impact on the financial results of the Company. The Company has provided below pro forma disclosures of net income and earnings per share for the years ended December 31, 2005 and December 31, 2004, as if the Company had applied the fair value based method to stock-based employee compensation (in thousands, except per share data):

	Year Ended
	December 31,
	2005			2004
Net income, as reported	$	9,034		$	8,229
Deduct: Total stock option-based employee compensation expense determined under fair value-based method, net of related tax effects		(749	)		(130	)
Pro forma net income	$	8,285		$	8,099
Earnings per share
Basic — as reported	$	1.14		$	1.04
Basic — pro forma	$	1.05		$	1.03
Diluted — as reported	$	1.14		$	1.04
Diluted — pro forma	$	1.04		$	1.02

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     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Year Ended
	December 31,
	2006 (1)	2005			2004
Dividend yield			1.57	%		1.56	%
Expected life		8 years			8 years
Expected volatility			28.98	%		16.55	%
Risk-free interest rate			4.00	%		4.00	%

(1) No stock options were issued during 2006.

OTHER COMPREHENSIVE INCOME — Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale, are reported as a separate component in the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Accumulated other comprehensive income is comprised solely of unrealized gains and losses on securities available for sale, net of applicable income taxes, for all periods presented.

EARNINGS PER SHARE — Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method. Treasury and unallocated ESOP shares are not considered outstanding for purposes of calculating basic or diluted earnings per share.

     Earnings per common share have been computed based on the following (in thousands except for per share data):

	Year Ended
	December 31,
	2006		2005		2004
Net income	$	9,102	$	9,034	$	8,229
Average number of common shares outstanding used to calculate basic earnings per common share		7,977,415		7,901,860		7,890,482
Effect of dilutive securities		20,146		38,428		37,901
Average number of common shares outstanding used to calculate diluted earnings per common share		7,997,561		7,940,288		7,928,383
Number of antidilutive stock options excluded from diluted earnings per share computation		—		34,696		38,754

TRUST ASSETS — Trust assets held in a fiduciary or agency capacity are not included in the accompanying consolidated balance sheet because they are not assets of the Company.

ADVERTISING COSTS – Advertising costs are expensed as incurred.

RECENT ACCOUNTING PRONOUNCEMENTS – In January 2006, FASB Statement No. 123(R), Share-Based Payment, became effective for the Company. It makes significant changes to accounting for “payments” involving employee compensation and “shares” or securities, in the form of stock options, restricted stock or other arrangements settled in the reporting entity’s securities. Most significant in the standard is the requirement that all stock options subject to Statement No. 123(R) be measured at estimated fair value at the grant date and recorded as compensation expense over the requisite service period associated with the option, usually the vesting period. The standard has been applied at the Company using the modified-prospective method to stock options granted or modified after December 31, 2005 and any unvested stock options at that date. The Company’s unvested stock options outstanding at December 31, 2006 were immaterial.

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     In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140. SFAS No.156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS No.156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. Adoption of this statement is not expected to have a material effect on results of operations or financial condition of the Company.

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company has not yet determined the impact of adopting FIN 48 on its financial statements.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS No. 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. While SFAS No. 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting SFAS No. 157 on its financial statements.

     In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB No. 108). Due to diversity in practice among registrants, SAB No. 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB No. 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The adoption of SAB No. 108 did not have a material impact on the consolidated financial statements.

     In February 2007, the FASB issued Statement No. 159, The Fair value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies on to entire instruments and not to portions of instruments. This Statement provides an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Statement No. 159 is effective for the Company beginning January 1, 2008. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to the Company’s results of operations or financial position.

RECLASSIFICATIONS — Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation.

NOTE 2 – GOODWILL AND INTANGIBLES

     Goodwill in the amount of $9.8 million and core deposit intangibles were recorded for the January 9, 2004 acquisition of Metro Bancorp, Inc. Net core deposit intangible assets at December 31, 2006 and December 31, 2005 were $2.7 million and $3.2 million, respectively. Amortization expense for the next 5 years is as follows: $405,000 in 2007, and $383,000 in 2008, 2009, 2010 and 2011, respectively. Annually, the core deposit intangible is evaluated for impairment by comparing the total dollar value of deposits

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purchased in 2004 to the amount remaining as of the testing date. Based on our analysis, no impairment of the identifiable intangible asset has occurred.

NOTE 3 — SECURITIES

     The amortized cost and estimated fair value of securities available for sale with gross unrealized gains and losses are as follows (in thousands):

	December 31, 2006
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	18,318	$	6	$	195	$	18,129
Obligations of state and political subdivisions		32,158		89		221		32,026
Corporate debt securities		4,001		—		53		3,948
Equity securities available for sale		5,000		—		225		4,775
Mortgage-backed securities		3,323		5		57		3,271
Total securities available for sale	$	62,800	$	100	$	751	$	62,149

	December 31, 2005
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	23,379		—	$	399	$	22,980
Obligations of state and political subdivisions		35,506	$	151		239		35,418
Corporate debt securities		20,584		—		108		20,476
Equity securities available for sale		5,000		—		687		4,313
Mortgage-backed securities		4,400		6		83		4,323
Total securities available for sale	$	88,869	$	157	$	1,516	$	87,510

     At December 31, 2006 and 2005, securities with a carrying value of $5,551,000 and $5,606,000, respectively, were pledged to secure borrowings, public deposits and for other purposes required or permitted by law.

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     The amortized cost and estimated fair value of securities available for sale by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	December 31, 2006
	Amortized		Fair
	Cost		Value
Due within one year or less	$	13,160	$	13,046
Due after one year through five years		30,741		30,479
Due after five years through ten years		8,601		8,595
Due after ten years		1,975		1,983
Total		54,477		54,103
Equity securities available for sale		5,000		4,775
Mortgage-backed securities		3,323		3,271
Total	$	62,800	$	62,149

     For the years ended December 31, 2006, 2005 and 2004, proceeds from sale of securities available for sale amounted to $0, $95,000 and $63,289,000, respectively. Gross realized gains amounted to $0, $0 and $531,000, respectively. Gross realized losses amounted to $0, $0 and $63,000, respectively. The tax provision applicable to these net realized gains and losses amounted to $0, $0 and $(164,000), respectively.

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     Information pertaining to securities available for sale with gross unrealized losses at December 31, 2006 and 2005 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

	December, 31 2006
	Less than Twelve Months				Over Twelve Months
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	3	$	509	$	192	$	16,990
Obligations of state and political subdivisions		9		4,525		212		15,413
Corporate debt securities		—		—		53		3,947
Equity securities available for sale		—		—		225		4,775
Mortgage-backed securities		—		11		57		2,390
Total	$	12	$	5,045	$	739	$	43,515

	December, 31 2005
	Less than Twelve Months				Over Twelve Months
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	183	$	11,074	$	216	$	11,905
Obligations of state and political subdivisions		160		14,128		79		5,588
Corporate debt securities		1		520		107		3,499
Equity securities available for sale		—		—		687		4,315
Mortgage-backed securities		10		889		73		2,966
Total	$	354	$	26,611	$	1,162	$	28,273

     Included in the tables above, at December 31, 2006, the Company had 72 securities in an unrealized loss position greater than 12 months, and 15 securities in an unrealized loss position less than 12 months. Management does not believe any individual unrealized loss as of December 31, 2006 represents an other-than-temporary impairment. The unrealized losses reported for equity securities relates to preferred stock issued by FHLMC. These unrealized losses are primarily attributable to changes in interest rates. The unrealized losses were 5% or less of their respective amortized cost basis. The Company has both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the amortized costs.

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NOTE 4 — LOANS

     Balances of loans are as follows (in thousands):

	December 31,
	2006		2005
Real estate loans:
One-to four-family	$	513,139	$	427,714
Commercial and multi-family		432,009		418,314
Residential construction		127,777		82,328
Home equity and lines of credit		137,112		131,378
		1,210,037		1,059,734
Commercial loans		280,005		271,436
Consumer loans:
Vehicles		83,435		84,189
Other		23,820		24,421
		107,255		108,610
Total loans		1,597,297		1,439,780
Less:
Allowance for loan losses		14,304		13,546
Net deferred loan fees		582		1,198
Net loans	$	1,582,411	$	1,425,036

     Loans made in the ordinary course of business to related parties, including senior officers and directors of the Company, totaled approximately $8,861,000 and $14,808,000 at December 31, 2006 and 2005, respectively. For the year ended December 31, 2006, $1,352,000 of new loans were made, repayments totaled $1,278,000, and other adjustments related to the change in board members totaled approximately $6,021,000.

     Activity in the allowance for loan losses was as follows (in thousands):

	Year Ended
	December 31,
	2006			2005			2004
Balance, beginning of period	$	13,546		$	13,472		$	11,664
Allowance from acquisition		—			—			1,135
Provision for loan losses		2,805			2,390			1,555
Charge-offs		(2,352	)		(2,609	)		(1,459	)
Recoveries		305			293			577
Balance, end of period	$	14,304		$	13,546		$	13,472

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     The following is a summary of information pertaining to impaired loans (in thousands):

	December 31,
	2006		2005
Impaired loans without a valuation	$	6,280	$	9,569
Impaired loans with a valuation allowance		4,694		2,290
Total impaired loans	$	10,974	$	11,859
Valuation allowance related to impaired	$	619	$	600
Total nonperforming loans	$	25,667	$	21,374

	Year Ended
	December 31,
	2006		2005		2004
Average investment in impaired loans	$	7,925	$	7,256	$	3,065
Interest income recognized on impaired loans	$	—	$	—	$	—
Interest income recognized on a cash basis on impaired loans	$	105	$	36	$	—

NOTE 5 — PREMISES AND EQUIPMENT

     Premises and equipment were as follows (in thousands):

	December 31,
	2006			2005
Land	$	9,824		$	7,943
Office buildings		33,656			29,609
Furniture, fixtures, and equipment		16,387			15,523
Construction in process		1,250			2,153
Total premises and equipment		61,117			55,228
Less accumulated depreciation		(17,852	)		(19,000	)
Net carrying amount	$	43,265		$	36,228

     Estimated costs to complete construction contracts in process at December 31, 2006 totaled $1.7 million.

     Pursuant to terms of noncancelable lease agreements in effect at December 31, 2006 pertaining to banking premises and equipment, future minimum rent payments under various operating leases are as follows (in thousands):

2007	$	1,061
2008		1,053
2009		1,053
2010		847
2011		710
Thereafter		1,613
Total	$	6,337

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     The leases contain options to extend for periods from 5 to 20 years. The cost of such rentals is not included above. Total rent expense for the years ended December 31, 2006, 2005, and 2004, amounted to $984,000, $844,000, and $691,000, respectively.

NOTE 6 – LOAN SERVICING

     The unpaid principal balance of mortgage loans serviced for others was approximately $673,380,000, $648,855,000 and $575,111,000 at December 31, 2006, 2005 and 2004, respectively, and are not included in the accompanying consolidated balance sheets.

     The carrying value of mortgage servicing rights included in other assets at December 31, 2006 and 2005 was $4,281,000 and $4,118,000, respectively. The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:

	December 31,
	2006			2005			2004
Annual constant prepayment speed		10.98	%		7.87	%		10.22	%
Weighted average life (in months)		260			264			257
Discount rate		8.50	%		8.50	%		7.50	%

     The following table summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in the related valuation allowance (in thousands):

	Year Ended
	December 31,
	2006			2005			2004
Balance, beginning of period	$	4,118		$	3,938		$	3,820
Net mortgage servicing rights acquired in acquisition		—			—			662
Amount capitalized		1,061			1,258			1,118
Amortization		941			1,010			1,662
Change in valuation reserve		43			(68	)		—
Balance, end of period	$	4,281		$	4,118		$	3,938
Valuation allowance:
Balance, beginning of period	$	68			—			—
Additions		—		$	68			—
Reductions		(43	)		—			—
Balance, end of period	$	25		$	68		$	—

NOTE 7 — DEPOSITS

     Interest-bearing deposit balances are summarized as follows (in thousands):

	December 31,
	2006		2005
Passbook and savings deposits	$	115,362	$	99,171
NOW accounts		91,587		90,078
Money market variable rate accounts		249,889		272,319
Time deposits		633,627		498,018
Total	$	1,090,465	$	959,586

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     At December 31, 2006, the scheduled maturities of time deposits were as follows (in thousands):

2007	$	483,200
2008		41,956
2009		20,579
2010		45,996
2011		25,258
Thereafter		16,638
Total	$	633,627

     Time deposits individually exceeding $100,000 were approximately $341.4 million and $202.5 million at December 31, 2006 and 2005, respectively.

     Deposits from related parties held by the Company at December 31, 2006 and 2005, amounted to $2,819,000 and $2,925,000, respectively.

NOTE 8 — BORROWINGS

     FHLB ADVANCES — FHLB advances (“advances”) consist of fixed-rate advances that bear interest at rates ranging from 3.35 percent to 6.81 percent payable monthly. The advances are collateralized by approximately $447.5 million and $362.9 million of mortgage loans at December 31, 2006 and 2005, respectively, under a blanket collateral agreement. At December 31, 2006, the weighted average interest rate on fixed-rate advances was 4.82 percent.

     The advances are subject to prepayment penalties and the provisions and conditions of the credit policy of the FHLB. Repayments of the advances are as follows at December 31, 2006 (in thousands):

2007	$	42,500
2008		143,608
2009		103,055
2010		25,000
2011		7,274
Thereafter		27,477
Total	$	348,914

SHORT TERM BORROWINGS — Borrowings with original maturities of one year or less are classified as short-term. Federal funds purchased are excess balances in reserve accounts held at the Federal Reserve Bank that the Company purchases from other member banks on an overnight basis. The daily average amount outstanding of funds purchased during the year ended December 31, 2006 was $63,439,000 at a weighted daily average interest rate of 5.43%. To provide additional support for growth, the Company has a line of credit from an unrelated bank of which $25.0 million was available and $0 was outstanding at December 31, 2006. The effective interest rate on the line of credit is based on the three month LIBOR rate plus 1.30 percent, effectively 6.66 percent at December 31, 2006. Under the terms of the Agreement, the Company is required to be categorized as “well capitalized” under regulatory guidelines. If the Company falls below this category, the line of credit would be terminated and become immediately due. The line is collateralized by the common stock of the Bank and was amended after December 31, 2006 to expire on January 9, 2008.

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NOTE 9 — FEDERAL INCOME TAXES

     The consolidated provision for federal income taxes consisted of the following (in thousands):

	Year Ended
	December 31,
	2006		2005		2004
Current tax expense	$	4,234	$	2,886	$	1,723
Deferred tax expense		270		1,392		2,477
Total income tax	$	4,504	$	4,278	$	4,200

     Federal income tax expense differed from the amounts computed by applying the statutory income tax rate to income before federal income tax expense as a result of the following (in thousands):,

	Year Ended
	December 31,
	2006			2005			2004
Income tax at statutory rates	$	4,762		$	4,659		$	4,350
Increase (decrease) resulting from:
Change in contribution carry forward reserve		(81	)		300			450
Tax-exempt interest expense		(365	)		(470	)		(432	)
Other		188			(211	)		(168	)
Total income tax expense	$	4,504		$	4,278		$	4,200

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     The net deferred income tax asset was comprised of the tax effects of the following temporary differences (in thousands):

	December 31,
	2006		2005
Deferred income tax assets:
Allowance for loan losses	$	4,397	$	4,077
Contribution carry forward		—		1,124
Employee benefit obligations		2,743		2,209
Net unrealized loss on securities available for sale		—		462
Other		505		366
Total deferred income tax assets		7,645		8,238
Deferred income tax liabilities:
Original issue discount		545		498
Investment in subsidiary		661		537
Deferred loan fees		401		185
Accumulated depreciation		2,110		1,412
Net unrealized gain on securities available for sale		221		—
Core deposit intangible		946		1,113
Other		784		813
Total deferred income tax liabilities		5,668		4,558
Deferred income tax asset		1,977		3,680
Valuation allowance		—		(750	)
Net deferred income tax asset	$	1,977	$	2,930

     The Company had a contribution carry forward for tax purposes of $3,457,000 at December 31, 2005. Realization of the deferred income tax asset related to the contribution carry forward is dependent on generation of sufficient taxable income before the carry forward expires. Prior to 2005, it became evident to the Company that realization of the entire contribution carry forward, based on projected taxable income amounts through fiscal 2006, became in doubt. Consequently, the Company recorded a valuation allowance of approximately $750,000 at December 31, 2005 because recognition of the full value of the deferred tax benefit was more likely than not going to be realized. During 2006, $1,569,000 of the carry forward was utilized and $1,888,000 was forfeited due to the fact that the carry forward expired on December 31, 2006. The Company has not recognized a deferred tax liability for tax bad debt reserves of approximately $6,600,000 that existed at December 31, 1987, because it is not expected that this temporary difference will reverse in the foreseeable future. Under current law, if these bad debt reserves are used for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate tax rate.

NOTE 10 — EMPLOYEE BENEFITS

     DEFINED BENEFIT PENSION PLAN — The Company is a participant in the multiple-employer Financial Institutions Retirement Fund (“FIRF”), which covers substantially all of its officers and employees. The FIRF, for all full-time employees with one year of service, provides benefits based on basic compensation and years of service. The Company’s contributions are determined by FIRF and generally represent the normal cost of the FIRF. Specific plan assets and accumulated benefit information for the Company’s portion of the FIRF are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. The (income) expense of the FIRF allocated to the Company for the years ended December 31, 2006, 2005, and 2004 amounted to $416,000, $(21,000) and $0, respectively.

     As of February 1, 2004, the Company froze the current accrual of benefits under the FIRF plan and ceased accruing future benefits for employees participating in the FIRF, although vesting service will continue.

DEFINED CONTRIBUTION PLANS — The Company sponsors a qualified savings plan (“Plan”) under Section 401(k) of the Internal Revenue Code. The Plan covers all employees who have completed at least one year of service. Eligible employees may contribute up to 25 percent of their annual compensation, subject to certain maximums established by the Internal Revenue Service. The Company will match up to 50 percent of the first 4 percent of the employees’ compensation deferred each year. The Company made matching

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contributions for the years ended December 31, 2006, 2005, and 2004 of approximately $155,000, $144,000, and $215,000, respectively.

DEFERRED COMPENSATION ARRANGEMENTS — The Company has entered into deferred compensation and fee arrangements with certain of its directors and senior officers. The amounts deferred under the arrangements are invested in Company common stock and are maintained in a rabbi trust. The Company has 241,865 and 236,622 treasury shares reserved for the various plans with a related obligation of $3,583,000 and $3,111,000 established within stockholders’ equity as of December 31, 2006 and 2005, respectively. The arrangements are accounted for in accordance with EITF Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. Assets of the rabbi trusts are consolidated with the Company, and the value of the Company’s stock held in rabbi trusts is classified in stockholders’ equity and generally accounted for in a manner similar to treasury stock. The Company recognizes the original amount of deferred compensation (fair value of the restricted stock award at the date of grant) as the basis for recognition in the rabbi trust. Changes in fair value owed to employees are not recognized as the arrangements do not permit diversification and must be settled by the delivery of a fixed number of shares of the Company’s common stock. Net of redemptions, shares repurchased for the rabbi trusts totaled 5,243, 22,239 and 15,725 for the years ended December 31, 2006, 2005 and 2004, respectively. The total shares repurchased have a weighted average price of $19.05 per share.

EMPLOYEE STOCK OWNERSHIP PLAN — The Company sponsors a leveraged employee stock ownership plan (ESOP). The ESOP covers all employees with more than one year of service who have completed at least 1,000 hours of service and who have attained the age of 18. The Company provided a loan to the ESOP, which was used to purchase 762,140 shares of the Company’s outstanding stock in the open market. The loan bears interest equal to the prime rate at the time of conversion and provides for the repayment of principal over the 15 year term of the loan. The scheduled maturities of the loan are as follows (in thousands):

Year Ending
December 31,	Amount
2007	$	551
2008		597
2009		648
2010		703
2011		763
Thereafter		4,900
Total	$	8,162

     The Company makes annual contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loan is paid. Dividends paid on unallocated shares are not considered dividends for financial reporting purposes and are used to pay principal and interest on the ESOP loan. Dividends on allocated shares are charged to retained earnings. Compensation expense is recognized for the ESOP equal to the average fair value of shares committed to be released for allocation to participant accounts. Any difference between the average fair value of shares committed to be released for allocation and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). Total compensation expense for the ESOP amounted to $1,264,000, $1,128,000 and $1,188,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

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     Shares held by the ESOP include the following:

	December 31,
	2006		2005
Allocated		304,855		254,046
Unallocated		457,285		508,094
Total		762,140		762,140

     The cost of unallocated ESOP shares (shares not yet released for allocation) is reflected as a reduction of stockholders’ equity. The fair value of the unallocated shares was approximately $14,057,000 and $11,976,000 at December 31, 2006 and 2005, respectively.

NOTE 11 – STOCK BASED COMPENSATION

     RESTRICTED STOCK AWARDS — The following table summarizes the activity of restricted stock awards:

	Year Ended December 31,
	2006			2005			2004
Beginning of period		87,900			72,562			68,817
Granted		5,000			27,209			6,245
Vested		(5,274	)		(5,274	)		—
Forfeited		—			(6,597	)		(2,500	)
Nonvested, end of period		87,626			87,900			72,562

     Substantially all awards cliff vest after five years from the date of the award. Compensation expense for the awards was approximately $330,000, $237,000 and $264,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

     Restricted stock awarded is subject to restrictions on sale, transfer, or assignment for the duration of the employee’s life. Holders of restricted stock generally may forfeit ownership of all or a portion of their award if employment is terminated before the end of the vesting period.

     STOCK OPTIONS — Under the Company’s stock-based incentive plan, the Company may grant options to its directors, officers, and employees for up to 1,429,014 shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the Plan, however, to date, only non-qualified stock options have been granted. The exercise price of each option equals the market price of the Company’s stock on the date of grant.

     At December 31, 2006, 1,203,9171 shares were available for future granting of options.

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     A summary of the status and activity for options granted under the plan is presented below:

	Year Ended December 31,
	2006						2005						2004
			Weighted						Weighted						Weighted
			Average		Aggregate				Average		Aggregate				Average		Aggregate
			Exercise		Intrinsic				Exercise		Intrinsic				Exercise		Intrinsic
	Shares		Price		Value		Shares		Price		Value		Shares		Price		Value
Outstanding, beginning of period		257,059	$	20.00				186,264	$	20.00				170,800	$	18.95
Options granted during the period (1)		—		—				90,016		19.96				42,113		23.90
Options forfeited		3,756		20.61				12,991		20.26				22,169		19.58
Options exercised		70,031		28.39				6,230		21.84				4,480		18.81
Outstanding, end of period		183,272	$	19.77	$	2,010,494		257,059	$	20.00	$	917,701		186,264	$	20.00	$	778,584
Options exercisable, end of year		180,872	$	19.74	$	1,989,592		254,059	$	19.97	$	914,612		46,790	$	19.32	$	227,399
Weighted-average fair value of options granted during the period	$	—					$	6.80					$	5.70

(1) No stock options were granted during 2006.

     The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price of $30.74 on December 31, 2006 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair market value of the Company’s stock.

     The total intrinsic value of stock options exercised was approximately $551,000, $12,000 and $23,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

     Information pertaining to options outstanding at December 31, 2006 is as follows:

	Options Outstanding			Options Exercisable
			Weighted
			Average	Weighted				Weighted
			Remaining	Average				Average
	Number		Contractual	Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life	Price		Exercisable		Price
$23.00 - $24.00		15,306	7.2 years	$	23.90		15,306	$	23.90
$20.00 - $21.00		2,400	8.3 years	$	21.91		—		—
$19.00 - $20.00		80,346	8.2 years	$	19.93		80,346	$	19.93
$18.00 - $19.00		85,220	6.2 years	$	18.81		85,220	$	18.81
Outstanding, end of year		183,272		$	19.77		180,872	$	19.74

NOTE 12 — REGULATORY MATTERS

     The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements.

     Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, which are shown in the table below.

     As of December 31, 2006, the most recent notification from the Bank’s regulators categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, minimum capital amounts and ratios

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must be maintained as shown in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s capital category.

     At December 31, 2006 and 2005, actual capital levels and minimum required for the Bank was as follows (in thousands):

						For Capital
	Actual					Adequacy Purposes						To Be Well Capitalized
			Ratio						Ratio						Ratio
	Amount		(Percent)			Amount			(Percent)			Amount			(Percent)
December 31, 2006
Total Capital to Risk
Weighted Assets:	$	161,746		10.6	%	$	121,700	>		8.0	%	$	152,100	>		10.0	%
Tier 1 Capital to Risk
Weighted Assets:		147,385		9.7	%		60,800	>		4.0	%		91,300	>		6.0	%
Tier 1 Capital to
Average Assets:		147,385		8.4	%		52,800	>		4.0	%		88,000	>		5.0	%
December 31, 2005
Total Capital to Risk
Weighted Assets:	$	148,607		10.6	%	$	112,200	>		8.0	%	$	140,300	>		10.0	%
Tier 1 Capital to Risk
Weighted Assets:		135,061		9.6	%		56,100	>		4.0	%		84,200	>		6.0	%
Tier 1 Capital to
Average Assets:		135,061		8.4	%		48,300	>		3.0	%		80,500	>		5.0	%

     The Bank is required to maintain average cash balances on hand or with the Federal Reserve Bank (FRB). At December 31, 2006 and 2005, the reserve balance amounted to $25,000 and $5,219,000, respectively. The Bank implemented a program designed to analyze our reserve requirements during 2006, thereby significantly reducing our requirements with the FRB and reducing noninterest earning assets.

     Federal and state banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. Accordingly, $112,580,000 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2006. At December 31, 2006, the Bank’s retained earnings available for the payment of dividends was $40,046,000.

     Loans or advances made by the Bank to the Company are generally limited to 10 percent of the Bank’s capital stock and surplus. Accordingly, at December 31, 2006, Bank funds available for loans or advances to the Company amounted to approximately $16,169,000.

     In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

     CREDIT-RELATED FINANCIAL INSTRUMENTS — The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

     The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

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     A summary of the notional or contractual amounts of financial instruments with off-balance sheet risk at December 31, 2006 and 2005 is as follows (in thousands):

	December 31,
	2006		2005
Commercial and stand-by letters of credit	$	8,829	$	9,062
Unused lines of credit		244,690		270,829
Commitments to originate loans or to refinance existing loans:
Real estate		49,837		88,180
Commercial		44,266		42,997
Consumer		4,493		8,324
Total commitments to extend credit	$	352,115	$	419,392

     Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

     Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

     Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. Under FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, fees earned on commercial and standby letters of credit are required to be deferred over the contractual life of the letter of credit. The Company determined that the fair value of guarantees on standby letters of credit has an immaterial effect on the financial results at December 31, 2006.

     To reduce credit risk related to the use of credit-related financial instruments, the Company generally holds collateral supporting those commitments if deemed necessary. The amount and nature of the collateral obtained is based on the Company’s credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and real estate.

     If the counterparty does not have the right and ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it.

     LEGAL CONTINGENCIES – At December 31, 2006, there were no material pending legal proceedings to which the Company is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operation of the Company.

NOTE 14 — FAIR VALUES OF FINANCIAL INSTRUMENTS

     The carrying values and estimated fair values of the Company’s financial instruments are presented below. Certain items, the most significant being premises and equipment, pension and deferred compensation arrangements, and the customer relationship intangible do not meet the definition of a financial instrument and are excluded from this disclosure. Accordingly, this fair value information is not intended to, and does not, represent the Company’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by management. These estimates inherently involve the use of judgment about a wide variety of factors, including, but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.

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     The carrying values and estimated fair values of financial instruments were as follows (in thousands):

	December 31, 2006				December 31, 2005
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
Financial assets:
Cash and cash equivalents	$	24,823	$	24,823	$	47,591	$	47,591
Securities available for sale		62,149		62,149		87,510		87,510
Federal Home Loan Bank stock		19,360		19,360		17,700		17,700
Loans held for sale		2,097		2,112		2,126		2,126
Loans		1,582,411		1,549,764		1,425,036		1,434,473
Accrued interest receivable		10,891		10,891		7,911		7,911
Financial liabilities:
Deposits		1,186,658		1,094,859		1,072,195		1,011,395
Federal Home Loan Bank advances		348,914		349,311		346,500		343,055
Bank line of credit		—		—		3,950		3,950
Federal funds purchased		51,095		51,095		52,013		52,013
Accrued interest payable		3,711		3,711		2,255		2,255

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS – Due to their short-term nature, the carrying value of cash and short-term instruments approximate fair values.

SECURITIES AND FHLB STOCK — Fair values for securities available for sale are based on quoted market prices. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB.

LOANS HELD FOR SALE — Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

LOANS — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, as adjusted by estimated credit losses. Fair values for other mortgage, commercial, and consumer loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

DEPOSITS — Fair values for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are equal to the amount payable on demand at the reporting date (i.e., their carrying values). The carrying values of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

FHLB ADVANCES — Fair values of FHLB advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

SHORT-TERM BORROWINGS- The carrying values of short-term borrowings approximate fair values.

ACCRUED INTEREST — The carrying values of accrued interest approximate fair values.

OFF-BALANCE SHEET INSTRUMENTS — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’

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credit standing. The fair value of loan commitments and standby letters of credit, valued on the basis of fees currently charged for commitments for similar loan terms to new borrowers with similar credit profiles, is not considered material.

     The fair value of off-balance sheet financial instruments used for risk management purposes, which consists solely of forward contracts extending up to 30 days to sell mortgage loans, is not material.

NOTE 15 — STOCK REPURCHASE PROGRAM

     On October 1, 2002, the Company announced a share repurchase program authorizing the repurchase of 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. The program allows management to repurchase up to 428,701 shares of the Company’s common stock, of which 0, 63,431 and 40,924 shares were repurchased during the years ended December 31, 2006, 2005 and 2004, respectively. The repurchased shares are reserved for reissuance in connection with future employee benefit plans and other general corporate purposes.

NOTE 16 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PARENT COMPANY

     The following represents the condensed financial statements of Citizens First Bancorp, Inc. (“Parent”) only, which should be read in conjunction with the Company’s consolidated financial statements.

BALANCE SHEETS (IN THOUSANDS):

	December 31,
	2006		2005
ASSETS
Cash at subsidiary bank	$	9,134	$	709
Securities available for sale		4,777		20,771
Investment in subsidiaries		159,764		147,976
Deferred taxes and other assets		4,204		4,345
Total assets	$	177,879	$	173,801
LIABILITIES
Bank line of credit	$	—	$	3,950
Accrued expenses and other liabilities		565		1,281
Total liabilities		565		5,231
STOCKHOLDERS’ EQUITY		177,314		168,570
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	177,879	$	173,801

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     STATEMENTS OF INCOME (IN THOUSANDS):

	Year Ended
	December 31,
	2006			2005			2004
Income:
Interest on loans		—		$	362		$	207
Interest on investments	$	1,247			1,517			382
Dividends from subsidiaries		—			5,000			20,500
Other		42			—			166
Total income		1,289			6,879			21,255
Expense:
Interest on short term borrowings		(45	)		(466	)		(361	)
Other		(1,227	)		(1,320	)		(1,152	)
Income, before income taxes and equity in undistributed net income of subsidiaries		17			5,093			19,742
Income tax benefit (expense)		(329	)		(273	)		256
Income (loss), before equity in undistributed net income of subsidiaries		(312	)		4,820			19,998
Equity in undistributed net income (loss) of subsidiaries		9,414			4,214			(11,769	)
Net income	$	9,102		$	9,034		$	8,229

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     STATEMENTS OF CASH FLOWS (IN THOUSANDS):

	Year Ended
	December 31,
	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	9,102		$	9,034		$	8,229
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain on sale of investments		—			—			(109	)
Amortization (accretion) of securities		270			213			(868	)
Equity in undistributed net income (loss) of subsidiaries		(11,788	)		(3,788	)		11,769
Deferred compensation and ESOP		2,028			1,720			1,766
(Increase) decrease in accrued interest receivable and other assets		(115	)		1,081			(1,451	)
Increase (decrease) in accrued interest payable and other liabilities		(716	)		(403	)		358
Net cash provided by (used in) operating activities		(1,219	)		7,857			19,694
INVESTING ACTIVITIES
Purchase of Metrobank		—			—			(30,000	)
Proceeds from sale or maturity of investments		16,456			8,521			4,572
Purchase of investments		—			(10,370	)		(8,775	)
Net decrease in loans		—			4,675			588
Net cash provided by (used in) investing activities		16,456			2,826			(33,615	)
FINANCING ACTIVITIES
Proceeds from exercises of stock options		1,572			130			93
Proceeds from line of credit		—			1,000			10,000
Repayment of line of credit		(3,950	)		(7,050	)		—
Purchase of treasury stock		(1,567	)		(1,883	)		(1,302	)
Payment of dividends		(2,867	)		(3,048	)		(2,845	)
Net cash provided by (used in) financing activities		(6,812	)		(10,851	)		5,946
NET CHANGE IN CASH AT SUBSIDIARY BANK		8,425			(168	)		(7,975	)
CASH, beginning of period		709			877			8,852
CASH, end of period	$	9,134		$	709		$	877

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NOTE 17 — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table summarizes the Company’s quarterly results for the years ended December 31, 2006 and 2005 (in thousands):

	For the Three-month Periods Ended
	March 31,		June 30,		September 30,		December 31,
	2006		2006		2006		2006		Total
Interest income	$	26,095	$	27,844	$	29,041	$	30,291	$	113,271
Interest expense		12,764		14,237		15,489		15,950		58,440
Net interest income		13,331		13,607		13,552		14,341		54,831
Provision for loan losses		870		710		605		620		2,805
Noninterest income		1,476		1,574		1,486		1,474		6,010
Noninterest expense		10,864		11,677		10,901		10,988		44,430
Income, before federal income tax expense		3,073		2,794		3,532		4,207		13,606
Federal income tax expense		1,028		934		1,204		1,338		4,504
Net income	$	2,045	$	1,860	$	2,328	$	2,869	$	9,102
Earnings per share, basic	$	0.26	$	0.24	$	0.29	$	0.36	$	1.14
Earnings per share, diluted	$	0.26	$	0.23	$	0.29	$	0.36	$	1.14

	For the Three-month Periods Ended
	March 31,		June 30,		September 30,		December 31,
	2005		2005		2005		2005		Total
Interest income	$	19,480	$	21,512	$	23,186	$	24,911	$	89,089
Interest expense		7,483		9,158		10,085		11,366		38,092
Net interest income		11,997		12,354		13,101		13,545		50,997
Provision for loan losses		480		780		560		570		2,390
Noninterest income		1,372		1,368		2,114		1,524		6,378
Noninterest expense		9,916		9,923		10,786		11,048		41,673
Income, before federal income tax expense		2,973		3,019		3,869		3,451		13,312
Federal income tax expense		965		874		1,386		1,053		4,278
Net income	$	2,008	$	2,145	$	2,483	$	2,398	$	9,034
Earnings per share, basic	$	0.25	$	0.27	$	0.32	$	0.31	$	1.14
Earnings per share, diluted	$	0.25	$	0.27	$	0.31	$	0.30	$	1.14

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

     None.

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ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

     The Company, under the supervision, and with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 31, 2006, pursuant to the requirements of Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

Management’s Report on Internal Control Over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

     BDO Seidman, LLP, the independent registered public accounting firm that audited the financial statements contained herein, has issued an attestation report on management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006.

     There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

     None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     The information required by this item relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Section captioned “Proposal 1 — Election of Directors” in the Registrant’s Proxy Statement, to be filed within 120 days after December 31, 2006, for the Annual Meeting of Stockholders to be held on May 24, 2007. Reference is made to the cover page of this Form 10-K and to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for information regarding compliance with Section 16(a) of the Exchange Act.

     The Board of Directors has determined that Robert Patterson is an “audit committee financial expert” and is “independent,” as each such term is defined under applicable SEC and NASDAQ rules. The Company has adopted a code of ethics that applies to its principal executive, financial and accounting officers. A copy of the code of ethics is posted on the Company’s website at www.cfsbank.com. In the event we make any amendment to, or grant any waiver of, a provision of the code of ethics that applies to the principal executive, financial or accounting officer, or any person performing similar functions, that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the nature of and reasons for it, along with the name of the person to whom it was granted and the date, on our internet website.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item relating to executive compensation is incorporated herein by reference to the sections captioned “Executive Compensation,” “Compensation Committee Report on Executive Compensation,” and “Compensation Committee Interlocks and Insider Participation” in the Registrant’s Proxy Statement, to be filed within 120 days after December 31, 2006, for the Annual Meeting of Stockholders to be held on May 24, 2007.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The information required by this item relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section captioned “Stock Ownership” in the Registrant’s Proxy Statement, to be filed within 120 days after December 31, 2006, for the Annual Meeting of Stockholders to be held on May 24, 2007.

Equity Compensation Plan Information

					Number of securities
					remaining available
	Number of securities				for future issuance
	to be issued upon		Weighted-average		under equity
	exercise of outstanding		exercise price of		compensation plans
	options, warrants,		outstanding options,		(excluding securities
	and rights		warrants and rights		in column (a))
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by security holders		183,272		$  19.77		1,203,917
Total		183,272		$  19.77		1,203,917

     The Company does not maintain any equity compensation plans that have not been approved by security holders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     The information required by this item relating to certain relationships and related transactions is incorporated herein by reference to the section captioned “Transactions with Related Parties” in the Registrant’s Proxy Statement, to be filed within 120 days after December 31, 2006, for the Annual Meeting of Stockholders to be held on May 24, 2007. The information required by this item relating to director independence is incorporated herein by reference to the section captioned “Proposal 1-Election of Directors”.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this item relating to accountant fees and services is incorporated by reference to the section captioned “Proposal II — Ratification of Independent Auditors” in the Registrant’s Proxy Statement, to be filed within 120 days after December 31, 2006, for the Annual Meeting of Shareholders to be held on May 24, 2007.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

     (1) Financial Statements

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	Pages in Form 10-K
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS	page 43
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets	page 45
Statements of Income	page 46
Statements of Changes in Stockholders’ Equity	page 47
Statements of Cash Flows	page 48
Notes to Consolidated Financial Statements	page 49 - 72

     (2) Financial Statement Schedules

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

     The following exhibits required by Item 601 of Regulation S-K are filed as part of this report:

     (3) Exhibits

3.1	Certificate of Incorporation of Citizens First Bancorp, Inc. (1)
3.2	Bylaws of Citizens First Bancorp, Inc. (1)
4.0	Draft Stock Certificate of Citizens First Bancorp, Inc. (1)
10.1	Form of Citizens First Savings Bank Employee Severance Compensation Plan (1)
10.2	Form of Citizens First Savings Bank Supplemental Executive Retirement Plan (1)
10.3	Form of Citizens First Savings Bank Director’s Deferred Fee Agreement (1)
10.4	Employment Agreement between Citizens First Bancorp, Inc. and Marshall J. Campbell (5)
10.5	Change in Control Agreement between Citizens First Savings Bank and Randy J. Cutler (2)
10.6	Change in Control Agreement between Citizens First Savings Bank and Timothy D. Regan (2)
10.7	Change in Control Agreement between Citizens First Savings Bank and J. Stephen Armstrong (2)
10.8	Change in Control Agreement between Citizens First Savings Bank and Douglas E. Brandewie (6)
10.9	Change in Control Agreement between Citizens First Savings Bank and William G. Oldford, Jr. (6)
10.10	Change in Control Agreement between Citizens First Savings Bank and Richard Stafford (6)
10.11	Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (3)
10.12	Amended and Restated Management Restricted Stock Purchase Plan (4)
10.13	Amended and Restated Executive Stock Ownership Plan (4)
21.0	Subsidiary Information is incorporated herein by reference to Part I, Item 1, “Business — Subsidiary Activities”
23.1	Consent of BDO Seidman, LLP
31.1	Rule 13a-14(a) Certifications of Chief Executive Officer
31.2	Rule 13a-14(a) Certifications of Chief Financial Officer
32.1	Section 1350 Certifications of Chief Executive Officer
32.2	Section 1350 Certifications of Chief Financial Officer

(1)	Incorporated by reference into this document from the Exhibits to the Form S-1, Registration Statement and amendments thereto, initially filed with the Securities and Exchange Commission on November 3, 2000, Registration No. 333-49234.
(2)	Incorporated by reference into this document from the Exhibits to the Form 10-Q as filed with the Securities and Exchange Commission on August 14, 2001 (Registration No. 0-32041).
(3)	Incorporated by reference into this document from the Appendix to the Proxy Statement as filed with the Securities and Exchange Commission on September 30, 2001.

(4)	Incorporated by reference into this document from the Appendix to the Proxy Statement as filed with the Securities and Exchange Commission on April 21, 2003.
(5)	Incorporated by reference into this document from the Exhibits to Registrant’s Form 10-K filed with the Securities and Exchange Commission on July 1, 2001 (Registration No. 0-32041)
(6)	Incorporated by reference into this document from the Exhibits to the Form 10-K as filed with the Securities and Exchange Commission on March 23, 2006 (Registration No. 0-32041).

76

SIGNATURES

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

	Citizens First Bancorp, Inc.
Date: March 14, 2007	By:	/s/ Marshall J. Campbell Marshall J. Campbell
		Chairman of the Board,
		President and Chief
		Executive Officer

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

/s/ Marshall J. Campbell Marshall J. Campbell	Chairman of the Board, President and Chief Executive Officer (principal executive officer)	March 14, 2007
/s/ Timothy D. Regan Timothy D. Regan	Secretary, Treasurer  (principal accounting and financial officer)	March 14, 2007
/s/ Ronald W. Cooley Ronald W. Cooley	Director	March 14, 2007
/s/ Gerald Bouchard Gerald Bouchard	Director	March 14, 2007
/s/ Walid Demashkieh Walid Demashkieh	Director	March 14, 2007
/s/ Robert Patterson Robert Patterson	Director	March 14, 2007

77

Exhibit Index

3.1	Certificate of Incorporation of the Citizens First Bancorp, Inc. (1)
3.2	Bylaws of the Citizens First Bancorp, Inc. (1)
4.0	Draft Stock Certificate of the Citizens First Bancorp, Inc. (1)
10.1	Form of the Citizens First Savings Bank Employee Severance Compensation Plan (1)
10.2	Form of the Citizens First Savings Bank Supplemental Executive Retirement Plan (1)
10.3	Form of the Citizens First Savings Bank Director’s Deferred Fee Agreement (1)
10.4	Employment Agreement between the Citizens First Bancorp, Inc. and Marshall J. Campbell (5)
10.5	Change in Control Agreement between the Citizens First Savings Bank and Randy J. Cutler (2)
10.6	Change in Control Agreement between the Citizens First Savings Bank and Timothy D. Regan (2)
10.7	Change in Control Agreement between the Citizens First Savings Bank and J. Stephen Armstrong (2)
10.8	Change in Control Agreement between the Citizens First Savings Bank and Douglas E. Brandewie (6)
10.9	Change in Control Agreement between Citizens First Savings Bank and William G. Oldford, Jr. (6)
10.10	Change in Control Agreement between Citizens First Savings Bank and Richard Stafford (6)
10.11	Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (3)
10.12	Amended and Restated Management Restricted Stock Purchase Plan (4)
10.13	Amended and Restated Executive Stock Ownership Plan (4)
21.0	Subsidiary Information is incorporated herein by reference to Part I, Item 1, “Business — Subsidiary Activities”
23.1	Consent of BDO Seidman, LLP
31.1	Rule 13a-14(a) Certifications of Chief Executive Officer
31.2	Rule 13a-14(a) Certifications of Chief Financial Officer
32.1	Section 1350 Certifications of Chief Executive Officer
32.2	Section 1350 Certifications of Chief Financial Officer

(1)	Incorporated by reference into this document from the Exhibits to the Form S-1, Registration Statement and amendments thereto, initially filed with the Securities and Exchange Commission on November 3, 2000, Registration No. 333-49234.
(2)	Incorporated by reference into this document from the Exhibits to the Form 10-Q as filed with the Securities and Exchange Commission on August 14, 2001 (Registration No. 0-32041).
(3)	Incorporated by reference into this document from the Appendix to the Proxy Statement as filed with the Securities and Exchange Commission on September 30, 2001.
(4)	Incorporated by reference into this document from the Appendix to the Proxy Statement as filed with the Securities and Exchange Commission on April 21, 2003.
(5)	Incorporated by reference into this document from the Exhibits to Registrant’s Form 10-K filed with the Securities and Exchange Commission on July 1, 2001 (Registration No. 0-32041)
(6)	Incorporated by reference into this document from the Exhibits to the Form 10-K as filed with the Securities and Exchange Commission on March 23, 2006 (Registration No. 0-32041).

78

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on Form S-8 for the Company’s Citizens First Savings Bank 401 (K) Plan (Registration No. 333-74218), Citizens First Bancorp, Inc. 2001 Stock-Based Incentive Plan (Registration No. 333-98199) and Citizens First Bancorp, Inc. Management Restricted Stock Purchase Plan (Registration Nos. 333-100516 and 333-122417) and in the Registration Statement on Form S-3 for the Citizens First Bancorp, Inc. Dividend Reinvestment and Optional Cash Purchase Plan (Registration No. 333-115896) of our reports dated March 15, 2007 relating to the consolidated financial statements and the effectiveness of Citizens First Bancorp, Inc.’s internal control over financial reporting, which appear in this Form 10-K.

Grand Rapids, Michigan
March 15, 2007

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Marshall J. Campbell, President and Chief Executive Officer of Citizens First Bancorp, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Citizens First Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2007	/s/ Marshall J. Campell
	Marshall J. Campbell
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Timothy D. Regan, Chief Financial Officer of Citizens First Bancorp, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Citizens First Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2007	/s/ Timothy D. Regan
	Timothy D. Regan
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Citizens First Bancorp, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marshall J. Campbell, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Mashall J. Campbell
Marshall J. Campbell,
President and Chief Executive Officer

March 14, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Citizens First Bancorp, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy D. Regan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Timothy D. Regan
Timothy D. Regan,
Chief Financial Officer

March 14, 2007